SUNLINK HEALTH SYSTEMS INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share and admissions data)

Forward-Looking Statements

This Quarterly Report and the documents that are incorporated by reference in
this Quarterly Report contain certain forward-looking statements within the
meaning of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include all statements that do not relate solely to historical or current facts
and may be identified by the use of words such as "may," "believe," "will,"
"seeks to", "expect," "project," "estimate," "anticipate," "plan" or "continue."
These forward-looking statements are based on the current plans and expectations
and are subject to a number of risks, uncertainties and other factors which
could significantly affect current plans and expectations and our future
financial condition and results. Throughout this annual report and the notes to
the condensed consolidated financial statements, SunLink Health Systems, Inc.,
and its consolidated subsidiaries are referred to on a collective basis as
"SunLink", "we", "our", "ours", "us" or the "Company." This drafting style is
not meant to indicate that SunLink Health Systems, Inc. or any particular
subsidiary of SunLink Health Systems, Inc. owns or operates any asset, business,
or property. Healthcare services, pharmacy operations and other businesses
described in this filing are owned and operated by distinct and indirect
subsidiaries of SunLink Health System, Inc. These forward-looking statements are
based on current plans and expectations and are subject to a number of risks,
uncertainties and other factors that could significantly affect current plans
and expectations and our future financial condition and results. These factors,
which could cause actual results, performance, and achievements to differ
materially from those anticipated, include, but are not limited to:

General Business Conditions

•

general economic and business conditions in the U.S., both nationwide and in the
states in which we operate;

•

the effects of the coronavirus ("COVID-19") pandemic, both nationwide and in the
states in which we operate, including among other things, on demand for our
customary services, the efficiency of such services, availability of staffing,
availability of supplies, costs and financial results;

•

the effects of COVID-19 on our ability to provide for customary services
including the large number of unvaccinated persons and plateaued or stagnant
vaccination and booster rates in Georgia, Louisiana and Mississippi, the primary
states in which we conduct healthcare operations. Future COVID-19 or other
pandemics of other contagious diseases could result in the unavailability of
personnel to provide services, regulatory bans on certain services or
admissions, decreased occupancy levels, increase costs, reduce our revenues and
otherwise adversely affect our business;

•

increases in uninsured and/or underinsured patients due to COVID-19,
unemployment or other conditions, higher deductibles and co-insurance, or other
terms of health insurance and drug coverage resulting in higher bad debt
amounts;

•

the competitive nature of the U.S. community hospital, extended care and
rehabilitation center, nursing home, and pharmacy businesses;

•

demographic characteristics and changes in areas where we operate, including
resistance to vaccination for COVID-19;

•

any new variants of the COVID-19 virus and other SARS-COV-2 viruses and other
infectious diseases;

•

the availability of cash or borrowings to fund working capital, renovations,
replacements, expansions, and capital improvements at existing healthcare and
pharmacy facilities and for acquisitions and replacement of such facilities;

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•

changes in accounting principles generally accepted in the U.S.;

•

the impact of inflation on our patients, operating costs, ability and
feasibility of raising funds, and on our ability to achieve cash flow and
profitability, including our inability to cover cost increases because most of
our revenue is from government programs whose payments are fixed; and

•

fluctuations in the market value of equity securities including SunLink common
shares, including fluctuations based on fears of actual inflation or recession.

Operational Factors

•

the ability or inability to operate profitably in one or more segments of the
healthcare business;

•

the availability of, and our ability to attract and retain, sufficient qualified
staff physicians, management, nurses, pharmacists, and staff personnel for our
operations;

•

timeliness and amount and conditions on of reimbursement payments received under
government programs;

•

the lack of availability of future governmental support that may be required to
offset the continuing effects of the COVID-19 pandemic and absence of
forgiveness features in any such future loans or an inability to meet the usage
or forgiveness requirements;

•

the ability to achieve compliance with requirements of the expenditure and
retention of Provider Relief Funds ("PRF");

•

the ability or inability to fund our obligations under capital leases or new or
existing obligations and/or any existing or potential defaults under existing
indebtedness;

•

restrictions imposed by existing or future contractual obligations including
existing or new indebtedness;

•

the cost and availability of insurance coverage including professional liability
(e.g., medical malpractice) and general, employment, fiduciary, and other
liability insurance;

•

the efforts of governmental authorities, insurers, healthcare providers, and
others to contain and reduce healthcare costs;

•

the impact on hospital, clinic, and nursing home services of the treatment of
patients in alternative or lower acuity healthcare settings, such as with drug
therapy, in surgery centers, and urgent care centers, retirement homes or at
home;

•

changes in medical and other technology;

•

changes in estimates of self-insurance claims and reserves;

•

increases in prices of materials and services utilized in our Healthcare
Services and Pharmacy segments;

•

increases in wages as a result of inflation or competition for physician,
nursing, pharmacy, management, and staff positions;

•

any impairment in our ability to collect accounts receivable, including
deductibles and co-pay amounts;

•

the functionality of or costs with respect to our information systems for our
Healthcare Services and Pharmacy segments and our corporate office, including
both software and hardware;

•

the availability of and competition from alternative drugs or treatments to
those provided by our Pharmacy segment;

•

the restrictions, clawbacks, processes, and conditions relating to our Pharmacy
segment imposed by pharmacy benefit managers, drug manufacturers, and
distributors; and

•

the ability of our Pharmacy segment to sustain its claims for exemption from
sales taxes position in Louisiana on any revenue from sales of products and
services to beneficiaries of government insurance programs to the extent
reimbursed by administrators of such programs.

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Liabilities, Claims, Obligations and Other Matters

•

claims under leases, guarantees, disposition agreements, and other obligations
relating to asset sales or discontinued operations, including claims from sold
or leased facilities and services, retained liabilities or retained
subsidiaries;

•

potential adverse consequences of any known and unknown government
investigations;

•

claims for medical malpractice product, environmental or other liabilities from
continuing and discontinued operations;

•

professional, general, and other claims which may be asserted against us,
including claims based on a failure currently unknown to us of our physicians
and other personnel to comply with COVID-19 vaccination mandates;

•

potential damages and consequences of natural disasters and weather-related
events such as tornados, earthquakes, hurricanes, flooding, snow, ice and wind
damage, and population evacuations affecting areas in which we operate; and

•

potential adverse contingencies of terrorist acts, crime or civil unrest.

Regulation and Governmental Activity

•

negative consequences of existing and proposed governmental budgetary
constraints or modification or termination of existing government programs or
the implementation and related costs and disruptions of new government programs
such as environmental, social and governance programs;

•

negative consequences of Federal and state insurance exchanges and their rules
relating to reimbursement terms;

•

the continuing decision by Mississippi (where we operate our remaining hospital
and nursing home) to not expand Medicaid;

•

the regulatory environment for our businesses, including state certificate of
need laws and regulations, pharmacy licensing laws and regulations, rules and
judicial cases relating thereto;

•

changes in the levels and terms of government (including Medicare, Medicaid and
other programs) and private reimbursement for SunLink's healthcare services
including the payment arrangements and terms of managed care agreements;
indigent care and other reimbursements (Medicare Upper Payment Limit "UPL" and
Disproportionate Share Hospital "DSH" adjustments) and governmental assessments
for such programs;

•

the failure of government and private reimbursement to cover our increasing
costs;

•

changes in or failure to comply with federal, state or local laws and
regulations and enforcement interpretations of such laws and regulations
affecting our Healthcare Services and Pharmacy segments; and

•

the possible enactment of additional federal healthcare reform laws or reform
laws in states where our subsidiaries operate hospital and pharmacy facilities
(including Medicaid waivers, bundled payments, managed care programs,
accountable care and similar organizations, competitive bidding and other
reforms).

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Dispositions, Acquisition and Renovation Related Matters

•

the ability to dispose of underperforming facilities, underperforming business
segments and surplus assets;

•

the availability of cash and the terms of capital to fund acquisitions or
replacement facilities, improvements or renovations to existing facilities or
both; and

•

competition in the market for acquisitions of hospitals, rehabilitation centers,
nursing homes, pharmacy facilities, and other healthcare businesses.

The foregoing are significant factors we think could cause our actual results to
differ materially from expected results. However, there could be additional
factors besides those listed herein that also could affect SunLink in an adverse
manner. You should read this Quarterly Report completely and with the
understanding that actual future results may be materially different from what
we expect. You are cautioned not to unduly rely on forward-looking statements
when evaluating the information presented in this Quarterly Report or our other
disclosures because current plans, anticipated actions, and future financial
conditions and results may differ from those expressed in any forward-looking
statements made by or on behalf of SunLink.

We have not undertaken any obligation to publicly update or revise any
forward-looking statements. All of our forward-looking statements speak only as
of the date of the document in which they are made or, if a date is specified,
as of such date. We disclaim any obligation or undertaking to provide any
updates or revisions to any forward-looking statement to reflect any change in
our expectations or any changes in events, conditions, circumstances or
information on which the forward-looking statement is based, except as required
by applicable law. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the foregoing factors and the other risk factors set forth
elsewhere in this report.

Business Strategy: Operations, Dispositions and Acquisitions

The business strategy of SunLink is to focus its efforts on improving its
operations and services generally and achieving and maintaining profitability in
its existing Healthcare Services and Pharmacy businesses. While the Company
intends primarily to pursue that business strategy, the Company also intends to
pursue growth by selective healthcare and pharmacy acquisitions subject to
available capital and other resources. We believe; however, the COVID-19
pandemic and its aftermath have resulted in substantial additional uncertainties
and risks in our businesses which are not subject to reliable estimation at this
time, particularly because the COVID-19 pandemic was novel in nature, its
effects uncertain in duration, and may be materially affected by government
actions. In response to the pandemic, the Company has discontinued certain
services, laid off or furloughed employees where necessary, reduced cash outlays
where practicable, and deferred other strategic activities. Our ability to
resume fully the pursuit of our normal business strategy in the aftermath of the
COVID-19 pandemic, including growth initiatives, has been challenging and will
continue to depending on the effect of, among other things, the nature, extent
and timing its lasting effects and potential new COVID-19 variants or other
pandemics, and government actions in response thereto.

The Company expects to use existing cash primarily to sustain it operations for
growth initiatives, including acquisitions, when available and appropriate, and
for other general corporate purposes. There is no assurance that any
acquisitions or dispositions of assets will be authorized by the Company's Board
of Directors or, if authorized, that any such transactions will be completed.
Although the Company believes certain portions of its businesses continue to
under-perform, and the Company periodically entertains overtures for the
purchase of its businesses or offers portions of its businesses for sale when
deemed appropriate.

COVID-19 Pandemic and CARES Act Funding

COVID-19 was declared a global pandemic by the World Health Organization on
March 11, 2020 and we continue to monitor the impact on our operations of the
COVID-19 pandemic and its aftermath. In certain of our healthcare businesses, we
experienced operational disruptions, COVID-19 illness, including deaths, and
some employees who tested positive and were placed on leave or in quarantine. We
believe the effect of the COVID-19 pandemic and certain public and certain
governmental responses to it have in varying degrees negatively affected each of
our last twelve quarter's results.



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During the COVID-19 pandemic and its aftermath our Healthcare business
experienced material reductions in demand and net revenues in. Shortages of and
increased cost of certain medical supplies and equipment related to the COVID-19
pandemic as well as increases in the levels of salaries, wages and benefits,
have continued adversely to affect our Healthcare businesses. In addition, we
experienced loss of some employees, including clinical staff, believed due to,
among other things, federally mandated vaccination of healthcare workers against
COVID-19.

Our Pharmacy business also experienced reduced sales trends in certain areas,
increased costs and reduced staff due to the COVID-19 pandemic and its aftermath
as well as material reductions in demand and net revenues. Many of our primary
physician referral sources operated at reduced capacity, and not all have
resumed operating at full capacity. We believe the COVID-19 pandemic and its
aftermath continues negatively to affect the cost of, and result in a lack of,
inventory for, certain DME products and Retail and Institutional Pharmacy drugs
and products. Our Institutional Pharmacy services also experienced increased
costs and operational inefficiencies due to measures taken by us and
restrictions implemented by our institutional customers in response to the
COVID-19 pandemic and its aftermath.


Our Healthcare and Pharmacy segments have received approximately $6,182 in
general and targeted Provider Relief Funds ("PRF") during the period April 1,
2020 through December 31, 2022 under the CARES Act, which was enacted in March
2020 in response to the COVID-19 pandemic. The PRF distributions have been
accounted for as government grants, and a total of $5,713 have been recognized
since April l, 2020 as other income under the gain contingency recognition
method.


During the quarter ended June 30, 2020, our Healthcare and Pharmacy segments
received $3,234 in Paycheck Protection Plan ("PPP") loans provided under the
CARES Act. These loans were forgivable upon compliance with conditions specified
under the PPP loan program. As of December 31, 2022, all our PPP loans have been
forgiven.


The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27,
2020, made a number of changes to employer retention tax credits previously made
available under the CARES Act, including modifying and extending the Employee
Retention Credit ("ERC") for the six calendar months ending June 30, 2021. As a
result of such legislation, the Company qualified for ERC for the first and
second calendar quarters of 2021 due to the decrease in its gross receipts and
has applied for ERC of $3,586 through amended quarterly payroll tax filings for
the applicable quarters. Through the date of this filing, the Company has
received all of the ERC which we applied for. We continue to monitor compliance
with the terms and conditions of the ERC and PPP programs and developing
interpretations and enforcement of the ERC and PPP program rules and the
regulations.


PRF distributions, PPP loan forgiveness and other grants received during the
pandemic are subject to Federal audits and Single Audits and not subject to
repayment provided we are able to attest to and comply with the terms and
conditions of the funding, including demonstrating that the funds received have
been used for designated, allowable healthcare-related expenses and capital
expenditures attributable to COVID-19 and for "Lost Revenues" as defined by the
department of "HHS". We continue to monitor compliance with the terms and
conditions such funds received, as well as the impact of the pandemic on our
revenues and expenses. If we are unable to attest to or comply with current or
future terms and conditions, and there is no assurance we will continue to be
able to do so, our ability to retain some or all of such funds received may be
impacted, and we may have to return the unutilized portion of those funds, if
any, in the future. The Company filed its Schedule of Grant Income of HHS awards
and audit report for the year ended June 30, 2021 with the Health Resources and
Services Administration ("HRSA") agency of HHS on September 30, 2022.


The Company is unable to determine the extent to which the COVID-19 pandemic and
its aftermath will continue to affect its assets and operations. Our ability to
make estimates of any continuing effect of the COVID-19 pandemic on revenues,
expenses or changes in accounting judgments that have had or are reasonably
likely to have a material effect on our financial statements is currently
limited. The nature and extent of the continuing effect of the COVID-19 pandemic
and its aftermath on our balance sheet and results of operations will depend on
the severity and length of the evolving strains of COVID-19; any further
government actions and regulatory changes to address the continuing effect of
the pandemic; regulatory changes in response to the pandemic, especially those
that affect our hospital, extended care, rehabilitation center, nursing home,
clinics, and our pharmacy operations; existing and

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potential government assistance that may be provided; and the requirements of
PRF, including our ability to retain such PRF received.

For additional discussion of the risks presented by continuing effects of the
COVID-19 pandemic to our results, see Risk Factors in Part II, Item 1A of this
Form 10-Q.


Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires us
to make estimates and assumptions that affect reported amounts and related
disclosures. We consider an accounting estimate to be critical if it requires
assumptions to be made that were uncertain at the time the estimate was made;
and changes in the estimate or different estimates that could have been made
could have a material impact on our consolidated results of operations or
financial condition.

Our critical accounting estimates are more fully described in our 2022 Annual
Report on Form 10-K and continue to include the following areas: receivables -
net and provision for doubtful accounts; revenue recognition and net patient
service revenues; goodwill, intangible assets and accounting for business
combinations; professional and general liability claims; and accounting for
income taxes. There have been no material changes in our critical accounting
estimates for the periods presented other than amounts readily computable from
the financial statements included in this form 10-Q.

Financial Summary

The Company's operations for the three and six months ended December 31, 2022
continued, although mitigated somewhat from prior quarters, to be impacted by
the effects of the COVID-19 pandemic, including among other factors, difficulty
hiring qualified employees, rising labor costs and supply chain challenges
resulting in inability to obtain pharmacy and DME products on a timely, cost
effective basis.

The results of continuing operations shown in the financial summary below are
for our two business segments, Healthcare Services and Pharmacy.

                                           Three Months Ended                          Six Months Ended
                                              December 31,                               December 31,
                                    2022          2021        % Change         2022          2021        % Change
Net Revenues - Healthcare
Services                          $   3,940     $   3,335          18.1 %    $   7,724     $   6,833          13.0 %
Net Revenues - Pharmacy              10,452         7,076          47.7 %       17,705        14,103          25.5 %
Total Net Revenues                   14,392        10,411          38.2 %       25,429        20,936          21.5 %
Costs and expenses                  (12,352 )     (11,483 )         7.6 %      (25,002 )     (23,001 )         8.7 %
Operating profit (loss)               2,040        (1,072 )      (290.3 )%         427        (2,065 )      (120.7 )%
Interest income (expense) - net           9            (3 )      (400.0 )%           5           (17 )      (129.4 )%
Federal stimulus - Provider
relief funds                              0           614            NA             61           614         (90.1 )%
Forgiveness of PPP loans and
accrued interest                          0             0            NA              0         3,010            NA
Gain on sale of assets                    2             7         (71.4 )%          14            12          16.7 %
Earnings (loss) from continuing
operations before income taxes    $   2,051     $    (454 )          NA      $     507     $   1,554         (67.4 )%




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Results of Operations

Our net revenues are from our two business segments, Healthcare Services and
Pharmacy. The Company's revenues by payor were as follows for the three and six
months ended December 31, 2022 and 2021:


                                      Three Months Ended          Six Months Ended
                                         December 31,               December 31,
                                       2022          2021         2022         2021
Medicare                            $    4,734     $  5,292     $  9,747     $ 10,347
Medicaid                                 3,183        2,699        6,039        5,067

Retail and Institutional Pharmacy 4,278 1,396 5,777

2,963

Managed Care & Other Insurance           2,129        1,074        3,514        2,394
Self-pay                                    32          (81 )        291          103
Other                                       36           31           61           62
Total Net Revenues                  $   14,392     $ 10,411     $ 25,429     $ 20,936



The Healthcare Services segment in the current year is composed of one hospital,
one extended care and rehabilitation center and four clinics, a subsidiary which
provides information technology services to outside customers and SunLink
subsidiaries and two subsidiaries holding undeveloped real estate. Healthcare
Services net revenues increased $605, or 18%, for the three months period and
increased $891 or 13% for the six month period ended December 31, 2022 compared
to the prior year periods. Increased revenues were primarily from increased
extended care patient days and admissions this year.

Pharmacy segment net revenues for the three months period ended December 31,
2022 increased $3,376 or 48% from the three months period ended December 31,
2021 and increased $3,602 or 26% from the six months period ended December 31,
2022. The increased net revenues include the recognition of prior periods'
accrued sales tax of $2,615 in the three months ended December 31, 2022.

Retail pharmacy sales increased 16% for the three month period ended December
31, 2022 from the prior year period due to a 13% increase in per script net
revenues and a 2% increase in scripts filled. Institutional pharmacy sales
increased 10% for the three month period ended December 31, 2022 from the prior
year period due to a 4% increase in per script net revenues and 8% increase in
scripts filled. Durable Medical Equipment ("DME") sales increased 2% for the
three month period ended December 31, 2022 from the prior year period due to a
3% increase in per order net revenues despite a 1% decrease in DME orders
filled.

Retail pharmacy sales increased 11% for the six month period ended December 31,
2022 from the prior year period due to a 13% increase in per script net
revenues. Institutional pharmacy sales increased 10% for the six month period
ended December 31, 2022 from the prior year period due to a 4% increase in per
script net revenues and 8% increase in scripts filled. Durable Medical Equipment
("DME") sales decreased 2% for the six month period ended December 31, 2022 from
the prior year period due to a 5% decrease in DME orders filled.

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Costs and expenses, including depreciation and amortization, were $12,352 and
$11,483 for the three months ended December 31, 2022 and 2021, respectively.
Costs and expenses, including depreciation and amortization, were $25,002 and
$23,001 for the six months ended December 31, 2022 and 2021, respectively.


                                                        Cost and Expenses
                                                     as a % of Net Revenues
                                          Three Months Ended          Six Months Ended
                                             December 31,               December 31,
                                          2022           2021         2022          2021
Cost of goods sold                           31.4 %        38.6 %        35.0 %      38.4 %
Salaries, wages and benefits                 32.4 %        46.0 %        39.3 %      45.3 %
Supplies                                      2.8 %         3.0 %         2.9 %       2.9 %
Purchased services                            6.9 %         7.6 %         8.0 %       7.9 %
Other operating expenses                      8.7 %        10.6 %         9.2 %      10.4 %
Rent and lease expense                        0.9 %         1.2 %        

1.0 % 1.4 %
Depreciation and amortization expense 2.7 % 3.6 % 3.0 % 3.3 %

Almost all categories of costs and expenses decreased as a percent of net
revenues in the three and six months ended December 31, 2022 compared to the
prior fiscal year due to the increased net revenues this year which included the
sales tax recognition of $2,615. Cot of goods sold increased in total due to
higher cost of certain pharmaceuticals and DME products which resulted from
supply chain issues. Salaries, wages and benefits ("SWB")increased in total for
the six months ended December 31, 2022 compared to the prior period last year
due to higher salaries and wages required in connection with current labor
markets and operating challenges of labor allocation relating to the pandemic,
including contract labor. For the three months ended December 31, 2022, SWB
decreased 3% for the same period last year, due primarily to cost reduction
efforts at our Healthcare Services facility. Purchased services cost increased
this year due to increased cost of fuel, outsourcing at our Healthcare Services
facility of certain services (due to challenges in hiring labor locally) and
increased costs of software support services. Depreciation expense also
increased this year due to the $3,190 of capital expenditures last fiscal year.

Operating Profit (Loss)

The Company reported an operating profit of $2,040 and $427 for the three and
six months periods ended December 31, 2022 compared to operating losses of
$1,072 and $2,065 for the three and six months periods ended December 31, 2021
due to the increased net revenues this year due to the sales tax recognition of
$2,615 in the three months ended December 31, 2022.

Forgiveness of PPP loans and accrued interest

During the six months ended December 3, 2021, $2,972 of our PPP loans and
related $38 of accrued interest were forgiven by the SBA and $3,010 was recorded
as income relating to PPP loan.

Other Income - Federal Stimulus - Provider relief funds

As part of the CARES Act, two subsidiaries have received PRF payments. The
Company recognized $0 and $614 during the three months ended December 31, 2022
and 2021, respectively and recognized $61 and $614 during the six months ended
December 31, 2022 and 2021, respectively.

Income Taxes

Income tax benefit of $1 (all state taxes) and income tax expense of $23 (all
state taxes) was recorded for continuing operations for the three months ended
December 31, 2022 and 2021, respectively. Income tax benefit of $1 (all state
taxes) and income tax expense of $25 (all state taxes) was recorded for
continuing operations for the six months ended December 31, 2022 and 2021,
respectively.

Of the CARES Act provisions, the currently most material income tax
considerations affecting the Company are related to the amounts for ERC and
amounts received as general and targeted PRF. Based on the latest published IRS
guidance as of the preparation of the December 31, 2022 financial statements,
PRF (to the extent the applicable terms and conditions required to retain the
funds are met "Retainable PRF") are fully includable in taxable income in

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the Company's tax returns in the fiscal year received. ERC are included in
taxable income in the quarter in which the payroll expenses which the credits
offset are deductible. ERC results in qualified wages being disallowed as a
deduction for the portion of the wages paid equal to the sum of the payroll tax
credit taken in the associated quarter. For amounts received and forgiven under
the PPP loans, due to the enactment of the Consolidated Appropriations Act,
2021, on December 27, 2020, Congress specifically allowed the deduction of any
expenses associated with forgiven PPP loan proceeds. Our assumption at December
31, 2022 that all PPP loan associated expenses will be deductible for income
tax.

In accordance with the Financial Accounting Standards Board Accounting Standards
Codification ("ASC") 740, we evaluate our deferred taxes quarterly to determine
if adjustments to our valuation allowance are required based on the
consideration of available positive and negative evidence using a "more likely
than not" standard with respect to whether deferred tax assets will be realized.
Our evaluation considers, among other factors, our historical operating results,
our expectation of future results of operations, the duration of applicable
statuary carryforward periods and conditions of the healthcare industry. The
ultimate realization of our deferred tax assets depends primarily on our ability
to generate future taxable income during the periods in which the related
temporary differences in the financial basis and the tax basis of the assets
become deductible. The value of our deferred tax assets will depend on
applicable income tax rates.

At December 31, 2022, consistent with the above process, we evaluated the need
for a valuation allowance against our deferred tax assets and determined that it
was more likely than not that none of our deferred tax assets would be realized.
As a result, in accordance with ASC 740, we recognized a valuation allowance of
$7,759 against the deferred tax asset so that there is no net long-term deferred
income tax asset at December 31, 2022. We conducted our evaluation by
considering available positive and negative evidence to determine our ability to
realize our deferred tax assets. In our evaluation, we gave more significant
weight to evidence that was objective in nature as compared to subjective
evidence. Also, more significant weight was given to evidence that directly
related to our current financial performance as compared to less current
evidence and future performance. A long-term deferred tax liability of $69 is
recorded at December 31, 2022 to reflect the deferred tax liability for the
non-amortizing trade name intangible asset.

The principal negative evidence that led us to determine at December 31, 2022
that all the deferred tax assets should have full valuation allowances was the
projected current fiscal year tax loss. For purposes of evaluating our
valuations allowances, we have disregarded unusual items associated with the
CARES Act discussed above, the Company's history of losses, as well as the
underlying negative business conditions for rural healthcare in which our
Healthcare Services operates, and we have recognized none of our federal income
tax net operating loss carry-forward of approximately $21,772.

For federal income tax purposes, at December 31, 2022, the Company had
approximately $21,772 of estimated net operating loss carry-forwards available
for use in future years subject to the limitations of the provisions of Internal
Revenue Code Section 382. These net operating loss carryforwards expire
primarily in fiscal year 2023 through fiscal year 2038; however, with the
enactment of the Tax Cut and Jobs Act on December 22, 2017, federal net
operating loss carryforwards generated in taxable years beginning after December
31, 2017 now have no expiration date. The Company's returns for the periods
prior to the fiscal year ended June 30, 2018 are no longer subject to potential
federal and state income tax examination.

Earnings (Loss) from Continuing Operations after Income Taxes

The earnings from continuing operations after income tax was $2,052 for the
three months ended December 31, 2022 as compared to a loss from continuing
operations after income tax of $ 477 for the three months ended December 31,
2021. The increase in earnings results from the increased net revenues of $2,615
resulting from the recognition of accrued sales tax payable. The earnings from
continuing operations after income tax was $508 for the six months ended
December 31, 2022 as compared to earnings from continuing operations after
income tax of $1,529 for the six months ended December 31, 2021.The decreased
earning from continuing operation compared to the prior year income from
continuing operations was due to the non-reoccurrence of the PPP loan
forgiveness this year.

Loss from Discontinued Operations after Income Taxes

The loss from discontinued operations after income taxes was $101 for the three
month period ended December 31, 2022 compared to a loss from discontinued
operations after income taxes of $116 for the three months period ended December
31, 2021. The loss from discontinued operations after income taxes was $115 for
the six month

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period ended December 31, 2022 compared to a loss from discontinued operations
after income taxes of $183 for the three months period ended December 31, 2021.
The loss from discontinued operations this year results primarily from legal
expenses related to a nursing home the Company sold in 2019. The loss from
discontinued operations for the periods ended December 31, 2021 are for the
settlement of a workers' compensation claim remaining from a sold business and
pension expense for a sold business

Discontinued Operations

Sold Hospitals and Nursing Homes- Subsidiaries of the Company have sold
substantially all the assets of four hospitals and a nursing home ("Sold
Facilities") during the period July 2, 2012 to March 17, 2019. The loss before
income taxes on the Sold Facilities results primarily from legal expense related
to a nursing home the Company sold in 2019, the effects of retained professional
liability insurance and claims expenses and settlement of a lawsuit.

Life Sciences and Engineering Segment -SunLink retained a defined benefit
retirement plan which covered substantially all of the employees of this segment
when the segment was sold in fiscal 1998. Effective February 28, 1997, the plan
was amended to freeze participant benefits and close the plan to new
participants. Pension expense and related tax benefit or expense is reflected in
the results of operations for this segment for the three and six months ended
December 31, 2022 and 2021, respectively.

Net Earnings (Loss)

Net earnings for the three months period ended December 31, 2022 was $1,951
($0.28 per fully diluted share) as compared to a net loss of $593 (or a loss of
$0.09 per fully diluted share) for the three months period ended December 31,
2021. Net earnings for the six months period ended December 31, 2022 was $393 (
$0.06 per fully diluted share) as compared to net earnings of $1,346 ($0.19 per
fully diluted share) for the six months period ended December 31, 2021.

Liquidity and Capital Resources

Overview

Our primary source of liquidity is unrestricted cash on hand, which was $5,156
at December 31, 2022. The Company also received a payment of approximately
$1,737 from its ERC filing in early January 2023. The Company and its
subsidiaries currently are funding working capital needs primarily from cash on
hand. From time-to-time, we may, nevertheless, seek to obtain financing for the
liquidity needs of the Company or individual

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subsidiaries based on anticipated need. However, currently, the Company's
ability to raise capital (debt or equity) in the public or private markets on
what it considers acceptable terms is uncertain.

CARES Act Funds - The CARES Act was enacted by the U.S. government on March 27,
2020. Among the relief provided to health care providers under the CARES Act are
grants under PRF and forgivable loans under PPP. We have received a total of
$9,416 under the CARES Act programs consisting of $6,182 in general and targeted
PRF and $3,234 of PPP loans. During the first two calendar quarters of 2021, the
Company became eligible for, and we applied for $3,586 of ERC through amended
quarterly payroll tax filings, all of which the Company has received as of the
date of this filing.

Subject to the effects, risks and uncertainties associated with the COVID-19
pandemic and our ability to retain the CARES funds described above, we believe
we have adequate financing and liquidity to support our current level of
operations through the next twelve months.

Contractual Obligations, Commitments and Contingencies

Contractual obligations, commitments and contingencies related to outstanding
debt, noncancelable operating leases and interest on outstanding debt from
continuing operations at December 31, 2022 were as follows:

                                                   Interest on
Payments           Long-Term       Operating       Outstanding
due within:           Debt          Leases            Debt
1 year             $       30     $       361     $           1
2 years                     0             348                 0
3 years                     0             309                 0
4 years                     0              42                 0
5 years                     0               9                 0
Over 5 years                0               0                 0
                   $       30     $     1,069     $           1

As of December 31, 2022, we had outstanding debt of $30 of capital lease debt.

The Company expects to purchase approximately $1,000 of capitalizable DME by the
Pharmacy segment (to be rented to customers) during the next twelve months. The
timing and actual amount which will be expended is difficult to predict due to
various factors including varying demand for such equipment as well as its
availability given current supply sourcing challenges. Other capital
expenditures for replacement and upgrade of current facilities and equipment of
the Healthcare Services and Pharmacy segments will be needed during the next
twelve months although there is no estimate of those expenditures. The Company
anticipates funding such expenditures primarily from cash on hand. Other cash
expenditures for the next twelve months currently are expected to be in-line
with expenditures for the six months ended December 31, 2022, subject to further
operating and administrative cost increases, and other settlements of cost
reports in the ordinary course of business, and the Company's ability to retain
unrecognized CARES Act grants, PPP funds and ERC funds received or previously
received. Other than reported above, there have been no material changes outside
the ordinary course of business relating to our upcoming cash obligations which
have occurred during the six months ended December 31, 2022. Other than with
respect to scheduled cash expenditures (based on current operating levels) for
long-term debt, operating leases, and interest on current outstanding debt, the
debt, the specific items previously disclosed here, as well as continued
uncertainties relating to the continuing impact of the COVID-19 pandemic, the
Company is currently unaware of other trends or unusual uncertainties that are
likely to cause a material change in its cash expenditures in periods beyond the
next twelve months. See Notes 7, 9, 10, and 11 to our financial statements. The
Company is also unaware of events that are reasonably likely to cause a material
change in the relationship between its costs and revenues (such as known or
reasonably likely future increases in costs of labor or materials, price
increases or inventory adjustments, beyond those discussed herein); however, we
are unable

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to predict with any degree of accuracy when, or the extent to which, recent
inflationary price trends, labor disruptions and supply chain challenges in 2021
and 2022 will mitigate.

Related Party Transactions

A director of the Company is a member of a law firm which provides services to
SunLink. The Company expensed an aggregate of $130 and $66 for legal services to
this law firm in the three months ended December 31, 2022 and 2021,
respectively. The Company expensed an aggregate of $185 and $111 for legal
services to this law firm in the six months ended December 31, 2022 and 2021,
respectively. Included in the Company's condensed consolidated balance sheets at
December 31, 2022 and June 30, 2022 is $120 and $15, respectively,