10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-12607

SunLink Health Systems, Inc.

(Exact name of registrant as specified in its charter)

Ohio	31-0621189
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

900 Circle 75 Parkway, Suite 690, Atlanta, Georgia 30339

(Address of principal executive offices)

Registrant’s telephone number, including area code: (770) 933-7000

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each Class	Trading Symbol	Name of each Exchange on which registered
Common Shares without par value Preferred Share Purchase Rights	SSY -	NYSE American, LLC -

Indicate by check mark whether if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growthcompany, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

At the close of business on September 24, 2020, there were 6,899,321 shares of the registrant’s common shares without par value outstanding. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price on December 31, 2019 of the registrant’s common shares as reported by NYSE American stock exchange amounted to $4,383,480.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be filed under Regulation 14A in connection with the Annual Meeting of Shareholders of SunLink Health Systems, Inc., scheduled to be held on November 11, 2020, have been incorporated by reference into Part III of this Report. The Proxy Statement or an amendment to this Annual Report will be filed with the Securities and Exchange Commission within 120 days after June 30, 2020.

Certain Cautionary Statements

FORWARD-LOOKING STATEMENTS

This Annual Report and the documents that are incorporated by reference in this Annual 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,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” Throughout the notes to the 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. Hospital and nursing home, pharmacy operations and 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 which 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 services, the efficiency of such services, availability of staffing, availability of supplies, cost and financial results as well as on the potential for claims and litigation relating to our operations;

• increases in uninsured and/or underinsured patients due to 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, nursing home, and pharmacy businesses;

• demographic changes in areas where we operate;

• 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;

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

• Fluctuations in the market value of equity securities including SunLink common shares.

Operational Factors

• the ability or inability to operate profitably in one or more segments of the healthcare business under the current and future business conditions;

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

• timeliness and amount of reimbursement payments received under government programs;

• changes in interest rates under any lending agreements and other indebtedness;

• the ability or inability to refinance or pay principal on existing or future indebtedness and/or any existing or potential defaults under existing indebtedness;

• the ability to achieve forgiveness of outstanding Paycheck Protection Program loans or any similar future loans and support such forgiveness upon review and audit by various authorities and/or the lack of availability of future governmental support that may be required to offset the effect of the COVID-19 pandemic;

• the ability to incur costs and the ability to identify “lost revenues” relating to Provider Relief Funds received under the CARES Act, and the ability to support and substantiate entitlement to such funds upon review and audit by various authorities;

• restrictions imposed by existing or future lending agreements or other indebtedness;

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• the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general, employment, fiduciary and other liability insurance, especially with respectto the availability, cost and increased risk retention limits including as a result of the COVID-19 pandemic;

• the efforts of insurers, healthcare providers, and others to contain 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 or 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;

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

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

• changes in the amount and risk of collectability of 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 some of which is licensed from or operated by third-party vendors;

• 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

• claims related to the COVID-19 pandemic and claims relating to CARES Act funds received relating thereto.

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 known and unknown government investigations;

• claims for product and environmental liabilities from continuing and discontinued operations;

• professional, general, and other claims which may be asserted against us; and

• 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.

Regulation and Governmental Activity

• existing and proposed governmental budgetary constraints;

• Federal and state insurance exchanges and their rules relating to reimbursement terms;

• the 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; EHR reimbursement and indigent care reimbursements (Medicare Upper Payment Limit “UPL” and Disproportionate Share Hospital “DSH” adjustments), and CARES Act funding relating to the COVID-19 pandemic;

• 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, 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 and business segments;

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

• competition in the market for acquisitions of hospitals, nursing homes, pharmacy facilities, and 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 Annual 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 Annual 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. 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.

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PART I

Item 1. Business (all dollar amounts in thousands except share, per share and revenue per equivalent admission amounts)

Overview

SunLink Health Systems, Inc., through subsidiaries, owns businesses which provide healthcare products and services in certain markets in the southeastern United States. Unless the context indicates otherwise, all references to “SunLink,” “we,” “our,” “ours,” “us” and the “Company” refer to SunLink Health Systems, Inc. and our consolidated subsidiaries. References to our specific operations refer to operations conducted through our subsidiaries and references to “we,” “our,” “ours,” and “us” in such context refer to the operations of our subsidiaries. Our business is composed of two business segments, the Healthcare Services segment and the Pharmacy segment. Our Healthcare Services segment subsidiaries own and operate an 84- bed community hospital and a 66- bed nursing home in Mississippi, and an IT service company based in Georgia. Our Pharmacy segment subsidiary owns and operates a pharmacy business in Louisiana with four service lines.

SunLink’s executive offices are located at 900 Circle 75 Parkway, Suite 690, Atlanta, Georgia 30339, and our telephone number is (770) 933-7000. Our website address is www.sunlinkhealth.com. Information contained on our website does not constitute part of this report. Certain materials we file with the SEC may also be read and copied at or through our website or at the Internet website maintained by the SEC at www.sec.gov.

Business Strategy: Operations, Dispositions and Acquisitions

The business strategy of SunLink is to focus its efforts on improving the operations, services and profitability of its existing Healthcare Services and Pharmacy businesses. However, we believe the COVID-19 pandemic has resulted in substantial additional uncertainties and risks in our businesses, the effect of which are not currently subject to estimation at this time, particularly because they are novel in nature, uncertain in duration, and materially affected by government actions related to or resulting from the pandemic.  Although the Company intends to pursue its business strategy of improving its operations, services and profitability of its existing businesses, in response to the pandemic, it has discontinued certain services, laid off or furloughed employees where necessary, reduced cash outlays where possible, and deferred other strategic activities. Although management periodically considers potential acquisitions of healthcare entities or businesses which it believes may be suitable in light of the Company’s management and financial resources, no such potential acquisition is currently pending. Our ability to resume pursuing our normal business strategy will depend on the effect of, among other things, the nature, extent and timing of the COVID-19 pandemic and government actions in response thereto.

The Company has used a portion of the cash proceeds from recent dispositions of assets to pay down debt and certain other liabilities, to repurchase common shares, including through tender offers completed in February and December 2017, a private purchase and open market repurchases of its common shares in November and December 2018 and again in November 2019 through March 2020, and to make improvements to its Healthcare Services and Pharmacy businesses. On March 24, 2020, the Company suspended the 2019-2020 Common Share Repurchase program in light of the COVID-19 pandemic and then terminated such program on June 1, 2020. The Company expects to use existing cash primarily to sustain it operations during the COVID-19 pandemic and for other general corporate purposes. There is no assurance that any further dispositions of assets will be authorized by the Company’s Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after-tax basis. The Company considers the disposition of business segments, facilities and operations based on a variety of factors in addition to under-performance, including asset values, return on investments, competition from existing and potential competitors, capital improvement needs, the prevailing reimbursement environment under various Federal and state programs (e.g., Medicare and Medicaid) and private payors, and other corporate objectives. Although the Company believes certain portions in its Healthcare Services segment as well as its Pharmacy segment continue to under-perform none of its businesses are currently being offered for sale as it believes current economic conditions are generally unfavorable for the disposition of assets.

COVID-19 Pandemic

A novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization on March 11, 2020. We have been monitoring the COVID-19 pandemic and its impact on our operations, and we have taken significant steps intended to minimize the risk to our employees and patients. Certain employees have been working remotely, but we believe these remote work arrangements have not materially affected our ability to maintain critical business operations, which are being conducted substantially in accordance with our understanding of applicable government health and safety protocols and guidance issued in response to the COVID-19 pandemic, although such protocols and guidance are very recent, rapidly changing and at times, unclear.  Nevertheless, as in many healthcare environments, we have experienced COVID-19 illness, including deaths, and some employees have tested positive and been placed on leave or in quarantine.

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Since the beginning of the COVID-19 pandemic, our Pharmacy business has experienced negative sales trends in certain operational areas, increased costs and reduced staff.  Retail Pharmacy and DME locations are operating with curbside or drive-through services only and many of our primary physician referral sources have been closed or are operating at substantially reduced capacity.  Until these referral sources are back to normal capacity and fullystaffed, we believe the COVID-19 pandemic will continue to affect the demand for DME products and Pharmacy drugs and products. Reductions in employee hours have been made in response to the lower demand. Demand for our Institutional Pharmacy services has been less affected to date. Nursing homes and other customers of such Institutional Pharmacy services are currently being adversely affected by the spreading of the COVID-19 pandemic, and this may be expected to have a further negative effect on such demand.  Our Institutional Pharmacy services have experienced increased costs and operational inefficiencies due to measures taken to protect our employees and by access controls and other restrictions implemented by our institutional customers. The impact of the COVID-19 pandemic has negatively affected our supply processes, especially with respect to access to respiratory equipment and certain personal protective equipment and cleaning products. The effect of the COVID–19 pandemic and public and governmental responses to it negatively affected our third and fourth quarter results.

Due to the COVID-19 pandemic, our Healthcare businesses, we have experienced material reductions in demand due to the COVID-19 outbreak. There appears to be minimal current demand for nursing home admissions, and clinic visits and hospital services have substantially decreased as wel1, in part due to the abrupt retirement of one physician and reduced capacity of other physicians and providers, all as a result of the pandemic. The availability and cost of medical supplies have adversely affected our Healthcare businesses, especially with respect to access to personal protective equipment, cleaning supplies and COVID-19 testing materials. We continue to monitor supplies and seek additional sources of many supply items. A reduction of the availability of qualified employees has also occurred. Although the Healthcare and Pharmacy segments received Paycheck Protection Program (“PPP”) loans totaling approximately $3,234 in April and May despite good faith efforts to do so, they have not yet been able to rehire or fully replace staff reductions which were previously furloughed or laid off or retired.

We believe that existing funds, cash generated from operations and additional sources of and access to financing from COVID-19 related government loans and grants will likely be adequate to satisfy our needs for working capital and capital expenditures in the near term. However, if the COVID-19 pandemic continues for an extended period, we expect to experience significant losses and additional financial assistance will likely be required. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted by the U.S. government on March 27, 2020. As part of CARES, the PPP loan program was established.  The PPP is administered by the U.S. Small Business Administration (“SBA”). In April and May 2020, the Company and five subsidiaries received approximately $3,234 of PPP loans.  Forgiveness of PPP loans may be available if the loans are used to pay wages, rent, utilities and interest on certain debt during an up to 24-week period in which to utilize PPP loan proceeds. The borrowing subsidiaries must apply for forgiveness with the lending bank within ten months after the end of the allowable period. The forgiveness applications are to be reviewed by both the lender and the SBA and a loan forgiveness amount, if any, will be determined. There can be no assurance, however, that any of the PPP loans we received will be forgiven, or if forgiven, the amount of such forgiveness. Loan proceeds not forgiven are payable over two years at a 1% annual interest rate. The Company had not applied for forgiveness of any of its PPP loans and recorded no income relating to the PPP loans at June 30, 2020.

Also, as part of CARES, two subsidiaries of the Company received total payments of approximately $4,586 under the Provider Relief Fund (“PRF”). These funds were allocated under the PRF to Medicare facilities and providers affected by COVID-19 based on eligible providers patient care operating revenues and are required to be used for COVID-19 related costs and to offset the effect of COVID-19, including “Lost Revenues”.  According to PRF reporting requirements released by the U.S. Department of Health and Human Services (“HHS”) on September 19, 2020, “Lost Revenues” are patient care revenues less related expenses, capped at the provider’s net gain from healthcare related sources or, up to a net zero gain/loss in 2020 if the provider  reported negative operating income in 2019.  

During the fourth quarter of fiscal 2020, our Healthcare and Pharmacy segments received funding of approximately $4,586 in general and targeted PRF distributions and $3,234 in PPP loans, administered by the SBA, both provided for under the CARES Act, for a total of $7,820 of such funding.

Going forward, the Company is unable to determine the extent to which the COVID-19 pandemic will continue to affect its assets and our ability to make estimates of the effect 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 effect of the COVID-19 pandemic on our balance sheet and results of operations will depend on the severity and length of the pandemic; government actions to mitigate the pandemic’s effect; regulatory changes in response to the pandemic, especially those that affect our hospital, nursing home and pharmacy operations; and existing and potential government assistance that may be provided.

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OPERATIONS

Healthcare Services

The Healthcare Services segment is composed of:

• A subsidiary which owns and operates Trace Regional Hospital and Floy Dyer Nursing Home (“Trace”), an 84-licensed-bed acute care hospital, located in Houston, Mississippi, which includes an 18-bed geriatric psychiatry unit (“GPU”) and a 66-bed nursing home. This facility focuses primarily on senior healthcare services.

• A subsidiary, SunLink Health Systems Technology (‘SHS Technology”), which provides information technology services (IT) to outside customers and to SunLink subsidiaries.

• A subsidiary which owns approximately five (5) acres of unimproved land in Houston, Mississippi.

• A subsidiary which owns approximately 25 acres of unimproved land in Ellijay, Georgia.

Pharmacy

The Pharmacy segment is composed of four operational areas:

• Retail pharmacy products and services provided to residents of southwestern Louisiana;

• Institutional pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to institutional clients or to patients in institutional settings, such as nursing homes, assisted living facilities, behavioral and specialty hospitals, hospices, and correctional facilities in Louisiana;

• Non-institutional pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to clients or patients in non-institutional settings, including private residences; and,

• Durable medical equipment products and services (“DME”), consisting primarily of the sale and rental of products for institutional clients or to patients in institutional settings and patient-administered home care in Louisiana.

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Trace receives payments for patient care from Federal Medicare programs, State Medicaid programs, private insurance carriers, health maintenance organizations, preferred provider organizations, TriCare, and from employers and patients directly. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a federal-state program, administered by the states, that provides hospital and nursing home benefits to qualifying individuals who are unable to afford care. Trace is certified as a healthcare services provider for persons covered by Medicare and Medicaid programs. TriCare is a federal program for the healthcare of certain U.S. military personnel and their dependents. See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Patients generally are not responsible for any difference between established charges and amounts reimbursed for such services under Medicare, Medicaid and some private insurer plans, health maintenance organization (“HMO”) plans and preferred provider organizations (“PPO”) plans, but are responsible to the extent of any exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has been increasing in recent years. Collection of amounts due from individuals typically is more difficult than from governmental or other third-party payors. Further, amounts received under the Medicare and Medicaid programs generally are significantly less than the established charges of our facilities for the services provided. Likewise, HMOs and PPOs generally seek and obtain discounts from the established charges. See “Item 1. Business—Government Reimbursement Programs—Hospitals—Medicare/Medicaid Reimbursement”.

Changes in the mix of the patient and resident population among reimbursement categories can significantly affect the profitability of our Healthcare Services operations. We cannot assure you that reimbursement payments under governmental and private third-party payor programs, including private Medicare supplemental insurance coverage, will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to these programs. Medicare reimbursement for services performed in nursing homes is subject to fixed payments under the Medicare prospective payment systems. In accordance with Medicare laws, the Centers for Medicare and Medicaid Services (‘CMS”) makes annual adjustments to Medicare payment rates in many prospective payment systems under what is commonly known as a “market basket update.” Each year, the Medicare Payment Advisory Commission (“Med PAC”), a commission chartered by Congress to advise it on Medicare payment issues, makes payment policy recommendations to Congress for a variety of Medicare payment systems. Congress is not obligated to adopt Med PAC’s recommendations, and, based upon outcomes in previous years, there can be no assurance that Congress will adopt Med Pac’s recommendations in a given year. Medicaid reimbursement rates in Mississippi where a subsidiary operates a nursing home also are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. However, these adjustments may not reflect the actual increase in the costs of providing healthcare services. In addition, Medicaid reimbursement can be impacted negatively by state budgetary pressures, which may lead to reduced reimbursement or delays in receiving payments. Moreover, we cannot assure you that the hospital or nursing home operated by us, or the provision of goods and services offered by us, will meet the requirements for participation in such programs.

Utilization of Local Management Teams

Each of our businesses is managed by a subsidiary officer who is supported by other professional personnel as needed, including, but not limited to, a state-licensed nursing home administrator, a director of nursing, nursing assistants, licensed practical nurses, staff development coordinators, activities directors, social services directors, clinical liaisons, admissions coordinators, licensed pharmacists, licensed pharmacy technicians, IT staff, and business office managers. In our businesses, more than one role may be performed by a single individual or may be delegated to more than one individual. Staff size and composition vary depending on the size and occupancy or volume of activity of each business, the types of services provided and the acuity level of the patients and residents. The nursing home contracts with physicians who provide medical director services and serve on performance improvement committees. Our businesses purchase certain services including information systems from affiliates and obtain certain services, such as legal, finance, accounting, purchasing, human resources and facilities management support, from vendors recommended by SunLink.

Quality Assurance

Quality of care and services is monitored and enhanced by our clinical operations personnel, as well as family satisfaction surveys. The Improving Medicare Post-Acute Care Transformation Act of 2014 (the “IMPACT Act”), passed on October 6, 2014, requires standardized assessment data for quality improvement, payment, and discharge planning purposes across the spectrum of post acute-care providers (“PACs”), including skilled nursing facilities.

Trace implements quality assurance procedures to monitor the level and quality of care provided to patients and has a medical director who supervises and is responsible for the quality of medical care so provided, as well as a medical advisory committee comprised of physicians who review the professional credentials of physicians applying for medical staff privileges at the facility. The medical advisory committee also reviews the quality of the logistical, medical and technological support provided to the physicians. Trace periodically conducts surveys of their patients, either during their stay or subsequently, to identify potential areas of improvement. Trace is accredited by The Joint Commission (“JCAHO”).

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Our pharmacy business maintains quality assurance procedures under the direction of licensed pharmacists-in-charge (“PIC”) including, among other procedures,regular inventories and reconciliations of drugs by a PIC,who is supported by additional staff pharmacists and additional staff pharmacy technicians.

Competition

Among the factors which we believe influence patient and customer selection in our healthcare businesses are the appearance, convenience and functionality of the facilities; the quality and demeanor of professional staff, physicians and pharmacists; and the participation of our businesses in plans which pay all or a portion of the patient’s bill. Such factors are influenced heavily by the quality and scope of services, strength of referral networks, location and the price of services.

Trace competes with similar senior care facilities primarily on the basis of quality of care, reputation, location, and physical appearance and, in the case of private payment residents, the charges for our services. Our Healthcare Services facilities also compete on a local and regional basis with other facilities providing similar services, including hospitals, extended care centers, assisted living facilities, home health agencies, and similar institutions. Some competitors may operate newer facilities and may provide services, including skilled nursing services that we may not offer at our nursing home. Our competitors include government-owned, religious organization-owned, secular nonprofit and for-profit institutions. Many of these competitors have greater financial and other resources than we do. Although there is limited, if any, price competition with respect to Medicare and Medicaid residents (since revenues received for services provided to these residents are generally based on pre-established rates), there is substantial price competition for private payment residents. Our Floy Dyer Nursing Home is located adjacent to our Trace Regional Hospital.

Our Pharmacy Segment competes with retail and institutional pharmacies, home health providers, and DME providers, including national chains with vastly more resources and larger distribution systems than ours, as well as with local pharmacies with strong reputations within the community.  We compete primarily on the basis of location, convenience, service, participation in pharmacy reimbursement and benefit plans, and reputation. Our retail pharmacy business seeks to provide non-pharmacy items, such as snacks, gifts and merchandise, to customers who visit our pharmacy, and our local staff are generally long-time community residents known to many of our pharmacy customers.  We believe our personal service approach has provided us with the ability to compete with larger pharmacy chains which operate larger stores and provide more merchandise offerings.

SHS Technology competes with companies which provide IT hosting, computer hardware, IT software implementation, and IT consulting services to customers, either for fees or in connection with the sale of hardware or software. SHS Technology does not sell hardware or software. Some of SHS Technology’s competitors have larger staffs and greater resources and be subsidized by hardware or software vendors or related businesses. Price competition for IT services such as SHS Technology provides is intense and some potential customers operate on legacy IT systems which make it difficult to change to systems which SHS Technology is able to support.

Managed Care

Our subsidiaries are affected by their ability to negotiate service contracts with purchasers of group healthcare services. HMOs, PPOs and pharmacy benefit managers attempt to direct and control the use of healthcare products, drugs and services through managed care programs. In addition, employers and traditional health insurers increasingly are seeking to contain costs through negotiations with facilities for managed care programs and discounts from established charges. Generally, facilities compete for service contracts with healthcare service purchasers on the basis of market reputation, geographic location, quality and range of services, quality of medical staff, convenience and price.

The importance of obtaining contracts with managed care organizations varies from market to market, depending on the market strength of such organizations. Nevertheless, a significant portion of patients in our hospital and pharmacy communities are covered by managed care or other reimbursement programs, all of which generally pay less than established charges for products and services.

The healthcare industry as a whole faces the challenge of continuing to provide quality patient care while managing rising costs, facing strong competition for patients, and adjusting to a continued general reduction of reimbursement rates by both private and government payors. Both private and government payors continually seek to reduce the nature and scope of services which may be reimbursed and healthcare reforms at both the federal and state level generally have created pressure to reduce reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations, and competitive contracting for drugs and provider services by private and government payors, have required and in the future may further require changes in our facilities, equipment, personnel, rates and/or services.

Efforts to Control Healthcare Costs

Rural facilities, including Trace, continue to have significant unused capacity. Average occupancy rates continue to be affected negatively by payor-required pre-admission authorization, utilization review, and payment mechanisms designed to maximize

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outpatient and alternative healthcare delivery services for less acutely ill patients and to limit the cost of nursing home care. Admissions constraints, payor pressures, and increased competition are likely to continue. Historically, facilities owned and operated by SunLink’s subsidiaries have responded to such trends by upgrading facilities and equipment and adding or expanding certain inpatient and ancillary services. In addition, our facilities have reduced services and taken beds out of service in response to such trends. Currently we expect our facilities will continue to respond to such trends in a similar manner, subject to the availability of capital resources and our evaluation of the continued utility of such historical responses.

Health Care Reform

The Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act” or “ACA”) were signed into law by former President Obama on March 23, 2010, and March 30, 2010, respectively. The ACA alters the United States health care system and is intended to decrease the number of uninsured Americans and reduce overall health care costs. The ACA attempts to achieve these goals by expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments including disproportionate share payments, expanding the Medicare program’s use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, and bundling payments to hospitals and other providers. The ACA also contains a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program and generally prohibiting physician-owned hospitals from adding new physician owners or increasing the number of beds and operating rooms for which they are licensed. We believe the implementation or interpretation of rules and regulations or the provisions of the ACA may have and may continue to have an adverse effect on our financial condition and results of our operations, especially since the one state in which we operate our hospital has decided not to set up state exchanges and not to expand Medicaid. During the current administration, various bills have been proposed or introduced into Congress to repeal and/or replace the ACA, and various executive orders and interpretations have been issued which modify the ACA. No such bills to repeal the ACA have been enacted to date. However, among other things, as a result of 2018’s Tax Cuts and Jobs Act, the former “individual mandate” (i.e. the requirement under the ACA that persons either lacking health insurance or Medicaid or Medicare coverage face a penalty on their taxes) has been effectively eliminated. In addition, the current administration also issued various orders and interpretations which modify application of the ACA including those that (i) permit states with federal approval to require Medicaid beneficiaries to prove with documentation that they either work or go to school and (ii) extended the term of permitted short-term plans that did not provide certain "essential benefits" specified by the ACA from a maximum duration of three months to 364 days and permitted renewal of such policies for up to three years.

GOVERNMENT REIMBURSEMENT PROGRAMS

Government Reimbursement Programs—Hospitals

A significant portion of SunLink’s Healthcare Services net revenues is dependent upon reimbursement from Medicare and Medicaid. CMS is the federal agency which administers Medicare, Medicaid and the Children’s Health Insurance Program (“CHIP”). The federal government generally reviews payment rates under its various programs annually, and changes in reimbursement rates under such programs, including Medicare and Medicaid, generally occur based on the fiscal year of the federal government which currently begins on October 1 and ends on September 30 of each year.

Medicare Inpatient Reimbursement

The Medicare program currently pays hospitals under the provisions of a prospective payment system for most inpatient services. Under the inpatient prospective payment system, a hospital receives a fixed amount for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, known as diagnosis related groups (“DRGs”). Each patient admitted for care is assigned to a DRG based upon a primary admitting diagnosis. Every DRG is assigned a payment rate by the government based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. DRG payments do not consider a specific hospital’s costs, but are national rates adjusted for area wage differentials and case-mix indices.

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DRG rates are usually adjusted by an update factor each federal fiscal year (“FFY”). The percentage increases to DRG payment rates for the last several years have been lower than the percentage increases in the related cost of goods and services provided by general hospitals. The index used to adjust the DRG payment rates is based on a price statistic, known as the CMS Market Basket Index, reduced by congressionally mandated reduction factors and other factors imposed by CMS.

DRG rate increases were 3.1% and 1.85% for FFY 2020 and 2019, respectively, which included the market basket updates of 2.7% and 1.35% for: FFY 2020 and FFY 2019. For 2021, the update factor is currently proposed to be 2.9%. The Balanced Budget Act of 1997 originally set the increase in DRG payment rates for future FFYs at rates that would be based on the market basket index, which in certain years have been, and in the future may be, subject to reduction factors. If the update factor does not adequately reflect increases in the cost of providing inpatient services by our subsidiary’s hospital, our financial condition or results of operations could be negatively affected.

The ACA combined with the America Taxpayer Relief Act of 2012 (“ATRA”) and the Medicare Access and CHIP Reauthorization Act of 2015 (“MARA”) made a number of changes to the provisions of Medicare which include but are not limited to:

• Reduction of market basket updates in Medicare payment rates for providers, to incorporate an adjustment for expected productivity gains. The market basket was reduced by 0.75% in FFYs 2017-2019.

• Reduction of Medicare payments that would otherwise be made to hospitals by specified percentages to account for preventable hospital readmissions, as defined by CMS.

• Extension of the Medicare Dependent Hospital Program until September 30, 2022.

• Expansion, on a temporary basis, of the low volume hospital inpatient payment adjustment to include hospitals that are more than 15 miles from other Healthcare Services and have less than 1,600 discharges per year. The new temporary criteria are effective through September 30, 2022.

• Hospitals that do not successfully participate in the Hospital IQR Program and do not submit the required quality data will be subject to a one-fourth reduction of the market basket update.

• A requirement that the market basket for any hospital which is not a meaningful electronic health records user will be reduced by 50% of the market basket update by 61% of the market basket rate in FFY 2019 and 90% in FFY 2020. Our subsidiary hospital did not attest as a meaningful electronic records user for FFYs 2019 or 2020.

SunLink’s subsidiary hospital is an eligible hospital under one or more provisions of ACA, ATRA and MARA.

Medicare Outpatient Reimbursement

Most outpatient services provided by general hospitals are reimbursed by Medicare under the outpatient prospective payment system. This outpatient prospective payment system is based on a system of Ambulatory Payment Classifications (“APC”). Each APC is designed to represent a “bundle” of outpatient services, and each APC is assigned a fully prospective reimbursement rate. Medicare pays a set price or rate for each APC group, regardless of the actual cost incurred in providing care. Each APC group rate generally is subject to adjustment each year by an “update factor” based on a market basket of services index. For calendar year 2020, the update factor was 2.6% and or calendar years 2019 and 2018, the update factor was 2.0%. For calendar year 2021, the update factor is currently proposed to be 2.6%. If the update factor for current and future periods does not adequately reflect increases in SunLink’s subsidiary hospital cost of providing outpatient services, our financial condition or results of operations could be negatively affected.

Medicare Bad Debt Reimbursement

Under Medicare, the costs attributable to the deductible and coinsurance amounts that remain unpaid by Medicare beneficiaries can be partially added to, and reimbursed as a portion of, the Medicare share of allowable costs as cost reports are filed. Bad debts must meet specific criteria to be allowable. Hospitals generally receive interim pass-through payments during the cost report year which are determined by the respective Medicare Audit Contractor (“MAC”) from the prior cost report filing, and which are finally adjusted when cost reports are filed and audited.

Amounts uncollectible from specific beneficiaries are charged off as bad debts in the accounting period in which the accounts are deemed to be worthless. In some cases, an amount previously written off as a bad debt and allocated to the program may be recovered in a subsequent accounting period. In these cases, the recoveries must be used to reduce the cost of beneficiary services for the period in which the collection is made. In determining reasonable costs for hospitals, the amount of bad debts otherwise treated as allowable costs is currently 35%.

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Medicare Disproportionate Share Payments

In addition to the standard DRG payment, the Social Security Act requires that additional Medicare payments be made to hospitals with a disproportionate share of low-income patients. Beneficiary Improvement and Protection Act (“BIPA”) provisions stipulate that rural facilities with fewer than 100 beds with a disproportionate share percentage greater than 15% will be classified as a disproportionate share hospital and entitled to receive a supplemental disproportionate share payment based on gross DRG payments. The effective rate has been 12.0% of DRG payments in recent years and Trace is classified as a disproportionate share hospital. The Affordable Care Act provides for material reductions in Medicare DSH funding. We estimate that Medicare disproportionate share payments represented less than 1% of our healthcare services net patient service revenues for the years ended June 30, 2020 and 2019.

Medicaid Inpatient and Outpatient Reimbursement

Each state operates a Medicaid program funded jointly by the state and the federal government. Federal law governs the general management of the Medicaid program, but there is wide latitude for states to customize Medicaid programs to fit local needs and resources. As a result, each state Medicaid plan has its own payment formula and recipient eligibility criteria.

In the recent past, Mississippi, in which one of subsidiary operates a hospital and nursing home, has initiated increased efforts and implemented initiatives to reduce Medicaid assistance payments. These efforts and reductions often are triggered by an increased effort by CMS to decrease the federal share of payments for Medicaid beneficiaries or by significant increases in program utilization and budgetary pressures on the applicable states. The federal government’s percentage share of each state’s medical assistance expenditures under Medicaid is determined by a formula specified in Medicaid law referred to as the Federal Medical Assistance Percentage (“FMAP”). Medicaid pays providers for inpatient services in a manner similar to the Medicare prospective payment system in that hospitals receive a fixed fee for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, also known as DRGs. These Medicaid DRG payments do not consider a specific hospital’s costs, but are statewide rates adjusted for each hospital's capital cost allotment, and generally are less than the Medicare DRG rate.

Medicaid outpatient services are reimbursed with interim rates based on a facility specific cost to charge ratio. These interim payments are then adjusted subsequent to the end of the cost reporting period to an amount equal to 85.6% of the costs associated with providing care to the Medicaid outpatient population.

If SunLink or our subsidiaries or any of their facilities are found to be in violation of federal or state laws relating to Medicare, Medicaid or similar programs, SunLink or the applicable subsidiary or facility, could be subject to substantial monetary fines, civil penalties and exclusion from future participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on our financial condition or results of operations.

Government Reimbursement Program Administration and Adjustments

The Medicare, Medicaid and TriCare programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review and changing governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments under such programs.

All hospitals participating in the Medicare and Medicaid programs are required to meet certain financial reporting requirements. Federal and state regulations require the submission of annual cost reports covering the revenues, costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.

Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits which may result in adjustments to the amounts initially determined by the subsidiary provider to be due under these reimbursement programs. These audits often require several years to reach the final determination of amounts due. Providers have rights of appeal, and it is common to contest issues raised in audits. Although the final outcome of these audits and the nature and amounts of any adjustments are difficult to predict, we believe that we have made adequate provisions in our financial statements for adjustments that may result from these audits and that final resolution of any contested issues should not have a material adverse effect upon our financial condition or results of operations. Until final adjustment, however, significant issues may remain unresolved and previously determined allowances could become either inadequate or greater than ultimately required.

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In 2005, CMS began using recovery audit contractors (“RACs”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private companies to examine Medicare claims filed by healthcare providers. The RAC program was made permanent by the Tax Relief and Health Care Act of 2006. The ACA expanded the RAC program’s scope to include managed Medicare and Medicaid claims, and allows all states to establish programs to contract with RACs by 2011. Currently Mississippi has RAC programs, and our hospital and nursing home have had requests from the RACs to review claims.

RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old. Claims review strategies used by RACs generally include a review of high dollar claims, including inpatient hospital claims. As a result, a large amount of the total recovered by RACs has come from hospitals. Claims identified as overpayments are subject to an appeals process and the Company’s facilities have routinely appealed RAC overpayment determinations. Under the RAC program, our facilities have experienced losses in the aggregate from audit adjustments of approximately $0 and $11 for the fiscal years ended June 30, 2020 and 2019.

RACs are paid a contingency fee based on the overpayments they identify and collect. We expect that the RACs will continue to look closely at claims submitted by our Healthcare Service facilities in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict the results of any future RAC audits.

In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The ACA has increased federal funding for the MIC program since FFY 2011. In addition to RACs and MICs, the state Medicaid agencies and other contractors have also increased their review activities.

Government Reimbursement Programs—Nursing Homes

Medicare —The Medicare Part A program provides reimbursement for extended-care services furnished to Medicare beneficiaries who are admitted to nursing homes after at least a three-day stay in an acute care hospital. Covered services include supervised nursing care room and board, social services, physical, speech, and occupational therapies, certain pharmaceuticals and supplies and other necessary services provided by nursing homes. Medicare payments to our nursing home were, until October 1, 2019, based upon certain resource utilization grouping (“RUG”) payment rates developed by CMS that provide various levels of reimbursement based upon patient acuity.

Medicare Part B provides reimbursement for certain physician services, limited drug coverage, and other outpatient services, such as therapy and other services, outside of a Medicare Part A covered patient stay. Payment for these services is determined according to the Medicare Physician Fee Schedule (“MPFS”). The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) established Medicare physician reimbursement updates with quality and value measurements and participation in alternative payment models.

Effective October 1, 2019, CMS replaced the prospective payment system for skilled nursing facilities, RUG, with a new prospective payment system called Patient-Driven Payment Model (“PDPM”).  PDPM bases payment on resident characteristics rather than on services provided.  Each resident’s reimbursement depends on the summations of five case–mix adjusted components (physical therapy, occupational therapy, speech language pathology, nursing, and nontherapy ancillaries), each with its own case-mix groups; application of a variable per day adjustment schedule, which reduces the daily payment for three of the case-mix categories on a sliding scale; and addition of these sums to the non-case-mix adjusted component. PDPM uses the five-day resident assessment for determining the Medicare rate for the resident’s entire Part A stay, eliminating the RUG requirement for additional assessments on days 14, 30, 60 and 90.  The rule allows a skilled nursing facility (“SNF”) to reclassify a resident after the five-day assessment under an optional Interim Payment Assessment (“IPA”) but CMS has not yet defined criteria for triggering an IPA.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) implemented a major expansion of the Medicare program through the introduction of a prescription drug benefit (“Medicare Part D”). Under Medicare Part D, dual-eligible patients have their outpatient prescription drug costs covered by this Medicare benefit, subject to certain limitations. Most of our nursing home patients are dual-eligible patients who qualify for the Medicare drug benefit. Accordingly, Medicaid is no longer a primary payor for the pharmacy services provided to these patients.

On April 1, 2014, the Protecting Access to Medicare Act (“PAMA”) was enacted, which directed CMS to create a value-based purchasing initiative applicable to nursing homes beginning October 1, 2018. The initiative focused on a preventable hospital readmission measure and corresponding preventable hospital readmission rates. Nursing homes are ranked according to performance on this preventable hospital readmission rate, with corresponding incentive payments based upon such ranking. CMS also reduced the Medicare per diem rate by 2% beginning October 1, 2018 in connection with the launch of this initiative.

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Federal legislation has imposed various limitations and administrative requirements on Medicare reimbursement, including therapy caps, automatic and specific payment reductions, pre-payment manual claim reviews and other efforts to limit reimbursement. CMS also provides periodic reimbursements updates, including market basket updates, which are often reduced by various factors.

Medicaid —Medicaid is a state-administered program financed by state funds and matching federal funds. The program provides for medical assistance to the indigent and certain other eligible persons. Although administered under broad federal regulations, states are given flexibility to construct programs and payment methods consistent with their individual goals. Accordingly, these programs differ in many respects from state to state.

Our nursing home provides Medicaid-covered services consisting of nursing care, room and board, and social services to eligible individuals. In addition, states may, at their option, cover other services such as physical, occupational, and speech therapies, and pharmaceuticals. Medicaid programs also are subject to statutory and regulatory changes, administrative rulings, interpretations of policy by the state agencies, and certain government funding limitations, all of which may materially increase or decrease the level of program payments to our nursing home. We believe that the payments under many of these programs may not be sufficient on an overall basis to cover the costs of serving certain patients participating in these programs. In addition, Mississippi is experiencing budgetary pressures which have resulted in further reductions to Medicaid payments to our nursing homes.

There continue to be legislative and regulatory proposals that would impose further limitations on government and private payments to providers of healthcare services. Many states are considering or have enacted measures that are designed to reduce their Medicaid expenditures and to make certain changes to private healthcare insurance. As states face budgetary issues, we anticipate further pressure on Medicaid rates that could negatively impact payments to our nursing home.

In addition, some states (including Mississippi) seek to increase the levels of funding contributed by the federal government to their Medicaid programs through a mechanism known as a provider tax. Under these programs, states levy a tax on healthcare providers, which increases the amount of state revenue available to expend on the Medicaid program. This increase in program revenues increases the payment made by the federal government to the state in the form of matching funds. Consequently, the state then has more funds available to support Medicaid rates for providers of Medicaid covered services. However, states may not necessarily use these funds to increase payments to nursing home providers. Provider tax plans are subject to approval by the federal government. Although some of these plans have been approved in the past, we cannot assure you that such plans will be approved by the federal government in the future.

Nongovernment payments —Although our nursing home seeks to selectively maximize the number of nongovernment payment residents it admits, including those covered under private insurance and managed care health plans, nongovernment payment residents in our nursing home are limited. Some nongovernment payment residents have financial resources (including insurance coverage) to pay for their services and do not rely on government programs for support. It is important to our business to establish relationships with commercial insurers, managed care health plans, and other private payors and to maintain our reputation with such payors as a provider of quality patient and resident care. We negotiate contracts with purchasers of group healthcare services, including private employers, commercial insurers, and managed care companies. Most payor organizations attempt to obtain discounts from established charges. We focus on demonstrating to these payors how our services can provide them and their customers with the most viable pricing arrangements in circumstances where they may otherwise be faced with funding treatment at higher rates at other healthcare providers. The importance of obtaining contracts with commercial insurers, managed care health plans and other private payors varies among markets, depending on such factors as the number of commercial payors and their relative market strength. Failure to obtain contracts with certain commercial insurers and managed care health plans or reductions in lengths of stay or payments for our services provided to individuals covered by commercial insurance could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Government Reimbursement Programs — Pharmacy

The operations of our Pharmacy segment are subject to certain rules implemented by MMA and, in the future, may be subject to other rules previously implemented by MMA with respect to certain providers. Regulations implementing cost containment mandates under MMA reduced the reimbursement for healthcare providers in certain areas for a number of products and services which are also provided by our pharmacy operations and established a competitive bidding program for certain durable medical equipment provided under Medicare Part B in certain areas with the goal of offering beneficiaries access to quality with lower out-of-pockets costs. Competitive bidding is intended to further reduce reimbursement for certain products and will likely decrease the number of companies permitted to serve Medicare beneficiaries beginning in certain designated competitive bidding areas (“CBAs”). CMS implemented a competitive bidding program for Medicare durable medical equipment, prosthetics, orthotics, and supplies (“DMEPOS”) products and services in specified CBAs. Pursuant to Sections 1834(a)(1)(F) and 1842(s)(3)(B) of the Social Security Act, Final Rule 1614-F, “Medicare Program: End-Stage Renal Disease Prospective Payment System, Quality Incentive Program, and Durable Medical Equipment, Prosthetics, Orthotics, and Supplies” established the methodology to expand competitive bidding to

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non-bid areas and to implement national price adjustments to payments for DMEPOS and enteral nutrition products.Under these rules and the resulting expansion plan, CMS has applied competitive bidding prices to claims for DMEPOS and enteral nutrition products in previously non-bid areas covered in Rounds 1, 2 and Round Recompete of the Competitive Bidding Program (CBP). All DMEPOS CBP contracts expired on December 31, 2018.  Accordingly, as of January 1, 2019, a temporary gap exists in the entire DMEPOS Competitive Bidding Program that CMS expects will last until December 31, 2020.  On March 7, 2019, CMS announced plans to consolidate the CBAs included in the Round 2 Recompete and the Round 1 2017 DMEPOS CBP into a single round of competition named Round 2021. Round 2021 contracts are scheduled to be effective on January 1, 2021 and extend through December 31, 2023. CMS has announced 131 CBAs for Round 2021, identified by counties and Zip Codes.  For Louisiana, such CBAs will include CBAs in New Orleans-Metairie and Baton Rouge. We cannot assure you that our Pharmacy segment will be able to operate its DMEPOS and enteral nutrition products operations profitably in the future either at the current reimbursement rates, or, if at all, under a competitive bid program.

Under MMA, Medicare Part B, covered drugs and biological products generally are paid based on the average sales price (“ASP”) methodology. The ASP methodology uses quarterly drug pricing data submitted to CMS by drug manufacturers. CMS will supply contractors with the ASP drug pricing files for Medicare Part B drugs on a quarterly basis. Principal products paid under the ASP methodology include certain oncology and renal dialysis drugs. Although, there are exceptions to this general rule which are listed in the latest ASP quarterly change request document and which exceptions generally are paid on a cost basis, such exceptions have not been and are not expected to be material to our operations.

CMS’s outpatient prospective payment system pays for most separately payable Medicare Part B drugs administered in a hospital outpatient setting at a reimbursement level of ASP plus 5% and ASP plus 6% in other settings.

Section 303(d) of the MMA also requires the implementation of a competitive acquisition program (the “Part B CAP”) for Medicare Part B drugs and biological not paid on a cost or prospective payment system basis. The Part B CAP is an alternative to the ASP methodology for acquiring certain Part B drugs which are administered incident to a physician’s services. Currently, the Part B CAP is a voluntary program that offers physicians the option to acquire many injectable and infused drugs they use in their practice from an approved Part B CAP vendor, thus reducing the time and cost of buying and billing for drugs. Currently, the CAP for Part B Drugs and Biologicals is only for injectable and infused drugs currently billed under Part B that are administered in a physician’s office, “incident to” a physician’s service.

At least one Medicaid program has adopted, and other Medicaid programs, some states and some private payors may be expected to adopt, those aspects of the MMA that either result in or appear to result in price reductions for drugs covered by such programs. Adoption of ASP as the measure for determining reimbursement by Medicare and Medicaid programs for additional drugs sold by our Pharmacy Segment operations could reduce revenue and gross margins and could materially affect our current average wholesale price (“AWP”) based reimbursement structure with private payors.

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We cannot assure you that the ASP reimbursement methodology will not be repeated or extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by our Pharmacy segment operations or that our Pharmacy segment will be able to operate profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which it operates, or may seek to operate, or that the Pharmacy Segment would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.

Non-government Reimbursement Arrangements—Pharmacy

Major insurance and commercial payors for pharmacy products and services have taken significant steps in recent years to reduce payments for pharmacy products and services and to reduce the involvement of independent pharmacies in an effort to reduce costs and aggregate product distribution into larger volumes in an effort to better bargain prices with pharmacy manufacturers. In addition, pharmacy benefit managers have evolved to act as the intermediary between payors and patients and they also attempt to limit the prices and involvement of independent pharmacies. Also, large retailers, both pharmacy and general retailers, such as Walgreens, CVS and Wal-Mart, have established bulk purchasing arrangements with pharmacy manufacturers and exclusive or limited participation agreements with pharmacy benefits managers to reduce the costs and volume of drugs provided by independent retail pharmacies. Further, e-commerce sites, such as Amazon and PillPack, are actively seeking to provide pharmaceuticals and DMEPOS products directly to patients via online ordering and remote fulfillment. These non-government reimbursements arrangements have had a negative effect on our Pharmacy segment. Our pharmacy locations seek to counteract these pressures by providing greater services and convenience locally than is provided by remote pharmacy providers. However, there can be no assurance that these non-government reimbursement arrangements will not have an increasingly negative impact on our Pharmacy segment revenues and profitability in the future.

HEALTHCARE REGULATION

Overview

The healthcare industry is governed by an extremely complex framework of federal, state and local laws, rules and regulations, and there continue to be federal and state proposals that would, and actions that do, impose limitations on government and private payments to providers, including community hospitals, nursing homes and pharmacy operations. In addition, there regularly are proposals to increase co-payments and deductibles from program and private patients. Facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls include what is commonly referred to as “utilization review”. Utilization review entails the review of a patient’s admission and course of treatment by a third party. Historically, utilization review has resulted in a decrease in certain treatments and procedures being performed. Utilization review is required in connection with the provision of care which is to be funded by Medicare and Medicaid and is also required under many managed care arrangements.

Many states have enacted, or are considering enacting, additional measures that are designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Various states have applied, or are considering applying, for a waiver from current Medicaid regulations in order to allow them to serve some of their Medicaid participants through managed care providers. These proposals also may attempt to include coverage for some people who presently are uninsured, and generally could have the effect of reducing payments to hospitals, physicians and other providers for the same level of service provided under Medicaid.

Healthcare Facility Regulation

Certificate of Need Requirements

A number of states require approval for the purchase, construction or expansion of various healthcare facilities, including findings of need for additional or expanded healthcare services. Certificates of Need (“CONs”), which are issued by governmental agencies with jurisdiction over applicable healthcare facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or the addition of services and certain other matters. Mississippi, where a SunLink subsidiary currently operates a hospital and a nursing home has a CON law that applies to such facilities. States periodically review, modify and revise their CON laws and related regulations. Any violation of state CON laws can result in the imposition of civil sanctions or the revocation of licenses for such facilities. SunLink is unable to predict whether its Healthcare Services subsidiaries will be able to obtain any CONs that may be necessary to accomplish their business objectives in any jurisdiction where such certificates of need are required.

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Utilization Review Compliance and Hospital Governance

Our Healthcare Services facilities are subject to, and are required to comply with, various forms of utilization review. In addition, under the Medicare prospective payment system, each state must have a peer review organization to carry out a Federally mandated system of review of Medicare patient admissions, treatments and discharges in hospitals. Medical and surgical services and physician practices are supervised by committees of staff doctors at each healthcare facility, are overseen by each healthcare facility’s local governing board, the primary voting members of which are physicians and community members and are reviewed by quality assurance personnel. The local governing boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures and approve the credentials and disciplining of medical staff members.

Emergency Medical Treatment and Active Labor Act

The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal law that requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition or is in active labor, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program, the Medicaid program or both. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against that other hospital. Although we believe that our subsidiary hospital complies with EMTALA, we cannot predict whether CMS will implement new requirements in the future and whether Trace will be able to comply with any new requirements. Trace does not offer an emergency department.

Pharmacy Segment Regulation

Overview

The operations of our Pharmacy segment subsidiary are subject to various federal and state statutes and regulations governing their operations, including laws and regulations with respect to the operation of pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substances, cross-jurisdictional sale and distribution of pharmacy products, medical waste disposal, clinical trials and non-discriminatory access. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs, as well as the dispensing of controlled substances. Federal controlled substance laws require us to register our pharmacies and repackaging facilities with the United States Drug Enforcement Administration (“DEA”) and to comply with security, recordkeeping, inventory control and labeling standards in order to dispense controlled substances. Although we believe that the operations of our Pharmacy segment have obtained the permits and/or licenses required to conduct its Pharmacy business as currently conducted, a failure to have the necessary permits and licenses could have a material adverse effect on its Pharmacy business, and our financial condition or results of operations.

Pharmaceutical Distribution

Our Pharmacy subsidiary, in addition to retail pharmacy walk-in customers, distributes pharmaceuticals through a variety of delivery methods, including by mail and express delivery services. Many states in which our Pharmacy segment delivers or may seek to deliver pharmaceuticals have laws and regulations that require out-of-state mail service pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located.

However, various state Medicaid programs have enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed in that state. To the extent that such laws or regulations are found to be applicable to the operations of the Pharmacy segment, we believe the operations of our Pharmacy segment comply with them in all material respects. To the extent that any of the foregoing laws or regulations prohibit or restrict the operation of mail service pharmacies and are found to be applicable to the operations of our Pharmacy segment, they could have an adverse effect on its ability to expand our pharmacy operations, which currently are concentrated in Louisiana. A number of state Medicaid programs prohibit the participation in such state’s Medicaid program by either out-of-state retail pharmacies or mail order pharmacies, whether located in-state or out-of-state.

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Advertising and Marketing Regulations

There are also other statutes and regulations which may affect advertising, marketing and distribution of pharmacy products. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail orders within 30 days, and to provide clients with refunds, when appropriate.

General Healthcare Regulations

Drugs and Controlled Substances

Various licenses and permits are required by our subsidiaries’ Healthcare Services and Pharmacy segments operations in order to dispense narcotics and operate pharmacies. All of our subsidiaries are required to register our dispensing operations for permits and/or licenses with, and comply with certain operating and security standards of, the United States DEA, the Food and Drug Administration (“FDA”), state Boards of Pharmacy, state health departments and other state agencies in states where we operate or may seek to operate.

In addition, our Pharmacy subsidiary is dependent on wholesale suppliers, manufacturers and other distribution sources for the drugs and pharmaceuticals it dispenses, and such distributors are highly regulated and licensed. If the Company’s distribution sources lose their ability to provide pharmaceuticals needed by the Company to service its customers, it could have an adverse impact on the subsidiary’s revenues and profitability.

State controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state’s pharmacy licensing authority. Such standards often address the qualification of an applicant’s personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy technicians employed at each of our dispensing locations also must satisfy applicable state licensing requirements.

Fraud and Abuse, Anti-Kickback and Self-Referral Regulations

Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statutes and regulations. If a Healthcare Services or Pharmacy segment operation fails to comply substantially with the numerous federal laws governing such activities, participation in the Medicare and/or Medicaid programs by the applicable subsidiary or even SunLink generally may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it makes claims to Medicare and/or Medicaid for services not provided or misrepresents actual services provided in order to obtain higher payments; pays money to induce the referral of patients or the purchase of items or services where such items or services are reimbursable under a federal or state health program; fails to report or repay improper or excess payments; or fails to provide appropriate emergency medical screening services to any individual who comes to a hospital’s campus or otherwise fails to properly treat and transfer emergency patients.

Hospitals continue to be one of the primary focus areas of the Office of the Inspector General (“OIG”) of the United States and other governmental fraud and abuse programs and the OIG has issued and periodically updates compliance program guidance for hospitals. Each federal fiscal year, the OIG also publishes a General Work Plan that provides a brief description of the activities that the OIG plans to initiate or continue with respect to the programs and operations of the Department of Health and Human Services (“HHS”) and details the areas that the OIG believes are prone to fraud and abuse.

Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as the “anti-kickback” statute, prohibit certain business practices and relationships that might influence the provision and cost of healthcare services reimbursable under Medicare, Medicaid, TriCare or other healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be funded by Medicare or other government programs. Sanctions for violating the anti-kickback statute include criminal penalties and civil sanctions, including fines and possible exclusion from future participation in government programs, such as Medicare and Medicaid. HHS has issued regulations that create safe harbors under the anti-kickback statute. A given business arrangement that does not fall within an enumerated safe harbor is not per se illegal; however, business arrangements that fail to satisfy the applicable safe harbor criteria are subject to increased scrutiny by enforcement authorities.

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The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. These laws cover all health insurance programs, private as well as governmental. In addition, HIPAA broadened the scope of certain fraud and abuse laws, such as the anti-kickback statute, to include not just Medicare and Medicaid services, but all healthcare services reimbursed under a federal or state healthcare program. Finally, HIPAA established enforcement mechanisms to combat fraud and abuse. These mechanisms include a bounty system, where a portion of the payment recovered is returned to the government agencies, as well as a whistleblower program, where a portion of the payment received is paid to the whistleblower. HIPAA also expanded the categories of persons that may be excluded from participation in federal and state healthcare programs.

There is increasing scrutiny by law enforcement authorities, the OIG, the courts and the U.S. Congress of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as mechanisms to exchange remuneration for patient-care referrals and opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction and to reinterpret the underlying purpose of payments between healthcare providers and potential referral sources. Enforcement actions have increased, as is evidenced by highly publicized enforcement investigations of certain hospital activities.

In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services with which the physicians or their immediate family members have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. A person making a referral, or seeking payment for services referred, in violation of the Stark Act is subject to civil monetary penalties of up to $15 for each service; restitution of any amounts received for illegally billed claims; and/or exclusion from future participation in the Medicare program, which can subject the person or entity to exclusion from future participation in state healthcare programs.

Further, if any physician or entity enters into an arrangement or scheme that the physician or entity knows or should have known has the principal purpose of assuring referrals by the physician to a particular entity, and the physician directly makes referrals to such entity, then such physician or entity could be subject to a civil monetary penalty of up to $100. Compliance with and the enforcing of penalties for violations of these laws and regulations is changing and increasing. For example, CMS has issued a “self-referral disclosure protocol” for hospitals and other providers that wish to self-disclose potential violations of the Stark Act and attempt to resolve those potential violations and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute. In light of the provisions of the Affordable Care Act that created potential liabilities under the Federal False Claims Act (discussed below) for failing to report and repay known overpayments and return an overpayment within sixty (60) days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later, hospitals and other healthcare providers are encouraged to disclose potential violations of the Stark Act to CMS. It is likely that self-disclosure of Stark Act violations will increase in the future. Finally, many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care.

The Federal False Claims Act and Similar State Laws

The Federal False Claims Act prohibits providers from, among other things, knowingly submitting false or fraudulent claims for payment to the federal government. The False Claims Act defines the term “knowingly” broadly, and while simple negligence generally will not give rise to liability, submitting a claim with reckless disregard to its truth or falsity can constitute the “knowing” submission of a false or fraudulent claim for the purposes of the False Claims Act. The “qui tam” or “whistleblower” provisions of the False Claims Act allow private individuals to bring actions under the False Claims Act on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of “whistleblower” lawsuits that have been filed against providers has increased significantly in recent years. When a private party brings a qui tam action under the False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation. If a provider is found to be liable under the False Claims Act, the provider may be required to pay up to three times the actual damages sustained by the government plus mandatory civil monetary penalties of between $5 to $11 for each separate false claim. The government has used the False Claims Act to prosecute Medicare and other government healthcare program fraud, such as coding errors, billing for services not provided, submitting false cost reports, and providing care that is not medically necessary or that is substandard in quality.

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HIPAA Transaction, Privacy and Security Requirements

HIPAA and federal regulations issued pursuant to HIPAA contain, among other measures, provisions that have required SunLink and our subsidiaries to implement modified or new computer systems, employee training programs and business procedures. The federal regulations are intended to encourage electronic commerce in the healthcare industry, provide for the confidentiality and privacy of patient healthcare information and ensure the security of healthcare information.

A violation of the HIPAA regulations could result in civil money penalties of $1 per incident, up to a maximum of $25 per person, per year, per standard violated. HIPAA also provides for criminal penalties of up to $50 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100 and five years in prison for obtaining protected health information under false pretenses and up to $250 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Since there is limited history of enforcement efforts by the federal government at this time, it is difficult to ascertain the likelihood of enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties, which may result from any violation of the regulations.

HIPAA Privacy Regulations

HIPAA privacy regulations protect the privacy of individually identifiable health information. The regulations provide increased patient control over medical records, mandate substantial financial penalties for violation of a patient’s right to privacy and, with a few exceptions, require that an individual’s individually identifiable health information only be used for healthcare-related purposes. These privacy standards apply to all health plans, all healthcare clearinghouses and healthcare providers, such as our subsidiaries’ facilities, that transmit health information in an electronic form in connection with standard transactions, and apply to individually identifiable information held or disclosed by a covered entity in any form. These standards impose extensive administrative requirements on our subsidiaries’ facilities and require compliance with rules governing the use and disclosure of such health information, and they require our subsidiaries’ facilities to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on behalf of our subsidiaries’ facilities. In addition, our subsidiaries’ facilities are subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by state and could impose stricter standards and additional penalties.

The HIPAA privacy regulations also require healthcare providers to implement and enforce privacy policies to ensure compliance with the regulations and standards. In conjunction with a private HIPAA consultant and HIPAA coordinators at each facility, individually tailored policies and procedures were developed and implemented and HIPAA privacy educational programs are presented to all employees and physicians at each facility. We believe all of our subsidiaries’ facilities are in compliance with current HIPAA privacy regulations.

HIPAA Electronic Data Standards

The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for all healthcare related electronic data interchange. These provisions are intended to streamline and encourage electronic commerce in the healthcare industry. Among other things, these provisions require Healthcare Services to use standard data formats and code sets established by HHS when electronically transmitting information in connection with certain transactions, including health claims and equivalent encounter information, healthcare payment and remittance advice and health claim status.

The HHS regulations establish electronic data transmission standards that all healthcare providers and payors must use when submitting and receiving certain electronic healthcare transactions. The uniform data transmission standards are designed to enable healthcare providers to exchange billing and payment information directly with the many payors thereby eliminating data clearinghouses and simplifying the interface programs necessary to perform this function. We believe that the management information systems at our subsidiaries comply with HIPAA’s electronic data regulations and standards.

HIPAA Security Standards

The Administrative Simplification Provisions of HIPAA require the use of a series of security standards for the protection of electronic health information. The HIPAA security standards rule specifies a series of administrative, technical and physical security procedures for covered entities to use to assure the confidentiality of electronic protected health information. The standards are delineated into either required or addressable implementation specifications.

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In conjunction with a consortium of rural hospitals, private HIPAA security consultants and HIPAA security officers at each facility, our subsidiaries have performed security assessments and implemented individually tailored plans to apply required or addressable solutions and implemented a set of security policies and procedures. In addition, our subsidiaries developed and adopted an individually tailored comprehensive disaster contingency plan for each facility and presented a HIPAA security training program to all applicable personnel. We believe SunLink and our subsidiaries are in compliance with all aspects of the HIPAA security regulations.

HIPAA National Provider Identifier

HIPAA also required HHS to issue regulations establishing standard unique health identifiers for individuals, employers, health plans and healthcare providers to be used in connection with standard electronic transactions. All healthcare providers, including our facilities, were required to obtain a new National Provider Identifier (“NPI”) to be used in standard transactions instead of other numerical identifiers by May 23, 2007. Our facilities implemented use of a standard unique healthcare identifier by utilizing their employer identification number. HHS has not yet issued proposed rules that establish the standard for unique health identifiers for health plans or individuals. Once these regulations are issued in final form, we expect to have approximately one to two years to become fully compliant but cannot predict the impact of such changes at this time. We cannot predict whether our facilities may experience payment delays during the transition to the new identifiers. HHS is currently working on the standards for identifiers for health plans; however, there are currently no proposed timelines for issuance of proposed or final rules. The issuance of proposed rules for individuals is on hold indefinitely.

Medical Waste Regulations

Our operations, especially our Healthcare Services facility operations, generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations are also generally subject to various other environmental laws, rules and regulations. Based on our current level of operations, we do not anticipate that such compliance costs will have a material adverse effect on our cash flows, financial position or results of operations.

Regulatory Compliance Program

Our subsidiaries maintain compliance programs under the direction of a risk manager. The compliance programs are directed at all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, as well as Pharmacy segment operations. Our Healthcare Services and Pharmacy segments’ operations each have one or more compliance officers and develop remediation plans to correct problems should they arise. In addition, all employees are provided with a copy of and given an introduction to the subsidiary’s Code of Conduct, which includes ethical and compliance guidelines and instructions about the proper resources to utilize in order to address any concerns that may arise. Our Healthcare Services and Pharmacy segment operations conduct annual training to re-emphasize its Code of Conduct and monitor its compliance program to respond to developments in healthcare regulations and the industry. A toll-free hotline is also maintained to permit employees to report compliance concerns on an anonymous basis.

Professional Liability

As part of our business, our subsidiaries are subject to claims of liability for events occurring in the ordinary course of operations. To cover a portion of these claims, professional malpractice liability insurance and general liability insurance are maintained in amounts which are commercially reasonably available and believed to be sufficient for operations as currently conducted. Nevertheless, some claims may exceed the scope or amount of the coverage in effect.

The recorded liability for professional liability risks of our subsidiaries’ operations includes an estimate of liability for claims, including claims retained after the disposition of any facility or operations or claims assumed in connection with the acquisition of any facility or operations. These estimates are based on actuarially determined amounts.

Environmental Regulation

We believe our subsidiaries are in substantial compliance with applicable federal, state and local environmental regulations. To date, compliance with federal, state and local laws regulating the discharge of material into the environment or otherwise relating to the protection of the environment have not had a material effect upon our results of operations, financial condition or competitive position. Similarly, we have not had to make material capital expenditures to comply with such regulations.

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INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Our executive officers, as of September 24, 2020, their positions with the Company or its subsidiaries and their ages are as follows:

Name	Offices	Age
Robert M. Thornton, Jr.	Director, Chairman of the Board of Directors, President and Chief Executive Officer	71
Mark J. Stockslager	Chief Financial Officer and Principal Accounting Officer	61
Sheila G. Brockman Byron D, Finn	Vice President – SunLink Health Systems, Inc., Chief Executive Officer – Southern Health Corporation of Houston, Inc. President—SunLink ScriptsRx, LLC	60 70

All of our executive officers hold office for an indefinite term, subject to the discretion of the Board of Directors.

Robert M. Thornton, Jr. has been Chairman and Chief Executive Officer of SunLink Health Systems, Inc. since September 10, 1998, President since July 16, 1996 and was Chief Financial Officer from July 18, 1997 to August 31, 2002. From March 1995 to the present, Mr. Thornton has been a private investor in and Chairman and Chief Executive Officer of CareVest Capital, LLC, a private investment and management services firm. Mr. Thornton was President, Chief Operating Officer, Chief Financial Officer and a director of Hallmark Healthcare Corporation (“Hallmark”) from November 1993 until Hallmark’s merger with Community Health Systems, Inc. in October 1994. From October 1987 until November 1993, Mr. Thornton was Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a director of Hallmark.

Mark J. Stockslager has been Chief Financial Officer of SunLink Health Systems, Inc. since July 1, 2007. He was interim Chief Financial Officer from November 6, 2006 until June 30, 2007. He has been the Principal Accounting Officer since March 11, 1998 and was Corporate Controller from November 6, 1996 to June 4, 2007. He has been associated continuously with our accounting and finance operations since June 1988 and has held various positions, including Manager of U.S. Accounting, from June 1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager was employed by Price Waterhouse & Co.

Sheila G. Brockman has been Vice President of SunLink Health Systems, Inc. since November 11, 2019 and the Chief Executive Officer of Southern Health Corporation of Houston, Inc. since February 11, 2020. Ms. Brockman was the CEO of Southern Health Corporation of Ellijay, Inc. from April 1, 2017 until its sale on March 17, 2019. She has been continuously with SunLink since July 7, 2003, with a variety of responsibilities including mergers and acquisitions and risk management. Prior to 2003, Ms. Brockman held various financial and management positions in several wireless technology and civil engineering companies.  

Byron D. Finn was named President of SunLink ScriptsRx, LLC on October 1, 2010. Mr. Finn was most recently president of Byron D. Finn, CPA, PC, which provided accounting, financial consulting and litigation support services to its clients, including numerous healthcare clients. His experience also includes various positions with The Coca-Cola Company, where he served in a number of financial-related positions and in connection with special projects, and he was previously employed by Ernst & Young. Mr. Finn is a licensed CPA and received his BA in Business Administration and Master in Accountancy degrees from the University of Georgia.

Item 1A. Risk Factors

In addition to other information contained in this Annual Report, including certain cautionary and forward-looking statements, you should carefully consider the following factors in evaluating an investment in SunLink:

Consolidated Operations Risks

The COVID-19 pandemic has significantly increased economic uncertainty.

The current outbreak or continued spread of COVID-19 may exacerbate or extend the current economic slowdown, and it is possible that it could cause a severe recession. While certain healthcare spending is considered non-discretionary and may not be significantly impacted by economic downturns, healthcare spending has been adversely impacted by such conditions. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose a high-deductible insurance plan or no insurance at all, which increases a hospital’s dependence on self-pay revenue. Moreover, a greater number of persons may elect to forgo treatments and therapies provided by SunLink’s hospital, clinics, nursing home, and Specialty Pharmacy business. As a result of the COVID-19 pandemic, the Company and its subsidiaries may experience increases in costs relating to less efficient operating procedures, increased cost of supplies, and salaries, wages and benefits. Accordingly, even a short continuing recession could result in an increase in uncollectible self-pay revenues and decreased patient volumes at Trace Regional Hospital and Floy Dyer Nursing Home, as well as decreased sales volume by SunLink’s Specialty Pharmacy business.

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If our operations continue to generate operating losses, we may not be able to generate sufficient cash flows to meet our liquidity needs.

We rely upon cash on hand, cash from operations, and cash from asset sales to fund our cash requirements for working capital, capital expenditures, commitments, and payments of principal and interest on borrowings. Our ability to generate cash from operations has been negatively impacted by reduced federal and state reimbursements, managed care efforts (including restrictions, limitations, administrative requirements and clawbacks in both our Healthcare Services and Pharmacy businesses), uncollectible self-pay net revenues of our Healthcare Services segment, increased salary expenses for employed physicians, and decreased patient volume at our facilities as a result of economic conditions in the locations we serve, as well as by decreased sales volume and earnings experienced by certain lines of business in our Pharmacy segment, and by our corporate overhead. A substantial portion of corporate overhead is incurred because we are a public company with limited operations. We expect that these factors will continue to have a negative impact on our business for the foreseeable future. The impact of these factors has been mitigated by government support payments (PPP loans and Provider Relief Funds) during the COVID-19 which are not recurring.  The COVID-19 pandemic has resulted in the abrupt retirement of one physician in our Healthcare Services segment and reduced capacity of other physicians and healthcare providers in both our Healthcare Services and Pharmacy segments. Further deterioration and the loss of government support payments would negatively impact our results of operations and cash flows.

SunLink may require additional debt or equity capital in order to make significant capital investments or expand our operations, and the inability to make significant capital investments or expand our operations may negatively affect SunLink’s competitive position, reduce earnings (or increase losses), and negatively affect our results of operations and financial position.

SunLink’s operations strategy may require significant capital investments from time to time. Significant capital investments may be required for on-going and planned capital improvements in connection with existing operations and for future acquired operations. SunLink’s ability to make capital investments depends on numerous factors, such as the availability of funds from operations and access to additional debt and equity financing. No assurance can be given that the necessary funds will be available. Moreover, incurrence of additional debt financing, if available, may involve additional restrictive covenants that could negatively affect SunLink’s ability to operate its business in the desired manner, and raising additional equity likely would be dilutive to shareholders. The failure to obtain necessary funds could impair SunLink’s existing operations and could force SunLink to forego opportunities that may arise in the future. This could, in turn, have a negative impact on the competitive position of our operating subsidiaries, reduce earnings (or increase losses) and negatively affect our results of operations and financial position.

Healthcare reform initiatives have resulted in significant changes to the United States healthcare system some of which may adversely affect our business.

Healthcare reform initiatives, including the enactment of the ACA, managed Medicaid initiatives, and commercial managed healthcare programs (including those relating to acute care services, diagnostic procedures and tests, laboratory services, drug formularies, pharmacy dispensing, and other programs) have impacted each of our businesses in some manner. The reforms are very significant and, ultimately, could further change the nature of our services, the methods and amounts of payment for our services, and the underlying regulatory environment.

In general, a primary goal of recurrent efforts at healthcare reform is to reduce the cost to federal and state governments of reimbursement to providers under various governmental programs, which includes reductions in the reimbursement paid to us and other healthcare providers. Moreover, healthcare reform could negatively impact insurance companies, other third-party payors and our customers, as well as other healthcare providers, which may in turn negatively impact our business. As such, healthcare reforms and changes resulting from the ACA, as well as other similar healthcare reforms, could have a material adverse effect on our business, financial position, results of operations, and liquidity.

SunLink conducts business in a heavily regulated industry; changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce revenue and profitability.

The healthcare industry is subject to extensive federal, state and local laws and regulations relating to licensure; conduct of operations including patient referrals, physician recruiting practices, pharmacy operations, cost reporting and billing practices; ownership, condition and operation of facilities; addition of facilities and services; confidentiality, maintenance, and security issues associated with medical records; billing for services; and prices for services.

These laws and regulations are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations, including in particular, Medicare and Medicaid anti-fraud and abuse amendments, codified in Section 1128B(b) of the Social Security Act and known as the “anti-kickback statute.” This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent to generate referrals of orders for services or items reimbursable under Medicare, Medicaid, and other federal healthcare programs.

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HHS regulations describe some of the conduct and business relationships immune from prosecution under the anti-kickback statute. The fact that a given business arrangement does not fall within one of these “safe harbor” provisions does not render the arrangement illegal. However, business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria risk increased scrutiny by enforcement authorities.

We have a variety of financial relationships with physicians who refer patients to our subsidiary’s hospital. We have contracts with physicians providing services under a variety of financial arrangements such as employment contracts and professional service agreements. We also provide financial incentives, including loans and minimum revenue guarantees, to recruit physicians into the communities served by our subsidiaries’ facilities and other operations.

HIPAA broadened the scope of the fraud and abuse laws to include all healthcare services, whether or not they are reimbursed under a federal program. In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services in which the physicians or their immediate family members have an ownership interest or certain other financial arrangements.

Due to the “opioid crisis”, the Drug Enforcement Administration (“DEA”) has added regulations and increased its scrutiny of drug dispensing at both the retail and wholesale level.  As a result, physicians and pharmacists are more cautious about dispensing certain drugs and wholesalers monitor drug purchases by their customers.  In addition, wholesalers are more closely monitored by the DEA and may limit the volume and delivery of drugs.

In addition, SunLink’s facilities will continue to remain subject to any state laws that are more restrictive than the regulations issued under HIPAA, which vary by state and could impose additional penalties. In recent years, both federal and state government agencies have announced plans for or implemented heightened and coordinated civil and criminal enforcement efforts.

Government officials charged with responsibility for enforcing healthcare laws could assert that SunLink or any of the transactions in which the Company, or its subsidiaries or their predecessors is or was involved, are in violation of these laws. It is also possible that these laws ultimately could be interpreted by the courts in a manner that is different from the interpretations made by the Company or others. A determination that either SunLink or its subsidiaries or their predecessors is or was involved in a transaction that violated these laws, or the public announcement that SunLink or its subsidiaries or their predecessors is being investigated for possible violations of these laws, could have a material adverse effect on SunLink’s business, financial condition, results of operations or prospects and SunLink’s business reputation could suffer significantly.

The industry trend towards value-based purchasing may negatively impact our revenues.

There is a trend in the healthcare industry toward “value-based” purchasing of healthcare products and services (including drugs). These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided. Governmental programs, including Medicare and Medicaid, currently require providers under such programs to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payors currently require providers under such programs to report quality data, and several commercial payors do not reimburse providers under such programs for certain preventable adverse events.

The ACA contains a number of provisions intended to promote value-based purchasing. The ACA prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital acquired conditions (“HACs”), conditions that are acquired by a patient while admitted as an inpatient at a hospital, such as a surgical site infection. Hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard.

The ACA also requires HHS to implement a value-based purchasing program for inpatient hospital services. The ACA requires HHS to reduce inpatient hospital payments for all discharges by a percentage which currently is 2%. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine from the pool of dollars created by these payment reductions the amount our subsidiary’s hospital will receive if it meets or exceeds the quality performance standards.

We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our results of operations, but it could negatively impact our financial condition or results of operations.

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Reforms in Pharmacy distribution and dispensing have impacted and may further impact our Pharmacy business

Pharmacy benefit managers have undertaken a number of actions, primarily in an effort to reduce cost and increase their own profitability, which have impacted our Pharmacy segment business. These actions include limiting reimbursable drug formularies, requiring outcome and quality reporting, and implementing claw backs, takebacks and penalties for alleged and substantially defined noncompliance with various contract terms, some of which may not be known at the time a prescription is filled. In addition, pharmacy benefit managers and manufacturers have limited the drugs which independent pharmacies (including our pharmacy subsidiary) may dispense and receive reimbursement for; and in some cases have determined not to contract with independent pharmacies for dispensing services at all, preferring to provide “direct-to-consumers” type distribution.  In addition, the recent purchase or merger of pharmacy benefit companies and insurance companies effectively allows the combined business to control distribution, dispensing, pricing and payment of drugs from the manufacturer to the consumer.  This “vertical integration” of the pharmacy distribution and dispensing system in the United States could have the effect of eliminating independent pharmacies, limiting the drugs available for dispensing to patients, and may reduce prices below dispensing costs.  Any of these pharmacy reforms could result in an adverse effect on our Pharmacy segment business.

General economic conditions.

Much healthcare spending is discretionary and can be significantly impacted by economic downturns. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose to defer or forego elective surgeries and other non-emergent procedures, which are generally more profitable lines of business for hospitals. In addition, employers may impose, or patients may select a high-deductible insurance plan or no insurance at all, which increases a hospital’s dependence on self-pay revenue.

We are unable to quantify the specific impact of the COVID-19 pandemic or current or recent economic conditions on our business; however, we believe that the economic conditions in the rural service areas in which our subsidiaries operate have had an adverse impact on our operations. Such impact can be expected to continue to affect not only the healthcare decisions of our patients and potential patients but could also have an adverse impact on the solvency of certain managed care providers and other counterparties to transactions with us.

Our subsidiaries are subject to potential claims for professional liability, including existing or potential claims based on the acts or omissions of third parties, which claims may not be covered by insurance.

Our subsidiaries are subject to potential claims for professional liability (medical malpractice) in connection with current operations, as well as potentially acquired or discontinued operations. Such potential claims increased as a result of the COVID-19 pandemic.  To cover such claims, professional malpractice liability insurance and general liability insurance is maintained in amounts believed to be sufficient for operations, although some claims may exceed the scope or amount of the coverage in effect and insurance may add limitations and exclusions to such insurance. However, SunLink currently purchases limited insurance policies to cover discontinued operations exposures. We may purchase such insurance in the future at levels providing for the retention of more risk by us and at lower aggregate limits. The assertion of a significant number of claims, either within a self-insured retention (deductible) or individually or in the aggregate in excess of available insurance, could have a material adverse effect on our results of operations or financial condition. Premiums for professional liability insurance have historically been volatile, and we cannot assure you that professional liability insurance will continue to be available on terms acceptable to us, if at all. The operations of our hospital and pharmacies also depend on the professional services of physicians, pharmacists and other trained healthcare providers and technicians in the conduct of their respective operations, including independent laboratories and physicians rendering diagnostic and medical services. There can be no assurance that any legal action stemming from the act or omission of a third party provider of healthcare services, would not be brought against our subsidiaries’ hospital, pharmacies, or SunLink, resulting in significant legal expenses in order to defend against such legal action or to obtain a financial contribution from the third-party whose acts or omissions occasioned the legal action.

SunLink depends heavily on its management personnel and the loss of the services of one or more of SunLink’s key senior management personnel could weaken SunLink’s management team.

SunLink has been, and will continue to be, dependent upon the services and management experience of its executive officers. If any of SunLink’s executive officers were to resign their positions or otherwise be unable to serve, SunLink’s management could be weakened.

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Risks Related to Our Operations

SunLink has a limited staff of corporate employees and depends heavily on its corporate staff and subsidiaries’ management personnel; the loss of the services of one or more of SunLink’s key personnel could weaken SunLink’s management team and impair its ability to deliver healthcare services and pharmacy products and services.

The success of our operations depends on the ability to attract and retain managers, related health care employees and information technology staff, as well as on the ability of subsidiary-based officers and key employees to manage growth successfully. SunLink’s subsidiaries have been able to attract healthcare subsidiary management; however, if the subsidiaries or corporate staff is unable to attract and retain effective management, the operating performance could decline.

SunLink’s success depends on the ability of our operating subsidiaries to attract and retain qualified healthcare professionals. A shortage of qualified healthcare professionals including physicians, mid-level healthcare practitioners (such as physician assistants, or nurse practitioners) and pharmacists in any of our markets could weaken the ability of our subsidiaries to deliver healthcare services.

In addition to the management personnel which each subsidiary employs, our Healthcare Services operations are dependent on the efforts, ability, and experience of our healthcare professionals, such as physicians, nurses, therapists, pharmacists and lab technicians. Nurses, pharmacists, lab technicians and other healthcare professionals are generally employees of an individual subsidiary. Each subsidiary’s success has been, and will continue to be, influenced by its ability to attract and retain these skilled employees. A shortage of healthcare professionals in one of our markets, the loss of some or all of its key employees or the inability to attract or retain sufficient numbers of qualified healthcare professionals could cause the operating performance of one or more of our subsidiaries to decline. As a result of the COVID-19 pandemic, one physician at Trace Regional Hospital retired abruptly, and the Healthcare Services and Pharmacy segments have both experienced reduced capacity and absences by healthcare providers.

The majority of SunLink’s revenue is dependent on Medicare and Medicaid payments to its subsidiaries and possible reductions in Medicare or Medicaid payments or the implementation of other measures to reduce reimbursements may reduce our revenues.

The majority of SunLink’s consolidated revenues are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. Approximately 71% and 70% of net consolidated revenues was derived from the Medicare and Medicaid programs for the years ended June 30, 2020 and June 30, 2019, respectively. Previous legislative changes have resulted in, and future legislative changes may result in, limitations on and reduced levels of payment and reimbursement for a substantial portion of hospital procedures, pharmacy services and costs. Mississippi has not expanded Medicaid or set-up healthcare exchanges.

Future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs may have a material adverse effect on our consolidated business, financial condition, results of operations or prospects.

Revenue and profitability of our subsidiaries’ operations may be constrained by future cost containment initiatives undertaken by purchasers of such services.

Our subsidiaries’ have been affected by the increasing number of initiatives undertaken during the past several years by all major purchasers of healthcare, including (in addition to federal and state governments) insurance companies, pharmacy benefit managers and employers, to revise payment methodologies and monitor healthcare expenditures in order to contain healthcare costs. Our community hospital operations derived approximately 17% and 19% of their consolidated net patient revenues for the fiscal year ended June 30, 2020 and June 30, 2019, respectively, from private payors and other non-governmental sources who contributed less than 5% of consolidated patient days. Initiatives such as managed care organizations offering prepaid and discounted medical services packages, have adversely affected hospital revenue growth throughout the country and such packages represent an increasing portion of our subsidiary’s hospital’s admissions and outpatient revenues and have resulted in reduced revenue growth at our current and former subsidiaries’ hospitals. In addition, private payors increasingly are attempting to control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations and preferred provider organizations, referred to as PPOs. If our subsidiaries, specifically our hospital subsidiary operations, are unable to contain costs through increased operational efficiencies and the trend toward declining reimbursements and payments continues, the results of our Healthcare Services facility segment operations and cash flow will be adversely affected and the results of our consolidated operations and our consolidated cash flow similarly likely would be adversely affected.

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A cyber-attack or security breach could result in the compromise of our facilities, confidential data or critical data systems and give rise to potential harm to patients, remediation and other expenses, expose us to liability under HIPAA, consumer protection laws, common law or other theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business.

We rely extensively on our computer systems to manage clinical and financial data, communicate with our patients, payors, vendors and other third parties and summarize and analyze operating results. We have made investments in technology to protect our systems, equipment and medical devices and information from cybersecurity risks including continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access. Also in connection with any cyber-attack, we likely would be subject to one or more purported class action lawsuits, as well as government investigations by various State Attorneys General and the U.S. Department of Health and Human Services Office for Civil Rights, and could be subject to additional litigation, potential governmental inquiries and potential reputation damages.

In spite of our security measures, there can be no assurance that we will not be subject to cyber-attacks or security breaches in the future. Additionally, where we agree to provide transition services to the buyer in connection with the sale of assets, including access to our legacy information systems, for a defined transition period, we are exposed to cyber-attacks or security breaches that originate outside of our processes and practices designed to prevent such threats from occurring. Any such cyber-attacks or security breaches could impact the integrity, availability or privacy of protected health information or other data subject to privacy laws or disrupt our information technology systems, devices or business, including our ability to provide various healthcare services. Additionally, growing cyber-security threats related to the use of ransomware and other malicious software threaten the access and utilization of critical information technology and data. As a result, cybersecurity and the continued development and enhancement of our controls, process and practices designed to protect our information systems from attack, damage or unauthorized access likely will be required. Our ability to recover from a ransomware or other cyber-attack is dependent on these practices, including successful backup systems and other recovery procedures. As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. If we are subject to cyber-attacks or security breaches in the future, this could result in harm to patients; business interruptions and delays; the loss, misappropriation, corruption or unauthorized access of data; litigation and potential liability under privacy, security, breach notification and consumer protection laws or other applicable laws; reputational damage and federal and state governmental inquiries, any of which could have an adverse effect on our business, financial condition or results of operations.

Worsening or additional pandemics, epidemics or outbreaks of an infectious disease in the markets in which we operate or that otherwise impacts our facilities could adversely impact our business.

In additional to the current COVID-19 pandemic, if one or more additional pandemics, epidemics, or outbreaks of an infectious disease or other public health crisis were to affect our markets, our business could be adversely affected. Any such crisis could diminish the public trust in healthcare facilities, especially in facilities that fail to accurately or timely diagnose or isolate infected persons, or that are treating (or have treated) patients affected by contagious diseases. If any of our facilities were involved in treating patients for such a contagious disease, other patients might cancel elective procedures or fail to seek needed care at our facilities. Further, an additional pandemic might adversely impact our business by causing a temporary shutdown or diversion of patients, by disrupting or delaying production and delivery of materials and products in the supply chain or by causing staffing shortages in our facilities. In particular, while it is uncertain the extent to which the coronavirus may impact our business, given that a portion of pharmaceuticals and medical supplies used at our facilities are sourced from China, in the event that the coronavirus outbreak or another infectious disease outbreak, or any actions taken by the Chinese government or other governmental authorities in connection therewith, were to disrupt the supply of these pharmaceuticals and/or medical supplies, then our business could be adversely affected. In addition, although we have disaster plans in place and operate pursuant to infectious disease protocols, the potential impact of a worsening of the COVID-19 pandemic or additional pandemics, epidemics or outbreaks of an infectious disease with respect to our markets or our facilities is difficult to predict and could adversely impact our business.

Our Healthcare Services operations face intense competition from other hospitals and nursing homes which directly affect such segment and consolidated revenues and profitability.

Although Trace operates in a community where it is currently the only general, acute care hospital, it faces substantial competition from other hospitals, including larger tertiary care centers. Although these competing hospitals may be as far as 30 to 50 miles away, patients in Trace’s market migrate to these competing facilities as a result of local physician referrals, managed care plan incentives or personal choice.

Trace’s nursing home also competes on a local and regional basis with other facilities providing similar services, including hospitals, extended care centers, assisted living facilities, home health agencies, and similar institutions. Some competitors may operate newer facilities and may provide services, including skilled nursing services, that we do not offer. Our competitors include government-owned, religious organization-owned, secular nonprofit and for-profit institutions. Many of these competitors have greater financial and other resources than we do. Although there is limited, if any, price competition with respect to Medicare and Medicaid residents (since revenues received for services provided to these residents are generally based on pre-established rates), there is substantial price competition for private payment residents.

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The Healthcare Services business is highly competitive and competition among hospitals, nursing homes and other healthcare providers for patients has intensified in recent years. Some of these competing facilities offer services which are not offered by SunLink’s subsidiaries’ facilities. Some of the competing facilities are owned or operated by tax-supported governmental bodies or by private not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis and are exempt from sales, property, and income taxes. SunLink’s subsidiaries also face competition from other for-profit healthcare companies, some of which have substantially greater resources, as well as other providers, such as outpatient surgery and diagnostic centers and home health agencies.

The intense competition from other providers of Healthcare Services directly affects the market share of our subsidiaries’ facilities, as well as their and our revenues and profitability.

Changes in market demographics may increase competition for certain of our Healthcare Services subsidiaries.

We cannot assure you that we will have the financial resources to fund capital improvements to our Trace facility or any other subsidiary, which may face additional competition, or that even if financial resources are available to us, that projected operating results will justify such expenditures. An inability to fund or the infeasibility of funding capital improvements could directly or indirectly have an adverse impact on our revenues through lower utilization, increased difficulty in the recruitment of physicians or other service providers and otherwise as a result of increased competition.

SunLink’s subsidiaries’ Healthcare Services may be subject to, and depend on, certificate of need laws which could affect their ability to operate profitably.

Mississippi currently has laws requiring approval for the purchase, construction or expansion of various Healthcare Services including hospitals, nursing homes and ambulatory surgery centers and the provision of various services. Under such certificate of need (“CON”) laws, prior state approval is required for the acquisition of major medical equipment or the purchase, lease, construction, expansion, sale or closure of covered healthcare facilities, based on a determination of need for additional or expanded facilities or services. The failure to obtain any required CON may impair SunLink’s subsidiaries’ ability to operate profitably.

In addition, the elimination or modification of CON laws in Mississippi, where our hospital and nursing home operates, could subject such facilities to greater competition making it more difficult to operate profitably.

The success of SunLink’s hospital subsidiary depends upon that subsidiary’s hospital’s ability to maintain good relationships with the physicians and, if the hospital is unable to successfully maintain good relationships with physicians, admissions and outpatient revenues may decrease and operating performance could decline.

Because physicians generally direct the majority of hospital admissions and outpatient services, a hospital’s success is, in part, dependent upon the number and quality of physicians on the medical staffs, the admissions and referrals practices of the physicians, and the ability to maintain good relations with physicians. Many physicians are not employees of the hospitals at which they practice and most physicians have admitting privileges at other hospitals. If our Trace hospital is unable to successfully maintain good relationships with physicians, admissions may decrease and operating performance could decline.

Changes in the laws and regulations regarding payments for hospice services and “room and board” provided to hospice patients residing in skilled nursing facilities could reduce our net patient service revenue and profitability.

For hospice patients receiving nursing home care under certain state Medicaid programs who elect hospice care under Medicare or Medicaid, the state must pay, in addition to the applicable Medicare or Medicaid hospice per diem rate, an amount equal to at least 95% of the Medicaid per diem skilled nursing facility rate for “room and board” furnished to the patient by the skilled nursing facility. The reduction or elimination of Medicare payments for hospice patients residing in skilled nursing facilities could adversely affect the revenues of our skilled nursing facility.

Risks Relating to our Pharmacy Operations

The operations of our Pharmacy segment may be adversely affected by changes in government reimbursement regulations and payment levels.

For the years ended June 30, 2020 and June 30, 2019, respectively, the operations of our Pharmacy segment derived approximately 64% and 65%, respectively. of its net revenues from government payors, principally Medicare and Medicaid. The Deficit Reduction Act of 2005 exempted rural providers of home care related services from the competitive acquisition program to which urban providers are subject.

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We cannot assure you that the ASP reimbursement methodology will not be extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by the Pharmacy segment or that the Pharmacy segment will continue to be able to operate our Pharmacy segment profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which the Pharmacy segment operates, or may seek to operate, in particular or the Pharmacy segment would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.

The operations of our Pharmacy segment could be harmed by further changes in government purchasing methodologies and reimbursement rates for Medicare or Medicaid.

In addition to the impact of MMA, in order to deal with budget shortfalls, some states are attempting to create state administered prescription drug discount plans, to limit the number of prescriptions per person that are covered, to raise Medicaid co-pays and deductibles, and are proposing more restrictive formularies and reductions in pharmacy reimbursement rates. Any reductions in amounts reimbursable by other government programs for pharmacy services or changes in regulations governing such reimbursements could materially and adversely affect our Pharmacy segment business, financial condition and results of operations.

Louisiana, where our Pharmacy segment operates, has implemented a managed Medicaid program which is administered by outside contractors.  These managed Medicaid programs are designed to reduce the State’s administrative costs and the cost of the products and services provided to beneficiaries.  

The durable medical equipment service line of the Pharmacy segment may be adversely affected by further changes in government reimbursement regulations and payment levels, especially if the durable medical equipment service line becomes subject to additional competitive bidding procedures.

The Pharmacy segment is currently subject to the expanded provisions of the Medicare competitive bidding program which have had a negative impact on the prices we receive for durable medical equipment. The current provisions could be expanded or changed in the future. Any additional changes in government reimbursement or payment amounts could have a further adverse effect on our consolidated results of operations.

The operations of our Pharmacy segment depend on a continuous supply of key products. Any shortages of key products could adversely affect the business of the Pharmacy segment.

Many of the products distributed by the operations of our Pharmacy segment are manufactured with ingredients that are susceptible to supply shortages. In addition, the manufacturers of these products may not have adequate manufacturing capability to meet rising demand. If any products distributed by the Pharmacy segment are in short supply for long periods of time, this could result in a material adverse effect on our business and results of operations.

The operations of our Pharmacy segment are highly dependent on our relationship with and the stability of one key supplier, and the loss of such key supplier could adversely affect the business of the Pharmacy segment.

Any termination of, or adverse change in, our relationships with our key supplier, or the loss of supply of one of our key products for any other reason, could have a material adverse effect on the business of the Pharmacy segment and our consolidated results of operations. The largest supplier for the Pharmacy segment accounted for approximately 77% of the segment’s cost of goods sold in the fiscal years ended June 30, 2020 and June 30, 2019, respectively. In addition, the Pharmacy segment has few long-term contracts with its suppliers. Arrangements with most of its suppliers may be canceled by either party, without cause and on minimal notice; and many of these arrangements are not governed by written agreements.

The loss of one or more of larger institutional pharmacy customers could hurt our business by reducing the revenues and profitability of the operations of our Pharmacy segment.

As is customary in the institutional pharmacy industry, the institutional pharmacy service line of our Pharmacy segment generally does not have long-term contracts with its institutional pharmacy customers. Significant declines in the level of purchases by one or more of the larger institutional pharmacy customers could have a material adverse effect on the business of the Pharmacy segment and our consolidated results of operations.

The failure of the Pharmacy segment to maintain eligibility as a Medicare and Medicaid supplier could materially adversely affect its competitive position. Likewise, its failure to maintain and expand relationships with private payors, who can effectively determine the pharmacy source for their members, could materially adversely affect its competitive position.

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Changes in average wholesale prices (“AWP”) could reduce our pricing and margins.

Many government payors, including Medicare and Medicaid, have paid, or continue to pay, the operations of our Pharmacy segment directly or indirectly at a rate based upon a drug’s AWP less a percentage factor. The Pharmacy segment also has contracted with some private payors to sell drugs at AWP or at AWP less a percentage factor. For most drugs, AWP is compiled and published by several private companies, including First DataBank, Inc. Several states have filed lawsuits against pharmaceutical manufacturers for allegedly inflating reported AWP for prescription drugs. In addition, class action lawsuits have been brought by consumers against pharmaceutical manufacturers alleging overstatement of AWP. We are not responsible for such calculations, reports or payments; however, there can be no assurance that the ability of our Pharmacy segment to negotiate discounts from drug manufacturers will not be materially adversely affected by such investigations or lawsuits.

The federal government also has entered into settlement agreements with several drug manufacturers relating to the calculation and reporting of AWP pursuant to which the drug manufacturers, among other things, have agreed to report new pricing information, the “average sales price”, to government healthcare programs. The average sales price is calculated differently than AWP and may be expected to have the effect of indirectly reducing reimbursement.

The Pharmacy segment faces numerous competitors and potential competitors in the market in which our Pharmacy segment operates, many of whom are significantly larger and who have significantly greater financial resources.

Large national companies operate in the existing market in which our Pharmacy segment operates. We cannot assure you that one or more of such companies or other healthcare companies will not seek to compete or intensify their level of competition in the areas in which we conduct or may seek to conduct one or more of the components of the operations of our Pharmacy segment.

The operations of our Pharmacy segment may be adversely affected by industry trends in managed care contracting and consolidation.

A growing number of health plans are contracting with a single provider of Pharmacy services. Likewise, manufacturers may not be eager to contract with regional providers of Pharmacy services. If the Pharmacy segment is unable to obtain managed care contracts in the areas in which we provide Pharmacy services or are unable to obtain Pharmacy products at reasonable costs or at all, the business operations of our Pharmacy segment could be adversely affected.

The Pharmacy segment market may grow slower than expected, which could adversely affect our revenues.

We cannot predict the rate of actual future growth in product availability and spending, the extent to which patient demand or spending for specialty drug services in rural or exurban areas will match national averages or whether government payors will provide reimbursement for new products under Medicare or Medicaid on a timely basis, at what rates, or at all. Adverse developments in any of these areas could have an adverse impact on the business operations of our Pharmacy segment.

The profitability of our Pharmacy segment can be adversely affected by a decrease in the introduction of new brand name and generic prescription drugs.

Sales and profit margins of the Pharmacy segment are materially affected by the introduction of new brand name and generic drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic alternatives typically result in relatively lower sales revenues, but higher gross profit margins. Accordingly, a decrease in the number of significant new brand name drugs or generics successfully introduced could adversely affect our business and results of operations.

Other Risks

Future developments could affect our ability to maintain adequate liquidity. Additionally, our ability to access alternative sources of capital is limited.

Historically, our available capital has been sufficient to meet our operating expenses, lease obligations, debt service requirements, and capital expenditures, and we have managed our liquidity such that our aggregate unrestricted cash at June 30, 2020, was $11,184, of which a substantial portion was received as government support funds relating to the COVID-19 pandemic and is subject to extensive terms and conditions. Future circumstances could require us to materially increase our revenues, materially reduce our expenses, or otherwise materially improve operating results, dispose of existing assets or obtain material new sources of capital in order to maintain adequate liquidity.

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The Company is currently limited in its ability to raise capital, debt or equity, in the public or private markets on what it considers acceptable terms and due to the COVID-19 pandemic may be nonexistent. The Company and its subsidiaries currently must fund working capital needs from cash on hand, cash from operations or cash from the sale of additional assets, and we cannot assure you that we will be successful in improving our results of operations, reducing our costs, obtaining additional credit facilities or selling additional assets.

If we were to go private, holders of our securities would be subject to the risks of an investment in a private rather than a public company.

From time to time, the Company has considered the advisability of deregistering its common shares under the Exchange Act. In the event the Company was able to deregister its common shares under the Exchange Act, holders of our securities would be subject to the risks of an investment in a private rather than a public company. Upon any such deregistration of our shares, our duty to file periodic reports with the SEC would be suspended for as long as we had fewer than 300 record shareholders, and we would no longer be a public reporting company. In addition, we would be relieved of the obligation to comply with the requirements of the proxy rules under Section 14 of the Exchange Act. When and if the Company were to deregister, SunLink shares would no longer be listed on the NYSE American stock exchange, and there might not be a sufficient number of shares outstanding and publicly traded following any deregistration to ensure a continued trading market in the shares in any over-the-counter market. The continued quotation of our common shares as well as the availability of any over-the-counter trading in our common shares would depend, in part, on the nature and extent of continued publicly available information about SunLink. Shareholders also could be adversely affected by a reduction in our “public float,” that is, the number of shares owned by outside shareholders and available for trading in the securities markets, especially if the Company makes future tender offers or private or open market purchases of its common shares. The suspension of our reporting obligations under the Exchange Act might further reduce the existing limited trading market for the Company’s shares and may result in a decline in the price of the Company’s shares and reduced liquidity in any trading market for our shares in the future. We might also have less access to capital markets and not be able to use the Company’s shares to effect acquisitions as a non-reporting company. Although the Company is not currently pursuing an effort to deregister our common shares under the Exchange Act, there is no assurance that our Board may not again determine to pursue going private in the future.

Forward-looking statements in this Annual Report may prove inaccurate.

This document contains forward-looking statements about SunLink that are not historical facts but, rather, are statements about future expectations. Forward-looking statements in this document are based on management’s current views and assumptions and may be influenced by factors that could cause actual results, performance or events to be materially different from those projected. These forward-looking statements are subject to numerous risks and uncertainties. Important factors, some of which are beyond the control of SunLink, could cause actual results, performance or events to differ materially from those in the forward-looking statements. These factors include those described above under “Risk Factors” and elsewhere in this Annual Report under “Forward-Looking Statements.”

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal properties as of the date of filing of this report are listed below:

Name or function (licensed beds)	Location City and State	Square Footage			Date of Acquisition/ Lease Inception	Ownership Type
Healthcare Services
Trace Regional Hospital (84)	Houston, MS		76,344		February 1, 2001	Owned
Floy Dyer Nursing Home (66)	Houston, MS		32,700		February 1, 2001	Owned
Houston, MS land	Houston, MS	5.3 acres		(1)	February 1, 2001	Owned
Ellijay, GA land	Ellijay, GA	24.7 acres		(1)	October 1, 2019	Owned
Pharmacy Operations
Carmichael’s Cashway Pharmacy, Inc.	Crowley, LA		22,500	(2)	April 22, 2008	Leased
Carmichael’s Cashway Pharmacy, Inc.	Lafayette, LA		7,244	(3)	April 22, 2008	Leased
Carmichael’s Cashway Pharmacy, Inc.	Lake Charles, LA		7,808	(4)	April 22, 2008	Leased
Carmichael’s Cashway Pharmacy, Inc.	Lafayette, LA		545	(5)	March 31, 2015	Leased
Corporate Offices	Atlanta, GA		1,121	(6)	June 1, 1998	Leased

(1) This owned property is currently undeveloped.

(2) Lease of approximately 20,100 square feet of store location, warehouse and office space. The lease expires in March 2021 and provides for a renewal of the lease for a five-year term. Includes an additional lease, commencing in June 2018, of approximately 2,400 square feet of off-site warehouse space. This lease expires in May 2022.

(3) This lease is for a store location and warehouse space. It expires in October 2025.

(4) This lease is for a store location and warehouse space and expires in December 2021.

(5) This lease is for a store location in a medical office building and expires in August 2021.

(6) This lease is for approximately 1,100 square feet of office space for corporate staff and SunLink Health Systems Technology. The lease expires in June 2025.

Item 3. Legal Proceedings

The Company and its subsidiaries are subject to various claims and litigation that arise from time to time in the ordinary course of business, including, among other things, tax, contract, workers compensation and medical malpractice claims and litigation. Medical malpractice and certain other claims are generally covered by malpractice, general liability or other insurance but are subject to provisions under which the Company retains a portion of the risk, which retention, particularly in the case of claims of medical malpractice, can be material. Based on current knowledge, the Company’s management does not believe that current pending claims and litigation will have a material adverse effect on the Company’s consolidated financial position or its liquidity.  However, in light of the uncertainties involved and indeterminate damages sought in some such claims and litigation, an adverse outcome could be material to our results of operations or cash flows in any reporting period.

Item 4.Not Applicable

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

SunLink common shares are listed on the NYSE American exchange. SunLink’s ticker symbol is “SSY”. As of June 30, 2020, there were approximately 292 registered holders of SunLink common shares.

American Stock Transfer & Trust Company is the Transfer Agent and Registrar for our common shares. For all shareholder inquiries, call American Stock Transfer & Trust’s Shareholder Services Department at 1-888-937-5449.

Dividends

SunLink does not currently pay cash dividends. SunLink has historically retained its earnings for use in the operation and improvement of its business and for other corporate purposes. While the Company currently does not anticipate declaring or paying regular cash dividends in the foreseeable future, the board of directors has discussed returning capital to shareholders from funds derived from asset sales or otherwise. Any future determination to declare or pay cash dividends will be made by SunLink’s board of directors and will depend on SunLink’s financial condition, results of operations, business, prospects, capital requirements, credit agreements and such other matters as the board of directors may consider relevant at this time.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (all dollar amounts in thousands, except per share and revenue per equivalent admissions amounts) 

This Annual Report and the documents that are incorporated by reference in this Annual 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. For a listing and a discussion of such factors, which could cause actual results, performance and achievements to differ materially from those anticipated, see Certain Cautionary Statements—Forward Looking Information and Item 1A.

Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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 statement of earnings or financial condition.

The table of critical accounting estimates that follows is not intended to be a comprehensive list of all of our accounting policies that require estimates. We believe that of our significant accounting policies, as discussed in Note 2 of our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for the fiscal year ended June 30, 2020, the estimates discussed below involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and financial condition.

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The table that follows presents information about our critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate:

Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Receivables-net and Provision for Concession Adjustments
Receivables-net for our Healthcare Services segment primarily consists of amounts due from third-party payors and patients from providing healthcare services to healthcare facility patients. Receivables for our Pharmacy segment primarily consists of amounts due from third-party payors; institutions such as nursing homes, home health, hospice, hospitals; Medicaid Part D program; and customers from the sale of pharmacy services and merchandise. Our ability to collect outstanding receivables is critical to our results of operations and cash flows. The primary uncertainty lies with accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients Our provision for concession adjustments, included in our results of continuing operations for the years ended June 30, was as follows: 2020—$784; and 2019—$817	The largest component of concessions adjustments in our patient accounts receivable for our Healthcare Services and Pharmacy segments relates to accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients. In general, we attempt to collect deductibles, co-payments and self-pay accounts prior to the time of service for non-emergency care. If we do not collect these patient responsibility accounts prior to the delivery of care, the accounts are handled through our billing and collections processes. We attempt to verify each patient’s insurance coverage as early as possible before a scheduled non-emergency admission or procedure, including with respect to eligibility, benefits and authorization/pre-certification requirements, in order to notify patients of the estimated amounts for which they will be responsible. We attempt to verify insurance coverage within a reasonable amount of time for all emergency room visits and non-emergency urgent admissions in compliance with the Emergency Medical Treatment and Active Labor Act. In general, we utilize the following steps in collecting accounts receivable: if possible, cash collection of all or a portion of deductibles, co-payments and self-pay accounts prior to or at the time service is provided; billing and follow-up with third party payors; collection calls; utilization of collection agencies; sue to collect if the patient has the means to pay and chooses not to pay; and if collection efforts are unsuccessful, write off the accounts.	A significant increase in our provision for doubtful accounts (as a percentage of revenues) would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and potentially our future access to capital. If net revenues during fiscal year 2020 were changed by 1%, our 2020 after-tax income from continuing operations would change by approximately $476 or diluted earnings per share of $0.07. This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate uncollectible patient accounts that are highly uncertain and requires a high degree of judgment. It is impacted by, among other things, changes in regional economic conditions, business office operations, payor mix and trends in private and federal or state governmental healthcare coverage.

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Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
	Our policy is to write off accounts after all collection efforts have failed, which is typically no longer than 120 days after the date of discharge of the patient or service to the patient or customer. Patient responsibility accounts represent the majority of our write-offs. Our subsidiary hospital retains third-party collection agencies for billing and collection of delinquent accounts; the use of one or more collection agencies promotes competition and improved performance. Generally, we do not write off accounts prior to utilizing the services of a collection agency. Once collection efforts have proven unsuccessful, an account is written off from our patient accounting system.
	We monitor our revenue trends by payor classification on a quarter-by-quarter basis along with the composition of our accounts receivable agings. This review is focused primarily on trends in self-pay revenues, self-pay accounts receivable, co-payment receivables and historic payment patterns. In addition, we analyze other factors such as day’s revenue in accounts receivable and we review admissions and charges by physicians, primarily focusing on recently recruited physicians.

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HEALTHCARE SERVICES SEGMENT NET ACCOUNTS RECEIVABLE

JUNE 30, 2020

	Days Outstanding 1
Payor Class		0 - 30		31 - 60		61 - 90		91 - 120		121 - 150		151 - 180		>180		Total
Medicare		$	525	$	35	$	52	$	30	$	23	$	13	$	48	$	726
Medicaid			267		28		7		2		6		4		17		331
Commercial			216		32		9		11		7		11		39		325
Self Pay			27		23		17		16		16		26		96		221
		$	1,035	$	118	$	85	$	59	$	52	$	54	$	200	$	1,603

1 The above table shows, as of June 30, 2020, net Healthcare Services segment accounts receivable aged from patient date of service and are grouped by classification of verified insurance coverage.

PHARMACY SEGMENT NET ACCOUNTS RECEIVABLE

JUNE 30, 2020

	Days Outstanding 2
Payor Class		0 - 30		31 - 60		61 - 90		91 - 120		121 - 150		Total
Medicare		$	365	$	35	$	59	$	90	$	79	$	628
Medicaid			255		104		60		49		170		638
Private insurance and institutions			216		53		24		19		(21)		291
Private pay			925		163		115		32		(80)		1,155
		$	1,761	$	355	$	258	$	190	$	148	$	2,712

2 The above table shows, as of June 30, 2020, net Pharmacy segment accounts receivable aged from the date of sale or services performed and are grouped by classification of verified payor class.

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Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Revenue recognition / Net Patient Service Revenues
For our Healthcare Services segment, we recognize revenues in the period in which services are provided. For our Pharmacy segment, we recognize revenues in the period in which services are provided and at the time the customer takes possession of merchandise. Patient receivables primarily consist of amounts due from third-party payors and patients. Amounts we receive for treatment of patients covered by governmental programs, such as Medicare and Medicaid, and other third-party payors, such as HMOs, PPOs and other private insurers, are determined pursuant to contracts or established government rates and are generally less than our established billing rates. Accordingly, our gross revenues and patient receivables are reduced to net amounts receivable pursuant to such contracts or government payment rates through an allowance for contractual discounts. The sources of these revenues were as follows for the year ended June 30, 2020 (as a percentage of total revenues): Medicare—41.9%; Medicaid—29.2%; and Commercial insurance and other sources—14.1%.	Revenues are recorded at estimated amounts due from patients, third- party payors, institutions, and others for healthcare and pharmacy services and goods provided net of contractual discounts pursuant to contract or government payment rates. Estimates for contractual allowances are calculated using computerized and manual processes depending on the type of payor involved. In our   hospital, the contractual allowances are calculated by a computerized system based on payment terms for each payor and certain manual estimates are used in calculating contractual allowances based on historical collections from payors that are not significant or have not entered into a contract with us. All contractual adjustments regardless of type of payor or method of calculation are reviewed and compared to actual experience on a periodic basis. Accounts receivable primarily consist of amounts due from third party payors, institutions, and patients. Amounts we receive for the treatment of patients covered by HMOs, PPOs and other private insurers are generally less than our established billing rates. We include contractual allowances as a reduction to revenues in our financial statements based on payor specific identification and payor specific factors for rate increases and denials.

37

Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
	Governmental payors	Governmental payors
	The majority of services performed on Medicare and Medicaid patients are reimbursed at predetermined reimbursement rates. The differences between the established billing rates (i.e., gross charges) and the predetermined reimbursement rates are recorded as contractual discounts and deducted from gross charges. Under this prospective reimbursement system, there is no adjustment or settlement of the difference between the actual cost to provide the service and the predetermined reimbursement rates. Discounts for retrospectively cost-based revenues, which were more prevalent in periods before 2000, are estimated based on historical and current factors and are adjusted in future periods when settlements of filed cost reports are received. Final settlements under all programs are subject to adjustment based on administrative review and audit by third party intermediaries, which can take several years to resolve completely.	Because the laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, the estimates of contractual discounts we record could change by material amounts. Adjustments related to final settlements for revenues retrospectively increased (decreased) our revenues from continuing operations by the following amounts for the years ended June 30: 2020—$139 and 2019—$(15).
	Commercial Insurance	Commercial Insurance
	For most managed care plans, contractual allowances estimated at the time of service are adjusted to actual contractual allowances as cash is received and claims are reconciled. We evaluate the following criteria in developing the estimated contractual allowance percentages: historical contractual allowance trends based on actual claims paid by managed care payors; review of contractual allowance information reflecting current contract terms; consideration and analysis of changes in payor mix reimbursement levels; and other issues that may impact contractual allowances.	If our overall estimated contractual discount percentage on all of our commercial revenues during 2020 were changed by 1%, our 2020 after-tax income from continuing operations would change by approximately $67. This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate the amount expected to be received and requires a high degree of judgment. It is impacted by changes in managed care contracts and other related factors. A significant increase in our estimate of contractual discounts would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and future access to capital.

38

Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Intangible assets and accounting for business combinations
Our intangible assets by business segment included in our consolidated balance sheets as of June 30 for the following years was as follows:	In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 350-10, “Intangibles—Goodwill and Other,” (“ASC 350-10”) goodwill and intangible assets with indefinite lives are reviewed by us at least annually for impairment. For purposes of these analyses, the estimate of fair value is based on the income approach, which estimates the fair value based on future discounted cash flows. The estimate of future discounted cash flows is based on assumptions and projections that are believed to be currently reasonable and supportable. If it is determined the carrying value of goodwill or other intangible assets to be impaired, then the carrying value is reduced. The purchase price of acquisitions is allocated to the assets acquired and liabilities assumed based upon their respective fair values and are subject to change during the twelve-month period subsequent to the acquisition date. We engage independent third-party valuation firms to assist us in determining the fair values of assets acquired and liabilities assumed at the time of acquisition. Such valuations require us to make significant estimates and assumption, including projections of future events and operating performance.

	2020		2019
Pharmacy
Trade name	$	1,180	$	1,180
Customer relationships		1,089		1,089
Medicare License		623		623
		2,892		2,892
Accumulated amortization		(1,638)		(1,539)
Total	$	1,254	$	1,353

39

Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
	Fair value estimates are derived from independent appraisals, established market values of comparable assets, or internal calculations of estimated future net cash flows. Our estimate of future cash flows is based on assumptions and projections we believe to be currently reasonable and supportable. Our assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns.
Professional and general liability claims
We are subject to potential medical malpractice lawsuits and other claims as part of providing healthcare and pharmacy related services. To mitigate a portion of this risk, we have maintained insurance for individual malpractice claims exceeding a self-insured retention amount. Our self-insurance retention amount was $1,000 on individual malpractice claims for each contract year commencing March 1, 2011 through February 29, 2016 and was reduced to $750 from March 1, 2016 to now. Each year, we obtain quotes from various malpractice insurers with respect to the cost of obtaining medical malpractice insurance coverage. We compare these quotes to our most recent actuarially determined estimates of losses at various self-insured retention levels. Accordingly, changes in insurance costs affect the self-insurance retention level we choose each year. As insurance costs increase, we may accept a higher level of risk in self-insured retention levels.	The reserve for professional and general liability claims is based upon independent actuarial calculations, which consider historical claims data, demographic considerations, severity factors and other actuarial assumptions in the determination of reserve estimates. The reserve for professional and general liability claims reflects the current estimate of all outstanding losses, including incurred but not reported losses, based upon actuarial calculations as of the balance sheet date. The loss estimates included in the actuarial calculations may change in the future based upon updated facts and circumstances. We revise our reserve estimation process by obtaining independent actuarial calculations quarterly.	Actuarial calculations include a large number of variables that may significantly impact the estimate of ultimate losses recorded during a reporting period. In determining loss estimates, professional judgment is used by each actuary by selecting factors that are considered appropriate by the actuary for our specific circumstances. Changes in assumptions used by our independent actuary with respect to demographics and geography, Industry trends, development patterns and judgmental selection of other factors may impact our recorded reserve levels and our results of operations. Changes in our initial estimates of professional and general liability claims are non-cash charges and accordingly, there would be no material impact currently on our liquidity or capital resources.

40

Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
The reserve for professional and general liability claims included in our consolidated balance sheets as of June 30 was as follows: 2020—$123 and 2019—$920 The total increases (decreases) for professional and general liability coverage, included in our consolidated results of operations for the years ended June 30, was as follows: 2020—$(338); and 2019—$351.	Our estimated reserve for professional and general liability claims will be significantly affected if current and future claims differ from historical trends. While we monitor reported claims closely and consider potential outcomes as estimated by our independent actuaries when determining our professional and general liability reserves, the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes complicates the estimation process. In addition, certain states, including Georgia, have passed varying forms of tort reform which attempt to limit the number and types of claims and the amount of some medical malpractice awards. If enacted limitations remain in place or if similar laws are passed in the states where our other medical facilities are located, our loss estimates could decrease. Conversely, liberalization of the number and type of claims and damage awards permitted under any such law applicable to our operations could cause our loss estimates to increase.

41

Balance Sheet or Statement of Operations and Comprehensive Earnings and Loss Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Accounting for income taxes
Deferred tax assets generally represent items that will result in a tax deduction in future years for which we have already recorded the tax benefit in our Statement of Operations and Comprehensive Earnings and Loss. We assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not probable, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance, we must include an expense as part of the income tax provision in our results of operations. Our net deferred tax asset balance (net of valuation allowance) in our consolidated balance sheets as of June 30 for the following years was as follows: 2020—$0; and 2019—$0. Our valuation allowances for deferred tax assets in our consolidated balance sheets as of June 30 for the following years were as follows: 2020—$8,389; and 2019—$8,625. In addition, significant judgment is required in determining and assessing the impact of certain tax-related contingencies. We establish accruals when, despite our belief that our tax return positions are fully supportable, it is probable that we have incurred a loss related to tax contingencies and the loss or range of loss can be reasonably estimated. We adjust the accruals related to tax contingencies as part of our provision for income taxes in our results of operations based upon changing facts and circumstances, such as the progress of a tax audit, development of industry related examination issues, as well as legislative, regulatory or judicial developments. A number of years may elapse before a particular matter, for which we have established an accrual, is audited and resolved.	The first step in determining the deferred tax asset valuation allowance is identifying reporting jurisdictions where we have a history of tax and operating losses or are projected to have losses in future periods as a result of changes in operational performance. We then determine if a valuation allowance should be established against the deferred tax assets for that reporting jurisdiction. The second step is to determine the amount of the valuation allowance. We will generally establish a valuation allowance equal to the net deferred tax asset (deferred tax assets less deferred tax liabilities) related to the jurisdiction identified in the first step of the analysis. In certain cases, we may not reduce the valuation allowance by the amount of the deferred tax liabilities depending on the nature and timing of future taxable income attributable to deferred tax liabilities. In assessing tax contingencies, we identify tax issues that we believe may be challenged upon examination by the taxing authorities. We also assess the likelihood of sustaining tax benefits associated with tax planning strategies and reduce tax benefits based on management’s judgment regarding such likelihood. We compute the tax on each contingency. We then determine the amount of loss, or reduction in tax benefits based upon the foregoing and reflects such amount as a component of the provision for income taxes in the reporting period. During each reporting period, we assess the facts and circumstances related to recorded tax contingencies. If tax contingencies are no longer deemed probable based upon new facts and circumstances, the contingency is reflected as a reduction of the provision for income taxes in the current period.	Our deferred tax assets were $8,389 at June 30, 2020, excluding the impact of valuation allowances. At June 30, 2020, the Company 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 total valuation allowance of $8,389 against the deferred tax asset so that the net tax deferred asset was $0 at June 30, 2020. 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 we judged directly related to our current financial performance as compared to less current evidence and future plans. The IRS may propose adjustments for items we have failed to identify as tax contingencies. If the IRS were to propose and sustain assessments equal to 10% of our taxable income for 2020, we would incur approximately $0 of additional tax expense for 2020 plus applicable penalties and interest.

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Financial Summary

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

	2020			2019
Net Revenues—Healthcare Services	$	16,243		$	15,453
Net Revenues—Pharmacy		31,570			30,165
Total Net Revenues		47,813			45,618
Costs and expenses		(48,142	)		(48,000	)
Electronic health records incentives		0			68
Operating Loss		(329	)		(2,314	)
Federal stimulus - Pandemic relief funds		54			0
Gain on economics damages claim—net		0			22
Interest Expense		(29	)		(241	)
Loss on extinguishment of debt—net		(178	)		0
Gain on sale of assets		192			455
Loss from continuing operations before income taxes	$	(290	)	$	(2,078	)
Healthcare Services segment:
Hospital and Nursing Home Admissions		400			487
Hospital and Nursing Home Patient Days		26,154			26,780

Results of Operations

Our net revenues are from our two business segments, Healthcare Services and Pharmacy. The Company’s net revenues by payor were as follows for the years ended June 30, 2020 and 2019:

	2020		2019
Medicare	$	20,013	$	18,183
Medicaid		13,956		13,871
Retail and Institutional Pharmacy		6,465		6,649
Managed Care & Other Insurance		6,742		6,220
Self-pay		498		505
Rent		16		63
Other		123		127
Total Net Revenues	$	47,813	$	45,618

Healthcare Services net revenues in the current year are composed of revenues from one hospital, one nursing home, and a subsidiary which provides information technology services to outside customers and SunLink subsidiaries. Healthcare Services net revenues increased $790 or 5.1% in the year ended June 30, 2020 compared to the year ended June 30, 2019. The increase in net revenues for fiscal 2020 resulted from increased net revenues in all three businesses. Hospital net revenue’s increased 4.4% in the fiscal year ended June 30, 2020 compared to the prior year with the hospital geriatric psychiatry unit patient days increasing 16.7% from year to year. Nursing home net revenues increased 6% and IT services net revenues increased 21% in the fiscal year ended June 30, 2020. Net revenues from continuing operations increased $139 for the year ended June 30, 2020 and decreased $15 for the year ended June 30, 2019 from the settlement of prior year Medicare and Medicaid cost reports.

Pharmacy Segment net revenues for the year ended June 30, 2020 of $31,570 increased 4.7% from the prior year due to increased net revenues from Retail Pharmacy, Institutional Pharmacy and DME. Revenues from DME increased 9.0% due to a 9.9% increase in sales revenue per DME sales orders. The Retail Pharmacy net revenues increased 3.9% this fiscal year due to a 3.9% increase in sales revenue per script sold. The Institutional Pharmacy net revenues increased 2.0% due to a 4.8% increase in the number of prescriptions filled.

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Costs and expenses, including depreciation and amortization, were $48,142 and $48,000 for the fiscal years ended June 30, 2020 and 2019, respectively. Costs and expenses as a percentage of net revenues were:

	2020			2019
Cost of goods sold		39.8	%		41.5	%
Salaries, wages and benefits		40.7	%		42.1	%
Supplies		2.5	%		2.7	%
Purchased services		6.2	%		5.5	%
Other operating expenses		7.3	%		8.5	%
Rent and lease expense		1.3	%		1.3	%
Depreciation and amortization expense		3.0	%		3.3	%

Cost of goods sold as a percent of net revenues decreased 1.7% in the fiscal year ended June 30, 2020 compared to the prior fiscal year due to the increased sales price of Pharmacy Segment product in the current fiscal year. Salaries, wages and benefits expense as a percent of net revenues decreased 1.4% this year compared to the prior fiscal year due to the increased net revenues this year. Purchased services expenses as a percent of net revenues increased 0.7% this year compared to the prior fiscal year due to the addition of a new contracted service line at a hospital. Other operating expenses decreased 1.2% due to decreased professional liability expenses.

Operating Profit (Loss)

Operating losses were $329 for the year ended June 30, 2020 and $2,314 for the year ended June 30, 2019. The decreased operating loss in the year ended June 30, 2020 compared to the prior fiscal year resulted from the increased operating profit of the Pharmacy and Healthcare Services segments.

Other Income - Federal stimulus – Pandemic relief funds

As part of CARES, two subsidiaries received total payments of $4,586 under the Provider Relief Fund (“PRF”). These funds were allocated to Medicare facilities and providers affected by COVID-19 based on eligible provider’s net patient revenues and are required to be used for COVID-19 related costs and to offset the effect of COVID-19, including reduced revenues. The relief funds are recognized as government grants.  The Company recognized income when it was able to comply with the relevant conditions of the grant.  During the fiscal year ended June 30, 2020, $54 of these funds were recognized as Other Income for reimbursement of “Lost Revenues and for COVID-19 related expenses.

Interest Expense-net

Interest expense, net was $29 and $241 for the years ended June 30, 2020 and 2019, respectively. The decrease in interest expense for the year ended June 30, 2020 was due to lower outstanding debt which resulted from the repayment of the Trace RDA loan during the year.

Loss on extinguishment of debt

During the year ended June 30, 2020, the Company repaid the outstanding balance of the Trace RDA Loan, which was scheduled to be fully repaid in July 2027. The pre-payment was made with cash on hand.  The Company recorded a non-cash loss on early extinguishment of debt relating to the pre-payment of $178 during the year ended June 30, 2020.

Gain on Sale of Assets

On December 20, 2019, the Company sold a medical office building and approximately 4 acres of land in Clanton, AL. After expenses, the Company received net proceeds from the sale of $204, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was $86 and is included in the Company’s results for the fiscal year ended June 30, 2020.

On September 9, 2019, the Company sold approximately 11.4 acres of undeveloped land in Fulton, MO. After expenses, the Company received net proceeds from the sale of $348, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was $100 and is included in the Company’s results for the fiscal year ended June 30, 2020.

44

On October 11, 2018, the Company sold a vacant medical office building and approximately 2 adjacent acres of undeveloped land in Dahlonega, GA. After expenses, the Company received net proceeds from the sale of $935, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property of $452 is included in the Company’s results for the fiscal year ended June 30, 2019.

Income Taxes

We recorded income tax expense of $296 ($296 state tax expense) for the year ended June 30, 2020 compared to an income tax benefit of $82 ($113 federal tax benefit and $31 state tax expense) for the year ended June 30, 2019.

Key income tax provisions of the CARES Act include new health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code.  The corporate income tax provisions of the CARES Act include allowing the carryback of net operating losses (“NOL”) generated in recent tax years, temporary removal of the 80% NOL usage limitation put in place under the Tax Cuts and Jobs Act (“TCJA”) enacted on December 27, 2017, temporary favorable adjustments to the business interest expense limitation calculated under Sec. 163(j), and the acceleration of refundable Alternative Minimum Tax (“AMT”) credits.

Of the CARES Act provisions, the most material income tax considerations to the Company are related to the amounts received as general and targeted PRF and the amounts received under the PPP loans.  Based on the latest published IRS guidance as of preparation of the June 30, 2020 financial statements, the PRF is be fully includable in taxable income and any amounts of income or expense related to the PPP loans will be excluded for tax purposes.  The result of including the PRF in taxable income and disallowing PPP loan expenses for the period is a total addition to taxable income of $7,303.  The Company has sufficient federal and state net operating losses for the period to cover the resulting provisional June 30, 2020 taxable income, except in Mississippi, the source of the substantial majority of the Company’s PRF. The June 30, 2020 current tax expense, as booked represents Mississippi state income tax.  The Company will continue to monitor the latest available IRS guidance on these funds for treatment on the June 30, 2020 tax return filing, which is due April 15, 2021. The Company elected to treat remaining available AMT credits as fully refundable as of the 2018 tax year as allowed by the CARES Act.  As of June 30, 2020 the Company has made use of this election in order to claim and received all remaining refundable AMT credits in the amout of $305.

We believe that the remainder of the corporate income tax provisions of the CARES Act should not have a material impact on the Company after June 30, 2020. Due to the Company’s history of losses , there is no potential for the carryback of NOLs.  The temporary removal of the 80% income limitation on NOL usage has no impact as the Company has substantial NOLs generated in years prior to the enactment of the TCJA not subject to this 80% limitation. The Company also does not have any interest expense disallowed under Sec. 163(j) after consideration of the PRF and PPP loan adjustments discussed previously that would be impacted by the CARES Act.

In accordance with the FASB 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 June 30, 2020, consistent with the above process, we evaluated the need for a valuation 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 $8,389 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability at June 30, 2020. 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 plans.

The principal negative evidence that led us to determine at June 30, 2020 that all the deferred tax assets should have full valuation allowances was the three-year cumulative pre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Services Segment businesses operate.

45

For Federal income tax purposes, at June 30, 2020, the Company had approximately $17,500 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 2023 through fiscal 2038; however, with the enactment of the TCJA 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, 2017 are no longer subject to potential federal and state income tax examination.

Discontinued Operations

Loss from discontinued operations net of income tax was $554 for the year ended June 30, 2020, and earnings from discontinued operations net of income taxes were $242 for the year ended June 30, 2019. The results of all the businesses in .discontinued operations are presented below:

Parkside Nursing Home — On March 17, 2019, a subsidiary of the Company sold its Parkside Ellijay Nursing Home (“Parkside”) and related real estate for $7,300. The pre-tax gain on the sale was $2,136 in the fiscal year. The net proceeds of the sale were retained for working capital and general corporate purposes.

Sold Hospitals – Subsidiaries of the Company have sold substantially all of the assets of four hospitals (“Other Sold Hospitals”) during the period July 2, 2012 to August 19, 2016. The income (loss) before income taxes of the Other Sold Hospitals results primarily from the effects of prior year Medicare and Medicaid cost report settlements and retained professional liability claims expenses.

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 fiscal years ended June 30, 2020 and 2019.

Discontinued Operations—Summary Statement of Earnings Information

	2020			2019
Net Revenues:
Parkside	$	11		$	5,574
Sold Hospitals		26			(581	)
	$	37		$	4,993
Loss Before Income Taxes:
Parkside	$	(246	)	$	(756	)
Sold Hospitals		(172	)		(919	)
Life sciences and engineering		(136	)		(137	)
Loss before income taxes		(554	)		(1,812	)
Gain (Loss) on Sale:
Parkside		0			2,136
Sold Hospitals		0			0
Gain (Loss) on Sale		0			2,136
Income tax expense		0			82
Earnings (Loss) from discontinued operations, net of income taxes	$	(554	)	$	242

Net Loss — Net loss for the year ended June 30, 2020 was $1,140 (a loss of $0.16 per fully diluted share) compared to the net loss for the year ended June 30, 2019 of $1,754 (a loss of $0.25 per fully diluted share).

46

Liquidity and Capital Resources

Overview

Our primary source of liquidity is unrestricted cash on hand, which was $11,184 at June 30, 2020. Currently, the Company’s ability to raise capital (debt or equity) in the public or private markets on what it considers acceptable terms is highly uncertain, and due to the COVID-19 pandemic, may be non-existent. The Company and five subsidiaries received approximately $3,234 of loans under the Paycheck Protection Program and approximately $4,586 of payments under the Provider Relief Fund plan. These funds are required to be expended under the terms of the government programs which authorized them.  The Company is uncertain as to whether these funds will be sufficient to sustain its operations for the duration of the COVID-19 pandemic which is itself uncertain. From time-to-time, nevertheless, we may seek options to obtain financing for the liquidity needs of the Company or individual subsidiaries based on anticipated needs. The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand.

Subject to the effects, risks and uncertainties associated with the COVID-19 pandemic and government programs discussed herein, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months.

CARES Act Paycheck Protection Plan Loans—The CARES Act was enacted by the U.S. government on March 27, 2020. As part of the CARES Act, the PPP loan program was established and is administered by the SBA. In April and May 2020, subsidiaries of the Company received approximately $3,234 of PPP loans through the Company’s regular bank.  Forgiveness of PPP loans may be available if the loan proceeds are used to pay wages, rent, utilities and interest on certain debt during the eight-week period following receipt of such proceeds and based on other Federally-established terms and conditions.  During July 2020, the allowable period for the use of loan proceeds was amended to up to a 24-week period. The borrowing subsidiaries must apply for loan forgiveness with the lending bank within ten months after the allowable use period. The forgiveness applications will be reviewed by both the bank and the SBA and a loan forgiveness amount, if any, will be determined. There can be no assurance, however, that any of our PPP loans will be forgiven, or if forgiven, the amount of such forgiveness. Loan proceeds not forgiven are payable over two years at a 1% annual interest rate. Prior to a July 2020 amendment, the two-year loan repayment was to begin six months after the loan was funded.

Trace RDA Loan— Southern Health Corporation of Houston, Inc. (“Trace”), a wholly owned subsidiary of the Company, closed on a $9,975 Mortgage Loan Agreement (“Trace RDA Loan”) with a bank, dated as of July 5, 2012. During the year ended June 30, 2020, the Company repaid the entire outstanding balance of the Trace RDA Loan, which was scheduled to be repaid in July 2027. The pre-payment was made with cash on hand.  The Company recorded a non-cash loss on early extinguishment of debt relating to the pre-payment of $178 during the year ended June 30, 2020. The Trace RDA Loan had a term of 15 years with level monthly payments of principal and interest. The Trace RDA Loan interest rate was the prime rate (as published in the Wall Street Journal) plus 1% with a floor of 5.5%. The Trace RDA Loan was collateralized by real estate and equipment of Trace. The Trace RDA Loan contained various covenants, terms and conditions, including financial restrictions and limitations, and affirmative and negative covenants and was guaranteed by SunLink. At June 30, 2019, Trace was not in compliance with the debt service coverage, fixed charge coverage and funded debt to EBITDA ratios and the entire outstanding amount of the Loan was classified as a current liability.  

Contractual Obligations, Commitments and Contingencies

Contractual obligations related to long-term debt, non-cancelable operating leases and interest on outstanding debt from continuing operations at June 30, 2020 is shown in the following table. The interest on variable interest debt is calculated at the interest rate in effect at June 30, 2020.

Payments due in:	Long-Term Debt		Interest on Long-Term Debt
1 year	$	1,401	$	45
2 years		1,904		33
3 years		39		2
4 years		14		0
5 years		0		0
More than 5 years		0		0
	$	3,358	$	80

47

Long-term Debt —At June 30, 2020, we had outstanding long-term debt of $3,358, which was composed of PPP Loans of $3,234 and capital lease debt of $124.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Instead of a two-step impairment model, if the carrying amount of a reporting unit exceeds its fair value as determined in step one of the impairment test, an impairment loss is measured at the amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not believe adoption of this pronouncement will have a material impact on its financial position and results of operations.

Related Party Transactions

A director of the Company is a member of a law firm which provides services to SunLink. The Company has expensed an aggregate of $251 and $306 to the law firm in the fiscal years ended June 30, 2020 and 2019, respectively. Included in the Company’s consolidated balance sheets at June 30, 2020 and 2019 is $6 and $47 of amounts payable to the law firm.

Inflation

During periods of inflation and labor shortages, employee wages increase and suppliers pass along rising costs to us in the form of higher prices for their supplies and services. We have not always been able to offset increases in operating costs by increasing prices for our services and products or by implementing cost control measures. We are unable to predict our ability to control future cost increases or offset future cost increases by passing along the increased cost to customers.

48

Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements and Supplementary Data

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets—as of June 30, 2020 and 2019	F-2
Consolidated Statements of Operations and Comprehensive Earnings and Loss—for each of the two years ended June 30, 2020 and 2019	F-3
Consolidated Statements of Shareholders’ Equity—for each of the two years ended June 30, 2020 and 2019	F-4
Consolidated Statements of Cash Flows—for each of the two years ended June 30, 2020 and 2019	F-5
Notes to Consolidated Financial Statements—as of and for the two years ended June 30, 2020 and 2019	F-6

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act ”), as of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Under the direction of our principal executive officer and principal financial officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of June 30, 2020.

Disclosure controls and procedures and other procedures are designed to ensure that information required to be disclosed in our reports or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on an evaluation of the effectiveness of disclosure controls and procedures performed in connection with this Annual Report on Form 10-K, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.

Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all information presented in this Annual Report on Form 10-K. The consolidated financial statements contained herein were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the Company’s independent registered public accounting firm and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accounting firm. The independent registered public accounting firm has free access to the Audit Committee.

49

Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our assessment we concluded that, as of June 30, 2020, the Company’s internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

During the last fiscal quarter ended June 30, 2020, there has been no significant change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.

Securities Authorized for Issuance under Equity Compensation Plans

Incorporated by reference from the registrant’s definitive Proxy Statement to be filed under Regulation 14A in connection with the Annual Meeting of Shareholders of SunLink Health Systems, Inc. scheduled to be held on November 11, 2020.

50

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) (1) Financial Statements

The following consolidated financial statements of the Company and its subsidiaries are set forth in Item 8 of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets—June 30, 2020 and 2019.

Consolidated Statements of Operations and Comprehensive Earnings and Loss—For the Years Ended June 30, 2020 and 2019.

Consolidated Statements of Shareholders’ Equity—For the Years Ended June 30, 2020 and 2019.

Consolidated Statements of Cash Flows—For the Years Ended June 30, 2020 and 2019.

Notes to Consolidated Financial Statements—For the Years Ended June 30, 2020 and 2019.

(a) (2) Financial Statement Schedules

Report of Independent Auditor on Supplemental Information	At page 55 of this Report
Schedule II Valuation and Qualifying Accounts	At page 56 of this Report

The information required to be submitted in Schedules I, III, IV and V for SunLink Health Systems, Inc. and its consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or not required under Regulation S-X and, therefore, has been omitted.

(a) (3) See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit is identified below by an asterisk.

(b) Exhibits

The following exhibits are filed with this Form 10-K or incorporated herein by reference from the document set forth next to the exhibit in the list below. Exhibit numbers refer to Item 601 of Regulation S-K:

3.(i)	Articles of Incorporation of SunLink Health Systems, Inc. (f/k/a KRUG International Corp.) and all amendments thereto ^
3.(ii)	Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180)
4.(i)(A)	Shareholder Rights Agreement dated as of February 10, 2014, between SunLink Health Systems, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference from Exhibit 4.1 of the Company’s Report on Form 8-K filed February 27, 2014). (Commission File No. 14647348)
4.(i)(B)	Tax Benefits Preservation Rights Plan between SunLink Health Systems, Inc. and American Stock Transfer & Trust, LLC, as Rights Agent dated as of September 29, 2016. (incorporated by reference from Exhibit 4.2 of the Company’s Report on Form 8-K filed September 29, 2016). (Commission File No. 161910046)
4.(i)(C)	Definition of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. (incorporated by reference from Exhibit 4.3 of the Company’s Report on Form 10-K for the fiscal year ended June 30, 2019). (Commission File No. 191122160)
10.1*	Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). (Commission File No. 051197210)
10.2*	Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K filed December 23, 2005). (Commission File No. 051285094)
10.3*	2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed September 20, 2006). (Commission File No. 061100389)

51

10.4	Agreement of Understanding, dated June 28, 2007, between Christopher H. B. Mills and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.2 of the Company’s Report on Form 8-K filed July 16, 2007). (Commission File No. 07982325)
10.5*	Employment letter dated September 23, 2010 with an effective date of September 30, 2010, by and between SunLink ScriptsRx, LLC and Byron D. Finn (incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No.  111108066)
10.6*	2011 Director Stock Option Plan (incorporated by reference from Appendix A to the Company’s Schedule 14A Definitive Proxy Statement filed September 29, 2011) (Commission File No. 111115265).
10.7	U. S. Small Business Administration Note between Carmichael’s Cashway Pharmacy, Inc., and the U. S. Small Business Administration dated May 2, 2020. ^
10.8	U. S. Small Business Administration Note between SunLink ScriptsRX, LLC, and the U. S. Small Business Administration dated May 1, 2020. ^
10.9	U. S. Small Business Administration Note between SunLink Health Systems, Inc. and the U. S. Small Business Administration dated April 15, 2020. ^
10.10	U. S. Small Business Administration Note between Crown Healthcare Investments, LLC, and the U. S. Small Business Administration dated April 13, 2020. ^
10.11	U. S. Small Business Administration Note between SunLink Health Systems Technology, Inc. and the U. S. Small Business Administration dated April 13, 2020. ^
10.12	U. S. Small Business Administration Note between Southern Health Corporation of Houston, Inc. and the U. S. Small Business Administration dated April 13, 2020. ^
21.1	List of Subsidiaries ^
23.1	Consent of Cherry Bekaert LLP ^
31.1	Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. ^
31.2	Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. ^
32.1	Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^
32.2	Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^
101	The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets as of June 30, 2020 and June 30, 2019, (ii) Consolidated Statements of Operations and Comprehensive Earnings and Loss for the fiscal years ended June 30, 2020 and 2019, (iii) Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 30, 2020 and 2019 (iv) Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2020 and 2019 and (v) Notes to Consolidated Financial Statements.

* Management contract or compensatory plan or arrangement.

^ Filed herewith.

52

INDEX TO EXHIBITS

3.(i)	Articles of Incorporation of SunLink Health Systems, Inc. (f/k/a KRUG International Corp.) and all amendments thereto (Commission File No. 1789180) ^
3.(ii)	Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180)
4.(a)(i)	Shareholder Rights Agreement dated as of February 10, 2014, between SunLink Health Systems, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference from Exhibit 4.1 of the Company’s Report on Form 8-K filed February 27, 2014). (Commission File No. 14647348)
4.(a)(ii)	Tax Benefits Preservation Rights Plan between SunLink Health Systems, Inc. and American Stock Transfer & Trust, LLC, as Rights Agent dated as of September 29, 2016. (incorporated by reference from Exhibit 4.2 of the Company’s Report on Form 8-K filed September 29, 2016). (Commission File  No. 161910046)
4.(a)(iii)	Definition of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. (incorporated by reference from Exhibit 4.3 of the Company’s Report on Form 10-K for the fiscal year ended June 30, 2019). (Commission File No. 191122160)
10.1*	Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of the Company’s Quarterly Report Form 10-Q for the quarter ended September 30, 2005). (Commission File No. 051197210)
10.2*	Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K filed December 23, 2005). (Commission File No. 051285094)
10.3*	2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed September 20, 2006). (Commission File No. 061100389)
10.4	Agreement of Understanding, dated June 28, 2007, between Christopher H. B. Mills and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.2 of the Company’s Report on Form 8-K filed July 16, 2007). (Commission File No. 07982325)
10.5*	Employment letter dated September 23, 2010 with an effective date of September  30, 2010, by and between SunLink ScriptsRx, LLC and Byron D. Finn (incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No.  111108066)
10.6*	2011 Director Stock Option Plan (incorporated by reference from Appendix A to the Company’s Schedule 14A Definitive Proxy Statement filed September 29, 2011) (Commission File No. 111115265).
10.7	U. S. Small Business Administration Note between Carmichael’s Cashway Pharmacy, Inc., and the U. S. Small Business Administration dated May 2, 2020. ^
10.8	U. S. Small Business Administration Note between SunLink ScriptsRX, LLC, and the U. S. Small Business Administration dated May 1, 2020. ^
10.9	U. S. Small Business Administration Note between SunLink Health Systems, Inc. and the U. S. Small Business Administration dated April 15, 2020. ^
10.10	U. S. Small Business Administration Note between Crown Healthcare Investments, LLC, and the U. S. Small Business Administration dated April 13, 2020. ^
10.11	U. S. Small Business Administration Note between SunLink Health Systems Technology, Inc. and the U. S. Small Business Administration dated April 13, 2020. ^
10.12	U. S. Small Business Administration Note between Southern Health Corporation of Houston, Inc. and the U. S. Small Business Administration dated April 13, 2020. ^
21.1	List of Subsidiaries ^
23.1	Consent of Cherry Bekaert LLP ^
31.1	Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. ^
31.2	Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. ^

53

32.1	Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^
32.2	Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^
101	The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets as of June 30, 2020 and June 30, 2019, (ii) Consolidated Statements of Operations and Comprehensive Earnings and Loss for the fiscal years ended June 30, 2020 and 2019, (iii) Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 30, 2020 and 2019 (iv) Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2020 and 2019 and (v) Notes to Consolidated Financial Statements.

* Management contract or compensatory plan or arrangement.

^ Filed herewith.

54

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SunLink Health Systems, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of September, 2020.

SUNLINK HEALTH SYSTEMS, INC.
By:	/s/ Robert M. Thornton, Jr.
	Robert M. Thornton, Jr. Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of SunLink Health Systems, Inc. and in the capacities and on the dates indicated:

Name	Title	Date
/s/ Robert M. Thornton, Jr.	Director, Chairman, President and Chief Executive Officer (principal executive officer)	September 28, 2020
Robert M. Thornton, Jr.
/s/ Mark J. Stockslager	Chief Financial Officer and Principal Accounting Officer (principal accounting officer)	September 28, 2020
Mark J. Stockslager
/s/ Steven J. Baileys, D.D.S.	Director	September 28, 2020
Steven J. Baileys, D.D.S.
/s/ Gene E. Burleson	Director	September 28, 2020
Gene E. Burleson
/s/ C. Michael Ford	Director	September 28, 2020
C. Michael Ford
/s/ Christopher H. B. Mills	Director	September 28, 2020
Christopher H. B. Mills
/s/ Howard E. Turner	Director	September 28, 2020
Howard E. Turner

55

Report of Independent Auditor on Supplemental Information

To the Board of Directors and Shareholders of
SunLink Health Systems, Inc.

We have audited the consolidated financial statements of SunLink Health Systems, Inc. (the Company) as of
June 30, 2020 and 2019 and for each of the years in the two-year period ended June 30, 2020, and have issued our report, which expressed an unqualified opinion on those consolidated financial statements, thereon dated September 28, 2020. The supplemental information contained in Schedule II Valuation and Qualifying Accounts has been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with accounting principles generally accepted in the United States of America. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.

/s/ Cherry Bekaert LLP

Atlanta, Georgia

September 28, 2020

56

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

(amounts in thousands)

Deferred Income Tax Asset Valuation Allowance	Balance at Beginning Of Year		Charged to Cost and Expenses/ (Benefit)		Currency Translation/ Acquisition/ (Disposition)		Deductions from Reserves			Balance at End of Year
Year Ended June 30, 2020	$	8,625	$	—	$	—	$	(236	)	$	8,389
Year Ended June 30, 2019	$	8,373	$	252	$	—	$	—		$	8,625

57

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
SunLink Health Systems, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of SunLink Health Systems, Inc. (the Company) as of June 30, 2020, and 2019, and the related consolidated statements of operations and comprehensive earnings and loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of July 1, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2004.

/s/ Cherry Bekaert LLP

Atlanta, Georgia

September 28, 2020

F-1

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2020 AND 2019

(All Amounts in thousands)

	2020			2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,184		$	7,742
Receivables		4,315			4,715
Inventory		1,866			2,016
Prepaid expenses and other assets		2,558			2,185
Total current assets		19,923			16,658
PROPERTY, PLANT AND EQUIPMENT
Land		582			273
Buildings and improvements		5,363			5,429
Equipment and fixtures		13,804			13,818
		19,749			19,520
Less accumulated depreciation		14,425			14,277
Property, plant and equipment—net		5,324			5,243
NONCURRENT ASSETS:
Intangible assets—net		1,254			1,353
Right of use assets		970			0
Other noncurrent assets		500			1,165
Total noncurrent assets		2,724			2,518
TOTAL ASSETS	$	27,971		$	24,419
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	872		$	1,564
Current maturities of long-term debt, net of debt issuance costs		1,401			2,836
Accrued payroll and related taxes		1,969			1,960
Accrued sales tax payable		1,411			843
Unearned CARES Act funds		4,532			0
Current operating lease liabilities		365			0
Other accrued expenses		866			1,207
Total current liabilities		11,416			8,410
LONG-TERM LIABILITIES:
Long-term debt, net of debt issuance costs		1,957			127
Noncurrent liability for professional liability risks		104			705
Long-term operating lease liabilities		607			0
Other noncurrent liabilities		144			134
Total long-term liabilities		2,812			966
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred Shares, authorized and unissued, 2,000 shares		0			0
Common Shares, no par value; authorized, 12,000 shares; issued    and outstanding, 6,899 shares at June 30, 2020 and    6,987 shares at June 30, 2019		3,450			3,493
Additional paid-in capital		10,714			10,745
Retained earnings (loss)		(82	)		1,058
Accumulated other comprehensive loss		(339	)		(253	)
Total Shareholders’ Equity		13,743			15,043
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	27,971		$	24,419

See notes to consolidated financial statements.

F-2

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE EARNINGS AND LOSS

FOR THE YEARS ENDED JUNE 30, 2020 and 2019

(All amounts in thousands, except per share amounts)

	2020			2019
Net Revenues	$	47,813		$	45,618
Costs and expenses:
Cost of goods sold		19,023			18,941
Salaries, wages and benefits		19,563			19,191
Supplies		1,215			1,241
Purchased services		2,924			2,508
Other operating expenses		3,366			3,895
Rent and lease expense		601			609
Impairments		0			129
Depreciation and amortization		1,450			1,486
Electronic Health Records incentive payments		0			(68	)
Operating Loss		(329	)		(2,314	)
Other income (expense):
Federal stimulus - Pandemic relief funds		54			0
Gain on economic damages claim, net		0			22
Interest income (expense), net		(29	)		(241	)
Loss on extinguishment of debt—net		(178	)		0
Gain on sale of assets—net		192			455
Loss from continuing operations before income taxes		(290	)		(2,078	)
Income tax expense (benefit)		296			(82	)
Loss from continuing operations		(586	)		(1,996	)
Earnings (Loss) from discontinued operations, net of income taxes		(554	)		242
Net loss		(1,140	)		(1,754	)
Other comprehensive loss		(86	)		(76	)
Comprehensive loss	$	(1,226	)	$	(1,830	)
Earnings (loss) per share:
Continuing operations:
Basic	$	(0.08	)	$	(0.28	)
Diluted	$	(0.08	)	$	(0.28	)
Discontinued operations:
Basic	$	(0.08	)	$	0.03
Diluted	$	(0.08	)	$	0.03
Net loss:
Basic	$	(0.16	)	$	(0.25	)
Diluted	$	(0.16	)	$	(0.25	)
Weighted-average common shares outstanding:
Basic		6,957			7,149
Diluted		6,957			7,149

See notes to consolidated financial statements.

F-3

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

(All amounts in thousands)

	Common Shares						Additional Paid-in Capital			Retained Earnings  (Loss)			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	Shares			Amount
JUNE 30, 2018		7,347		$	3,673		$	10,947		$	2,743		$	(177	)	$	17,186
Net loss		0			0			0			(1,754	)		0			(1,754	)
Minimum pension liability adjustment		0			0			0			0			(7	)		(7	)
Adoption of ASU 2018-02		0			0			0			69			(69	)		0
Share-based compensation		0			0			1			0			0			1
Shares repurchased		(360	)		(180	)		(203	)		0			0			(383	)
JUNE 30, 2019		6,987			3,493			10,745			1,058			(253	)		15,043
Net loss		0			0			0			(1,140	)		0			(1,140	)
Minimum pension liability adjustment		0			0			0			0			(86	)		(86	)
Share-based compensation		0			0			28			0			0			28
Shares repurchased		(88	)		(43	)		(59	)		0			0			(102	)
JUNE 30, 2020		6,899		$	3,450		$	10,714		$	(82	)	$	(339	)	$	13,743

See notes to consolidated financial statements.

F-4

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

(All amounts in thousands)

	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,140	)	$	(1,754	)
Adjustments to reconcile net loss to net cash provided by    (used in) operating activities:
Depreciation and amortization		1,450			1,728
Share-based compensation		28			1
Impairments		0			129
Gain on sale of Parkside		0			(2,136	)
Gain on disposal of property, plant and equipment		(192	)		(455	)
Change in assets and liabilities:
Receivables		400			108
Inventory		150			(162	)
Prepaid expenses and other assets		10			1,049
Accounts payable and accrued expenses		(1,624	)		588
Deferred relief funds		4,532			0
Accrued sales taxes		569			602
Third-party payor settlements		(214	)		(218	)
Net activities of discontinued operations		0			(907	)
Net cash provided by (used in) operating activities		3,969			(1,427	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of Parkside		0			6,899
Proceeds from sale of property, plant & equipment		559			937
Expenditures for property, plant and equipment—continuing operations		(1,185	)		(1,272	)
Expenditures for property, plant and equipment—discontinued operations		0			(172	)
Net cash provided by (used in) investing activities		(626	)		6,392
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common shares		(102	)		(383	)
Proceeds from new long-term debt		3,234			0
Payment of long-term debt		(3,033	)		(296	)
Net cash used in financing activities		99			(679	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		3,442			4,286
CASH AND CASH EQUIVALENTS:
Beginning of year		7,742			3,456
End of year	$	11,184		$	7,742
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing and financing activities
Assets acquired under capital obligations	$	0		$	176
Assets acquired in exchange for note receivable	$	371		$	0
Right-of-use assets obtained for lease liabilities	$	1,498		$	0
Cash paid for (received from):
Income taxes	$	(349	)	$	0
Interest	$	6		$	222

See notes to consolidated financial statements.

F-5

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

(All dollar amounts in thousands, except per share amounts)

1. BUSINESS OPERATIONS

SunLink Health Systems, Inc., through subsidiaries (“SunLink”, “we”, “our”, “ours”, “us” or the “Company”), owns businesses which are providers of healthcare services in certain markets in the United States. SunLink’s business is composed of the ownership of two business segments:

Healthcare Services

• A subsidiary which owns and operates Trace Regional Hospital and Floy Dyer Nursing Home (“Trace”), an 84 licensed-bed acute care hospital, located in Houston, Mississippi, which includes an 18-bed geriatric psychology unit (“GPU”), and a 66-bed nursing home. This facility focuses primarily on senior healthcare services.

• Asubsidiary, SunLink Health Systems Technology (“SHST Technology”), which provides information technology (“IT”) to outside customers and to SunLink subsidiaries.

• Asubsidiary which owns approximately five (5) acres of unimproved land in Houston, Mississippi.

• A subsidiary which owns approximately 25 acres of unimproved land in Ellijay, Georgia.

Pharmacy

The Pharmacy segment, which is composed of four operational areas:

• Retail pharmacy products and services, consisting of retail pharmacy sales conducted in rural markets at two locations in Louisiana.

• Institutional pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to institutional clients or to patients in institutional settings, such as nursing homes, assisted living facilities, behavioral and specialty hospitals, hospice, and correctional facilities.

• Non-institutional Pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to clients or patients in non-institutional settings including private residential homes.

• Durable medical equipment products and services (“DME”), consisting primarily of the sale and rental of products for institutional clients or to patients in institutional settings and patient-administered home care.

SunLink subsidiaries have conducted the Healthcare Services business since 2001 and the Pharmacy operations since 2008. Our Pharmacy segment currently is operated through Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”), a subsidiary of our SunLink ScriptsRx, LLC subsidiary.

Throughout these notes to the 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 the publicly traded Company or any particular subsidiary of the Company owns or operates any asset, business or property. The operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc.

COVID-19 Pandemic and CARES Act Funding

A novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization on March 11, 2020. We have been monitoring the COVID-19 pandemic and its impact on our operations, and we have taken significant steps intended to minimize the risk to our employees and patients. Certain employees have been working remotely, but we believe these remote work arrangements have not materially affected our ability to maintain critical business operations, which are being conducted substantially in accordance with our understanding of applicable government health and safety protocols and guidance issued in response to the COVID-19 pandemic, although such protocols and guidance are very recent, rapidly changing and at times, unclear. Nevertheless, as in many healthcare environments, we have experienced COVID-19 illness, including deaths, and some employees have tested positive and have been placed on leave or in quarantine.

F-6

In our Healthcare businesses, we have experienced material reductions in demand due to the COVID-19 outbreak. There appears to be minimal current demand for nursing home admissions, and clinic visits and hospital services have substantially decreased as well in part due to the abrupt retirement of one physician and reduced capacity of other physicians and providers, all as a result of the effects of the pandemic. The availability and cost of medical supplies have adversely affected our Healthcare businesses, especially with respect to access to personal protective equipment, cleaning supplies and COVID-19 testing materials. We continue to monitor supplies and seek additional sources of many supply items. A reduction of the availability of qualified employees has also occurred and despite good faith efforts to do, they have not yet been able to rehire or fully replace staff reductions which were previously furloughed, laid off or retired.

Since the beginning of the COVID-19 pandemic, our Pharmacy business has experienced negative sales trends, increased costs and reduced staff.  Retail Pharmacy and DME locations are operating with curbside or drive-through services only and many of our primary physician referral sources have been closed or are operating at substantially reduced capacity.  Until these referral sources are open and fully-staffed, we believe the COVID-19 pandemic will continue to affect the demand for DME products and Pharmacy drugs and products. Reductions in employee hours have been made in response to the lower demand. Demand for our Institutional Pharmacy services has been less affected to date. Nursing homes and other customers of such Institutional Pharmacy services are currently being adversely affected by the spreading of the COVID-19 pandemic, and this may be expected to have a further negative effect on such demand.  Our Institutional Pharmacy services have experienced increased costs and operational inefficiencies due to measures taken to protect our employees and by access controls and other restrictions implemented by our institutional customers. The impact of the COVID-19 pandemic has negatively affected our supply processes, especially with respect to access to respiratory equipment and certain personal protective equipment and cleaning products. We believe the effect of the COVID–19 pandemic and public and governmental responses to it negatively affected our third and fourth fiscal quarters results.

During the fourth quarter of fiscal 2020, our Healthcare and Pharmacy segments received approximately $4,586 in general and targeted Provider Relief Fund (“PRF”) distributions and $3,234 in Paycheck Protection Programs (“PPP”) loans, administered by the , SBA, both provided for under the CARES Act for a total of $7,820 of such funding.

The distributions from the PRF are 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 healthcare-related expenses or “Lost Revenues” (as defined by HHS) attributable to COVID-19. Such funds under the PRF are accounted for as government grants and are recognized on a systematic and rational basis once there is reasonable assurance that the applicable terms and conditions required to retain the funds will be met. Based on an analysis of the compliance and reporting requirements of the PRF and the impact of the pandemic on our operating results through the end of our fiscal year ended June 30, 2020, we recognized $54 of income related to PRF and these funds are recorded under the caption “Federal stimulus pandemic relief funds” in other income (expense) in our consolidated statement of operations. The unrecognized amount of the PRF are recorded under the caption “Deferred income- CARES Act” in our consolidated balance sheets. We will continue to monitor compliance under the terms and conditions of the PRF and 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 be able to do so, our ability to retain some or all of the distributions received may be impacted.

Forgiveness of PPP loans may be available if the loans are used to pay wages, rent, utilities and interest on certain debt during the eight-week period following receipt of the loan proceeds subject to Federally-established terms and conditions.  During July 2020, the allowable period for the use of loan proceeds was amended to allow for a 24-week period in which to utilize PPP loan  proceeds. The borrowing subsidiaries must apply for loan forgiveness with the lending bank within ten months after the end of the allowable period. The forgiveness applications are to be reviewed by both the lender and the Small Business Administration (“SBA”) and a loan forgiveness amount, if any, will be determined. There can be no assurance, however, that any of the PPP loans to us will be forgiven, or if forgiven, the amount of such forgiveness. Loan proceeds not forgiven are payable over two years at a 1% annual interest rate. The two-year loan repayment begins two months after the loan forgiveness amount is determined by SBA. The Company had not applied for forgiveness of any of its PPP loans and recorded no income relating to the PPP loans at June 30, 2020.

Going forward, the Company is unable to determine the extent to which the COVID-19 pandemic will continue to affect its assets. Our ability to make estimates of the 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 effect of the COVID-19 pandemic on our balance sheet and results of operations will depend on the severity and length of the pandemic; government actions to mitigate the pandemic’s effect; regulatory changes in response to the pandemic, especially those that affect our hospital, nursing home and pharmacy operations; and existing and potential government assistance that may be provided.

F-7

We believe that existing funds, cash generated from operations and additional sources of and access to financing from COVID-19 related government loans and grants will likely be adequate to satisfy our needs for working capital and capital expenditures in the near term. However, if the COVID-19 pandemic continues for an extended period, we expect to experience significant losses and additional financial assistance will likely be required.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — The consolidated financial statements include the accounts of SunLink and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Management Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates made by management involve reserves for adjustments to net patient service revenues, evaluation of the recoverability of assets, including accounts receivable and intangible assets, and the assessment of litigation and contingencies, including income taxes and related tax asset valuation allowances, all as discussed in more detail in the remainder of these notes to the consolidated financial statements. Actual results could differ materially from these estimates.

Net Patient Service Revenue — Effective July 1, 2018, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”), which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented. ASC 606 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The adoption of the provisions of ASC 606 had no material impact on the Company’s current or historical financial position, results of operations or cash flows. Additionally, management does not anticipate that the provisions of ASC 606 will have a material impact on the amount or timing of when the Company recognizes revenue prospectively. However, in accordance with ASC 606, the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented. Subsequent material events that alter the payor’s ability to pay are recorded as bad debt expense. The Company’s revenue recognition and accounts receivable policies are more fully described in Note 4. Revenue Recognition and Accounts Receivable.

SunLink’s subsidiaries have agreements with third-party payors that provide for payments at amounts different from established charges. Payment arrangements vary and include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Patient service revenues are reported as services are rendered at the estimated net realizable amounts from patients, third-party payors, and others. Estimated net realizable amounts are estimated based upon contracts with third-party payors, published reimbursement rates, and historical reimbursement percentages pertaining to each payor type. Estimated reductions in revenues to reflect agreements with third-party payors and estimated retroactive adjustments under such reimbursement agreements are accrued during the period the related services are rendered and are adjusted in future periods as interim and final settlements are determined. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to accrue such revenue deductions. At June 30, 2020, there were no material claims or disputes with third-party payors.

Concentrations of Credit Risk —SunLink’s Healthcare Services segment subsidiaries grant unsecured credit to their patients, most of who reside in the service area of the subsidiaries’ facilities and are insured under third-party agreements. Medicare and Medicaid patient accounts represent SunLink’s only significant concentrations of credit risk. For SunLink’s Healthcare Services segment, Medicare net revenues were approximately 52% and 49% of net revenues for the years ended June 30, 2020 and 2019, respectively. For SunLink’s Healthcare Services segment, Medicaid was approximately 32% and 33% net revenues for the years

F-8

ended June 30, 2020 and 2019, respectively. For SunLink’s Healthcare Services segment, Medicare receivables were approximately 45% and 42% of receivables—net at June 30, 2020 and 2019, respectively, while Medicaid receivables were approximately 21% and 26% of receivables—net at June 30, 2020 and 2019, respectively.

SunLink’s Pharmacy segment subsidiary grants unsecured credit to individual customers and institutional customers. Individual customers primarily are insured under third-party agreements, including Medicare and Medicaid, while the institutional customers are granted credit according to their determined credit risk. Medicare receivables were approximately 23% and 17% of the Pharmacy segment’s receivables at June 30, 2020 and 2019, respectively, while Medicaid receivables were approximately 23% and 17% of the Pharmacy segment receivable at June 30, 2020 and 2019, respectively. Approximately 54% and 66% of the Pharmacy’s net receivables at June 30, 2020 and 2019, respectively, were private insurance and institutional customers’ receivables. Net revenues for the Pharmacy segment for the fiscal year ended June 30, 2020 and 2019 were approximately 37% and 35% Medicare, respectively, and approximately 28% and 29% Medicaid, respectively.

Cash and Cash Equivalents —Cash and cash equivalents consist of all funds in banks and short-term liquid investments with an original maturity of three months or less. Cash deposited with commercial banks at June 30, 2020 was $11,178, of which approximately $10,384 totaled amounts greater than the federally insured limits. At June 30, 2020, the Company’s cash equivalents included $3,660 of overnight repurchase agreements.The Company accounts for these agreements as cash equivalents in accordance with FASB ASC 305-10-20. The investing of cash in amounts greater than the insurable limits with major well-capitalized financial institutions mitigates the risk of the deposited cash and the certificate of deposit. The overnight repurchase agreements are 102% collateralized by U. S. government backed securities with the Company’s U.S. bank. The U.S. Government backed collateralized securities are of high credit quality which mitigates any significant risk to the credit rating or interest rate risk of the agreements.

Inventory —Inventory consists of medical and pharmacy supplies. Medical supplies are valued at the lower of cost or market, using the first-in, first-out method. Pharmacy supplies are stated at the lower of cost (standard cost method), or net realizable value. Use of this method does not result in a material difference from the methods required by generally accepted accounting principles in the United States of America.

Accounts Receivable —Substantially all of SunLink’s subsidiaries’ receivables result from providing healthcare services to hospital facility patients and from providing pharmacy services and products to customers. The Company evaluates the valuation of accounts receivable based upon its historical collection trends, as well as its understanding of the nature and collectability of accounts based on their age and other factors.

Government Grant Accounting—As a result of the COVID-19 pandemic, SunLink subsidiaries have received grants from the U.S. government under the CARES Act as targeted Provider Relief Funds. We recognize the grants as we calculate the amounts of COVID-19 related costs and to offset the effect of COVID-19 Lost Revenues on a systematic and rational basis in the Consolidated Statement of Operations into other income once there is reasonable assurance that we can comply with the relevant conditions of the specific grant and the grant has been or be will be received. The amount of the grant recognized into other income at any point in time is based on the terms of the grant received. Any unearned portions of the grants are deferred and shown as a current liability on our balance sheet.

Property, Plant, and Equipment —Property, plant, and equipment, including equipment subject to capital leases, is recorded at cost. Depreciation is recognized over the estimated useful lives of the assets, which range from 3 to 45 years, on a straight-line basis. Generally, furniture and fixtures are depreciated over 5 to 10 years, machinery and equipment over 10 years, and buildings over 25 to 45 years. Leasehold improvements and leased machinery and equipment are depreciated over the lease term or estimated useful life of the asset, whichever is shorter, and range from 5 to 15 years. For the Pharmacy segment, durable medical equipment is depreciated over 3 years. Expenditures for major renewals and replacements are capitalized. Expenditures for maintenance and repairs are charged to operating expense as incurred. When property items are retired or otherwise disposed of, amounts applicable to such items are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Depreciation expense totaled $1,350 and $1,369 for the years ended June 30, 2020 and 2019, respectively.

Leases— On July 1, 2019, the Company adopted cumulative accounting standard updates initially by the Financial Accounting Standards Board (“FASB”) that amended the accounting for leases and are codified as ASC 842. SunLink and its subsidiaries recognize right-of-use assets and lease liabilities for leases with terms greater than 12 months or leases that contain a purchase option that is reasonably certain to be exercised.  Leases are classified as either finance or operating leases.  This classification whether lease expense is recognized based on an effective interest method or on a straight-line method over the term of the lease.  Our right-of-use assets and liabilities primarily relate to office and warehouse facilities, healthcare equipment and office equipment.  Certain of our facility leases include one or more option to renew.  The exercise of lease renewal options is at our option.  None of our lease agreements contain material residual value guarantees.  

F-9

Risk Management —SunLink and its subsidiaries are exposed to various risks of loss from professional liability and other claims and casualties; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters (including earthquakes and hurricanes); and employee health, dental and accident benefits. Commercial insurance coverage is purchased for a portion of claims arising from such matters.

When, in management’s judgment, claims are sufficiently identified, a liability is accrued for estimated costs and losses under such claims, net of estimated insurance recoveries except where applicable laws, rules or regulations require us to report the gross estimate of potential or estimated losses.

The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition of a business. These amounts are based on actuarially determined estimates.

The Company self-insures for workers’ compensation risk. The estimated liability for workers’ compensation risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. The Company is also self-insured for employee health risks. The estimated liability for employee health risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported.

The Company accrues an estimate of losses resulting from workers’ compensation and professional liability claims to the extent they are not covered by insurance. These accruals are estimated quarterly based upon management’s review of claims reported and historical loss data.

The Company records a liability pertaining to pending litigation if it is probable a loss has been incurred and accrues the most likely amount of loss based on the information available. If no amount within the range of losses estimated from the information available is more likely than any other amount in the range of loss, the minimum amount in the range of loss is accrued. Because of uncertainties surrounding the nature of litigation and the ultimate liability to SunLink and its subsidiaries, if any, estimates are revised as additional facts become known.

Long-lived Assets —SunLink and its subsidiaries periodically assesses the recoverability of assets based on its expectations of future profitability and the undiscounted cash flows of the related operations and, when circumstances dictate, adjust the carrying value of the asset to estimated fair value. These factors, along with management’s plans with respect to the operations, are considered in assessing the recoverability of long-lived assets.

Goodwill and Intangibles —Goodwill represents the cost of acquired businesses in excess of fair value of identifiable tangible and intangible net assets purchased. Goodwill has an indefinite life and is not subject to periodic amortization. However, goodwill is tested at least annually for impairment, using a fair value methodology, in lieu of amortization. Definite-life intangible assets are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 2 to 30 years. SunLink and its subsidiaries evaluate the reasonableness of the useful lives of intangible assets and they are tested for impairment as conditions warrant.

Income Taxes —SunLink accounts for income taxes using an asset and liability approach and the recognition of deferred tax assets and liabilities for expected future tax consequences. SunLink considers all expected future events other than proposed enactments of changes in the income tax law or rates. When management determines that it is more likely than not that a portion of or none of the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies, management provides a valuation allowance for the portion not expected to be realized.

   Share-Based Compensation —The Company has issued common share options to key employees and directors under various shareholder-approved plans. Share-based compensation expense of $28 and $1 for the fiscal years ended June 30, 2020 and 2019, respectively, was recorded in salaries, wages and benefits expense for share options issued to employees and directors of the Company. The fair value of the share options was estimated using the Black-Scholes option pricing model. The historical volatility is used to calculate the estimated volatility in this model.

Fair Value of Financial Instruments —The recorded values of cash, receivables, and payables approximate their fair values because of the relatively short maturity of these instruments. Similarly, the fair value of long-term debt is estimated to approximate the recorded value due to its current variable interest rate.

F-10

Fair Value Measurements —Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. Generally Accepted Accounting Principles (“GAAP”) fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

Level 1:  Quoted market prices in active markets for identical assets or liabilities.

Level 2:  Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level3:  Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability.

Earnings (Loss) per Share —Earnings (loss) per common share is based on the weighted-average number of common shares and dilutive common share equivalents outstanding for each period presented, including vested and unvested shares issued under SunLink’s 2005 Equity Incentive Plan, and the 2011 Director Stock Option Plan. Common share equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options.

Recent Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Instead of a two-step impairment model, if the carrying amount of a reporting unit exceeds its fair value as determined in step one of the impairment test, an impairment loss is measured at the amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not believe adoption of this pronouncement will have a material impact on its financial position and results of operations.

3. DISCONTINUED OPERATIONS

All of the businesses discussed below are reported as discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation.

Parkside Nursing Home — On March 17, 2019, a subsidiary of the Company sold its Parkside Ellijay Nursing Home (“Parkside”) and related real estate for $7,300. The pre-tax gain on the sale was $2,136.The net proceeds of the sale were retained for working capital and general corporate purposes.

Sold Hospitals – Subsidiaries of the Company have sold substantially all of the assets of four hospitals (“Other Sold Hospitals”) during the period July 2, 2012 to August 19, 2016. The income (loss) before income taxes of the Other Sold Hospitals results primarily from the effects of prior year Medicare and Medicaid cost report settlements and retained professional liability claims expenses.

Life Sciences and Engineering Segment —SunLink retained a defined benefit retirement plan which covered substantially all of the employees of the segment when this 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 fiscal years ended June 30, 2020 and 2019.

F-11

Results for all the businesses included in discontinued operations are presented in the following table:

Discontinued Operations—Summary Statement of Earnings Information

	2020			2019
Net Revenues:
Parkside	$	11		$	5,574
Sold Hospitals		26			(581	)
	$	37		$	4,993
Loss Before Income Taxes:
Parkside	$	(246	)	$	(756	)
Sold Hospitals		(172	)		(919	)
Life sciences and engineering		(136	)		(137	)
Loss before income taxes		(554	)		(1,812	)
Gain on Sale:
Parkside		0			2,136
Gain on Sale		0			2,136
Income tax expense		0			82
Earnings (Loss) from discontinued operations	$	(554	)	$	242

4. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLES

Effective July 1, 2018, the Company adopted the provisions of ASC) 606, “Revenue from Contracts with Customers” which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented. ASC 606 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The adoption of the provisions of ASC 606 had no material impact on the Company’s current or historical financial position, results of operations or cash flows. Additionally, management does not anticipate that the provisions of ASC 606 will have a material impact on the amount or timing of when the Company recognizes revenue prospectively. However, in accordance with ASC 606 the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented. Subsequent material events that alter the payor’s ability to pay are recorded as bad debt expense.

Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. A reconciliation of disaggregated revenue to segment revenue is disclosed in Note 17. Financial Information by Segment.

The Company’s service specific revenue recognition policies are as follows:

F-12

Healthcare Services

The Company’s revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rates, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.

Pharmacy

The Company’s revenue is derived primarily from providing pharmacy goods and services to patients and is recognized on the date goods and services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. Revenue is recognized when control of the promised goods or services are transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Each prescription claim represents a separate performance obligation of the Company, separate and distinct from other prescription claims under customer arrangements. Significant portions of the revenue from sales of pharmaceutical and medical products are reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and reduces revenue at the revenue recognition date, to properly account for the variable consideration due to anticipated differences between billed and reimbursed amounts. Accordingly, the total net revenues and receivables reported in the Company’s financial statements are recorded at the amount expected to be ultimately received from these payors.

Medicare Revenue

Net healthcare services revenue is recorded under the Medicare prospective payment system based on an episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a patient, regardless of whether the same provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.

The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Revenue is also adjusted for estimates for variable consideration. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.

In addition to revenue recognized on completed services, the Company also recognizes a portion of revenue associated with services in progress. Services in progress are days of care that begin during the reporting period but were not completed as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of services in progress at the end of the reporting period, expected Medicare revenue per episode and its estimate of the average percentage complete based on services performed.

Non-Medicare Revenue

The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for service-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.

Revenue is recorded on an accrual basis based upon the date of service at amounts equal to its established or estimated per-visit rates, and adjusted for estimates for variable consideration, as applicable.

F-13

Practical Expedients and Exemptions

The Company’s contracts with its patients have an original duration of one year or less, therefore, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs, and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

The Company’s revenues by payor were as follows for the years ended June 30, 2020 and 2019:

	2020		2019
Medicare	$	20,013	$	18,183
Medicaid		13,956		13,871
Retail and Institutional Pharmacy		6,465		6,649
Managed Care & Other Insurance		6,742		6,220
Self-pay		498		505
Rent		16		63
Other		123		127
Total Net Revenues	$	47,813	$	45,618

Net revenues included an increase of $139 for the year ended June 30, 2020 from the settlement of prior year Medicare and Medicaid cost reports. Net revenues included a decrease of $15 for the year ended June 30, 2019 from the settlement of prior year Medicare and Medicaid cost reports. 

5. INVENTORY

Inventory consisted of the following:

	June 30,
	2020		2019
Healthcare Services segment, supplies inventory	$	152	$	157
Pharmacy segment, goods held for sale		1,714		1,859
	$	1,866	$	2,016

6. LEASES

On July 1, 2019, the Company adopted cumulative accounting standard updates initially issued by the FASB that amend the accounting for leases and are codified as ASC 842. These lease accounting changes require operating leases be recorded on the balance sheet through the recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right-of-use (“ROU”) asset.  The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. Leases with an initial term of 12 months or less which do not have an option to purchase the underlying asset that is deemed reasonably certain to be exercised are not recorded on the balance sheet; rather, rent expense for these leases is recognized on a straight-line basis over the lease term, or when incurred if a month-to-month lease. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company’s incremental borrowing rate is utilized. Our lease agreements do not contain any material residual value guarantees.

F-14

The Company elected the amended transition requirements allowed for by the FASB in ASU 2018-11, which provides relief from requirements to recast prior comparative periods under ASC 842. As a result, the prior year comparative financial statements have not been restated to reflect the adoption of ASC 842. Additionally, the Company elected the “package of practical expedients” available in ASC 842 whereby an entity need not reassess expired contracts for lease identification or classification as a finance or operating lease, or reassess the initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. Certain of the Company’s lease agreements have lease and non-lease components, which for the majority of leases the Company accounts for separately when the actual lease and non-lease components are determinable. For equipment leases with immaterial non-lease components incorporated into the fixed rent payment, the Company accounts for the lease and non-lease components as a single lease component in determining the lease payment.

The adoption of ASC 842 on July 1, 2019 resulted in the Company recording $1,423 of operating lease liabilities and an equal amount of ROU assets with no impact on retained earnings. The adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows for the fiscal year ended June 30, 2020.

The Company has operating leases and a financing lease relating to its pharmacy operations, medical office buildings, certain medical equipment and office equipment. All lease agreements generally require the Company to pay maintenance, repairs, property taxes and insurance costs, which are variable amounts based on actual costs. Variable lease costs also include escalating rent payments that are not fixed at commencement but are based on an index determined in future periods over the lease term based on changes in the Consumer Price Index or other measure of cost inflation. Some leases include one or more options to renew the lease at the end of the initial term, with renewal terms that generally extend the lease at the then market rental rates. Leases may also include an option to buy the underlying asset at or a short time prior to the termination of the lease. All such options are at the Company’s discretion and are evaluated at the commencement of the lease, with only those that are reasonably certain of exercise included in determining the appropriate lease term. The components of lease cost and rent expense for the fiscal year ended June 30, 2020 are as follows:

	Fiscal Year Ended
Lease Cost	June 30, 2020
Operating lease cost:
Operating lease cost	$	593
Short-term rent expense		5
Variable lease cost		3
Total operating lease cost	$	601
Finance lease cost:
Amortization right-of-use assets	$	36
Interest on finance lease liabilities		9
Total finance lease cost	$	45

Supplemental balance sheet information relating to leases was as follows:

		As of
	Balance Sheet Classifications	June 30, 2020
Operating Leases:
Operating Lease ROU Assets	ROU Assets	$	970
Finance Leases:
Finance Lease ROU Assets	Property, plant and equipment		203
Accumulated amortization	Accumulated depreciation		43
Current finance lease liabilities	Current maturities of long-term debt		34
Long-term finance lease liabilities	Long-term debt		90

F-15

Supplemental cash flow and other information related to leases as of and for the year ended June 30, 2020 are as follows:

	Fiscal Year Ended
Other information	June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	593
Operating cash flows from finance leases	9
Financing cash flow from finance leases	32
Right-of-use assets obtained in exchange for new finance lease liabilities	0
Right-of-use assets obtained in exchange for new operating lease liabilities		1,498
Weighted-average remaining lease term:
Operating leases	3.75
Finance leases	3.41
Weighted-average discount rate:
Operating leases		6.54	%
Finance leases		5.49	%

Commitments relating to non-cancellable operating and finance leases as of June 30, 2020 for each of the next five years and thereafter are as follows:

Payments due within	Operating Leases			Finance Leases
1 year	$	406		$	42
2 years		275			42
3 years		115			42
4 years		106			13
5 years		101			0
Over 5 years		74			0
Total minimum future payments		1,077			139
Less: Imputed interest		(105	)		(15	)
Total liabilities		972			124
Less: Current portion		(365	)		(34	)
Long-term liabilities	$	607		$	90

7. IMPAIRMENT OF LONG-LIVED ASSETS

Impairment of Note Receivable and Land Acquisition— In conjunction with the settlement of a lawsuit, the Company received a five-year promissory note in the principal amount of $600 maturing in October 2019. The note was secured by a non-recourse mortgage on an approximately 25 acres of unimproved land in Ellijay, Georgia.  The terms of the Note and mortgage provide that if the owner of the real property did not pay the note at maturity, then the Company could foreclose and take title of the real property. The market value of the note was estimated to be $500 when received based on an appraisal of the real property at that time. A subsequent appraisal of the real property reduced the value of the property to $371. As a result, an impairment of the note of $129 was recorded in the fourth quarter of the fiscal year ended June 30, 2019. The owners/obligors of the note conveyed the real property to the Company in lieu of payment of the note on November 1, 2019.  

Impairment of Intangible Assets— See Note 8. Intangible Assets for discussion of impairment analysis of Intangible Assets.

Impairment analysis —For the purposes of these analyses, our estimates of fair value are based on a combination of the income approach, which estimates the fair value based on future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices. Estimates of fair value for reporting units fall under Level 3 of the fair value hierarchy. Estimates of future discounted cash flows are based on assumptions and projections we believe to be currently reasonable and supportable. These assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns.

F-16

8. INTANGIBLE ASSETS

SunLink’s Pharmacy segment has intangible assets related to its Carmichael acquisition, which consists of:

Intangible assets:
	June 30,
	2020			2019
Pharmacy segment
Trade Name	$	1,180		$	1,180
Customer Relationships		1,089			1,089
Medicare License		623			623
		2,892			2,892
Accumulated Amortization		(1,638	)		(1,539	)
Total	$	1,254		$	1,353

Impairment testing —During the fourth quarters of fiscal 2020 and 2019, we completed our annual impairment test of certain intangible assets and no impairment was indicated.

The Trade Name intangible asset under the Pharmacy segment is a non-amortizing intangible asset. Customer Relationships intangible asset is being amortized over 12 years and Medicare License intangible asset is being amortized over 15 years. Amortization expense was $ 99 and $117 for the fiscal years ended June 30, 2020 and 2019, respectively.

Annual amortization of amortizing intangibles for the next five years is as follows:

2021	$	26
2022		26
2023		22
2024		0
2025 and thereafter		0
Total	$	74

9. LONG-TERM DEBT

Long-term debt consisted of the following:

	June 30,
	2020			2019
CARES Act Paycheck Protection Plan Loans	$	3,234		$	0
Trace RDA Loan		0			2,999
Capital lease obligations		124			159
Total		3,358			3,158
Less unamortized debt costs		0			(195	)
Less current maturities		(1,401	)		(2,836	)
	$	1,957		$	127

CARES Act Paycheck Protection Plan Loans—The CARES Act was enacted by the U.S. government on March 27, 2020. As part of the CARES Act, the PPP loan program was established and administered by the SBA. In April and May 2020, subsidiaries of the Company received approximately $3,234 of PPP loans through its regular bank. Forgiveness of PPP loans may be available if the loans are used to pay wages, rent, utilities and interest on certain debt during the eight-week period following receipt of the loan proceeds and subject to other Federally-established terms and conditions. During July 2020, the period for loan proceeds use was amended to allow for a 24-week period. The borrowing subsidiaries must apply for loan forgiveness with the bank within ten months after the allowable use period. The forgiveness applications will be reviewed by both the lending bank and SBA and a loan forgiveness amount, if any, will be determined. There can be no assurance, however, that any of the PPP loans to us will be forgiven, or if forgiven, the amount of such forgiveness. Loan proceeds not forgiven are payable over two years at a 1% annual interest rate. Prior to the July amendment, the two-year loan repayment begins six months after the loan was funded by SBA.

F-17

Trace RDA Loan— Southern Health Corporation of Houston, Inc. (“Trace”)’ a wholly owned subsidiary of the Company, closed on a $9,975 Mortgage Loan Agreement (“Trace RDA Loan”) with a bank, dated as of July 5, 2012. During the year ended June 30, 2020, the Company paid the entire outstanding balance of the Trace RDA Loan, which was scheduled to be repaid in July 2027. The pre-payment was made with cash on hand. The Company recorded a non-cash loss on early extinguishment of debt relating to the pre-payment of $178 during the fiscal year ended June 30, 2020. The Trace RDA Loan had a term of 15 years with level monthly payments of principal and interest. The Trace RDA Loan interest rate was the prime rate (as published in the Wall Street Journal) plus 1% with a floor of 5.5%. The Trace RDA Loan was collateralized by real estate and equipment of Trace. The Trace RDA Loan contained various covenants, terms and conditions, including financial restrictions and limitations, and affirmative and negative covenants and is guaranteed by SunLink. At June 30, 2019, Trace was not in compliance with the debt service coverage, fixed charge coverage and funded debt to EBITDA ratios and the entire outstanding amount of the Loan was classified as a current liability.

Debt Commitments —Annual required payments of debt and contractual commitments for interest on long-term debt are shown in the following table. The interest rate on variable interest debt is calculated at the interest rate at June 30, 2020.

	Debt		Interest
2021	$	1,401	$	45
2022		1,904		33
2023		39		2
2024		14		0
2025		0		0
2026 and after		0		0
Total	$	3,358	$	80

10. SHAREHOLDERS’ EQUITY

Employee and Directors Stock Option Plans —The 2011 Director Stock Option Plan was approved by SunLink’s shareholders at the Annual Meeting of Shareholders on November 7, 2011. This plan permits the grant of options to non-employee directors of SunLink for the purchase of up to 300,000 common shares through November 2021. Options for 50,000 shares were granted during the fiscal year ended June 30, 2020 and no options were granted during the fiscal year ended June 30, 2019. No options have been exercised under this plan. Options outstanding under the plan were 300,000 shares at June 30, 2020. 

The 2005 Equity Incentive Plan approved by SunLink’s shareholders on November 7, 2005 permitted the grant of options to employees, non-employee directors and service providers of SunLink for the purchase of up to 800,000 common shares plus the number of unused shares under its 2001 Plans, which were 30,675. No options have been exercised under this Plan. No option shares were granted during the fiscal years ended June 30, 2020 and 2019, respectively. Options for 165,000 shares were forfeited during the fiscal year ended June 30, 2020. Options outstanding under this Plan were 180,000 at June 30, 2020. No additional awards may be granted under this Plan.

The activity of Company’s share options is shown in the following table:

	Number of Shares			Weighted- Average Exercise Price		Range of Exercise Prices
Options outstanding June 30, 2018		651,000		$	1.52	$0.71 - $2.51
Granted		0		N/A		N/A
Forfeited		(56,000	)		1.46	$0.71 - $2.51
Options outstanding June 30, 2019		595,000		$	1.53	$0.71 - $2.09
Granted		50,000		1.38		1.38
Forfeited		(165,000	)		2.01	$1.79 - $2.09
Options outstanding June 30, 2020		480,000		$	1.35	$0.71 - $1.79
Options exercisable June 30, 2019		595,000		$	1.52	$0.71 - $2.51
Options exercisable June 30, 2020		480,000		$	1.35	$0.71 - $1.79

F-18

For the fiscal years ended June 30, 2020 and 2019, the Company recognized $28 and $1, respectively, of compensation expense for share options issued. As of June 30, 2020, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans.

Information with respect to stock options outstanding and exercisable at June 30, 2020 is as follows:

Exercise Prices		Number Outstanding		Weighted-Average Remaining Contractual Life (in years)		Number Exercisable
$	0.71		15,000		3.21		15,000
$	1.21		60,000		6.21		60,000
$	1.22		190,000		2.18		190,000
$	1.38		50,000		9.20		50,000
$	1.49		90,000		4.18		90,000
$	1.67		50,000		1.36		50,000
$	1.79		25,000		5.20		25,000
			480,000		3.90		480,000

No options were exercised during the years ended June 30, 2020 and 2019. As of June 30, 2020, and 2019, the aggregate intrinsic value of options outstanding and options exercisable were $132 and $74, respectively.

Common Share Purchase Transactions

2019-2020 Common Share Repurchase Program – On October 8, 2019, the Company announced a share repurchase program (“2019-2020 Program”) approved by its Board of Directors which authorized the Company to purchase up to $750 of its common shares in the open market. On March 24, 2020, the Company announced that it had suspended the 2019-2020 Program in light of the COVID-19 pandemic and on June 1, 2020, the Company terminated the 2019-2020 program. The total number of shares that have been purchased under the Plan is 87,534 and the cost of such shares was approximately $101. The chart below shows by month the total shares repurchased and average price per share paid for the 2019-2020 Program.

	Total Shares		Average Price
	Purchased		Per Share Paid
November 2019		935	$	1.17
December 2019		2,879		1.18
January 2020		4,272		1.15
February 2020		33,873		1.22
March 2020		45,575		1.09
Total		87,534	$	1.15

2018 Common Share Repurchase Program – On November 29, 2018, the Company announced a share repurchase program (“2018 Program”) approved by its Board of Directors, which authorized the Company to purchase up to 300,000 shares of its common shares.  On December 13, 2018, the Company announced it had purchased the 300,000 shares authorized under the program, and that its Board of Directors had authorized an additional 450,000 shares to be purchased under the 2018 Program. The total number of shares that was purchased under the 2018 Program was 359,959 and the cost of shares purchased was approximately $372. The chart below shows by month the total shares repurchased and average price per share paid for the 2018 Program prior to its termination.

	Total Shares		Average Price
	Purchased		Per Share Paid
November 2018		1,235	$	1.14
December 2018		358,724		1.03
Total		359,959	$	1.03

F-19

Accumulated Other Comprehensive Loss —Information with respect to the balances of each classification within accumulated other comprehensive loss is as follows:

	Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Loss
June 30, 2018	$	(177	)	$	(177	)
Current period change		(76	)		(76	)
June 30, 2019	$	(253	)	$	(253	)
Current period change		(86	)		(86	)
June 30, 2020	$	(339	)	$	(339	)

11. INCOME TAXES

The provision (benefit) for income taxes on continuing operations are as follows:

	2020		2019
Current	$	296	$	0
Deferred		0		(82	)
Total income tax expense (benefit)	$	296	$	(82	)

Net deferred income tax assets recorded in the consolidated balance sheets are as follows:

	June 30,
	2020			2019
Net operating loss carryforward	$	6,078		$	6,766
Depreciation expense		(86	)		46
Allowances for receivables		131			125
Accrued liabilities		1,407			603
Intangible assets		585			877
Pension liabilities		165			141
Other		109			67
		8,389			8,625
Less valuation allowance		(8,389	)		(8,625	)
Net deferred income tax assets	$	0		$	0

The differences between income taxes on continuing operations at the Federal statutory rate and the effective tax rate were as follows:

	2020			2019
Income tax expense (benefit) at Federal statutory rate	$	(61	)	$	(436	)
Changes in valuation allowance—continuing operations		(369	)		378
U.S. state income taxes, net of federal benefit		175			(45	)
Permanent differences under CARES Act		582			0
Deferred tax rate changes		(34	)		32
Other		3			(11	)
Total income tax expense (benefit)—continuing operations	$	296		$	(82	)

Key income tax provisions of the CARES Act include new health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code.  The corporate income tax provisions of the CARES Act include allowing the carryback of net operating losses (“NOL”) generated in recent tax years, temporary removal of the 80% NOL usage limitation put in place under the Tax Cuts and Jobs Act (“TCJA”) enacted on December 27, 2017, temporary favorable adjustments to the business interest expense limitation calculated under Sec. 163(j), and the acceleration of refundable Alternative Minimum Tax (“AMT”) credits.

F-20

Of the CARES Act provisions, the most material income tax considerations relating to the Company, are relating to the amounts received as general and targeted PRFand amounts receivedunder the PPP loans.  Based on the latest published IRS guidance as of preparation of the June 30, 2020 financial statements, the PRF is be fully includable in taxable income and any amounts of income or expense related to the PPP loans will be excluded for tax purposes.  The result of including the PRF in taxable income and disallowing PPP loan expenses for the period is a total addition to taxable income of $7,303.  The Company has sufficient federal and state net operating losses for the period to cover the resulting provisional June 30, 2020 taxable income, except in Mississippi, the source of the substantial majority of the Company’s PRF. The June 30, 2020 current tax expense, as booked represents Mississippi state income tax.  The Company will continue to monitor the latest available IRS guidance on these funds for treatment on the June 30, 2020 tax return filing, which is due April 15, 2021.The Company elected to treat remaining available AMT credits as fully refundable as of the 2018 tax year as allowed by the CARES Act.  As of June 30, 2020 the Company has made use of this election in order to claim and received all remaining refundable AMT credits in the amout of $305.

We believe that the remainder of the corporate income tax provisions of the CARES Act will not have a material impact on the Company after June 30, 2020. Due to the Company’s history of losses , there is no potential for the carryback of NOLs.  The temporary removal of the 80% income limitation on NOL usage has no impact as the Company has substantial NOLs generated in years prior to the enactment of the TCJA not subject to this 80% limitation. The Company also does not have any interest expense disallowed under Sec. 163(j) after consideration of the PRF and PPP loan adjustments discussed previously that would be impacted by the CARES Act.

In accordance with the FASB 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 June 30, 2020, consistent with the above process, we evaluated the need for a valuation 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 $8,389 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability at June 30, 2020. 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 plans.

The principal negative evidence that led us to determine at June 30, 2020 that all the deferred tax assets should have full valuation allowances was the three-year cumulative pre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Services Segment businesses operate.

For Federal income tax purposes, at June 30, 2020, the Company had approximately $17,500 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 2023 through fiscal 2038; however, with the enactment of the TCJA 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, 2017 are no longer subject to potential federal and state income tax examination.

12. EMPLOYEE BENEFITS

Defined Benefit Plans —No defined benefit plan is maintained for employees of either the Healthcare Services segment or the Pharmacy segment. Prior to 1997, SunLink maintained a defined benefit retirement plan covering substantially all of its domestic employees. Effective February 28, 1997, SunLink amended its domestic retirement plan to freeze participant benefits and closed the plan to new participants. Benefits under the frozen plan are based on years of service and level of earnings. SunLink funds the frozen plan, which is noncontributory, at a rate that meets or exceeds the minimum amounts required by the Employee Retirement Income Security Act of 1974.

Since the sale of SunLink’s life sciences and engineering segment businesses in the fiscal year ended March 31, 1999, net pension expense has been classified as an expense of discontinued operations.

F-21

At June 30, 2020, the plan’s assets were invested 47% in cash and short-term investments, 36% in equity investments and 17% in fixed income investments. The plan’s current investment policy of primarily investing in cash and short-term investments is based on the possible need for immediate liquidity as participants withdraw from the plan. The expected return on investment of 4% is based upon the plan’s historical return on assets. The plan expects to pay $52, $50, $61, $60, and $174 in pension benefits in the years ending June 30, 2021 through 2025, respectively. The plan expects to pay $363 in pension benefits for the years June 30, 2025 through 2029, in the aggregate. This assumes the plan participants elect to take monthly pension benefits as opposed to a lump sum payout when they reach age 65. The Company made a contributions of $132and $107to the plan during the years ended June 30, 2020and 2019, respectively, and plans to make a contribution of $100 to the plan for the year ended June 30, 2021.

The components of net pension expense for all plans (comprised solely of one domestic plan) were as follows for the fiscal years ended June 30, 2020 and 2019:

	2020			2019
Service cost	$	0		$	0
Interest cost		47			56
Expected return on assets		(34	)		(36	)
Amortization of prior service cost		123			78
Settlement cost		0			39
Net pension expense	$	136		$	137
Weighted-average assumptions:
Discount rate		3.50	%		4.10	%
Expected return on plan assets		4.00	%		4.00	%
Rate of compensation increase		0.00	%		0.00	%

Summary information for the plans (comprised solely of one domestic plan) is as follows for the fiscal years ended June 30, 2020 and 2019:

	2020			2019
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,390		$	1,420
Interest cost		47			56
Actuarial loss		168			90
Benefits paid		(31	)		(176	)
Benefit obligation end of year	$	1,574		$	1,390
Change in Fair Value of Plan Assets:
Beginning fair value	$	827		$	895
Actual return (loss) on plan assets		(5	)		1
Employer contribution		132			107
Benefits paid		(31	)		(176	)
Plan assets at end of year	$	923		$	827
Funded status of the plans		(651	)		(563	)
Unrecognized actuarial loss		469			384
Accrued benefit cost	$	(182	)	$	(179	)
Amounts Recognized in Consolidated Balance Sheets
Accrued benefit cost		(182	)		(179	)
Accumulated other comprehensive loss*		469			384
Net amount recognized	$	(651	)	$	(563	)

* Accumulated other comprehensive loss represents minimum pension liability adjustments.

Defined Contribution Plan —SunLink has a defined contribution plan pursuant to IRS Section 401(k) covering substantially all domestic employees. SunLink matches a specified percentage of the employee’s contribution as determined periodically by its management. A match of $137 was provided for the fiscal year ended June 30, 2020. A match of $85 was provided for the fiscal year ended June 30, 2019. Plan expense for the defined contribution plan was $0 for the years ended June 30, 2020 and 2019.

F-22

13. ECONOMIC DAMAGES

The Pharmacy segment subsidiary asserted claims for economic damages in connection with the Deepwater Horizon Settlement Program related to the event which occurred in 2010. In January 2018, these claims were settled and a payment of approximately $22(net of costs and attorneys’ fees) for the year ended June 30, 2019 was received. The net settlement was recognized as a gain in the results for the year ended June 30, 2019.

14. SALE OF ASSETS

On December 20, 2019, the Company sold a medical office building and approximately 4 acres of land in Clanton, AL. After expenses, the Company received net proceeds from the sale of $204, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was $86 and is included in the Company’s results for the fiscal year ended June 30, 2020.

On September 9, 2019, the Company sold approximately 11.4 acres of undeveloped land in Fulton, MO. After expenses, the Company received net proceeds from the sale of $348, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was $100 and is included in the Company’s results for the fiscal year ended June 30, 2020.

On October 11, 2018, the Company sold a vacant medical office building and approximately 2 adjacent acres of undeveloped land in Dahlonega, GA. After expenses, the Company received net proceeds from the sale of $935, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property of $452 is included in the Company’s results for the fiscal year ended June 30, 2019.

15. SALES TAX PAYABLE

During the fiscal year ended June 30, 2019, the Pharmacy segment business amended its sales tax position to claim exemption from sales taxes on any revenue from sales of products and services to beneficiaries of government insurance programs to the extent reimbursed by the administrators of such programs. No sales taxes are included in the related reimbursement received from sales of such products and services from the government payers’ insurance programs. The Company has filed amended sales tax returns for periods still open under the applicable statutes of limitations. Refunds have been received from two taxing authorities in the amounts claimed in all such amended returns. Accordingly, amounts claimed and received from these two taxing authorities were recorded as revenues in the year ended June 30, 2020 in the amount of $359. The Company’s position with certain other local taxing authorities is still uncertain and has not yet been determined probable of collection; therefore, the Company has continued to accrue the amounts for sales tax estimates that it believes would be payable if its amended returns and continuing position are challenged and the Company does not prevail. The sales tax accrued at June 30, 2020 was $1,411 compared to $843 at June 30, 2019.   

16. RELATED PARTIES

A director of the Company is a member of a law firm which provides services to SunLink. The Company has expensed an aggregate of $251 and $306 to the law firm in the fiscal years ended June 30, 2020 and 2019, respectively. Included in the Company’s consolidated balance sheets at June 30, 2020 and 2019 is $6 and $47 of amounts payable to the law firm.

F-23

17. FINANCIAL INFORMATION BY SEGMENTS

Under ASC Topic No. 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our two reportable operating segments are Healthcare Services and Pharmacy.

We evaluate performance of our operating segments based on revenue and operating profit (loss).  Segment information for the fiscal years ended June 30, 2020 and 2019 is as follows:

	Healthcare Services			Pharmacy		Corporate and Other			Total
2020
Net Revenues from external customers	$	16,243		$	31,570	$	0		$	47,813
Operating profit (loss)		734			1,076		(2,139	)		(329	)
Depreciation and amortization		361			1,085		4			1,450
Assets		8,174			8,170		11,627			27,971
Expenditures for property, plant and equipment		296			888		1			1,185
2019
Net Revenues from external customers	$	15,453		$	30,165	$	0		$	45,618
Operating profit (loss)		(538	)		147		(1,923	)		(2,314	)
Depreciation and amortization		336			1,147		3			1,486
Assets		7,612			8,273		8,534			24,419
Expenditures for property, plant and equipment		309			961		2			1,272

18. EARNINGS PER SHARE

(Share Amounts in Thousands)

Earnings (loss) per share and shares outstanding information for the years ended June 30, 2020 and 2019 is as follows:

	2020						2019
	Amount			Per Share Amount			Amount			Per Share Amount
Earnings (Loss) from continuing operations	$	(586	)				$	(1,996	)
Basic:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	(0.28	)
Diluted:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	(0.28	)
Earnings (loss) from discontinued operations	$	(554	)				$	242
Basic:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	0.03
Diluted:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	0.03
Net Loss	$	(1,140	)				$	(1,754	)
Basic:
Weighted-average shares outstanding		6,957		$	(0.16	)		7,149		$	(0.25	)
Diluted:
Weighted-average shares outstanding		6,957		$	(0.16	)		7,149		$	(0.25	)
Weighted-average number of shares outstanding—basic		6,957						7,149
Effect of dilutive director, employee and guarantor options    and outstanding common share warrants		0						0
Weighted-average number of shares outstanding—diluted		6,957						7,149

F-24

Share options of14 and 31 for the years ended June 30, 2020 and 2019, respectively, are not included in the computation of diluted earnings per share because their effect would be antidilutive.

19. SUBSEQUENT EVENTS

On August 26, 2020, the operations of the Pharmacy segment in Lake Charles, Louisiana, was struck by Hurricane Laura.  The facility suffered wind and rain damage and the local area suffered devastating winds and flooding.  The Pharmacy segment has been able to deliver its products to its customers as needed by this facility or by the facility in Crowley, Louisiana, but customer demand has decreased due to damage caused by the hurricane.  The cost of the damage to the leased facility in Lake Charles is the responsibility of the landlord.

F-25

EX-3.I

EXHIBIT 3.1(i)

Amended July 22 and 24, 1986; August 17,
1990; July 16, 1996; and August 20,
2001

SUNLINK HEALTH SYSTEMS, INC.

CODE OF REGULATIONS

ARTICLE I

Office

The principal office of the Corporation shall be located in the City of Dayton, Montgomery County, Ohio.

ARTICLE II

Meeting of Shareholders

Section 1. Annual Meeting. The annual meeting of the shareholders of the Corporation for the purpose of electing directors and transacting such other business as may be specified in the notice thereof shall be held at the principal office of the Corporation or at such other place either within or without the State of Ohio as may be specified in said notice, on such date during the month of October or November each year as shall be determined by the Board of Directors.

Section 2. Special Meetings. Special meetings of the shareholders may be called by the President, or in case of the President's absence, death or disability, the Vice President authorized to exercise the authority of the President, or the Board of Directors by action at a meeting, or a majority of the directors acting without a meeting, and shall be called by the Secretary upon written request of shareholders holding of record fifty (50) percent or more of all shares outstanding and entitled to vote thereat. Any such request for a special meeting of shareholders shall state the purpose or purposes of the meeting.

Special meetings of the shareholders may be held at such time and place, either within or without the State of Ohio, as may be designated in the notice thereof.

Section 3. Notice of Meetings. Unless waived by him, a written or printed notice of each annual or special meeting stating the time and place and the purpose or purposes thereof shall be mailed postage prepaid to each shareholder of record entitled to notice thereof, not more than sixty (60) days nor less than seven (7) days before any such meeting. If mailed, it shall be addressed to the shareholder at his address as it appears upon the records of the Corporation. Notice of adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at such meeting.

Notice of the time, place and purposes of any meeting of shareholders, whether required by law, the Articles of Incorporation or this code of Regulations, may be waived in

writing either before or after the holding of such meeting by any shareholder, which writing shall be filed with or entered upon the records of the meeting. The attendance of any shareholder at any such meeting without protesting prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting.

Section 4. Quorum. At any meeting, the holders of shares entitling them to exercise a majority of the voting power of the Corporation, present in person or represented by proxy, shall constitute a quorum for all purposes, except when a greater proportion is required by law. At any meeting at which a quorum is present, all questions and business which shall come before the meeting shall be determined by the vote of the holders of a majority of the voting shares held by shareholders present in person or by proxy at the meeting, except when a different proportion is required by law.

At any meeting, whether a quorum is present or not, the holders of a majority of the voting shares held by shareholders present in person or by proxy may adjourn from time to time and from place to place without notice other than by announcement at the meeting. At any such adjourned meeting at which a quorum is present, any business may be transacted which may be transacted at the meeting as originally notified or held.

Section 5. Proxies. The instrument appointing a proxy shall be in a writing signed by the person making the appointment. The person so appointed need not be a shareholder. A vote in accordance with the terms of a proxy shall be valid notwithstanding the previous death or incapacity of the principal or revocation of the appointment unless notice in writing of such death, incapacity or revocation shall have been given to the Corporation before a vote is taken. The presence of a shareholder at a meeting shall not operate to revoke a proxy unless and until notice of such revocation is given to the Corporation in writing or in open meeting.

Section 6. Financial Report. At the annual meeting of shareholders, or the meeting held in lieu thereof, there shall be laid before the shareholders a financial statement consisting of a balance sheet containing a summary of the assets, liabilities, stated capital, and surplus (showing separately any capital surplus arising from unrealized appreciation of assets, other capital surplus, and earned surplus) of the Corporation as of a date not more than four (4) months before such meeting (except that if such meeting is an adjourned meeting, said balance sheet may be as of a date not more than four (4) months before the date of the meeting as originally convened), and a statement of profit and loss and surplus, including a summary of profits, dividends paid, and other changes in the surplus accounts of the Corporation for the period for which the last preceding statement of profit and loss was made as required hereby and ending with the date of said balance sheet.

The financial statement shall have appended thereto a certificate signed by the President or a Vice President or the Treasurer or an Assistant Treasurer of the Corporation, or by a public accountant or firm of public accountants to the effect that the financial statement presents fairly the position of the Corporation and the results of its operations in conformity with generally accepted accounting principles applied on a basis consistent for

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the period covered thereby, or such other certificate as is in accordance with sound accounting principles.

ARTICLE III

Directors

Section 1. Number of Directors and Term of Office. Unless changed in accordance with the provisions of Section 2 of this Article III, the number of directors of the Corporation shall be fixed at six (6) and shall be divided into two (2) classes of directors, each of which shall have three (3) directors. One class of three directors shall be elected at the annual meeting of shareholders at which this Section 1 is adopted for a term of office expiring at the annual meeting of shareholders to be held in 1992 and until their successors are elected and qualified. The other class of three directors shall initially be comprised of the three directors of the Corporation whose terms of office on the date this Section 1 is adopted by shareholders are scheduled to expire at the annual meeting of shareholders in 1991 and shall hold office until such annual meeting of shareholders in 1991 and until their successors are elected and qualified. At the annual meeting of shareholders to be held in 1991 and each subsequent annual meeting, directors to succeed those whose terms of office shall expire at such annual meeting shall be elected for a two-year term of office and until their successors are elected and qualified.

Section 2. Change in Number of Directors. The number of authorized directors and the number of directors in each class may be changed either by the affirmative vote of the holders of record of two-thirds of the voting power of the Corporation at a meeting of shareholders called for that purpose and for the purpose of electing directors, or by the affirmative vote of a majority of the directors in office; provided, however, that in no event shall any class contain fewer than three (3) directors nor more than four (4) directors. No reduction in the number of directors, either by the shareholders or the directors, shall of itself have the effect of shortening the term of any incumbent director.

Section 3. Qualification of Directors. Directors of the Corporation need not be shareholders of the Corporation.

Section 4. Vacancies. The remaining directors, though less than a majority of the whole authorized number of directors, may, by the vote of a majority of their number, fill any vacancy in the Board of Directors however arising, including a vacancy arising from an increase in the number of authorized directors, for the unexpired term thereof. Any person elected a fill a vacancy in the Board of Directors shall hold office until the expiration of the term of office for the class to which he is elected and until his successor is elected and qualified.

Section 5. Nominations. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election as directors of the Corporation may be made at a meeting of shareholders (i) by or at the direction of the Board of Directors or by any committee or person appointed by the

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Board of Directors or (ii) by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 5. Any nomination other than those governed by clause (i) of the preceding sentence shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of any shares of the Corporation which are beneficially owned by such person and(iv) any other information relating to such person that is required to be disclosed in solicitations for proxies for election of directors pursuant to any then existing rule or regulation promulgated under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice (i) the name and record address of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director. No person shall be eligible for election as a director unless nominated as set forth herein.

Section 6. Removal of Directors. No director may be removed prior to the expiration of such director's term of office, except by the affirmative vote of the holders of two-thirds of the voting power of the Corporation entitled to vote in the election of directors.

Section 7. Limitation of Liability and Indemnification of Directors Officers Employees and Agents.

A. No person shall be liable to the Corporation for any loss or damage suffered by it on account of any action taken or omitted to be taken by him as a director or officer of the Corporation in good faith, if such person
(i) exercised or used the same degree of care and skill as a prudent man would have exercised or used under the circumstances in the conduct of his own affairs, or (ii) took, or omitted to take, such action in reliance upon advice of counsel for the Corporation or upon statements made or information furnished by officers or employees of the Corporation which he had reasonable grounds to believe or upon a financial statement of the Corporation prepared by an officer or employee of the Corporation in charge of its accounts or certified by a public accountant or firm of public accountants, or (iii) considered the assets to be of their book value or followed what he believed to be sound accounting and business practice.

B. (1) In case any person was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Corporation, by

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reason of the fact that he is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, the Corporation shall indemnify such person, against expenses, including attorneys' fees, judgments, decrees, fines, penalties, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any matter the subject of a criminal action, suit, or proceeding, he had no reasonable cause to believe that his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any matter the subject of a criminal action, suit or proceeding, that he had reasonable cause to believe that his conduct was unlawful.

(2) In case any person was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, the Corporation shall indemnify such person, against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation, unless and only to the extent that the Court of Common Pleas, or the Court in which such action or suit was brought, shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or such other Court shall deem proper.

(3) To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in paragraphs (1) and (2) of this Subsection 7B or in defense of any claim, issue or matter therein, the Corporation shall indemnify him against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith.

(4) Any indemnification under paragraphs (1) and (2) of this Subsection 7B, unless ordered by a court, shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (1) and (2) of this Subsection 7B. Such determination shall be made
(a) by a majority vote of a quorum consisting of directors of the

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Corporation who were not and are not parties to or threatened with any such action, suit, or proceeding, or (b) if such a quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Corporation or any person to be indemnified within the past five years, or (c) by the shareholders, or (d) by the Court of Common Pleas or the Court in which such action, suit, or proceeding was brought. Any determination made by the disinterested directors under subparagraph (a) of this paragraph (4) or by independent legal counsel under subparagraph (b) of this paragraph (4) shall be promptly communicated to the person who threatened or brought the action or suit by or in the right of the Corporation referred to in paragraph (2) of this Subsection 7B, and if, within ten days after the receipt of such notification, such person shall petition the Court of Common Pleas or the Court in which such action or suit was brought to review the reasonableness of such determination, no action in implementing such determination shall be taken until after the final judgment of such Court has been rendered and such determination has been modified to the extent necessary to accord with such judgment; however, if, after such ten-day period, such person shall not have petitioned the Court of Common Pleas or the Court in which such action or suit was brought to review the reasonableness of such determination, the Corporation shall proceed to implement such determination.

(5) Expenses, including attorneys' fees, incurred in defending any action, suit or proceeding referred to in paragraphs (1) and (2) of this Subsection 7B, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the directors in the specific case upon the receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount, unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Subsection 7B.

(6) The indemnification provided by this Subsection 7B shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles or the Regulations of the Corporation, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Notwithstanding any repeal of this Subsection 7B or other amendment thereof, the indemnification provided for in this Subsection 7B shall be binding upon the Corporation in accordance with the provisions thereof as to all actions, suits, or proceedings instituted or threatened which arise out of matters occurring during, or referable to, the period prior to any such repeal or amendment.

(7) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any

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such capacity or arising out of his status as such, whether or not the Corporation would have indemnified him against such liability under this Subsection 7B.

ARTICLE IV

Powers and Meetings of the Board of Directors

Section 1. Powers of the Board. Except as otherwise provided in the General Corporation Law of Ohio, or in the Articles of Incorporation, in respect of action required to be taken, authorized or approved by the shareholders, all the capacity of the Corporation shall be vested in and all its authority shall be exercised by the Board of Directors.

Section 2. Meetings of the Board. A regular meeting of the Board of Directors shall be held immediately following the adjournment of each shareholders' meeting at which directors are elected, and notice of such meeting need not be given.

The Board of Directors may, by by-law or resolution, provide for other meetings of the Board.

Special meetings of the Board of Directors may be held at any time upon call of the President, a Vice President, or any two members of the Board.

Meetings of the Board of Directors may be held at any place either within or without the State of Ohio. Written notice of the time and place of each special meeting of the Board of Directors shall be given by mailing the same to each director at his last known address at least three (3) days prior to the date of said meeting, or such notice may be personally delivered or telegraphed in substance to each director not less than twenty-four (24) hours before the meeting, which notice need not specify the purposes of the meeting. Such notice may be waived in writing, either before or after the holding of such meeting, by any director, which writing shall be filed with or entered upon the records of the meeting. The attendance of any director at any such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting. Notice of adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at such meeting.

Section 3. Quorum. A majority of the Board of Directors shall constitute a quorum for the transaction of business, provided that whenever less than a quorum is present at any time or place appointed for a meeting of the Board, a majority of those present may adjourn the meeting from time to time without notice, other than by announcement at the meeting, until a quorum shall be present. The act of a majority of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

Section 4. By-Laws of the Board. The Board of Directors may adopt by-laws for the government of its actions consistent with the Articles of Incorporation and these Regulations.

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ARTICLE V

Committees

Section 1. Committees. The Board of Directors by resolution adopted by a majority of the whole Board, may appoint three or more directors to constitute one or more committees of directors. The resolution establishing each such committee shall specify a designation by which it shall be known and shall fix its powers and authority. The Board of Directors may delegate to any such committee any of the authority of the Board of Directors, however conferred, other than that of filling vacancies among the directors or in any committee of the directors.

The Board of Directors may likewise appoint one or more directors as alternate members of any such committee, who may take the place of any absent member or members at any meeting of such committee.

Each such committee shall serve at the pleasure of the Board of Directors, shall act only in the intervals between meetings of the Board of Directors, and shall be subject to the control and direction of the Board of Directors. All actions by any such committee shall be subject to revision and alteration by the Board of Directors provided that no rights of third persons shall be adversely affected by any such revision or alteration.

An act or authorization of an act by any such committee within the authority delegated to it by the resolution establishing it shall be as effective for all purposes as the act or authorization of the Board of Directors.

Any such committee may act by a majority of its members at a meeting or by a writing or writings signed by all of its members.

The Board of Directors may likewise appoint other members of any committee who are not members of the Board of Directors who shall act in an advisory capacity but who shall have no vote upon any matter of business before the committee.

ARTICLE VI

Officers

Section 1. Officers. The officers of this Corporation shall be a President, one or more vice Presidents, a Secretary, a Treasurer, and such other officers, subordinate officers and assistants as the Board of Directors may from time to time determine.

Any two or more offices may be held by one person, except the offices of President and Vice President.

Section 2. Election of Officers. All officers of the Corporation shall be elected by the Board of Directors, and shall hold office until the organization meeting of the Board

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of Directors following the date of the election of such directors or until their successors are elected and qualified. The Board of Directors may remove any officer at any time, with or without cause, by a majority vote. The Board of Directors may fill any vacancy in any office occurring from whatever cause.

ARTICLE VII

Duties of Officers

Section 1. President. The President shall have general supervision, administration and direction of all the Corporation's affairs, subject to the direction of the Board of Directors. He shall preside at all meetings of shareholders and directors and sign all certificates for shares, contracts, notes, deeds, mortgages, bonds, other obligations, or other papers requiring his signature, and he shall perform such other and further duties as may from time to time be required of him by the Board of Directors.

Section 2. Vice Presidents. The Vice Presidents, in the order designated by the Board of Directors, shall perform all duties of the President, in case of his absence or disability, together with such other duties as the Board of Directors may from time to time prescribe. The authority of the Vice Presidents to execute certificates for shares, contracts, deeds, notes, mortgages, bonds, other obligations and other papers in the name of the Corporation shall be coordinate with like authority of the President.

Section 3. Secretary. The Secretary shall keep minutes of all the proceedings of the shareholders and Board of Directors, and shall make proper record of the same, which shall be attested by him; sign all certificates for shares, contracts, deeds, notes, mortgages, bonds, other obligations, and other papers executed by the Corporation requiring his signature; give notice of meetings of shareholders and directors; keep such books as may be required by the Board of Directors and perform such other and further duties as may from time to time be required of him by the Board of Directors.

Section 4. Treasurer. The Treasurer shall have general supervision of all finances. He shall receive and have in charge all money, bills, notes, deeds, leases, mortgages, insurance policies and similar property belonging to the Corporation, and shall do with the same as may from time to time be required by the Board of Directors. He shall cause to be kept adequate and correct accounts of the business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, stated capital, and shares, together with such other accounts as may be required, and, on the expiration of his term of office shall turn over to his successor or to the Board of Directors all property, books, papers and money of the Corporation in his hands. He shall also perform such other duties as may be assigned to him by the Board of Directors.

Section 5. Assistant Officers. Assistant officers shall act as assistants to and under the direction of their superior officers, and shall be vested with all the powers and be required to perform any of the duties of their superior officers in their absence, and they

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shall perform such other and further duties as may from time to time be required of them by the Board of Directors.

ARTICLE VIII

Certificates for Shares of Stock

Section 1. The interest of each shareholder of the Corporation shall be evidenced by a certificate or certificates for shares in such form as the Board of Directors may from time to time prescribe. The shares of the Corporation shall be transferable on the books of the Corporation by the holder thereof in person or by his attorney, upon surrender for cancellation of a certificate or certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the authenticity of the signature as the Corporation or its agent may reasonably require.

Section 2. The certificates for shares shall be signed by the President or a Vice President and by the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer (except that where any such certificate is countersigned by an incorporated transfer agent or registrar, the signatures of any such President, Vice President, Secretary, Treasurer, Assistant Secretary or Assistant Treasurer, may be facsimile, engraved, stamped or printed), and shall be countersigned and registered in such manner, if any, as the Board of Directors may by resolution prescribe. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates shall nevertheless be effective in all respects when delivered, as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Corporation.

Section 3. No certificate for shares shall be delivered in place of any certificate alleged to have been lost, stolen or destroyed, except upon production of such evidence of such loss, theft or destruction and upon delivery to the Corporation of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors in its discretion may require.

ARTICLE IX

Seal

The seal of the Corporation shall be circular with the name of the Corporation and the word "OHIO" surrounding the word "SEAL."

Page 10 of 11

ARTICLE X

Amendments

This Code of Regulations may be amended or repealed at any meeting of shareholders called for that purpose by the affirmative vote of the holders of record of shares entitling them to exercise at least two-thirds of the voting power on such proposal, or, without a meeting, by the written consent of holders of record of shares entitling them to exercise at least two-thirds of the voting power on such proposal.

ARTICLE XI

Ohio Control Share Acquisition Statute

The provisions of Section 1701.831 of the Ohio Revised Code requiring shareholder approval of control share acquisitions, as defined in Section 1701.01 (Z)(1) of such Code, shall not be applicable to the Corporation.

Page 11 of 11

AMENDED ARTICLES OF INCORPORATION

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KRUG INTERNATIONAL CORP.

FIRST: The name of the Corporation shall be KRUG International Corp.

SECOND: The principal office of the Corporation shall be located in the City of Dayton, Montgomery County, Ohio

THIRD: The purpose or purposes for which the Corporation is formed are:

A. To engage in the trade or business of research, design, development and manufacture of semiautomatic and automatic equipment and components in the electrical, electromechanical and electronic fields, to consult and perform services related to design application and integration of units and devices into systems in these fields; to conduct studies, consult, do research in, make data processing reduction and analysis of, design and manufacture and perform other services related to these units, instrumentation, test, calibration, installation, maintenance, repair, component replacement on military and commercial flight and space vehicles and devices, the instruments thereon, the components thereof and the equipment associated therewith.

B. To manufacture, purchase or otherwise acquire, sell, assign and transfer, exchange or otherwise dispose of, and to invest, trade, deal in or deal with goods, wares and merchandise and personal property of every class and description.

C. To purchase or otherwise acquire, construct, hold, maintain, work, develop, sell, lease, exchange, convey, transfer, mortgage, pledge, hypothecate, loan money upon, or in any manner dispose of and deal in, within and without the State of Ohio, wherever situated, real property of every kind, character and description whatsoever and any interest therein, and personal or mixed property of every kind, character and description whatsoever, including the shares of stock and other securities or obligations of other corporations, and any franchises, rights, licenses, or privileges necessary, convenient or appropriate for any of the purposes herein expressed.

D. To enter into, make and perform contracts of every kind of any lawful purpose, with any person, firm, association, corporation, municipality, state or government, or any political or other subdivision of any of the same.

E. To apply for, obtain, purchase, take licenses in respect of or otherwise acquire, and to hold, own, use, grant, pledge or otherwise dispose of, and in any manner deal with, any and all inventions, devices, processes and any improvement and

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modifications thereof; and any and all letters patent of the United States or of any other country, state, territory, or locality, and all rights connected therewith or appertaining thereunto; any and all copyrights granted by the United States or any other country, state, territory, or locality; and any and all trade-marks, trade names, trade symbols and other indications of origin and ownership granted by or recognized under the laws of the United States or of any other country, state, territory or locality.

F. To purchase or otherwise acquire the whole or any part of the property, assets, business, goodwill and rights, and to undertake and assume the whole or any part of the liabilities and obligations, or any person, firm, association or corporation, and to pay for the same in cash or in shares of any class or series, or in bonds, debentures, notes or other obligations of the corporation, or otherwise, to hold or in any manner to dispose of the whole or any part of the property or assets so acquired, and to conduct the whole or any part of the business so acquired, and to exercise all the powers necessary or convenient in and about the conduct, management and carrying on of any such business.

G. To do any and all things necessary, convenient, or expedient for the accomplishment of any of the purposes or the furtherance of any of the powers hereinbefore set forth either alone or in association with other corporations, firms or individuals, and in general to carry on any other business not forbidden by the General Corporation Law of the State of Ohio.

Each purpose specified in any clause or paragraph contained in this Article THIRD shall be deemed to be independent of all other purposes herein specified and shall not be limited or restricted by reference to or inference from the terms of any other clause or paragraph of these Articles of Incorporation.

FOURTH: The maximum number of shares which the Corporation is authorized to have outstanding is 14,000,000 shares which shall be classified as follows:

2,000,000 Preferred Shares without par value (hereinafter called "Preferred Shares"); and

12,000,000 Common Shares without par value (hereinafter called "Common Shares").

SECTION 1. The express terms and provisions of the Preferred Shares are as follows:

I. Preferred Shares may be issued in series from time to time. Within the limitations and restrictions set forth in this Article FOURTH, the Board of Directors is expressly authorized, at one time or from time to time, to adopt amendments to the Articles of Incorporation in respect of any authorized and unissued Preferred Shares to fix or alter the division of such shares into series, the designation and number of shares of each series, the dividend rates, the date of payment of dividends, the dates from which dividends shall be

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cumulative, redemption rights, redemption prices, liquidation prices, sinking fund requirements, conversion rights, and restrictions on issuance of shares of the same series or of any other class or series. The express terms and provisions of Preferred Shares of different series shall be identical except that there may be variations in respect of any or all of the particulars hereinbefore set forth in this subsection I. In case the stated dividends or the amounts payable on dissolution, liquidation, or sale of assets of the corporation are not paid in full, all Preferred Shares of all series shall participate ratably in the payment of dividends, including accumulations, if any, in proportion to the sums which would be payable thereon if all dividends thereon were paid in full, and, in any distribution of assets other than by way of dividends, in proportion to the sums which would be payable on such distribution if all sums payable thereon to holders of Preferred Shares were discharged in full.

II. The holders of Preferred Shares shall be entitled to receive when and as declared out of the surplus of the Corporation, subject to any limitations prescribed by statute, cash dividends at the respective rates and on the respective dates fixed by the Board of Directors for the shares of the several series of Preferred Shares, and no more. Dividends on each Preferred Share shall be cumulative from the date fixed therefor by the Board of Directors.

Subject to the provisions of this Article FOURTH, the holders of all Common Shares shall be entitled to receive such dividends as may from time to time be declared thereon by the Board of Directors.

III. Upon dissolution, liquidation or sale of all or substantially all the assets of the Corporation, the holders of Preferred Shares shall be entitled to receive the following sums, before any payment shall be made to the holders of Common Shares with respect to payment upon dissolution, liquidation or sale of assets:

(a) in case of any involuntary dissolution or liquidation or forced sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the sum fixed for such contingency by the Board of Directors in respect of such series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment; or

(b) in case of any voluntary dissolution or liquidation or voluntary sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the amount fixed for such contingency by the Board of Directors in respect of such series prior to the initial issuance of the first shares or series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment.

After all sums payable on the Preferred Shares as herein provided upon a particular contingency shall have been paid in full, but not prior thereto, the Common Shares shall be entitled to payment of all other sums then distributable. For the purposes of this subsection III, a

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consolidation or merger of the Corporation with or into any other corporation, or a consolidation or merger of any other corporation, with or into the Corporation shall not be deemed a dissolution, liquidation, or sale of assets.

IV. The holders of Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively.

V. So long as any of the Preferred Shares shall remain outstanding, no dividend (other than dividends payable in Common Shares) shall be paid, nor shall any distribution (by purchase, redemption, payment to any sinking fund or market fund, or otherwise) be made, on any of the Common Shares unless:

(a) all dividends on all outstanding Preferred Shares shall have been paid, and full dividends thereon for the then current quarterly dividend period shall have been declared and a sum sufficient for the payment thereof set apart therefor; and

(b) the Corporation shall not be in arrears in respect of any sinking fund obligation in respect of any series of Preferred Shares.

VI. Preferred Shares acquired by the Corporation through the exercise by the holders thereof of any conversion privilege shall not be re-issued except as hereinafter provided. Such shares and any other Preferred Shares acquired by the Corporation otherwise than through the operation of any sinking fund and not used to reduce the amount of any sinking fund installment shall, upon compliance with such provisions of law relating to the retirement of shares as may be applicable, have the status of authorized and unissued Preferred Shares which are unclassified into any series. Preferred Shares acquired by the Corporation through the operation of any sinking fund or which have been used to reduce the amount of any sinking fund installment shall be canceled and not reissued, and the Corporation shall from time to time take appropriate corporate action to reduce the authorized number of Preferred Shares accordingly.

SECTION 2. The express terms and provisions of the Common Shares are as follows:

I. The rights and preferences of the Common Shares shall be subject in all respects to the rights and preferences of the Preferred Shares in the manner and to the extent provided in this Article FOURTH.

II. The Common Shares shall rank junior to the Preferred Shares with respect to the payment of dividends. Out of the assets of the Corporation available for dividends remaining after there shall have been paid or declared and set apart for payment full dividends on the Preferred Shares, and subject to the restrictions or limitations contained in the express terms and provisions of any series of Preferred Shares with respect to the payment of dividends,

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dividends may be declared and paid upon the Common Shares, but only when and as determined by the Board of Directors.

III. The Common Shares shall rank junior to the Preferred Shares with respect to payment upon dissolution, liquidation or sale of assets of the Corporation. Upon the dissolution, liquidation or sale of all or substantially all the assets of the Corporation, after there shall have been paid to or set apart for holders of the Preferred Shares the full preferential amounts to which they are entitled, the holders of Common Shares shall be entitled to receive pro rata all of the remaining assets of the Corporation available for distribution to its shareholders.

IV. The holders of Common Shares shall be entitled to one vote for each Common Share held by them respectively.

SECTION 3. No shareholder of the Corporation shall have the right to vote cumulativly in the election of directors of the Corporation.

FIFTH: When authorized by the affirmative vote of the Board of Directors, without the action or approval of the shareholders of this Corporation, this Corporation may purchase, or contract to purchase, at any time and from time to time, shares of any class issued by this Corporation, voting trust certificates for shares, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness or any other securities of this Corporation, for such prices and upon and subject to such terms and conditions as the Board of Directors may determine, provided that no such purchase shall be made, pursuant to any such contract or otherwise, if after such purchase the assets of this Corporation would be less than its liabilities plus stated capital or if it is insolvent as defined in the General Corporation Law of Ohio or if there is reasonable ground to believe that by such purchase it would be rendered insolvent.

SIXTH: No shareholder of this Corporation shall be entitled, as such, as a matter of right to subscribe for or purchase shares of any class now or hereafter authorized, or to purchase or subscribe for securities convertible into or exchangeable for shares of the Corporation or to which shall be attached or appertain any warrants or rights entitling the holder thereof to subscribe for or purchase shares except such rights of subscription or purchase, if any, at such price or prices and upon such terms and conditions as the Board of Directors, in its discretion, from time to time may determine.

SEVENTH: This Corporation may amend its Articles of Incorporation in any respect in the manner provided by law, and may make amendments substantially changing the purposes for which the Corporation is formed.

EIGHTH: The Board of Directors is hereby authorized to fix and determine and to vary the amount of working capital of the Corporation, to determine to the extent permitted by the General Corporation Law of Ohio whether any, and, if any, what part of its

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surplus, however created or arising, shall be used or disposed of or declared in dividends or paid to shareholders.

NINTH: Every statute of the State of Ohio hereafter enacted whereby the rights or privileges of shareholders of a corporation organized under the General Corporation Law of said State are increased, diminished or in any way affected, or whereby effect is given to any action authorized, ratified or approved, by less than all the Shareholders of any such corporation, shall apply to this Corporation and shall be binding upon every shareholder thereof to the same extent as if such statute had been in force at the date of the filing of these Amended Articles of Incorporation.

TENTH: A director of this Corporation shall not be disqualified by his office from dealing or contracting with the Corporation as a vendor, purchaser, employee, agent or otherwise; nor shall any transaction or contract or act of this Corporation be void or voidable or in any way affected or invalidated by reason of the fact that any director or any firm of which any director is a member or any corporation of which any director is a shareholder or director is in any way interested in such transaction or contract or act, provided the fact that such director or such firm or such corporation is so interested shall be disclosed or shall be known to the Board of Directors or such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such contract or transaction or act shall be taken; nor shall any such director be accountable or responsible to the Corporation for or in respect of any such transaction or contract or act of this Corporation or for any gains or profits realized by him by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder or director is interested in such transaction or contract or act; and any such director may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize or take action in respect to any such contract or transaction or act, and may vote thereat to authorize, ratify or approve any such contract or transaction or act, with like force and effect as if he or any firm of which he is a member or any corporation of which he is a shareholder or director were not interested in such transaction or contract or act.

The Board of Directors shall have the power to fix compensation of officers or directors or both and a director may be counted in determining the existence of a quorum at any meeting of the Board of Directors which shall take such action and may vote thereat in favor or against such action whether or not such director may be interested in the action so taken.

ELEVENTH: These Amended Articles of Incorporation supersede the existing Articles of Incorporation and all amendments thereto.

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CERTIFICATE OF AMENDMENT BY SHAREHOLDERS
TO AMENDED ARTICLES OF INCORPORATION
OF
KRUG INTERNATIONAL CORP.
CHARTER NUMBER 281540

James J. Mulligan, Secretary of the above named Ohio corporation organized for profit, does hereby certify that a meeting of the shareholders was duly called and held on August 20, 2001, at which meeting a quorum of the shareholders was present in person or by proxy, and that at such meeting the following resolution was adopted by the affirmative vote of the holders of shares entitling them to exercise more than two thirds of the voting power of said corporation:

RESOLVED, that Article First of the Amended Articles of Incorporation
Of the Corporation be amended to read as follows:

"The name of this Corporation shall be "SunLink Health Systems, Inc."

IN WITNESS WHEREOF, the above named officer, acting for and on behalf of KRUG International Corp., has hereunto subscribed his name this 20th day of August, 2001.

/s/  James J. Mulligan              
James J. Mulligan, Secretary

CERTIFICATE OF AMENDMENT TO

AMEND ARTICLE FOURTH OF THE

AMENDED ARTICLES OF INCORPORATION

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SUNLINK HEALTH SYSTEMS, INC.

FOURTH: The maximum number of shares which the Corporation is authorized to have outstanding is 14,000,000 shares which shall be classified as follows:

2,000,000 Preferred Shares without par value (hereinafter called “Preferred Shares”); and

12,000,000 Common Shares without par value (hereinafter called “Common Shares”).

SECTION 1. The express terms and provisions of the Preferred Shares are as follows:

I. Preferred Shares may be issued in series from time to time. Within the limitations and restrictions set forth in this Article FOURTH, the Board of Directors is expressly authorized, at one time or from time to time, to adopt amendments to the Articles of Incorporation in respect of any authorized and unissued Preferred Shares to fix or alter the division of such shares into series, the designation and number of shares of each series, the dividend rates, the date of payment of dividends, the dates from which dividends shall be cumulative, redemption rights, redemption prices, liquidation prices, sinking fund requirements, conversion rights, and restrictions on issuance of shares of the same series or of any other class or series. The express terms and provisions of Preferred Shares of different series shall be identical except that there may be variations in respect of any or all of the particulars hereinbefore set forth in this subsection I. In case the stated dividends or the amounts payable on dissolution, liquidation, or sale of assets of the corporation are not paid in full, all Preferred Shares of all series shall participate ratably in the payment of dividends, including accumulations, if any, in proportion to the sums which would be payable thereon if all dividends thereon were paid in full, and, in any distribution of assets other than by way of dividends, in proportion to the sums which would be payable on such distribution if all sums payable thereon to holders of Preferred Shares were discharged in full.

II. The holders of Preferred Shares shall be entitled to receive when and as declared out of the surplus of the Corporation, subject to any limitations prescribed by statute, cash dividends at the respective rates and on the respective dates fixed by the Board of Directors for the shares of the several series of Preferred Shares, and no more.

Dividends on each Preferred Share shall be cumulative from the date fixed therefor by the Board of Directors.

Subject to the provisions of this Article FOURTH, the holders of all Common Shares shall be entitled to receive such dividends as may from time to time be declared thereon by the Board of Directors.

III. Upon dissolution, liquidation or sale of all or substantially all the assets of the Corporation, the holders of Preferred Shares shall be entitled to receive the following sums, before any payment shall be made to the holders of Common Shares with respect to payment upon dissolution, liquidation or sale of assets:

(a) in case of any involuntary dissolution or liquidation or forced sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the sum fixed for such contingency by the Board of Directors in respect of such series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment; or

(b) in case of any voluntary dissolution or liquidation or voluntary sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the amount fixed for such contingency by the Board of Directors in respect of such series prior to the initial issuance of the first shares or series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment. After all sums payable on the Preferred Shares as herein provided upon a particular contingency shall have been paid in full, but not prior thereto, the Common Shares shall be entitled to payment of all other sums then distributable. For the purposes of this subsection III, a consolidation or merger of the Corporation with or into any other corporation, or a consolidation or merger of any other corporation, with or into the Corporation shall not be deemed a dissolution, liquidation, or sale of assets.

IV. The holders of Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively.

V. So long as any of the Preferred Shares shall remain outstanding, no dividend (other than dividends payable in Common Shares) shall be paid, nor shall any distribution (by purchase, redemption, payment to any sinking fund or market fund, or otherwise) be made, on any of the Common Shares unless:

(a) all dividends on all outstanding Preferred Shares shall have been paid, and full dividends thereon for the then current quarterly dividend period shall have been declared and a sum sufficient for the payment thereof set apart therefor; and

(b) the Corporation shall not be in arrears in respect of any sinking fund obligation in respect of any series of Preferred Shares.

VI. Preferred Shares acquired by the Corporation through the exercise by the holders thereof of any conversion privilege shall not be re-issued except as hereinafter provided. Such shares and any other Preferred Shares acquired by the Corporation otherwise than through the operation of any sinking fund and not used to reduce the amount of any sinking fund installment shall, upon compliance with such provisions of law relating to the retirement of shares as may be applicable, have the status of authorized and unissued Preferred Shares which are unclassified into any series. Preferred Shares acquired by the Corporation through the operation of any sinking fund or which have been used to reduce the amount of any sinking fund installment shall be canceled and not reissued, and the Corporation shall from time to time take appropriate corporate action to reduce the authorized number of Preferred Shares accordingly.

VII. Series A Voting Preferred Shares:

From the authorized number of Preferred Shares of Corporation, a series of Preferred Shares designated as “Series A Voting Preferred Shares” is hereby created and shall consist of 500,000 Preferred Shares of which the preferences, relative and other rights, and the qualifications, limitations or restrictions thereof shall be (in addition to those set forth elsewhere in these Articles) as follows:

1. Voting Rights . The holders of Series A Voting Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively.

2. Dividends . The Board shall declare a dividend or distribution on the Series A Voting Preferred Shares immediately after it declares any dividend or distribution on the Common Shares. Such dividends or distributions shall be in an amount per share equal to the amount per share of the dividend or distribution declared for each Common Share, multiplied by 100.

3. Reacquired Shares . Any Series A Voting Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after such acquisition. All such shares, upon their cancellation, shall become authorized but unissued Preferred Shares, without designation as to series, and may be reissued as part of any series of Preferred Shares created by the Board (including Series A Voting Preferred Shares) subject to the condition and restrictions on issuance set forth herein.

4. Liquidation, Dissolution or Winding Up . Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to:

(a) the holders of (x) Preferred Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Voting Preferred Shares or (y) any holder of Common Shares, unless (prior thereto) the holders of Series A Voting Preferred Shares have received the greater of: (i) One Dollar ($1.00) per share ($0.01 per one one-hundredth of a share), plus an amount equal to accrued and unpaid dividends and distributions thereon (whether

or not declared) to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment herein set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares; or

(b) the holders of Preferred Shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Voting Preferred Shares, except distributions made ratably on the Series A Voting Preferred Shares and all other such parity Preferred Shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.

If the Corporation shall at any time declare or pay any dividend on Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then (and in each such event) the aggregate amount to which the holder of each share of Series A Voting Preferred Shares was entitled immediately prior to such event under paragraph (a) of this Section 4 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

5. Combination . If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock, securities, cash or any other property, then (in each such event) the Series A Voting Preferred Shares shall at the same time be similarly exchanged or changed in an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. If, at any time on or after the Rights Declaration Date, the Corporation (i) declares any dividend on Common Shares payable outstanding Common Shares into a smaller number of Shares, (ii) subdivides the outstanding Common Shares; or (iii) combines the outstanding Common Shares into a smaller number of Shares, then (in each such case) the amount set forth in the preceding sentence with respect to the exchange or change of Series A Voting Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

6. No Redemption . The Series A Voting Preferred Shares shall not be redeemable; provided, however, that the Corporation may acquire Series A Voting Preferred Shares in any other manner permitted by law or these Articles.

7. Ranking . Unless otherwise provided in these Articles or any subsequent amendment of these Articles relating to a subsequent series of Preferred Shares of the Corporation, the Series A Voting Preferred Shares shall rank junior to all other series of the Corporation’s Preferred Shares as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and shall rank senior to the Common Shares.

8. Amendment . These Articles shall not, following the issuance of any shares of Series A Voting Preferred, be further amended in any manner which would materially and adversely alter or change the powers, preference or special rights of the Series A Voting Preferred Shares without the affirmative vote of the holders of at least a majority of the outstanding Series A Voting Preferred Shares, voting together as a single series.

9. Fractional Shares . Series A Voting Preferred Shares may be issued in fractions of a share (in one one-hundredths (1/100) of a Share and integral multiples thereof) that shall entitle the holder (in proportion to such holder’s fractional shares) to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Voting Preferred Shares.

SECTION 2. The express terms and provisions of the Common Shares are as follows:

I. The rights and preferences of the Common Shares shall be subject in all respects to the rights and preferences of the Preferred Shares in the manner and to the extent provided in this Article FOURTH.

II. The Common Shares shall rank junior to the Preferred Shares with respect to the payment of dividends. Out of the assets of the Corporation available for dividends remaining after there shall have been paid or declared and set apart for payment full dividends on the Preferred Shares, and subject to the restrictions or limitations contained in the express terms and provisions of any series of Preferred Shares with respect to the payment of dividends, dividends may be declared and paid upon the Common Shares, but only when and as determined by the Board of Directors.

III. The Common Shares shall rank junior to the Preferred Shares with respect to payment upon dissolution, liquidation or sale of assets of the Corporation. Upon the dissolution, liquidation or sale of all or substantially all the assets of the Corporation, after there shall have been paid to or set apart for holders of the Preferred Shares the full preferential amounts to which they are entitled, the holders of Common Shares shall be entitled to receive pro rata all of the remaining assets of the Corporation available for distribution to its shareholders.

IV. The holders of Common Shares shall be entitled to one vote for each Common Share held by them respectively.

SECTION 3. No shareholder of the Corporation shall have the right to vote cumulatively in the election of directors of the Corporation.

CERTIFICATE OF AMENDMENT TO

AMEND AND RESTATE ARTICLE FOURTH OF THE

AMENDED ARTICLES OF INCORPORATION

OF

SUNLINK HEALTH SYSTEMS, INC.

FOURTH: The maximum number of shares which the Corporation is authorized to have outstanding is 14,000,000 shares which shall be classified as follows:

2,000,000 Preferred Shares without par value (hereinafter called “Preferred Shares”); and

12,000,000 Common Shares without par value (hereinafter called “Common Shares”).

SECTION 1.    The express terms and provisions of the Preferred Shares are as follows:

I.    Preferred Shares may be issued in series from time to time. Within the limitations and restrictions set forth in this Article FOURTH, the Board of Directors is expressly authorized, at one time or from time to time, to adopt amendments to the Articles of Incorporation in respect of any authorized and unissued Preferred Shares to fix or alter the division of such shares into series, the designation and number of shares of each series, the dividend rates, the date of payment of dividends, the dates from which dividends shall be cumulative, redemption rights, redemption prices, liquidation prices, sinking fund requirements, conversion rights, and restrictions on issuance of shares of the same series or of any other class or series. The express terms and provisions of Preferred Shares of different series shall be identical except that there may be variations in respect of any or all of the particulars hereinbefore set forth in this subsection I. In case the stated dividends or the amounts payable on dissolution, liquidation, or sale of assets of the corporation are not paid in full, all Preferred Shares of all series shall participate ratably in the payment of dividends, including accumulations, if any, in proportion to the sums which would be payable thereon if all dividends thereon were paid in full, and, in any distribution of assets other than by way of dividends, in proportion to the sums which would be payable on such distribution if all sums payable thereon to holders of Preferred Shares were discharged in full.

II.    The holders of a series of Preferred Shares shall be entitled to receive when and as declared out of the surplus of the Corporation, subject to any limitations prescribed by statute, cash dividends at the respective rates and on the respective dates fixed by the Board of Directors for the shares of the specified series of Preferred Shares, and no more. Dividends on each specified series of Preferred Shares shall be cumulative from the date fixed therefor by the Board of Directors.

Subject to the provisions of this Article FOURTH, the holders of all Common Shares shall be entitled to receive such dividends as may from time to time be declared thereon by the Board of Directors.

III.    Upon dissolution, liquidation or sale of all or substantially all the assets of the Corporation, the holders of Preferred Shares shall be entitled to receive the following sums, before any payment shall be made to the holders of Common Shares with respect to payment upon dissolution, liquidation or sale of assets:

(a) in case of any involuntary dissolution or liquidation or forced sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the sum fixed for such contingency by the Board of Directors in respect of such series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment; or

(b) in case of any voluntary dissolution or liquidation or voluntary sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the amount fixed for such contingency by the Board of Directors in respect of such series prior to the initial issuance of the first shares or series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment. After all sums payable on the Preferred Shares as herein provided upon a particular contingency shall have been paid in full, but not prior thereto, the Common Shares shall be entitled to payment of all other sums then distributable. For the purposes of this Section III(b), a consolidation or merger of the Corporation with or into any other corporation, or a consolidation or merger of any other corporation, with or into the Corporation shall not be deemed a dissolution, liquidation, or sale of assets.

IV.    The holders of Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively when voting as a series or class.

V.    So long as any of the Preferred Shares shall remain outstanding, no dividend (other than dividends payable in Common Shares) shall be paid, nor shall any distribution (by purchase, redemption, payment to any sinking fund or market fund, or otherwise) be made, on any of the Common Shares unless:

(a) all dividends on all outstanding Preferred Shares shall have been paid, and full dividends thereon for the then current dividend period shall have been declared and a sum sufficient for the payment thereof set apart therefor; and

(b) the Corporation shall not be in arrears in respect of any sinking fund obligation in respect of any series of Preferred Shares.

V.    Preferred Shares acquired by the Corporation through the exercise by the holders thereof of any conversion privilege shall not be re-issued except as hereinafter provided. Such shares and any other Preferred Shares acquired by the Corporation otherwise than through the operation of any sinking fund and not used to reduce the amount of any sinking fund installment shall, upon compliance with such provisions of

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law relating to the retirement of shares as may be applicable, have the status of authorized and unissued Preferred Shares which are unclassified into any series. Preferred Shares acquired by the Corporation through the operation of any sinking fund or which have been used to reduce the amount of any sinking fund installment shall be canceled and not reissued, and the Corporation shall from time to time take appropriate corporate action to reduce the authorized number of Preferred Shares accordingly.

VI.    Series A Voting Preferred Shares:

From the authorized number of Preferred Shares of Corporation, a series of Preferred Shares designated as “Series A Voting Preferred Shares” is hereby created and shall consist of 500,000 Preferred Shares of which the preferences, relative and other rights, and the qualifications, limitations or restrictions thereof shall be (in addition to those set forth elsewhere in these Articles) as follows:

1.     Voting Rights . The holders of Series A Voting Preferred Shares shall be entitled to one hundred votes for each Preferred Share held by them respectively and shall be entitled to vote on all matters on which the Common Shares are entitled to vote.

2.     Dividends . The Board shall declare a dividend or distribution on the Series A Voting Preferred Shares immediately after it declares any dividend or distribution on the Common Shares. Such dividends or distributions shall be in an amount per share equal to the amount per share of the dividend or distribution declared for each Common Share, multiplied by 100.

3.     Reacquired Shares . Any Series A Voting Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after such acquisition. All such shares, upon their cancellation, shall become authorized but unissued Preferred Shares, without designation as to series, and may be reissued as part of any series of Preferred Shares created by the Board (including Series A Voting Preferred Shares) subject to the condition and restrictions on issuance set forth herein.

4.     Liquidation, Dissolution or Winding Up . Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to:

(a) the holders of (x) Preferred Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Voting Preferred Shares or (y) any holder of Common Shares, unless (prior thereto) the holders of Series A Voting Preferred Shares have received the greater of: (i) One Dollar ($1.00) per share ($0.01 per one one-hundredth of a share), plus an amount equal to accrued and unpaid dividends and distributions thereon (whether or not declared) to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment herein set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares; or

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(b) the holders of Preferred Shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Voting Preferred Shares, except distributions made ratably on the Series A Voting Preferred Shares and all other such parity Preferred Shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.

If the Corporation shall at any time declare or pay any dividend on Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then (and in each such event) the aggregate amount to which the holder of each share of Series A Voting Preferred Shares was entitled immediately prior to such event under paragraph (a) of this Section 4 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

5.     Combination . If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock, securities, cash or any other property, then (in each such event) the Series A Voting Preferred Shares shall at the same time be similarly exchanged or changed in an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. If, at any time on or after the Rights Declaration Date, the Corporation (i) declares any dividend on Common Shares payable outstanding Common Shares into a smaller number of Shares, (ii) subdivides the outstanding Common Shares; or (iii) combines the outstanding Common Shares into a smaller number of Shares, then (in each such case) the amount set forth in the preceding sentence with respect to the exchange or change of Series A Voting Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

6.     No Redemption . The Series A Voting Preferred Shares shall not be redeemable; provided, however , that the Corporation may acquire Series A Voting Preferred Shares in any other manner permitted by law or these Articles.

7.     Ranking . Unless otherwise provided in these Articles or any subsequent amendment of these Articles relating to a subsequent series of Preferred Shares of the Corporation, the Series A Voting Preferred Shares shall rank junior to all other series of the Corporation’s Preferred Shares as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and shall rank senior to the Common Shares.

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8.     Amendment . These Articles shall not, following the issuance of any shares of Series A Voting Preferred, be further amended in any manner which would materially and adversely alter or change the powers, preference or special rights of the Series A Voting Preferred Shares without the affirmative vote of the holders of at least a majority of the outstanding Series A Voting Preferred Shares, voting together as a single series.

9.     Fractional Shares . Series A Voting Preferred Shares may be issued in fractions of a share (in one one-hundredths (1/100) of a Share and integral multiples thereof) that shall entitle the holder (in proportion to such holder’s fractional shares) to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Voting Preferred Shares.

VIII. Series B Preferred Shares:

From the authorized number of Preferred Shares of Corporation, a series of Preferred Shares designated as “Series B Voting Preferred Shares” is hereby created and shall consist of 900,000 Preferred Shares of which the preferences, relative and other rights, and the qualifications, limitations or restrictions thereof shall be (in addition to those set forth elsewhere in these Articles) as follows:

1.     Voting Rights . The holders of Series B Voting Preferred Shares shall be entitled to one thousand votes for each Preferred Share held by them respectively and shall be entitled to vote on all matters on which the Common Shares are entitled to vote.

2.     Dividends . The Board shall declare a dividend or distribution on the Series B Voting Preferred Shares immediately after it declares any dividend or distribution on the Common Shares. Such dividends or distributions shall be in an amount per share equal to the amount per share of the dividend or distribution declared for each Common Share, multiplied by 1000.

3.     Reacquired Shares . Any Series B Voting Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after such acquisition. All such shares, upon their cancellation, shall become authorized but unissued Preferred Shares, without designation as to series, and may be reissued as part of any series of Preferred Shares created by the Board (including Series B Voting Preferred Shares) subject to the condition and restrictions on issuance set forth herein.

4.     Liquidation, Dissolution or Winding Up . Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to:

(a) the holders of (x) Preferred Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Voting Preferred Shares or (y) any holder of Common Shares, unless (prior thereto) the holders of Series B Voting Preferred Shares have received the greater of: (i) One Dollar ($1.00) per share

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($0.01 per one one-thousandth of a share), plus an amount equal to accrued and unpaid dividends and distributions thereon (whether or not declared) to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment herein set forth, equal to 1000 times the aggregate amount to be distributed per share to holders of Common Shares; or

(b) the holders of Preferred Shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Voting Preferred Shares, except distributions made ratably on the Series B Voting Preferred Shares and all other such parity Preferred Shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.

If the Corporation shall at any time declare or pay any dividend on Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then (and in each such event) the aggregate amount to which the holder of each share of Series B Voting Preferred Shares was entitled immediately prior to such event under paragraph (a) of this Section 4 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

5.     Combination . If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock, securities, cash or any other property, then (in each such event) the Series B Voting Preferred Shares shall at the same time be similarly exchanged or changed in an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. If, at any time on or after the Rights Declaration Date, the Corporation (i) declares any dividend on Common Shares payable outstanding Common Shares into a smaller number of Shares, (ii) subdivides the outstanding Common Shares; or (iii) combines the outstanding Common Shares into a smaller number of Shares, then (in each such case) the amount set forth in the preceding sentence with respect to the exchange or change of Series B Voting Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

6.     No Redemption . The Series B Voting Preferred Shares shall not be redeemable; provided, however , that the Corporation may acquire Series B Voting Preferred Shares in any other manner permitted by law or these Articles.

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7.     Ranking . Unless otherwise provided in these Articles or any subsequent amendment of these Articles relating to a subsequent series of Preferred Shares of the Corporation, the Series B Voting Preferred Shares shall rank pari passu to the Series A Voting Preferred Shares and junior to all other series of the Corporation’s Preferred Shares as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and shall rank senior to the Common Shares.

8.     Amendment . These Articles shall not, following the issuance of any shares of Series B Voting Preferred, be further amended in any manner which would materially and adversely alter or change the powers, preference or special rights of the Series B Voting Preferred Shares without the affirmative vote of the holders of at least a majority of the outstanding Series B Voting Preferred Shares, voting together as a single series.

9.     Fractional Shares . Series B Voting Preferred Shares may be issued in fractions of a share (in one one-thousandths (1/1000) of a Share and integral multiples thereof) that shall entitle the holder (in proportion to such holder’s fractional shares) to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series B Voting Preferred Shares.

10.     Rights Plan . The Series B Voting Preferred Shares are the Series B Preferred Shares referred to in that certain SunLink Tax Benefits Preservation Rights Plan between the Corporation and the Rights Agent identified therein dated as of September 29, 2016.

SECTION 2.    The express terms and provisions of the Common Shares are as follows:

I.    The rights and preferences of the Common Shares shall be subject in all respects to the rights and preferences of the Preferred Shares in the manner and to the extent provided in this Article FOURTH.

II.    The Common Shares shall rank junior to the Preferred Shares with respect to the payment of dividends. Out of the assets of the Corporation available for dividends remaining after there shall have been paid or declared and set apart for payment full dividends on the Preferred Shares, and subject to the restrictions or limitations contained in the express terms and provisions of any series of Preferred Shares with respect to the payment of dividends, dividends may be declared and paid upon the Common Shares, but only when and as determined by the Board of Directors.

III.    The Common Shares shall rank junior to the Preferred Shares with respect to payment upon dissolution, liquidation or sale of assets of the Corporation. Upon the dissolution, liquidation or sale of all or substantially all the assets of the Corporation, after there shall have been paid to or set apart for holders of the Preferred Shares the full preferential amounts to which they are entitled, the holders of Common Shares shall be entitled to receive pro rata all of the remaining assets of the Corporation available for distribution to its shareholders.

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IV.    The holders of Common Shares shall be entitled to one vote for each Common Share held by them respectively.

SECTION 3.    No shareholder of the Corporation shall have the right to vote cumulatively in the election of directors of the Corporation.

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CERTIFICATE OF AMENDMENT TO

AMEND ARTICLE  FOURTH OF THE

AMENDED ARTICLES OF INCORPORATION

- of -

SUNLINK HEALTH SYSTEMS, INC.

FOURTH: The maximum number of shares which the Corporation is authorized to have outstanding is 14,000,000 shares which shall be classified as follows:

2,000,000 Preferred Shares without par value (hereinafter called “Preferred Shares”); and

12,000,000 Common Shares without par value (hereinafter called “Common Shares”).

SECTION 1. The express terms and provisions of the Preferred Shares are as follows:

I. Preferred Shares may be issued in series from time to time. Within the limitations and restrictions set forth in this Article FOURTH, the Board of Directors is expressly authorized, at one time or from time to time, to adopt amendments to the Articles of Incorporation in respect of any authorized and unissued Preferred Shares to fix or alter the division of such shares into series, the designation and number of shares of each series, the dividend rates, the date of payment of dividends, the dates from which dividends shall be cumulative, redemption rights, redemption prices, liquidation prices, sinking fund requirements, conversion rights, and restrictions on issuance of shares of the same series or of any other class or series. The express terms and provisions of Preferred Shares of different series shall be identical except that there may be variations in respect of any or all of the particulars hereinbefore set forth in this subsection I. In case the stated dividends or the amounts payable on dissolution, liquidation, or sale of assets of the corporation are not paid in full, all Preferred Shares of all series shall participate ratably in the payment of dividends, including accumulations, if any, in proportion to the sums which would be payable thereon if all dividends thereon were paid in full, and, in any distribution of assets other than by way of dividends, in proportion to the sums which would be payable on such distribution if all sums payable thereon to holders of Preferred Shares were discharged in full.

II. The holders of Preferred Shares shall be entitled to receive when and as declared out of the surplus of the Corporation, subject to any limitations prescribed by statute, cash dividends at the respective rates and on the respective dates fixed by the Board of Directors for the shares of the several series of Preferred Shares, and no more.

Dividends on each Preferred Share shall be cumulative from the date fixed therefor by the Board of Directors.

Subject to the provisions of this Article FOURTH, the holders of all Common Shares shall be entitled to receive such dividends as may from time to time be declared thereon by the Board of Directors.

III. Upon dissolution, liquidation or sale of all or substantially all the assets of the Corporation, the holders of Preferred Shares shall be entitled to receive the following sums, before any payment shall be made to the holders of Common Shares with respect to payment upon dissolution, liquidation or sale of assets:

(a) in case of any involuntary dissolution or liquidation or forced sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the sum fixed for such contingency by the Board of Directors in respect of such series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment; or

(b) in case of any voluntary dissolution or liquidation or voluntary sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the amount fixed for such contingency by the Board of Directors in respect of such series prior to the initial issuance of the first shares or series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment. After all sums payable on the Preferred Shares as herein provided upon a particular contingency shall have been paid in full, but not prior thereto, the Common Shares shall be entitled to payment of all other sums then distributable. For the purposes of this subsection III, a consolidation or merger of the Corporation with or into any other corporation, or a consolidation or merger of any other corporation, with or into the Corporation shall not be deemed a dissolution, liquidation, or sale of assets.

IV. The holders of Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively.

V. So long as any of the Preferred Shares shall remain outstanding, no dividend (other than dividends payable in Common Shares) shall be paid, nor shall any distribution (by purchase, redemption, payment to any sinking fund or market fund, or otherwise) be made, on any of the Common Shares unless:

(a) all dividends on all outstanding Preferred Shares shall have been paid, and full dividends thereon for the then current quarterly dividend period shall have been declared and a sum sufficient for the payment thereof set apart therefor; and

(b) the Corporation shall not be in arrears in respect of any sinking fund obligation in respect of any series of Preferred Shares.

VI. Preferred Shares acquired by the Corporation through the exercise by the holders thereof of any conversion privilege shall not be re-issued except as hereinafter provided. Such shares and any other Preferred Shares acquired by the Corporation otherwise than through the operation of any sinking fund and not used to reduce the amount of any sinking fund installment shall, upon compliance with such provisions of law relating to the retirement of shares as may be applicable, have the status of authorized and unissued Preferred Shares which are unclassified into any series. Preferred Shares acquired by the Corporation through the operation of any sinking fund or which have been used to reduce the amount of any sinking fund installment shall be canceled and not reissued, and the Corporation shall from time to time take appropriate corporate action to reduce the authorized number of Preferred Shares accordingly.

VII. Series A Voting Preferred Shares:

From the authorized number of Preferred Shares of Corporation, a series of Preferred Shares designated as “Series A Voting Preferred Shares” is hereby created and shall consist of 500,000 Preferred Shares of which the preferences, relative and other rights, and the qualifications, limitations or restrictions thereof shall be (in addition to those set forth elsewhere in these Articles) as follows:

1. Voting Rights . The holders of Series A Voting Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively.

2. Dividends . The Board shall declare a dividend or distribution on the Series A Voting Preferred Shares immediately after it declares any dividend or distribution on the Common Shares. Such dividends or distributions shall be in an amount per share equal to the amount per share of the dividend or distribution declared for each Common Share, multiplied by 100.

3. Reacquired Shares . Any Series A Voting Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after such acquisition. All such shares, upon their cancellation, shall become authorized but unissued Preferred Shares, without designation as to series, and may be reissued as part of any series of Preferred Shares created by the Board (including Series A Voting Preferred Shares) subject to the condition and restrictions on issuance set forth herein.

4. Liquidation, Dissolution or Winding Up . Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to:

(a) the holders of (x) Preferred Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Voting Preferred Shares or (y) any holder of Common Shares, unless (prior thereto) the holders of Series A Voting Preferred Shares have received the greater of: (i) One Dollar ($1.00) per share ($0.01 per one one-hundredth of a share), plus an amount equal to accrued and unpaid dividends and distributions thereon (whether

or not declared) to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment herein set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares; or

(b) the holders of Preferred Shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Voting Preferred Shares, except distributions made ratably on the Series A Voting Preferred Shares and all other such parity Preferred Shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.

If the Corporation shall at any time declare or pay any dividend on Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then (and in each such event) the aggregate amount to which the holder of each share of Series A Voting Preferred Shares was entitled immediately prior to such event under paragraph (a) of this Section 4 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

5. Combination . If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock, securities, cash or any other property, then (in each such event) the Series A Voting Preferred Shares shall at the same time be similarly exchanged or changed in an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. If, at any time on or after the Rights Declaration Date, the Corporation (i) declares any dividend on Common Shares payable outstanding Common Shares into a smaller number of Shares, (ii) subdivides the outstanding Common Shares; or (iii) combines the outstanding Common Shares into a smaller number of Shares, then (in each such case) the amount set forth in the preceding sentence with respect to the exchange or change of Series A Voting Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

6. No Redemption . The Series A Voting Preferred Shares shall not be redeemable; provided, however, that the Corporation may acquire Series A Voting Preferred Shares in any other manner permitted by law or these Articles.

7. Ranking . Unless otherwise provided in these Articles or any subsequent amendment of these Articles relating to a subsequent series of Preferred Shares of the Corporation, the Series A Voting Preferred Shares shall rank junior to all other series of the Corporation’s Preferred Shares as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and shall rank senior to the Common Shares.

8. Amendment . These Articles shall not, following the issuance of any shares of Series A Voting Preferred, be further amended in any manner which would materially and adversely alter or change the powers, preference or special rights of the Series A Voting Preferred Shares without the affirmative vote of the holders of at least a majority of the outstanding Series A Voting Preferred Shares, voting together as a single series.

9. Fractional Shares . Series A Voting Preferred Shares may be issued in fractions of a share (in one one-hundredths (1/100) of a Share and integral multiples thereof) that shall entitle the holder (in proportion to such holder’s fractional shares) to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Voting Preferred Shares.

SECTION 2. The express terms and provisions of the Common Shares are as follows:

I. The rights and preferences of the Common Shares shall be subject in all respects to the rights and preferences of the Preferred Shares in the manner and to the extent provided in this Article FOURTH.

II. The Common Shares shall rank junior to the Preferred Shares with respect to the payment of dividends. Out of the assets of the Corporation available for dividends remaining after there shall have been paid or declared and set apart for payment full dividends on the Preferred Shares, and subject to the restrictions or limitations contained in the express terms and provisions of any series of Preferred Shares with respect to the payment of dividends, dividends may be declared and paid upon the Common Shares, but only when and as determined by the Board of Directors.

III. The Common Shares shall rank junior to the Preferred Shares with respect to payment upon dissolution, liquidation or sale of assets of the Corporation. Upon the dissolution, liquidation or sale of all or substantially all the assets of the Corporation, after there shall have been paid to or set apart for holders of the Preferred Shares the full preferential amounts to which they are entitled, the holders of Common Shares shall be entitled to receive pro rata all of the remaining assets of the Corporation available for distribution to its shareholders.

IV. The holders of Common Shares shall be entitled to one vote for each Common Share held by them respectively.

SECTION 3. No shareholder of the Corporation shall have the right to vote cumulatively in the election of directors of the Corporation.

EX-10.7

EXHIBIT 10.7

U.S. Small Business Administration NOTE

SBA Loan #	9738687704
SBA Loan Name	CARMICHAEL'S CASHWAY PHARMACY, INC.
Date	5/2/2020
Loan Amount	1246682.07
Interest Rate	1.00% FIXED
Borrower	CARMICHAEL'S CASHWAY PHARMACY, INC.
Operating Company	N/A
Lender	Synovus Bank

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of Lender the amount of

One Million Two Hundred Forty Six Thousand Six Hundred Eighty Two and 07/100                                Dollars,

interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS:

“Collateral” means any property taken as security for payment of this Note or any guarantee of this Note.

“Guarantor” means each person or entity that signs a guarantee of payment of this Note.

“Loan” means the loan evidenced by this Note.

“Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who pledges collateral, including, but not limited to the Paycheck Protection Program Borrower Application Form.

“SBA” means the Small Business Administration, an Agency of the United States of America.

3. PAYMENT TERMS:

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

This loan is made pursuant to the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security Act.

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The term of this loan will be twenty-four (24) months, with the first six (6) months of principal and interest payments being deferred, with interest accruing, then converting to monthly principal and interest payments, amortized over eighteen (18) months, at the interest rate provided herein, for the remaining eighteen (18) months.  Lender will apply each payment first to pay interest accrued to the day Lender received the payment, then to bring principal current, and will apply any remaining balance to reduce principal.  Payments must be made on the same day as the date of this Note in the months they are due.  Lender shall adjust payments at least annually as needed to amortize principal over the remaining term of the Note.  

All remaining unpaid principal and accrued interest is due and payable twenty-four (24) months from the date of the Note.

The interest rate will be fixed at 1.00% for the life of the loan. Interest will accrue on an Actual/365 day basis.  Interest shall accrue from the date hereof on the unpaid principal balance and shall continue to accrue until this Note is paid in full.

Late Charge:  To the extent permitted, if a payment on this Note is more than 10 days late, Lender may charge Borrower a late fee of up to 5% of the unpaid portion of the regularly scheduled payment.

4. DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan with Lender;

C. Does not preserve, or account to Lender’s satisfaction for, any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender or SBA;

F. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially affect Borrower’s ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that Lender believes may materially affect Borrower’s ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior  written consent; or

M. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s ability to pay this Note.

5. LENDER’S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, Lender may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; or

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

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6. LENDER’S GENERAL POWERS:

Without notice and without Borrower’s consent, Lender may:

A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

7. WHEN FEDERAL LAW APPLIES:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

8. SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its successors and assigns.

9. GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower waives all suretyship defenses.

C. Borrower must sign all documents necessary at any time to comply with the Loan Documents and to enable Lender to acquire, perfect, or maintain Lender’s liens on Collateral and further agrees to fully cooperate to correct or supplement, if necessary, in the sole discretion of Lender, any and all Loan Documents so that all Loan Documents accurately describe the Loan.  

D. Borrower further agrees to provide such additional instrumentation or documentation that Lender may from time to time deem to be required by the SBA or the Paycheck Protection Program.  

E. Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them.

F. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note.

G. If any part of this Note is unenforceable, all other parts remain in effect.

H. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that Lender did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale.

10. STATE-SPECIFIC PROVISIONS:

If Borrower is a resident of Georgia, the following language applies:

The undersigned Borrower hereby waives the right to require the Holder of this obligation to confirm any foreclosure sale as a condition for taking action to collect on this Note.

Page 3/4

11. BORROWER’S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

CARMICHAEL'S CASHWAY PHARMACY, INC.

By:	/s/ Mark Stockslager
	Mark Stockslager
	As Authorized Signer

Page 4/4

EX-10.8

EXHIBIT 10.8

U.S. Small Business Administration NOTE

SBA Loan #	9613657702
SBA Loan Name	SUNLINK SCRIPTSRX, LLC
Date	5/1/2020
Loan Amount	23091.72
Interest Rate	1.00% FIXED
Borrower	SUNLINK SCRIPTSRX, LLC
Operating Company	N/A
Lender	Synovus Bank

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of Lender the amount of

Twenty Three Thousand Ninety One and 72/100                                                                                                                 Dollars, interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS:

“Collateral” means any property taken as security for payment of this Note or any guarantee of this Note.

“Guarantor” means each person or entity that signs a guarantee of payment of this Note.

“Loan” means the loan evidenced by this Note.

“Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who

pledges collateral, including, but not limited to the Paycheck Protection Program Borrower Application Form.

“SBA” means the Small Business Administration, an Agency of the United States of America.

Page 1/4

3. PAYMENT TERMS:

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

This loan is made pursuant to the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security Act.

The term of this loan will be twenty-four (24) months, with the first six (6) months of principal and interest payments being deferred, with interest accruing, then converting to monthly principal and interest payments, amortized over eighteen (18) months, at the interest rate provided herein, for the remaining eighteen (18) months.  Lender will apply each payment first to pay interest accrued to the day Lender received the payment, then to bring principal current, and will apply any remaining balance to reduce principal.  Payments must be made on the same day as the date of this Note in the months they are due.  Lender shall adjust payments at least annually as needed to amortize principal over the remaining term of the Note.

All remaining unpaid principal and accrued interest is due and payable twenty-four (24) months from the date of the Note.

The interest rate will be fixed at 1.00% for the life of the loan. Interest will accrue on an Actual/365 day basis.  Interest shall accrue from the date hereof on the unpaid principal balance and shall continue to accrue until this Note is paid in full.

Late Charge:  To the extent permitted, if a payment on this Note is more than 10 days late, Lender may charge Borrower a late fee of up to 5% of the unpaid portion of the regularly scheduled payment.

4. DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan with Lender;

C. Does not preserve, or account to Lender’s satisfaction for, any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender or SBA;

F. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially affect Borrower’s ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that Lender believes may materially affect Borrower’s ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent; or

M. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s ability to pay this Note.

5. LENDER’S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, Lender may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; or

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

Page 2/4

6. LENDER’S GENERAL POWERS:

Without notice and without Borrower’s consent, Lender may:

A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

7. WHEN FEDERAL LAW APPLIES:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

8. SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its successors and assigns.

9. GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower waives all suretyship defenses.

C. Borrower must sign all documents necessary at any time to comply with the Loan Documents and to enable Lender to acquire, perfect, or maintain Lender’s liens on Collateral and further agrees to fully cooperate to correct or supplement, if necessary, in the sole discretion of Lender, any and all Loan Documents so that all Loan Documents accurately describe the Loan.  

D. Borrower further agrees to provide such additional instrumentation or documentation that Lender may from time to time deem to be required by the SBA or the Paycheck Protection Program.  

E. Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them.

F. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note.

G. If any part of this Note is unenforceable, all other parts remain in effect.

H. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that Lender did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale.

10. STATE-SPECIFIC PROVISIONS:

If Borrower is a resident of Georgia, the following language applies:

The undersigned Borrower hereby waives the right to require the Holder of this obligation to confirm any foreclosure sale as a condition for taking action to collect on this Note.

Page 3/4

11. BORROWER’S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

SUNLINK SCRIPTSRX, LLC

By:	/s/ Mark Stockslager
	Mark Stockslager
	As Authorized Signer

Page 4/4

EX-10.9

EXHIBIT 10.9

U.S. Small Business Administration NOTE

SBA Loan #	49050671-02
SBA Loan Name	SUNLINK HEALTH SYSTEMS INC
Date	4/14/2020
Loan Amount	88842.00
Interest Rate	1.00% FIXED
Borrower	SUNLINK HEALTH SYSTEMS INC
Operating Company	N/A
Lender	Synovus Bank

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of Lender the amount of

Eighty Eight Thousand Eight Hundred Forty Two and 00/100                                                                                          Dollars, interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS:

“Collateral” means any property taken as security for payment of this Note or any guarantee of this Note.

“Guarantor” means each person or entity that signs a guarantee of payment of this Note.

“Loan” means the loan evidenced by this Note.

“Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who pledges collateral.

“SBA” means the Small Business Administration, an Agency of the United States of America.

Page 1/4

3. PAYMENT TERMS:

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

This loan is made pursuant to the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security Act.

The term of this loan will be twenty-four (24) months, with the first six (6) months of principal and interest payments being deferred, with interest accruing, then converting to monthly principal and interest payments, amortized over eighteen (18) months, at the interest rate provided herein, for the remaining eighteen (18) months.  Lender will apply each payment first to pay interest accrued to the day Lender received the payment, then to bring principal current, and will apply any remaining balance to reduce principal.  Payments must be made on the same day as the date of this Note in the months they are due.  Lender shall adjust payments at least annually as needed to amortize principal over the remaining term of the Note.  

All remaining unpaid principal and accrued interest is due and payable twenty-four (24) months from the date of the Note.

The interest rate will be fixed at 1.00% for the life of the loan. Interest will accrue on an Actual/365 day basis.  Interest shall accrue from the date hereof on the unpaid principal balance and shall continue to accrue until this Note is paid in full.

Late Charge:  To the extent permitted, if a payment on this Note is more than 10 days late, Lender may charge Borrower a late fee of up to 5% of the unpaid portion of the regularly scheduled payment.

4. DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan with Lender;

C. Does not preserve, or account to Lender’s satisfaction for, any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender or SBA;

F. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially affect Borrower’s ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that Lender believes may materially affect Borrower’s ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent; or

M. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s ability to pay this Note.

5. LENDER’S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, Lender may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; or

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

Page 2/4

6. LENDER’S GENERAL POWERS:

Without notice and without Borrower’s consent, Lender may:

A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

7. WHEN FEDERAL LAW APPLIES:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

8. SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its successors and assigns.

9. GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower waives all suretyship defenses.

C. Borrower must sign all documents necessary at any time to comply with the Loan Documents and to enable Lender to acquire, perfect, or maintain Lender’s liens on Collateral.

D. Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them.

E. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note.

F. If any part of this Note is unenforceable, all other parts remain in effect.

G. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that Lender did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale.

10. STATE-SPECIFIC PROVISIONS:

If Borrower is a resident of Georgia, the following language applies:

The undersigned Borrower hereby waives the right to require the Holder of this obligation to confirm any foreclosure sale as a condition for taking action to collect on this Note.

Page 3/4

11. BORROWER’S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

SUNLINK HEALTH SYSTEMS INC

By:	/s/ Mark Stockslager
	Mark Stockslager
	As Authorized Signer

Page 4/4

EX-10.10

EXHIBIT 10.10

U.S. Small Business Administration NOTE

SBA Loan #	43097571-01
SBA Loan Name	CROWN HEALTHCARE INVESTMENTS, LLC
Date	4/13/2020
Loan Amount	25407.00
Interest Rate	1.00% FIXED
Borrower	CROWN HEALTHCARE INVESTMENTS, LLC
Operating Company	N/A
Lender	Synovus Bank

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of Lender the amount of

Twenty Five Thousand Four Hundred Seven and 00/100                                                                                                                                                      Dollars, interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS:

“Collateral” means any property taken as security for payment of this Note or any guarantee of this Note.

“Guarantor” means each person or entity that signs a guarantee of payment of this Note.

“Loan” means the loan evidenced by this Note.

“Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who pledges collateral.

“SBA” means the Small Business Administration, an Agency of the United States of America.

Page 1/4

3. PAYMENT TERMS:

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

This loan is made pursuant to the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security Act.

The term of this loan will be twenty-four (24) months, with the first six (6) months of principal and interest payments being deferred, with interest accruing, then converting to monthly principal and interest payments, amortized over eighteen (18) months, at the interest rate provided herein, for the remaining eighteen (18) months.  Lender will apply each payment first to pay interest accrued to the day Lender received the payment, then to bring principal current, and will apply any remaining balance to reduce principal.  Payments must be made on the same day as the date of this Note in the months they are due.  Lender shall adjust payments at least annually as needed to amortize principal over the remaining term of the Note.  

All remaining unpaid principal and accrued interest is due and payable twenty-four (24) months from the date of the Note.

The interest rate will be fixed at 1.00% for the life of the loan. Interest will accrue on an Actual/365 day basis.  Interest shall accrue from the date hereof on the unpaid principal balance and shall continue to accrue until this Note is paid in full.

Late Charge:  To the extent permitted, if a payment on this Note is more than 10 days late, Lender may charge Borrower a late fee of up to 5% of the unpaid portion of the regularly scheduled payment.

4. DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan with Lender;

C. Does not preserve, or account to Lender’s satisfaction for, any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender or SBA;

F. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially affect Borrower’s ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that Lender believes may materially affect Borrower’s ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent; or

M. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s ability to pay this Note.

5. LENDER’S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, Lender may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; or

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

Page 2/4

6. LENDER’S GENERAL POWERS:

Without notice and without Borrower’s consent, Lender may:

A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

7. WHEN FEDERAL LAW APPLIES:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

8. SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its successors and assigns.

9. GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower waives all suretyship defenses.

C. Borrower must sign all documents necessary at any time to comply with the Loan Documents and to enable Lender to acquire, perfect, or maintain Lender’s liens on Collateral.

D. Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them.

E. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note.

F. If any part of this Note is unenforceable, all other parts remain in effect.

G. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that Lender did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale.

10. STATE-SPECIFIC PROVISIONS:

If Borrower is a resident of Georgia, the following language applies:

The undersigned Borrower hereby waives the right to require the Holder of this obligation to confirm any foreclosure sale as a condition for taking action to collect on this Note.

Page 3/4

11. BORROWER’S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

CROWN HEALTHCARE INVESTMENTS, LLC

By:	/s/ Mark Stockslager
	Mark Stockslager
	As Authorized Signer

Page 4/4

EX-10.11

EXHIBIT 10.11

U.S. Small Business Administration NOTE  

SBA Loan #	42801771-10
SBA Loan Name	SUNLINK HEALTH SYSTEMS TECHNOLOGY INC
Date	4/13/2020
Loan Amount	149530.00
Interest Rate	1.00% FIXED
Borrower	SUNLINK HEALTH SYSTEMS TECHNOLOGY INC
Operating Company	N/A
Lender	Synovus Bank

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of Lender the amount of

One Hundred Forty Nine Thousand Five Hundred Thirty and 00/100                                                                                Dollars, interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS:

“Collateral” means any property taken as security for payment of this Note or any guarantee of this Note.

“Guarantor” means each person or entity that signs a guarantee of payment of this Note.

“Loan” means the loan evidenced by this Note.

“Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who pledges collateral.

“SBA” means the Small Business Administration, an Agency of the United States of America.

Page 1/4

3. PAYMENT TERMS:

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

This loan is made pursuant to the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security Act.

The term of this loan will be twenty-four (24) months, with the first six (6) months of principal and interest payments being deferred, with interest accruing, then converting to monthly principal and interest payments, amortized over eighteen (18) months, at the interest rate provided herein, for the remaining eighteen (18) months.  Lender will apply each payment first to pay interest accrued to the day Lender received the payment, then to bring principal current, and will apply any remaining balance to reduce principal.  Payments must be made on the same day as the date of this Note in the months they are due.  Lender shall adjust payments at least annually as needed to amortize principal over the remaining term of the Note.  

All remaining unpaid principal and accrued interest is due and payable twenty-four (24) months from the date of the Note.

The interest rate will be fixed at 1.00% for the life of the loan. Interest will accrue on an Actual/365 day basis.  Interest shall accrue from the date hereof on the unpaid principal balance and shall continue to accrue until this Note is paid in full.

Late Charge:  To the extent permitted, if a payment on this Note is more than 10 days late, Lender may charge Borrower a late fee of up to 5% of the unpaid portion of the regularly scheduled payment.

4. DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan with Lender;

C. Does not preserve, or account to Lender’s satisfaction for, any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender or SBA;

F. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially affect Borrower’s ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that Lender believes may materially affect Borrower’s ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent; or

M. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s ability to pay this Note.

5. LENDER’S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, Lender may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; or

Page 2/4

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

6. LENDER’S GENERAL POWERS:

Without notice and without Borrower’s consent, Lender may:

A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

7. WHEN FEDERAL LAW APPLIES:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

8. SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its successors and assigns.

9. GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower waives all suretyship defenses.

C. Borrower must sign all documents necessary at any time to comply with the Loan Documents and to enable Lender to acquire, perfect, or maintain Lender’s liens on Collateral.

D. Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them.

E. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note.

F. If any part of this Note is unenforceable, all other parts remain in effect.

G. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that Lender did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale.

10. STATE-SPECIFIC PROVISIONS:

If Borrower is a resident of Georgia, the following language applies:

The undersigned Borrower hereby waives the right to require the Holder of this obligation to confirm any foreclosure sale as a condition for taking action to collect on this Note.

Page 3/4

11. BORROWER’S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

SUNLINK HEALTH SYSTEMS TECHNOLOGY INC

By:	s/ Mark Stockslager
	Mark Stockslager
	As Authorized Signer

Page 4/4

EX-10.12

EXHIBIT 10.12

U.S. Small Business Administration NOTE

SBA Loan #	41704071-06
SBA Loan Name	SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.
Date
Loan Amount	1700405.02
Interest Rate	1.00% FIXED
Borrower	SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.
Operating Company	N/A
Lender	Synovus Bank

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of Lender the amount of

One Million Seven Hundred Thousand Four Hundred Five and 02/100                                                                             Dollars, interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS:

“Collateral” means any property taken as security for payment of this Note or any guarantee of this Note.

“Guarantor” means each person or entity that signs a guarantee of payment of this Note.

“Loan” means the loan evidenced by this Note.

“Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who pledges collateral.

“SBA” means the Small Business Administration, an Agency of the United States of America.

Page 1/4

3.PAYMENT TERMS:

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

This loan is made pursuant to the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security Act.

The term of this loan will be twenty-four (24) months, with the first six (6) months of principal and interest payments being deferred, with interest accruing, then converting to monthly principal and interest payments, amortized over eighteen (18) months, at the interest rate provided herein, for the remaining eighteen (18) months. Lender will apply each payment first to pay interest accrued to the day Lender received the payment, then to bring principal current, and will apply any remaining balance to reduce principal. Payments must be made on the same day as the date of this Note in the months they are due. Lender shall adjust payments at least annually as needed to amortize principal over the remaining term of the Note.

All remaining unpaid principal and accrued interest is due and payable twenty-four (24) months from the date of the Note.

The interest rate will be fixed at 1.00% for the life of the loan. Interest will accrue on an Actual/365 day basis. Interest shall accrue from the date hereof on the unpaid principal balance and shall continue to accrue until this Note is paid in full.

Late Charge: To the extent permitted, if a payment on this Note is more than 10 days late, Lender may charge Borrower a late fee of up to 5% of the unpaid portion of the regularly scheduled payment.

4. DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan with Lender;

C. Does not preserve, or account to Lender’s satisfaction for, any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender or SBA;

F. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially affect Borrower’s ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that Lender believes may materially affect Borrower’s ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent; or

M. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s ability to pay this Note.

5. LENDER’S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, Lender may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; or

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

Page 2/4

6. LENDER’S GENERAL POWERS:

Without notice and without Borrower’s consent, Lender may:

A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

7. WHEN FEDERAL LAW APPLIES:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

8. SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its successors and assigns.

9. GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower waives all suretyship defenses.

C. Borrower must sign all documents necessary at any time to comply with the Loan Documents and to enable Lender to acquire, perfect, or maintain Lender’s liens on Collateral.

D. Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them.

E. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note.

F. If any part of this Note is unenforceable, all other parts remain in effect.

G. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that Lender did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale.

10. STATE-SPECIFIC PROVISIONS:

If Borrower is a resident of Georgia, the following language applies:

The undersigned Borrower hereby waives the right to require the Holder of this obligation to confirm any foreclosure sale as a condition for taking action to collect on this Note.

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11. BORROWER’S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.

By:

Mark Stockslager

As Authorized Signer

Page 4/4

EX-21.1

Exhibit 21.1

LIST OF SUBSIDIARIES

The direct and indirect subsidiaries of SunLink Health Systems, Inc. are listed below:

Name of Subsidiary

SunLink Health Systems Technology, Inc.

SunLink ScriptsRx, LLC

Crown Healthcare Investments, LLC (f/k/a MedCare South, LLC)

New Seasons Assisted Living, LLC

HealthMont LLC

Dexter Hospital LLC

Southern Health Corporation of Houston, Inc.

Southern Health Corporation of Ellijay, Inc.

Southern Health Corporation of Dahlonega, Inc.

HealthMont of Georgia Inc.

HealthMont of Missouri, LLC

Carmichael’s Cashway Pharmacy, Inc.

Carmichael’s Nutritional Distributor, Inc.

CarMed Direct, Inc.

Breath of Life Home Health Equipment, Inc.

Southeastern Healthcare Alliance, Inc.

Central Alabama Medical Associates, LLC

Castlemark Properties, LLC

SunLink Healthcare Professional Property, LLC

Callaland, LLC

Mountain Drive Properties, LLC

Gold Rush Development, LLC

East Madison Property, LLC

EX-23.1

Exhibit 23.1

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the registration statements (No. 333-137474 and 333-184027) on Forms S-8 of SunLink Health Systems, Inc. of our reports dated September 28, 2020, appearing in this Annual Report on Form 10-K of SunLink Health Systems, Inc. for the year ended June 30, 2020.

/s/ Cherry Bekaert LLP

Atlanta, Georgia

September 28, 2020

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert M. Thornton, Jr., the Chief Executive Officer of SunLink Health Systems, Inc. (the “Company”), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2020 (the “Evaluation Date”) based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter ended on the Evaluation Date, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: September 28, 2020	/s/ Robert M. Thornton, Jr.
	Robert M. Thornton, Jr.
	SunLink Health Systems, Inc.
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Mark J. Stockslager, the Chief Financial Officer of SunLink Health Systems, Inc. (the “Company”), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2020 (the “Evaluation Date”) based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter ended on the Evaluation Date, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: September 28, 2020	/s/ Mark J. Stockslager
	Mark J. Stockslager
	SunLink Health Systems, Inc.
	Chief Financial Officer

EX-32.1

Exhibit 32.1

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of SunLink Health Systems, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2020, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Robert M. Thornton, Jr., Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 28, 2020	/s/ Robert M. Thornton, Jr.
	Robert M. Thornton, Jr.
	SunLink Health Systems, Inc. Chief Executive Officer

EX-32.2

Exhibit 32.2

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of SunLink Health Systems, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2020, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Mark J. Stockslager, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 28, 2020	/s/ Mark J. Stockslager
	Mark J. Stockslager
	SunLink Health Systems, Inc. Chief Financial Officer

XML

Summary of Significant Accounting Policies

12 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — The consolidated financial statements include the accounts of SunLink and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Management Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates made by management involve reserves for adjustments to net patient service revenues, evaluation of the recoverability of assets, including accounts receivable and intangible assets, and the assessment of litigation and contingencies, including income taxes and related tax asset valuation allowances, all as discussed in more detail in the remainder of these notes to the consolidated financial statements. Actual results could differ materially from these estimates.

Net Patient Service Revenue — Effective July 1, 2018, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”), which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented. ASC 606 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The adoption of the provisions of ASC 606 had no material impact on the Company’s current or historical financial position, results of operations or cash flows. Additionally, management does not anticipate that the provisions of ASC 606 will have a material impact on the amount or timing of when the Company recognizes revenue prospectively. However, in accordance with ASC 606, the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented. Subsequent material events that alter the payor’s ability to pay are recorded as bad debt expense. The Company’s revenue recognition and accounts receivable policies are more fully described in Note 4. Revenue Recognition and Accounts Receivable.

SunLink’s subsidiaries have agreements with third-party payors that provide for payments at amounts different from established charges. Payment arrangements vary and include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Patient service revenues are reported as services are rendered at the estimated net realizable amounts from patients, third-party payors, and others. Estimated net realizable amounts are estimated based upon contracts with third-party payors, published reimbursement rates, and historical reimbursement percentages pertaining to each payor type. Estimated reductions in revenues to reflect agreements with third-party payors and estimated retroactive adjustments under such reimbursement agreements are accrued during the period the related services are rendered and are adjusted in future periods as interim and final settlements are determined. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to accrue such revenue deductions. At June 30, 2020, there were no material claims or disputes with third-party payors.

Concentrations of Credit Risk —SunLink’s Healthcare Services segment subsidiaries grant unsecured credit to their patients, most of who reside in the service area of the subsidiaries’ facilities and are insured under third-party agreements. Medicare and Medicaid patient accounts represent SunLink’s only significant concentrations of credit risk. For SunLink’s Healthcare Services segment, Medicare net revenues were approximately 52% and 49% of net revenues for the years ended June 30, 2020 and 2019, respectively. For SunLink’s Healthcare Services segment, Medicaid was approximately 32% and 33% net revenues for the years ended June 30, 2020 and 2019, respectively. For SunLink’s Healthcare Services segment, Medicare receivables were approximately 45% and 42% of receivables—net at June 30, 2020 and 2019, respectively, while Medicaid receivables were approximately 21% and 26% of receivables—net at June 30, 2020 and 2019, respectively.

SunLink’s Pharmacy segment subsidiary grants unsecured credit to individual customers and institutional customers. Individual customers primarily are insured under third-party agreements, including Medicare and Medicaid, while the institutional customers are granted credit according to their determined credit risk. Medicare receivables were approximately 23% and 17% of the Pharmacy segment’s receivables at June 30, 2020 and 2019, respectively, while Medicaid receivables were approximately 23% and 17% of the Pharmacy segment receivable at June 30, 2020 and 2019, respectively. Approximately 54% and 66% of the Pharmacy’s net receivables at June 30, 2020 and 2019, respectively, were private insurance and institutional customers’ receivables. Net revenues for the Pharmacy segment for the fiscal year ended June 30, 2020 and 2019 were approximately 37% and 35% Medicare, respectively, and approximately 28% and 29% Medicaid, respectively.

Cash and Cash Equivalents —Cash and cash equivalents consist of all funds in banks and short-term liquid investments with an original maturity of three months or less. Cash deposited with commercial banks at June 30, 2020 was $11,178, of which approximately $10,384 totaled amounts greater than the federally insured limits. At June 30, 2020, the Company’s cash equivalents included $3,660 of overnight repurchase agreements.The Company accounts for these agreements as cash equivalents in accordance with FASB ASC 305-10-20. The investing of cash in amounts greater than the insurable limits with major well-capitalized financial institutions mitigates the risk of the deposited cash and the certificate of deposit. The overnight repurchase agreements are 102% collateralized by U. S. government backed securities with the Company’s U.S. bank. The U.S. Government backed collateralized securities are of high credit quality which mitigates any significant risk to the credit rating or interest rate risk of the agreements.

Inventory —Inventory consists of medical and pharmacy supplies. Medical supplies are valued at the lower of cost or market, using the first-in, first-out method. Pharmacy supplies are stated at the lower of cost (standard cost method), or net realizable value. Use of this method does not result in a material difference from the methods required by generally accepted accounting principles in the United States of America.

Accounts Receivable —Substantially all of SunLink’s subsidiaries’ receivables result from providing healthcare services to hospital facility patients and from providing pharmacy services and products to customers. The Company evaluates the valuation of accounts receivable based upon its historical collection trends, as well as its understanding of the nature and collectability of accounts based on their age and other factors.

Government Grant Accounting—As a result of the COVID-19 pandemic, SunLink subsidiaries have received grants from the U.S. government under the CARES Act as targeted Provider Relief Funds. We recognize the grants as we calculate the amounts of COVID-19 related costs and to offset the effect of COVID-19 Lost Revenues on a systematic and rational basis in the Consolidated Statement of Operations into other income once there is reasonable assurance that we can comply with the relevant conditions of the specific grant and the grant has been or be will be received. The amount of the grant recognized into other income at any point in time is based on the terms of the grant received. Any unearned portions of the grants are deferred and shown as a current liability on our balance sheet.

Property, Plant, and Equipment —Property, plant, and equipment, including equipment subject to capital leases, is recorded at cost. Depreciation is recognized over the estimated useful lives of the assets, which range from 3 to 45 years, on a straight-line basis. Generally, furniture and fixtures are depreciated over 5 to 10 years, machinery and equipment over 10 years, and buildings over 25 to 45 years. Leasehold improvements and leased machinery and equipment are depreciated over the lease term or estimated useful life of the asset, whichever is shorter, and range from 5 to 15 years. For the Pharmacy segment, durable medical equipment is depreciated over 3 years. Expenditures for major renewals and replacements are capitalized. Expenditures for maintenance and repairs are charged to operating expense as incurred. When property items are retired or otherwise disposed of, amounts applicable to such items are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Depreciation expense totaled $1,350 and $1,369 for the years ended June 30, 2020 and 2019, respectively.

Leases— On July 1, 2019, the Company adopted cumulative accounting standard updates initially by the Financial Accounting Standards Board (“FASB”) that amended the accounting for leases and are codified as ASC 842. SunLink and its subsidiaries recognize right-of-use assets and lease liabilities for leases with terms greater than 12 months or leases that contain a purchase option that is reasonably certain to be exercised.  Leases are classified as either finance or operating leases.  This classification whether lease expense is recognized based on an effective interest method or on a straight-line method over the term of the lease.  Our right-of-use assets and liabilities primarily relate to office and warehouse facilities, healthcare equipment and office equipment.  Certain of our facility leases include one or more option to renew.  The exercise of lease renewal options is at our option.  None of our lease agreements contain material residual value guarantees.  

Risk Management —SunLink and its subsidiaries are exposed to various risks of loss from professional liability and other claims and casualties; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters (including earthquakes and hurricanes); and employee health, dental and accident benefits. Commercial insurance coverage is purchased for a portion of claims arising from such matters.

When, in management’s judgment, claims are sufficiently identified, a liability is accrued for estimated costs and losses under such claims, net of estimated insurance recoveries except where applicable laws, rules or regulations require us to report the gross estimate of potential or estimated losses.

The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition of a business. These amounts are based on actuarially determined estimates.

The Company self-insures for workers’ compensation risk. The estimated liability for workers’ compensation risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. The Company is also self-insured for employee health risks. The estimated liability for employee health risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported.

The Company accrues an estimate of losses resulting from workers’ compensation and professional liability claims to the extent they are not covered by insurance. These accruals are estimated quarterly based upon management’s review of claims reported and historical loss data.

The Company records a liability pertaining to pending litigation if it is probable a loss has been incurred and accrues the most likely amount of loss based on the information available. If no amount within the range of losses estimated from the information available is more likely than any other amount in the range of loss, the minimum amount in the range of loss is accrued. Because of uncertainties surrounding the nature of litigation and the ultimate liability to SunLink and its subsidiaries, if any, estimates are revised as additional facts become known.

Long-lived Assets —SunLink and its subsidiaries periodically assesses the recoverability of assets based on its expectations of future profitability and the undiscounted cash flows of the related operations and, when circumstances dictate, adjust the carrying value of the asset to estimated fair value. These factors, along with management’s plans with respect to the operations, are considered in assessing the recoverability of long-lived assets.

Goodwill and Intangibles —Goodwill represents the cost of acquired businesses in excess of fair value of identifiable tangible and intangible net assets purchased. Goodwill has an indefinite life and is not subject to periodic amortization. However, goodwill is tested at least annually for impairment, using a fair value methodology, in lieu of amortization. Definite-life intangible assets are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 2 to 30 years. SunLink and its subsidiaries evaluate the reasonableness of the useful lives of intangible assets and they are tested for impairment as conditions warrant.

Income Taxes —SunLink accounts for income taxes using an asset and liability approach and the recognition of deferred tax assets and liabilities for expected future tax consequences. SunLink considers all expected future events other than proposed enactments of changes in the income tax law or rates. When management determines that it is more likely than not that a portion of or none of the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies, management provides a valuation allowance for the portion not expected to be realized.

   Share-Based Compensation —The Company has issued common share options to key employees and directors under various shareholder-approved plans. Share-based compensation expense of $28 and $1 for the fiscal years ended June 30, 2020 and 2019, respectively, was recorded in salaries, wages and benefits expense for share options issued to employees and directors of the Company. The fair value of the share options was estimated using the Black-Scholes option pricing model. The historical volatility is used to calculate the estimated volatility in this model.

Fair Value of Financial Instruments —The recorded values of cash, receivables, and payables approximate their fair values because of the relatively short maturity of these instruments. Similarly, the fair value of long-term debt is estimated to approximate the recorded value due to its current variable interest rate.

Fair Value Measurements —Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. Generally Accepted Accounting Principles (“GAAP”) fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

Level 1:  Quoted market prices in active markets for identical assets or liabilities.

Level 2:  Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level3:  Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability.

Earnings (Loss) per Share —Earnings (loss) per common share is based on the weighted-average number of common shares and dilutive common share equivalents outstanding for each period presented, including vested and unvested shares issued under SunLink’s 2005 Equity Incentive Plan, and the 2011 Director Stock Option Plan. Common share equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options.

Recent Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Instead of a two-step impairment model, if the carrying amount of a reporting unit exceeds its fair value as determined in step one of the impairment test, an impairment loss is measured at the amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not believe adoption of this pronouncement will have a material impact on its financial position and results of operations.

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Business Operations

12 Months Ended

Jun. 30, 2020

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Business Operations

1. BUSINESS OPERATIONS

SunLink Health Systems, Inc., through subsidiaries (“SunLink”, “we”, “our”, “ours”, “us” or the “Company”), owns businesses which are providers of healthcare services in certain markets in the United States. SunLink’s business is composed of the ownership of two business segments:

Healthcare Services

• A subsidiary which owns and operates Trace Regional Hospital and Floy Dyer Nursing Home (“Trace”), an 84 licensed-bed acute care hospital, located in Houston, Mississippi, which includes an 18-bed geriatric psychology unit (“GPU”), and a 66-bed nursing home. This facility focuses primarily on senior healthcare services.

• A subsidiary, SunLink Health Systems Technology (“SHST Technology”), which provides information technology (“IT”) to outside customers and to SunLink subsidiaries.

• A subsidiary which owns approximately five (5) acres of unimproved land in Houston, Mississippi.

• A subsidiary which owns approximately 25 acres of unimproved land in Ellijay, Georgia.

Pharmacy

The Pharmacy segment, which is composed of four operational areas:

• Retail pharmacy products and services, consisting of retail pharmacy sales conducted in rural markets at two locations in Louisiana.

• Institutional pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to institutional clients or to patients in institutional settings, such as nursing homes, assisted living facilities, behavioral and specialty hospitals, hospice, and correctional facilities.

• Non-institutional Pharmacy services consisting of the provision of specialty and non-specialty pharmaceutical and biological products to clients or patients in non-institutional settings including private residential homes.

• Durable medical equipment products and services (“DME”), consisting primarily of the sale and rental of products for institutional clients or to patients in institutional settings and patient-administered home care.

SunLink subsidiaries have conducted the Healthcare Services business since 2001 and the Pharmacy operations since 2008. Our Pharmacy segment currently is operated through Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”), a subsidiary of our SunLink ScriptsRx, LLC subsidiary.

Throughout these notes to the 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 the publicly traded Company or any particular subsidiary of the Company owns or operates any asset, business or property. The operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc.

COVID-19 Pandemic and CARES Act Funding

A novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization on March 11, 2020. We have been monitoring the COVID-19 pandemic and its impact on our operations, and we have taken significant steps intended to minimize the risk to our employees and patients. Certain employees have been working remotely, but we believe these remote work arrangements have not materially affected our ability to maintain critical business operations, which are being conducted substantially in accordance with our understanding of applicable government health and safety protocols and guidance issued in response to the COVID-19 pandemic, although such protocols and guidance are very recent, rapidly changing and at times, unclear. Nevertheless, as in many healthcare environments, we have experienced COVID-19 illness, including deaths, and some employees have tested positive and have been placed on leave or in quarantine.

In our Healthcare businesses, we have experienced material reductions in demand due to the COVID-19 outbreak. There appears to be minimal current demand for nursing home admissions, and clinic visits and hospital services have substantially decreased as well in part due to the abrupt retirement of one physician and reduced capacity of other physicians and providers, all as a result of the effects of the pandemic. The availability and cost of medical supplies have adversely affected our Healthcare businesses, especially with respect to access to personal protective equipment, cleaning supplies and COVID-19 testing materials. We continue to monitor supplies and seek additional sources of many supply items. A reduction of the availability of qualified employees has also occurred and despite good faith efforts to do, they have not yet been able to rehire or fully replace staff reductions which were previously furloughed, laid off or retired.

Since the beginning of the COVID-19 pandemic, our Pharmacy business has experienced negative sales trends, increased costs and reduced staff.  Retail Pharmacy and DME locations are operating with curbside or drive-through services only and many of our primary physician referral sources have been closed or are operating at substantially reduced capacity.  Until these referral sources are open and fully-staffed, we believe the COVID-19 pandemic will continue to affect the demand for DME products and Pharmacy drugs and products. Reductions in employee hours have been made in response to the lower demand. Demand for our Institutional Pharmacy services has been less affected to date. Nursing homes and other customers of such Institutional Pharmacy services are currently being adversely affected by the spreading of the COVID-19 pandemic, and this may be expected to have a further negative effect on such demand.  Our Institutional Pharmacy services have experienced increased costs and operational inefficiencies due to measures taken to protect our employees and by access controls and other restrictions implemented by our institutional customers. The impact of the COVID-19 pandemic has negatively affected our supply processes, especially with respect to access to respiratory equipment and certain personal protective equipment and cleaning products. We believe the effect of the COVID–19 pandemic and public and governmental responses to it negatively affected our third and fourth fiscal quarters results.

During the fourth quarter of fiscal 2020, our Healthcare and Pharmacy segments received approximately $4,586 in general and targeted Provider Relief Fund (“PRF”) distributions and $3,234 in Paycheck Protection Programs (“PPP”) loans, administered by the , SBA, both provided for under the CARES Act for a total of $7,820 of such funding.

The distributions from the PRF are 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 healthcare-related expenses or “Lost Revenues” (as defined by HHS) attributable to COVID-19. Such funds under the PRF are accounted for as government grants and are recognized on a systematic and rational basis once there is reasonable assurance that the applicable terms and conditions required to retain the funds will be met. Based on an analysis of the compliance and reporting requirements of the PRF and the impact of the pandemic on our operating results through the end of our fiscal year ended June 30, 2020, we recognized $54 of income related to PRF and these funds are recorded under the caption “Federal stimulus pandemic relief funds” in other income (expense) in our consolidated statement of operations. The unrecognized amount of the PRF are recorded under the caption “Deferred income- CARES Act” in our consolidated balance sheets. We will continue to monitor compliance under the terms and conditions of the PRF and 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 be able to do so, our ability to retain some or all of the distributions received may be impacted.

Forgiveness of PPP loans may be available if the loans are used to pay wages, rent, utilities and interest on certain debt during the eight-week period following receipt of the loan proceeds subject to Federally-established terms and conditions.  During July 2020, the allowable period for the use of loan proceeds was amended to allow for a 24-week period in which to utilize PPP loan  proceeds. The borrowing subsidiaries must apply for loan forgiveness with the lending bank within ten months after the end of the allowable period. The forgiveness applications are to be reviewed by both the lender and the Small Business Administration (“SBA”) and a loan forgiveness amount, if any, will be determined. There can be no assurance, however, that any of the PPP loans to us will be forgiven, or if forgiven, the amount of such forgiveness. Loan proceeds not forgiven are payable over two years at a 1% annual interest rate. The two-year loan repayment begins two months after the loan forgiveness amount is determined by SBA. The Company had not applied for forgiveness of any of its PPP loans and recorded no income relating to the PPP loans at June 30, 2020.

Going forward, the Company is unable to determine the extent to which the COVID-19 pandemic will continue to affect its assets. Our ability to make estimates of the 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 effect of the COVID-19 pandemic on our balance sheet and results of operations will depend on the severity and length of the pandemic; government actions to mitigate the pandemic’s effect; regulatory changes in response to the pandemic, especially those that affect our hospital, nursing home and pharmacy operations; and existing and potential government assistance that may be provided.

We believe that existing funds, cash generated from operations and additional sources of and access to financing from COVID-19 related government loans and grants will likely be adequate to satisfy our needs for working capital and capital expenditures in the near term. However, if the COVID-19 pandemic continues for an extended period, we expect to experience significant losses and additional financial assistance will likely be required.

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Schedule II-Valuation and Qualifying Accounts

12 Months Ended

Jun. 30, 2020

Valuation And Qualifying Accounts [Abstract]

Schedule II-Valuation and Qualifying Accounts

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

(amounts in thousands)

Deferred Income Tax Asset Valuation Allowance	Balance at Beginning Of Year		Charged to Cost and Expenses/ (Benefit)		Currency Translation/ Acquisition/ (Disposition)		Deductions from Reserves			Balance at End of Year
Year Ended June 30, 2020	$	8,625	$	—	$	—	$	(236	)	$	8,389
Year Ended June 30, 2019	$	8,373	$	252	$	—	$	—		$	8,625

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Earnings Per Share - Additional Information (Detail) - shares shares in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Earnings Per Share [Abstract]
Share options not included in diluted earnings per share	14	31

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Earnings Per Share - Schedule of Earnings (Loss) Per Share and Shares Outstanding (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Earnings Per Share [Abstract]
Earnings (Loss) from continuing operations	$ (586)	$ (1,996)
Basic:
Weighted-average shares outstanding	6,957	7,149
Diluted:
Weighted-average shares outstanding	6,957	7,149
Earnings (loss) from discontinued operations	$ (554)	$ 242
Net loss	$ (1,140)	$ (1,754)
Weighted-average number of shares outstanding—basic	6,957	7,149
Effect of dilutive director, employee and guarantor options and outstanding common share warrants	0	0
Weighted-average number of shares outstanding—diluted	6,957	7,149
Basic:
Weighted-average shares outstanding, Per Share Amount from continuing operations	$ (0.08)	$ (0.28)
Weighted-average shares outstanding, Per Share Amount from discontinued operations	(0.08)	0.03
Weighted-average shares outstanding, per share	(0.16)	(0.25)
Diluted:
Weighted-average shares outstanding, Per Share Amount from continuing operations	(0.08)	(0.28)
Weighted-average shares outstanding, Per Share Amount from discontinued operations	(0.08)	0.03
Weighted-average shares outstanding, per share	$ (0.16)	$ (0.25)

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Financial Information by Segments - Segment Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Segment Reporting Information [Line Items]
Net Revenues from external customers	$ 47,813	$ 45,618
Operating profit (loss)	(329)	(2,314)
Depreciation and amortization	1,450	1,486
Assets	27,971	24,419
Expenditures for property, plant and equipment	1,185	1,272
Operating Segments [Member] | Healthcare Services Segment [Member]
Segment Reporting Information [Line Items]
Net Revenues from external customers	16,243	15,453
Operating profit (loss)	734	(538)
Depreciation and amortization	361	336
Assets	8,174	7,612
Expenditures for property, plant and equipment	296	309
Operating Segments [Member] | Pharmacy Segment [Member]
Segment Reporting Information [Line Items]
Net Revenues from external customers	31,570	30,165
Operating profit (loss)	1,076	147
Depreciation and amortization	1,085	1,147
Assets	8,170	8,273
Expenditures for property, plant and equipment	888	961
Corporate and Other [Member]
Segment Reporting Information [Line Items]
Net Revenues from external customers	0	0
Operating profit (loss)	(2,139)	(1,923)
Depreciation and amortization	4	3
Assets	11,627	8,534
Expenditures for property, plant and equipment	$ 1	$ 2

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Financial Information by Segments - Additional Information (Detail)	12 Months Ended
	Jun. 30, 2020 Segment
Segment Reporting [Abstract]
Number of segments	2

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Related Parties - Additional Information (Detail) - Management [Member] - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Related Party Transaction [Line Items]
Legal services to these law firms	$ 251	$ 306
Amount payable to law firms	$ 6	$ 47

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Sales Tax Payable - Additional Information (Detail) $ in Thousands	12 Months Ended
	Jun. 30, 2020 USD ($) Authority	Jun. 30, 2019 USD ($)
Payables And Accruals [Abstract]
Number of taxing authorities | Authority	2
Sales tax accrued	$ 1,411	$ 843
Amounts claimed and received	$ 359

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Sale of Assets - Additional Information (Detail) $ in Thousands				12 Months Ended
	Dec. 20, 2019 USD ($) a	Sep. 09, 2019 USD ($) a	Oct. 11, 2018 USD ($) a	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)
Sale of Assets [Line Items]
Proceeds from sale				$ 0	$ 6,899
Pre-tax gain on the sale of property				192	455
Medical Office Building [Member] | Clanton, AL [Member]
Sale of Assets [Line Items]
Undeveloped land sold | a	4
Proceeds from sale	$ 204
Pre-tax gain on the sale of property				86
Undeveloped Land [Member] | Fulton, MO [Member]
Sale of Assets [Line Items]
Undeveloped land sold | a		11.4
Proceeds from sale		$ 348
Pre-tax gain on the sale of property				$ 100
Medical Office Building And Undeveloped Land [Member] | Georgia [Member]
Sale of Assets [Line Items]
Undeveloped land sold | a			2
Proceeds from sale			$ 935
Pre-tax gain on the sale of property					$ 452

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Economic Damages - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Loss Contingencies [Line Items]
Gain on economic damages claim, net	$ 0	$ 22
Pharmacy Segment [Member]
Loss Contingencies [Line Items]
Gain on economic damages claim, net		$ 22

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Employee Benefits - Summary Information for Plans (Comprised Solely of One Domestic Plan) (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Change in Benefit Obligation:
Benefit obligation at beginning of year	$ 1,390	$ 1,420
Interest cost	47	56
Actuarial loss	168	90
Benefits paid	(31)	(176)
Benefit obligation end of year	1,574	1,390
Change in Fair Value of Plan Assets:
Beginning fair value	827	895
Actual return (loss) on plan assets	(5)	1
Contribution by employer	132	107
Benefits paid	(31)	(176)
Plan assets at end of year	923	827
Funded status of the plans	(651)	(563)
Unrecognized actuarial loss	469	384
Accrued benefit cost	(182)	(179)
Amounts Recognized in Consolidated Balance Sheets
Accrued benefit cost	(182)	(179)
Accumulated other comprehensive loss	469	384
Net amount recognized	$ (651)	$ (563)

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Employee Benefits - Components of Net Pension Expense for All Plans (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Defined Benefit Plan Disclosure [Line Items]
Interest cost	$ 47	$ 56
Weighted-average assumptions:
Discount rate	3.50%	4.10%
Expected return on plan assets	4.00%	4.00%
Rate of compensation increase	0.00%	0.00%
Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Service cost	$ 0	$ 0
Interest cost	47	56
Expected return on assets	(34)	(36)
Amortization of prior service cost	123	78
Settlement cost	0	39
Net pension expense	$ 136	$ 137

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (1,140)	$ (1,754)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,450	1,728
Share-based compensation	28	1
Impairments	0	129
Gain (loss) on sale of business	0	(2,136)
Gain on disposal of property, plant and equipment	(192)	(455)
Change in assets and liabilities:
Receivables	400	108
Inventory	150	(162)
Prepaid expenses and other assets	10	1,049
Accounts payable and accrued expenses	(1,624)	588
Deferred relief funds	4,532	0
Accrued sales taxes	569	602
Third-party payor settlements	(214)	(218)
Net activities of discontinued operations	0	(907)
Net cash provided by (used in) operating activities	3,969	(1,427)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of Parkside	0	6,899
Proceeds from sale of property, plant & equipment	559	937
Expenditures for property, plant and equipment—continuing operations	(1,185)	(1,272)
Expenditures for property, plant and equipment—discontinued operations	0	(172)
Net cash provided by (used in) investing activities	(626)	6,392
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common shares	(102)	(383)
Proceeds from new long-term debt	3,234	0
Payment of long-term debt	(3,033)	(296)
Net cash used in financing activities	99	(679)
NET INCREASE IN CASH AND CASH EQUIVALENTS	3,442	4,286
CASH AND CASH EQUIVALENTS:
Beginning of year	7,742	3,456
End of year	11,184	7,742
Non-cash investing and financing activities
Assets acquired under capital obligations	0	176
Assets acquired in exchange for note receivable	371	0
Right-of-use assets obtained for lease liabilities	1,498	0
Cash paid for (received from):
Income taxes	(349)	0
Interest	6	222
Parkside [Member]
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain (loss) on sale of business	$ 0	$ (2,136)

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Employee Benefits - Additional Information (Detail) - USD ($)	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Defined Benefit Plan Disclosure [Line Items]
Plan's assets invested in cash and short term investments	47.00%
Plan's assets invested in equity investments	36.00%
Plan's assets invested in fixed income investments	17.00%
Expected return on investment	4.00%
Plan expected to pay in pension benefits, 2021	$ 52,000
Plan expected to pay in pension benefits, 2022	50,000
Plan expected to pay in pension benefits, 2023	61,000
Plan expected to pay in pension benefits, 2024	60,000
Plan expected to pay in pension benefits, 2025	174,000
Plan expected to pay in pension benefits through three years	363,000
Contribution by employer	132,000	$ 107,000
Estimated contribution by employer, next fiscal year	$ 100,000
Age of participants to take monthly pension benefits	65 years
Plan expenses for defined contribution plan	$ 0	0
Employee matching contribution	137,000	$ 85,000
Specialty Pharmacy Segment [Member]
Defined Benefit Plan Disclosure [Line Items]
Benefit plan maintained for employees	0
Healthcare Services Segment [Member]
Defined Benefit Plan Disclosure [Line Items]
Benefit plan maintained for employees	$ 0

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Income Taxes - Additional Information (Detail) - USD ($)	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Income Tax Disclosure [Abstract]
Percentage of NOL under tax cuts and jobs act	80.00%
Addition to taxable income	$ 7,303,000
Refundable AMT credits	305,000
Deferred income tax valuation allowance	8,389,000	$ 8,625,000
Net long-term deferred income tax asset or liability	0	$ 0
Net operating loss carry-forward	$ 17,500,000
Net operating loss carryforward expiration year	2023 through fiscal 2038

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Income Taxes - Differences Between Income Taxes on Continuing Operations at Federal Statutory Rate and Effective Tax Rate (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Income Tax Disclosure [Abstract]
Income tax expense (benefit) at Federal statutory rate	$ (61)	$ (436)
Changes in valuation allowance—continuing operations	(369)	378
U.S. state income taxes, net of federal benefit	175	(45)
Permanent differences under CARES Act	582	0
Deferred tax rate changes	(34)	32
Other	3	(11)
Total income tax expense (benefit)	$ 296	$ (82)

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Income Taxes - Net Deferred Income Tax Assets (Detail) - USD ($)	Jun. 30, 2020	Jun. 30, 2019
Deferred Tax Assets Net [Abstract]
Net operating loss carryforward	$ 6,078,000	$ 6,766,000
Depreciation expense	(86,000)	46,000
Allowances for receivables	131,000	125,000
Accrued liabilities	1,407,000	603,000
Intangible assets	585,000	877,000
Pension liabilities	165,000	141,000
Other	109,000	67,000
Gross deferred tax assets	8,389,000	8,625,000
Less valuation allowance	(8,389,000)	(8,625,000)
Net deferred income tax assets	$ 0	$ 0

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Income Taxes - Provision (Benefit) for Income Taxes on Continuing Operations (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Income Tax Disclosure [Abstract]
Current	$ 296	$ 0
Deferred	0	(82)
Total income tax expense (benefit)	$ 296	$ (82)

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Shareholders' Equity - Classification Other Accumulated Comprehensive Loss (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Minimum Pension Liability Adjustment, Beginning balance	$ (253)	$ (177)
Minimum Pension Liability Adjustment, Current period change	(86)	(76)
Minimum Pension Liability Adjustment, Ending balance	(339)	(253)
Accumulated Other Comprehensive Income (Loss), Beginning balance	(253)	(177)
Accumulated Other Comprehensive Income (Loss), Current period change	(86)	(76)
Accumulated Other Comprehensive Income (Loss), Ending balance	$ (339)	$ (253)

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Shareholders' Equity - Summary of Total Share Repurchased and Average Price Per Share Paid for the Program (Detail) - $ / shares	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased	87,534	359,959
Average Price Per Share Paid	$ 1.15	$ 1.03
November 2019 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased	935
Average Price Per Share Paid	$ 1.17
December 2019 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased	2,879
Average Price Per Share Paid	$ 1.18
January 2020 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased	4,272
Average Price Per Share Paid	$ 1.15
February 2020 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased	33,873
Average Price Per Share Paid	$ 1.22
March 2020 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased	45,575
Average Price Per Share Paid	$ 1.09
November 2018 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased		1,235
Average Price Per Share Paid		$ 1.14
December 2018 [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Total Shares Purchased		358,724
Average Price Per Share Paid		$ 1.03

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Shareholders' Equity - Number of Stock Options Outstanding and Exercisable (Detail) - $ / shares	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2018
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 1.35	$ 1.53	$ 1.52
Number Outstanding	480,000	595,000	651,000
Weighted-Average Remaining Contractual Life (in years)	3 years 10 months 24 days
Number Exercisable	480,000	595,000
Range One [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 0.71
Number Outstanding	15,000
Weighted-Average Remaining Contractual Life (in years)	3 years 2 months 15 days
Number Exercisable	15,000
Range Two [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 1.21
Number Outstanding	60,000
Weighted-Average Remaining Contractual Life (in years)	6 years 2 months 15 days
Number Exercisable	60,000
Range Three [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 1.22
Number Outstanding	190,000
Weighted-Average Remaining Contractual Life (in years)	2 years 2 months 4 days
Number Exercisable	190,000
Range Four [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 1.38
Number Outstanding	50,000
Weighted-Average Remaining Contractual Life (in years)	9 years 2 months 12 days
Number Exercisable	50,000
Range Five [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 1.49
Number Outstanding	90,000
Weighted-Average Remaining Contractual Life (in years)	4 years 2 months 4 days
Number Exercisable	90,000
Range Six [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 1.67
Number Outstanding	50,000
Weighted-Average Remaining Contractual Life (in years)	1 year 4 months 9 days
Number Exercisable	50,000
Range Seven [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Exercise Prices	$ 1.79
Number Outstanding	25,000
Weighted-Average Remaining Contractual Life (in years)	5 years 2 months 12 days
Number Exercisable	25,000

XML

Shareholders' Equity - Activity of Company's Share Options (Detail) - $ / shares	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number of Shares, Options outstanding, Beginning balance	595,000	651,000
Number of Shares, Granted	50,000	0
Number of Shares, Forfeited	(165,000)	(56,000)
Number of Shares, Options outstanding, Ending balance	480,000	595,000
Exercisable, Number of Shares, Options outstanding, Ending balance	480,000	595,000
Options Outstanding, Weighted Average Exercise Price, Beginning Balance	$ 1.53	$ 1.52
Weighted Average Exercise Price, Granted	1.38
Weighted Average Exercise Price, Forfeited	2.01	1.46
Options Outstanding, Weighted Average Exercise Price, Ending Balance	1.35	1.53
Exercisable, Weighted Average Exercise Price, Ending balance	1.35	1.52
Range of Exercise Prices, Granted	1.38
Minimum [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Outstanding Options, Range of Exercise Prices, Beginning balance	0.71	0.71
Range of Exercise Prices, Forfeited	1.79	0.71
Outstanding Options, Range of Exercise Prices, Ending balance	0.71	0.71
Exercisable, Range of Exercise Prices, Ending balance	0.71	0.71
Maximum [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Outstanding Options, Range of Exercise Prices, Beginning balance	2.09	2.51
Range of Exercise Prices, Forfeited	2.09	2.51
Outstanding Options, Range of Exercise Prices, Ending balance	1.79	2.09
Exercisable, Range of Exercise Prices, Ending balance	$ 1.79	$ 2.51

XML

Shareholders' Equity - Additional Information (Detail) - USD ($)		12 Months Ended
	Dec. 13, 2018	Jun. 30, 2020	Jun. 30, 2019	Oct. 08, 2019	Nov. 29, 2018	Jun. 30, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options granted		50,000	0
Options exercised		0	0
Options outstanding		480,000	595,000			651,000
Options forfeited		165,000	56,000
Share-based compensation, amount recognized		$ 28,000	$ 1,000
Unrecognized compensation cost		0
Aggregate intrinsic value of options exercisable		132,000	74,000
Aggregate intrinsic value of options outstanding		132,000	74,000
Stock repurchased during period, value		$ 102,000	$ 383,000
Stock repurchased during period, shares		87,534	359,959
2019-2020 Common Share Repurchase Program [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock repurchased during period, value		$ 101,000
Stock repurchased during period, shares		87,534
2018 Common Share Repurchase Program [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock repurchased during period, value			$ 372,000
Stock repurchased during period, shares	300,000		359,959
Additional shares authorized for purchase	450,000
2005 Equity Incentive Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Plan, Description		The 2005 Equity Incentive Plan approved by SunLink’s shareholders on November 7, 2005 permitted the grant of options to employees, non-employee directors and service providers of SunLink for the purchase of up to 800,000 common shares plus the number of unused shares under its 2001 Plans, which were 30,675.
Options granted		0	0
Options exercised		0
Options outstanding		180,000
Options forfeited		165,000
Shares available for grants		0
Maximum [Member] | 2019-2020 Common Share Repurchase Program [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Amount of shares authorized to be repurchased				$ 750,000
Maximum [Member] | 2018 Common Share Repurchase Program [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares authorized to be repurchased					300,000
Maximum [Member] | 2005 Equity Incentive Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Purchase of common shares		800,000
2011 Director Stock Option Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Plan, Description		The 2011 Director Stock Option Plan was approved by SunLink’s shareholders at the Annual Meeting of Shareholders on November 7, 2011. This plan permits the grant of options to non-employee directors of SunLink for the purchase of up to 300,000 common shares through November 2021.
Options granted		50,000	0
Options exercised		0
Options outstanding		300,000
2011 Director Stock Option Plan [Member] | Maximum [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Purchase of common shares		300,000
2001 Plans [Member] | 2005 Equity Incentive Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares restricted under share based plan		30,675

XML

Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Total	Cumulative Effect, Period of Adoption, Adjustment [Member]	Common Shares [Member]	Common Shares [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Additional Paid-in Capital [Member]	Additional Paid-in Capital [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Retained Earnings (Loss) [Member]	Retained Earnings (Loss) [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Accumulated Other Comprehensive Loss [Member]	Accumulated Other Comprehensive Loss [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]
Beginning Balance at Jun. 30, 2018	$ 17,186	$ 0	$ 3,673	$ 0	$ 10,947	$ 0	$ 2,743	$ 69	$ (177)	$ (69)
Beginning Balance,Shares at Jun. 30, 2018			7,347
Accounting Standards Update [Extensible List]	us-gaap:AccountingStandardsUpdate201802Member
Net loss	$ (1,754)		$ 0		0		(1,754)		0
Minimum pension liability adjustment	(7)		0		0		0		(7)
Share-based compensation	1		$ 0		1		0		0
Share-based compensation, shares			0
Shares repurchased	$ (383)		$ (180)		(203)		0		0
Shares repurchased, shares	(359,959)		(360)
Ending Balance at Jun. 30, 2019	$ 15,043		$ 3,493		10,745		1,058		(253)
Ending Balance, Shares at Jun. 30, 2019	6,987,000		6,987
Net loss	$ (1,140)		$ 0		0		(1,140)		0
Minimum pension liability adjustment	(86)		0		0		0		(86)
Share-based compensation	28		$ 0		28		0		0
Share-based compensation, shares			0
Shares repurchased	$ (102)		$ (43)		(59)		0		0
Shares repurchased, shares	(87,534)		(88)
Ending Balance at Jun. 30, 2020	$ 13,743		$ 3,450		$ 10,714		$ (82)		$ (339)
Ending Balance, Shares at Jun. 30, 2020	6,899,000		6,899

XML

Long-Term Debt - Annual Required Payments of Debt and Contractual Commitments for Interest on Long-term Debt (Detail) $ in Thousands	Jun. 30, 2020 USD ($)
Long Term Debt By Maturity [Abstract]
Debt, 2021	$ 1,401
Debt, 2022	1,904
Debt, 2023	39
Debt, 2024	14
Debt, 2025	0
Debt, 2026 and after	0
Debt, Total	3,358
Interest, 2021	45
Interest, 2022	33
Interest, 2023	2
Interest, 2024	0
Interest, 2025	0
Interest, 2026 and after	0
Interest, Total	$ 80

XML

Long-Term Debt (Trace RDA Loan) - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Debt Instrument [Line Items]
Non-cash loss on early extinguishment of debt	$ 178	$ 0
Trace RDA Loan [Member]
Debt Instrument [Line Items]
Debt instrument maturity period	15 years
Non-cash loss on early extinguishment of debt	$ 178
Debt instrument description	prime rate (as published in the Wall Street Journal) plus 1% with a floor of 5.5%
Debt instrument interest rate, basis spread	1.00%
Debt instrument, interest rate floor	5.50%
Trace RDA Loan [Member] | Mortgages [Member]
Debt Instrument [Line Items]
Loan agreement amount	$ 9,975
Date of loan agreement	Jul. 05, 2012

XML

Long-Term Debt (CARES Act Paycheck Protection Plan Loans) - Additional Information (Detail) - CARES Act Paycheck Protection Plan Loans [Member] $ in Thousands	2 Months Ended
	May 31, 2020 USD ($)
Debt Instrument [Line Items]
PPP loans from bank	$ 3,234
Debt instrument maturity period	2 years
Debt instrument, annual interest rate	1.00%

XML

Long-Term Debt - Summary of Long-Term Debt (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Jun. 30, 2019
Debt Instrument [Line Items]
Capital lease obligations	$ 124	$ 159
Total	3,358	3,158
Less unamortized debt costs	0	(195)
Less current maturities	(1,401)	(2,836)
Total Long-term debt, excluding current maturities	1,957	127
CARES Act Paycheck Protection Plan Loans [Member]
Debt Instrument [Line Items]
Loans	3,234	0
Trace RDA Loan [Member]
Debt Instrument [Line Items]
Loans	$ 0	$ 2,999

XML

Intangible Assets - Annual Amortization of Amortizing Intangibles for Next Five Years (Detail) $ in Thousands	Jun. 30, 2020 USD ($)
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
2021	$ 26
2022	26
2023	22
2024	0
2025 and thereafter	0
Total	$ 74

XML

Intangible Assets - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Goodwill And Intangible Assets [Line Items]
Amortization expense	$ 99	$ 117
Customer Relationships [Member] | Pharmacy Segment [Member]
Goodwill And Intangible Assets [Line Items]
Intangible asset, remaining amortization period	12 years
Medicare License [Member] | Pharmacy Segment [Member]
Goodwill And Intangible Assets [Line Items]
Intangible asset, remaining amortization period	15 years

XML

Intangible Assets - Intangible Assets (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Jun. 30, 2019
Indefinite-lived Intangible Assets [Line Items]
Total	$ 1,254	$ 1,353
Specialty Pharmacy Segment [Member]
Indefinite-lived Intangible Assets [Line Items]
Finite and Indefinite-Lived Intangible Assets, Gross	2,892	2,892
Accumulated Amortization	(1,638)	(1,539)
Total	1,254	1,353
Trade Name [Member] | Specialty Pharmacy Segment [Member]
Indefinite-lived Intangible Assets [Line Items]
Indefinite-Lived Intangible Assets	1,180	1,180
Customer Relationships [Member] | Specialty Pharmacy Segment [Member]
Indefinite-lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets, Gross	1,089	1,089
Medicare License [Member] | Specialty Pharmacy Segment [Member]
Indefinite-lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets, Gross	$ 623	$ 623

XML

Impairment of Long-Lived Assets - Additional Information (Detail) - Promissory Note [Member] $ in Thousands	3 Months Ended	12 Months Ended
	Jun. 30, 2019 USD ($)	Jun. 30, 2020 USD ($) a
Impairment Of Long Lived Assets [Line Items]
Principal amount of promissory note		$ 600
Value of real property	$ 371
Impairment of notes receivable	129
Land
Impairment Of Long Lived Assets [Line Items]
Promissory note receivable term		5 years
Area of unimproved land owned by subsidiary | a		25
Promissory note maturity date		2019-10
Estimated market value of the note receivable	$ 500

XML

Lease - Summary of Non-cancellable Operating and Finance Leases (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Jun. 30, 2019
Leases [Abstract]
1 year	$ 406
2 years	275
3 years	115
4 years	106
5 years	101
Over 5 years	74
Total minimum future payments	1,077
Less: Imputed interest	(105)
Total liabilities	972
Less: Current portion	(365)	$ 0
Long-term liabilities	607	$ 0
1 year	42
2 years	42
3 years	42
4 years	13
5 years	0
Over 5 years	0
Total minimum future payments	139
Less: Imputed interest	(15)
Total liabilities	124
Less: Current portion	(34)
Long-term finance lease liabilities	$ 90

XML

Lease - Summary of Supplemental Cash Flow and Other Information Related to Leases (Detail) $ in Thousands	12 Months Ended
	Jun. 30, 2020 USD ($)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$ 593
Operating cash flows from finance leases	9
Financing cash flow from finance leases	32
Right-of-use assets obtained in exchange for new finance lease liabilities	0
Right-of-use assets obtained in exchange for new operating lease liabilities	$ 1,498
Weighted-average remaining lease term:
Operating leases	3 years 9 months
Finance leases	3 years 4 months 28 days
Weighted-average discount rate:
Operating leases	6.54%
Finance leases	5.49%

XML

Consolidated Statements of Operations and Comprehensive Earnings and Loss - USD ($) shares in Thousands, $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Net Revenues	$ 47,813	$ 45,618
Costs and expenses:
Salaries, wages and benefits	19,563	19,191
Supplies	1,215	1,241
Other operating expenses	3,366	3,895
Rent and lease expense	601	609
Impairments	0	129
Depreciation and amortization	1,450	1,486
Electronic Health Records incentive payments	0	(68)
Operating Loss	(329)	(2,314)
Other income (expense):
Federal stimulus - Pandemic relief funds	54	0
Gain on economic damages claim, net	0	22
Interest income (expense), net	(29)	(241)
Loss on extinguishment of debt—net	(178)	0
Gain on sale of assets—net	192	455
Loss from continuing operations before income taxes	(290)	(2,078)
Income tax expense (benefit)	296	(82)
Loss from continuing operations	(586)	(1,996)
Earnings (Loss) from discontinued operations, net of income taxes	(554)	242
Net loss	(1,140)	(1,754)
Other comprehensive loss	(86)	(76)
Comprehensive loss	$ (1,226)	$ (1,830)
Continuing operations:
Basic	$ (0.08)	$ (0.28)
Diluted	(0.08)	(0.28)
Discontinued operations:
Basic	(0.08)	0.03
Diluted	(0.08)	0.03
Net loss:
Basic	(0.16)	(0.25)
Diluted	$ (0.16)	$ (0.25)
Weighted-average common shares outstanding:
Basic	6,957	7,149
Diluted	6,957	7,149
Product [Member]
Costs and expenses:
Cost of goods sold	$ 19,023	$ 18,941
Service [Member]
Costs and expenses:
Cost of goods sold	$ 2,924	$ 2,508

XML

Lease - Summary of Supplemental Balance Sheet Information Relating to Leases (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Jun. 30, 2019
Operating Leases:
Operating Lease ROU Assets	$ 970	$ 0
Finance Leases:
Finance Lease ROU Assets	$ 203
Finance Lease, Right-of-Use Asset, Statement of Financial Position [Extensible List]	us-gaap:PropertyPlantAndEquipmentNet
Accumulated amortization	$ 43
Current finance lease liabilities	$ 34
Finance Lease, Liability, Current, Statement of Financial Position [Extensible List]	us-gaap:LongTermDebtCurrent
Long-term finance lease liabilities	$ 90
Finance Lease, Liability, Noncurrent, Statement of Financial Position [Extensible List]	us-gaap:LongTermDebtNoncurrent

XML

Lease - Components of Lease Cost and Rent Expense (Detail) $ in Thousands	12 Months Ended
	Jun. 30, 2020 USD ($)
Operating lease cost:
Operating lease cost	$ 593
Short-term rent expense	5
Variable lease cost	3
Total operating lease cost	601
Finance lease cost:
Amortization right-of-use assets	36
Interest on finance lease liabilities	9
Total finance lease cost	$ 45

XML

Leases - Additional Information (Detail) - USD ($)	Jun. 30, 2020	Jul. 01, 2019	Jun. 30, 2019
Lessee Lease Description [Line Items]
Operating lease liabilities	$ 972,000
Operating lease ROU assets	970,000		$ 0
Impact on retained earnings	$ (82,000)		$ 1,058,000
Accounting Standards Codification ("ASC") 842 [Member]
Lessee Lease Description [Line Items]
Operating lease liabilities		$ 1,423,000
Operating lease ROU assets		1,423,000
Revision of Prior Period, Accounting Standards Update, Adjustment [Member] | Accounting Standards Codification ("ASC") 842 [Member]
Lessee Lease Description [Line Items]
Impact on retained earnings		$ 0

XML

Inventory - Inventory, Net (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Jun. 30, 2019
Inventory [Line Items]
Inventory, net, total	$ 1,866	$ 2,016
Healthcare Services Segment [Member]
Inventory [Line Items]
Healthcare Services segment, supplies inventory	152	157
Pharmacy Segment [Member]
Inventory [Line Items]
Pharmacy segment, goods held for sale	$ 1,714	$ 1,859

XML

Revenue Recognition and Accounts Receivables - Summary of Revenue by Payor (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	$ 47,813	$ 45,618
Medicare [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	20,013	18,183
Medicaid [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	13,956	13,871
Retail and Institutional Pharmacy [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	6,465	6,649
Managed Care & Other Insurance [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	6,742	6,220
Self-Pay [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	498	505
Rent [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	16	63
Other [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Net Revenues	$ 123	$ 127

XML

Revenue Recognition and Accounts Receivables - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Segment Reporting Revenue Reconciling Item [Line Items]
Net revenues for settlements and filings of prior year Medicare and Medicaid cost reports	$ 139	$ (15)
Accounting Standards Update 2014-09 [Member]
Segment Reporting Revenue Reconciling Item [Line Items]
Change in accounting principle, accounting standards update, adopted [true false]	true
Change in accounting principle, accounting standards update, adoption date	Jul. 01, 2018
Change in accounting principle, accounting standards update, immaterial effect [true false]	true
Change in Accounting Principle, Accounting Standards Update, Transition Option Elected [Extensible List]	us-gaap:AccountingStandardsUpdate201409RetrospectiveMember

XML

Discontinued Operations - Schedule of Discontinued Operations (Detail) - USD ($) $ in Thousands		12 Months Ended
	Mar. 17, 2019	Jun. 30, 2020	Jun. 30, 2019
Net Revenues:
Net revenues		$ 37	$ 4,993
Loss Before Income Taxes:
Loss before income taxes		(554)	(1,812)
Gain on Sale:
Gain (Loss) on Sale		0	2,136
Income tax expense		0	82
Earnings (Loss) from discontinued operations		(554)	242
Parkside [Member]
Net Revenues:
Net revenues		11	5,574
Loss Before Income Taxes:
Loss before income taxes		(246)	(756)
Gain on Sale:
Gain (Loss) on Sale	$ 2,136	0	2,136
Sold Hospitals [Member]
Net Revenues:
Net revenues		26	(581)
Loss Before Income Taxes:
Loss before income taxes		(172)	(919)
Life Sciences and Engineering [Member]
Loss Before Income Taxes:
Loss before income taxes		$ (136)	$ (137)

XML

Discontinued Operations - Additional Information (Detail) - USD ($) $ in Thousands		12 Months Ended
	Mar. 17, 2019	Jun. 30, 2020	Jun. 30, 2019
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Proceeds from sale		$ 0	$ 6,899
Pre-tax gain on the sale		0	2,136
Parkside [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Proceeds from sale	$ 7,300
Pre-tax gain on the sale	$ 2,136	$ 0	$ 2,136

XML

Summary of Significant Accounting Policies - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Accounting Policies [Line Items]
Cash	$ 11,178
Cash deposits in excess of federally insured limits	$ 10,384
Overnight repurchase agreements collateralized by government backed securities	102.00%
Depreciation method	Depreciation is recognized over the estimated useful lives of the assets, which range from 3 to 45 years, on a straight-line basis.
Description of property, plant and equipment, estimated useful lives	Estimated useful lives of the assets, which range from 3 to 45 years, on a straight-line basis.
Depreciation	$ 1,350	$ 1,369
Share-based compensation	$ 28	$ 1
Machinery and Equipment [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	10 years
Medical Equipment [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	3 years
Minimum [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	3 years
Definite-life intangible assets, estimated useful lives	2 years
Minimum [Member] | Furniture and Fixtures [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	5 years
Minimum [Member] | Buildings [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	25 years
Minimum [Member] | Leasehold Improvements and Leased Machinery and Equipment [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	5 years
Maximum [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	45 years
Definite-life intangible assets, estimated useful lives	30 years
Maximum [Member] | Furniture and Fixtures [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	10 years
Maximum [Member] | Buildings [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	45 years
Maximum [Member] | Leasehold Improvements and Leased Machinery and Equipment [Member]
Accounting Policies [Line Items]
Property, plant and equipment, estimated useful lives	15 years
Overnight Repurchase Agreements [Member]
Accounting Policies [Line Items]
Cash equivalents	$ 3,660
Healthcare Services Segment [Member] | Medicare [Member] | Credit Concentration Risk [Member] | Sales Revenue, Segment [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	52.00%	49.00%
Healthcare Services Segment [Member] | Medicare [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	45.00%	42.00%
Healthcare Services Segment [Member] | Medicaid [Member] | Credit Concentration Risk [Member] | Sales Revenue, Segment [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	32.00%	33.00%
Healthcare Services Segment [Member] | Medicaid [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	21.00%	26.00%
Pharmacy Segment [Member] | Medicare [Member] | Credit Concentration Risk [Member] | Sales Revenue, Segment [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	37.00%	35.00%
Pharmacy Segment [Member] | Medicare [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	23.00%	17.00%
Pharmacy Segment [Member] | Medicaid [Member] | Credit Concentration Risk [Member] | Sales Revenue, Segment [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	28.00%	29.00%
Pharmacy Segment [Member] | Medicaid [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	23.00%	17.00%
Pharmacy Segment [Member] | Private Insurance and Institutional Customers [Member] | Credit Concentration Risk [Member] | Accounts Receivable [Member]
Accounting Policies [Line Items]
Concentrations of Credit Risk	54.00%	66.00%
Accounting Standards Update 2014-09 [Member]
Accounting Policies [Line Items]
Change in accounting principle, accounting standards update, adopted [true false]	true
Change in accounting principle, accounting standards update, adoption date	Jul. 01, 2018
Change in accounting principle, accounting standards update, immaterial effect [true false]	true
Change in Accounting Principle, Accounting Standards Update, Transition Option Elected [Extensible List]	us-gaap:AccountingStandardsUpdate201409RetrospectiveMember

XML

Business Operations - Additional Information (Detail) $ in Thousands	3 Months Ended	12 Months Ended
	Jun. 30, 2020 USD ($)	Jun. 30, 2020 USD ($) Segment Bed a Area Location	Jun. 30, 2019 USD ($)
Business And Organization [Line Items]
Number of segments | Segment		2
Proceeds from long-term debt		$ 3,234	$ 0
Recognized amount related to provide relief fund in other income (expense)		54	$ 0
Provider Relief Fund Distributions CARES Act [Member]
Business And Organization [Line Items]
Recognized amount related to provide relief fund in other income (expense)		$ 54
Paycheck Protection Program, CARES Act [Member]
Business And Organization [Line Items]
Debt instrument maturity period		2 years
Annual interest rate	1.00%	1.00%
Healthcare Services Segment [Member] | Mississippi [Member]
Business And Organization [Line Items]
Area of unimproved land owned by subsidiary | a		5
Healthcare Services Segment [Member] | Georgia [Member]
Business And Organization [Line Items]
Area of unimproved land owned by subsidiary | a		25
Healthcare Services Segment [Member] | Acute Care Hospital [Member] | Mississippi [Member]
Business And Organization [Line Items]
Number of licensed-bed owned and operated by a subsidiary | Bed		84
Number of bed in nursing home owned and operated by subsidiary | Bed		66
Number of bed in geriatric psychology subsidiary | Bed		18
Pharmacy Segment [Member]
Business And Organization [Line Items]
Number of operational areas | Area		4
Pharmacy Segment [Member] | Louisiana [Member] | Retail Pharmacy Products and Services [Member]
Business And Organization [Line Items]
Number of locations sales conducted in rural markets | Location		2
Healthcare and Pharmacy segments [Member]
Business And Organization [Line Items]
Funds received	$ 7,820
Healthcare and Pharmacy segments [Member] | Provider Relief Fund Distributions CARES Act [Member]
Business And Organization [Line Items]
Proceeds under relief fund distributions	4,586
Healthcare and Pharmacy segments [Member] | Paycheck Protection Program, CARES Act [Member]
Business And Organization [Line Items]
Proceeds from long-term debt	$ 3,234

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2020	Jun. 30, 2019
Statement Of Financial Position [Abstract]
Preferred shares, authorized	2,000,000	2,000,000
Preferred shares, unissued	2,000,000	2,000,000
Common shares, without par value
Common shares, authorized	12,000,000	12,000,000
Common shares, issued	6,899,000	6,987,000
Common shares, outstanding	6,899,000	6,987,000

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SEC Schedule II - Schedule of Valuation and Qualifying Accounts Disclosure (Detail) - Deferred Income Tax Asset Valuation Allowance [Member] - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Valuation and Qualifying Accounts Disclosure [Line Items]
Balance at Beginning Of Year	$ 8,625	$ 8,373
Charged to Cost and Expenses/(Benefit)		252
Deductions from Reserves	(236)
Balance at End of Year	$ 8,389	$ 8,625

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Earnings Per Share (Tables)

12 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

Schedule of Earnings (Loss) Per Share and Shares Outstanding

Earnings (loss) per share and shares outstanding information for the years ended June 30, 2020 and 2019 is as follows:

	2020						2019
	Amount			Per Share Amount			Amount			Per Share Amount
Earnings (Loss) from continuing operations	$	(586	)				$	(1,996	)
Basic:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	(0.28	)
Diluted:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	(0.28	)
Earnings (loss) from discontinued operations	$	(554	)				$	242
Basic:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	0.03
Diluted:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	0.03
Net Loss	$	(1,140	)				$	(1,754	)
Basic:
Weighted-average shares outstanding		6,957		$	(0.16	)		7,149		$	(0.25	)
Diluted:
Weighted-average shares outstanding		6,957		$	(0.16	)		7,149		$	(0.25	)
Weighted-average number of shares outstanding—basic		6,957						7,149
Effect of dilutive director, employee and guarantor options    and outstanding common share warrants		0						0
Weighted-average number of shares outstanding—diluted		6,957						7,149

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Financial Information by Segments (Tables)

12 Months Ended

Jun. 30, 2020

Segment Reporting [Abstract]

Segment Information

Segment information for the fiscal years ended June 30, 2020 and 2019 is as follows:

	Healthcare Services			Pharmacy		Corporate and Other			Total
2020
Net Revenues from external customers	$	16,243		$	31,570	$	0		$	47,813
Operating profit (loss)		734			1,076		(2,139	)		(329	)
Depreciation and amortization		361			1,085		4			1,450
Assets		8,174			8,170		11,627			27,971
Expenditures for property, plant and equipment		296			888		1			1,185
2019
Net Revenues from external customers	$	15,453		$	30,165	$	0		$	45,618
Operating profit (loss)		(538	)		147		(1,923	)		(2,314	)
Depreciation and amortization		336			1,147		3			1,486
Assets		7,612			8,273		8,534			24,419
Expenditures for property, plant and equipment		309			961		2			1,272

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Employee Benefits (Tables)

12 Months Ended

Jun. 30, 2020

Postemployment Benefits [Abstract]

Components of Net Pension Expense for All Plans

The components of net pension expense for all plans (comprised solely of one domestic plan) were as follows for the fiscal years ended June 30, 2020 and 2019:

	2020			2019
Service cost	$	0		$	0
Interest cost		47			56
Expected return on assets		(34	)		(36	)
Amortization of prior service cost		123			78
Settlement cost		0			39
Net pension expense	$	136		$	137
Weighted-average assumptions:
Discount rate		3.50	%		4.10	%
Expected return on plan assets		4.00	%		4.00	%
Rate of compensation increase		0.00	%		0.00	%

Summary Information for Plans (Comprised Solely of One Domestic Plan)

Summary information for the plans (comprised solely of one domestic plan) is as follows for the fiscal years ended June 30, 2020 and 2019:

	2020			2019
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,390		$	1,420
Interest cost		47			56
Actuarial loss		168			90
Benefits paid		(31	)		(176	)
Benefit obligation end of year	$	1,574		$	1,390
Change in Fair Value of Plan Assets:
Beginning fair value	$	827		$	895
Actual return (loss) on plan assets		(5	)		1
Employer contribution		132			107
Benefits paid		(31	)		(176	)
Plan assets at end of year	$	923		$	827
Funded status of the plans		(651	)		(563	)
Unrecognized actuarial loss		469			384
Accrued benefit cost	$	(182	)	$	(179	)
Amounts Recognized in Consolidated Balance Sheets
Accrued benefit cost		(182	)		(179	)
Accumulated other comprehensive loss*		469			384
Net amount recognized	$	(651	)	$	(563	)

* Accumulated other comprehensive loss represents minimum pension liability adjustments.

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Income Taxes (Tables)

12 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Provision (Benefit) for Income Taxes on Continuing Operations

The provision (benefit) for income taxes on continuing operations are as follows:

	2020		2019
Current	$	296	$	0
Deferred		0		(82	)
Total income tax expense (benefit)	$	296	$	(82	)

Net Deferred Income Tax Assets

Net deferred income tax assets recorded in the consolidated balance sheets are as follows:

	June 30,
	2020			2019
Net operating loss carryforward	$	6,078		$	6,766
Depreciation expense		(86	)		46
Allowances for receivables		131			125
Accrued liabilities		1,407			603
Intangible assets		585			877
Pension liabilities		165			141
Other		109			67
		8,389			8,625
Less valuation allowance		(8,389	)		(8,625	)
Net deferred income tax assets	$	0		$	0

Differences Between Income Taxes on Continuing Operations at Federal Statutory Rate and Effective Tax Rate

The differences between income taxes on continuing operations at the Federal statutory rate and the effective tax rate were as follows:

	2020			2019
Income tax expense (benefit) at Federal statutory rate	$	(61	)	$	(436	)
Changes in valuation allowance—continuing operations		(369	)		378
U.S. state income taxes, net of federal benefit		175			(45	)
Permanent differences under CARES Act		582			0
Deferred tax rate changes		(34	)		32
Other		3			(11	)
Total income tax expense (benefit)—continuing operations	$	296		$	(82	)

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Shareholders' Equity (Tables)

12 Months Ended

Jun. 30, 2020

Federal Home Loan Banks [Abstract]

Activity of Company's Share Options

The activity of Company’s share options is shown in the following table:

	Number of Shares			Weighted- Average Exercise Price		Range of Exercise Prices
Options outstanding June 30, 2018		651,000		$	1.52	$0.71 - $2.51
Granted		0		N/A		N/A
Forfeited		(56,000	)		1.46	$0.71 - $2.51
Options outstanding June 30, 2019		595,000		$	1.53	$0.71 - $2.09
Granted		50,000		1.38		1.38
Forfeited		(165,000	)		2.01	$1.79 - $2.09
Options outstanding June 30, 2020		480,000		$	1.35	$0.71 - $1.79
Options exercisable June 30, 2019		595,000		$	1.52	$0.71 - $2.51
Options exercisable June 30, 2020		480,000		$	1.35	$0.71 - $1.79

Number of Stock Options Outstanding and Exercisable

Information with respect to stock options outstanding and exercisable at June 30, 2020 is as follows:

Exercise Prices		Number Outstanding		Weighted-Average Remaining Contractual Life (in years)		Number Exercisable
$	0.71		15,000		3.21		15,000
$	1.21		60,000		6.21		60,000
$	1.22		190,000		2.18		190,000
$	1.38		50,000		9.20		50,000
$	1.49		90,000		4.18		90,000
$	1.67		50,000		1.36		50,000
$	1.79		25,000		5.20		25,000
			480,000		3.90		480,000

Summary of Total Share Repurchased and Average Price Per Share Paid for the Program

The chart below shows by month the total shares repurchased and average price per share paid for the 2019-2020 Program.

	Total Shares		Average Price
	Purchased		Per Share Paid
November 2019		935	$	1.17
December 2019		2,879		1.18
January 2020		4,272		1.15
February 2020		33,873		1.22
March 2020		45,575		1.09
Total		87,534	$	1.15

The chart below shows by month the total shares repurchased and average price per share paid for the 2018 Program prior to its termination.

	Total Shares		Average Price
	Purchased		Per Share Paid
November 2018		1,235	$	1.14
December 2018		358,724		1.03
Total		359,959	$	1.03

Classification Other Accumulated Comprehensive Loss

Accumulated Other Comprehensive Loss —Information with respect to the balances of each classification within accumulated other comprehensive loss is as follows:

	Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Loss
June 30, 2018	$	(177	)	$	(177	)
Current period change		(76	)		(76	)
June 30, 2019	$	(253	)	$	(253	)
Current period change		(86	)		(86	)
June 30, 2020	$	(339	)	$	(339	)

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Long-Term Debt (Tables)

12 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

Summary of Long-Term Debt

Long-term debt consisted of the following:

	June 30,
	2020			2019
CARES Act Paycheck Protection Plan Loans	$	3,234		$	0
Trace RDA Loan		0			2,999
Capital lease obligations		124			159
Total		3,358			3,158
Less unamortized debt costs		0			(195	)
Less current maturities		(1,401	)		(2,836	)
	$	1,957		$	127

Annual Required Payments of Debt and Contractual Commitments for Interest on Long-term Debt

Debt Commitments —Annual required payments of debt and contractual commitments for interest on long-term debt are shown in the following table. The interest rate on variable interest debt is calculated at the interest rate at June 30, 2020.

	Debt		Interest
2021	$	1,401	$	45
2022		1,904		33
2023		39		2
2024		14		0
2025		0		0
2026 and after		0		0
Total	$	3,358	$	80

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Intangible Assets (Tables)

12 Months Ended

Jun. 30, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Intangible Assets

Intangible assets:
	June 30,
	2020			2019
Pharmacy segment
Trade Name	$	1,180		$	1,180
Customer Relationships		1,089			1,089
Medicare License		623			623
		2,892			2,892
Accumulated Amortization		(1,638	)		(1,539	)
Total	$	1,254		$	1,353

Annual Amortization of Amortizing Intangibles for Next Five Years

Annual amortization of amortizing intangibles for the next five years is as follows:

2021	$	26
2022		26
2023		22
2024		0
2025 and thereafter		0
Total	$	74

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Leases (Tables)

12 Months Ended

Jun. 30, 2020

Leases [Abstract]

Components of Lease Cost and Rent Expense

The components of lease cost and rent expense for the fiscal year ended June 30, 2020 are as follows:

	Fiscal Year Ended
Lease Cost	June 30, 2020
Operating lease cost:
Operating lease cost	$	593
Short-term rent expense		5
Variable lease cost		3
Total operating lease cost	$	601
Finance lease cost:
Amortization right-of-use assets	$	36
Interest on finance lease liabilities		9
Total finance lease cost	$	45

Summary of Supplemental Balance Sheet Information

Supplemental balance sheet information relating to leases was as follows:

		As of
	Balance Sheet Classifications	June 30, 2020
Operating Leases:
Operating Lease ROU Assets	ROU Assets	$	970
Finance Leases:
Finance Lease ROU Assets	Property, plant and equipment		203
Accumulated amortization	Accumulated depreciation		43
Current finance lease liabilities	Current maturities of long-term debt		34
Long-term finance lease liabilities	Long-term debt		90

Summary of Supplemental Cash Flow and Other Information Related to Leases

Supplemental cash flow and other information related to leases as of and for the year ended June 30, 2020 are as follows:

	Fiscal Year Ended
Other information	June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	593
Operating cash flows from finance leases	9
Financing cash flow from finance leases	32
Right-of-use assets obtained in exchange for new finance lease liabilities	0
Right-of-use assets obtained in exchange for new operating lease liabilities		1,498
Weighted-average remaining lease term:
Operating leases	3.75
Finance leases	3.41
Weighted-average discount rate:
Operating leases		6.54	%
Finance leases		5.49	%

Summary of Non-cancellable Operating and Finance Leases

Commitments relating to non-cancellable operating and finance leases as of June 30, 2020 for each of the next five years and thereafter are as follows:

Payments due within	Operating Leases			Finance Leases
1 year	$	406		$	42
2 years		275			42
3 years		115			42
4 years		106			13
5 years		101			0
Over 5 years		74			0
Total minimum future payments		1,077			139
Less: Imputed interest		(105	)		(15	)
Total liabilities		972			124
Less: Current portion		(365	)		(34	)
Long-term liabilities	$	607		$	90

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Inventory (Tables)

12 Months Ended

Jun. 30, 2020

Inventory Disclosure [Abstract]

Inventory, Net

Inventory consisted of the following:

	June 30,
	2020		2019
Healthcare Services segment, supplies inventory	$	152	$	157
Pharmacy segment, goods held for sale		1,714		1,859
	$	1,866	$	2,016

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Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2020	Jun. 30, 2019
CURRENT ASSETS:
Cash and cash equivalents	$ 11,184	$ 7,742
Receivables	4,315	4,715
Inventory	1,866	2,016
Prepaid expenses and other assets	2,558	2,185
Total current assets	19,923	16,658
PROPERTY, PLANT AND EQUIPMENT
Land	582	273
Buildings and improvements	5,363	5,429
Equipment and fixtures	13,804	13,818
Property, plant and equipment, at cost	19,749	19,520
Less accumulated depreciation	14,425	14,277
Property, plant and equipment—net	5,324	5,243
NONCURRENT ASSETS:
Intangible assets—net	1,254	1,353
Right of use assets	970	0
Other noncurrent assets	500	1,165
Total noncurrent assets	2,724	2,518
TOTAL ASSETS	27,971	24,419
CURRENT LIABILITIES:
Accounts payable	872	1,564
Current maturities of long-term debt, net of debt issuance costs	1,401	2,836
Accrued payroll and related taxes	1,969	1,960
Accrued sales tax payable	1,411	843
Unearned CARES Act funds	4,532	0
Current operating lease liabilities	365	0
Other accrued expenses	866	1,207
Total current liabilities	11,416	8,410
LONG-TERM LIABILITIES:
Long-term debt, net of debt issuance costs	1,957	127
Noncurrent liability for professional liability risks	104	705
Long-term operating lease liabilities	607	0
Other noncurrent liabilities	144	134
Total long-term liabilities	2,812	966
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred Shares, authorized and unissued, 2,000 shares	0	0
Common Shares, no par value; authorized, 12,000 shares; issued and outstanding, 6,899 shares at June 30, 2020 and 6,987 shares at June 30, 2019	3,450	3,493
Additional paid-in capital	10,714	10,745
Retained earnings (loss)	(82)	1,058
Accumulated other comprehensive loss	(339)	(253)
Total Shareholders’ Equity	13,743	15,043
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$ 27,971	$ 24,419

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Revenue Recognition and Accounts Receivables (Tables)

12 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Summary of Revenues by Payor

The Company’s revenues by payor were as follows for the years ended June 30, 2020 and 2019:

	2020		2019
Medicare	$	20,013	$	18,183
Medicaid		13,956		13,871
Retail and Institutional Pharmacy		6,465		6,649
Managed Care & Other Insurance		6,742		6,220
Self-pay		498		505
Rent		16		63
Other		123		127
Total Net Revenues	$	47,813	$	45,618

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Discontinued Operations (Tables)

12 Months Ended

Jun. 30, 2020

Discontinued Operations And Disposal Groups [Abstract]

Schedule of Discontinued Operations

Results for all the businesses included in discontinued operations are presented in the following table:

Discontinued Operations—Summary Statement of Earnings Information

	2020			2019
Net Revenues:
Parkside	$	11		$	5,574
Sold Hospitals		26			(581	)
	$	37		$	4,993
Loss Before Income Taxes:
Parkside	$	(246	)	$	(756	)
Sold Hospitals		(172	)		(919	)
Life sciences and engineering		(136	)		(137	)
Loss before income taxes		(554	)		(1,812	)
Gain on Sale:
Parkside		0			2,136
Gain on Sale		0			2,136
Income tax expense		0			82
Earnings (Loss) from discontinued operations	$	(554	)	$	242

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation — The consolidated financial statements include the accounts of SunLink and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Management Estimates

Management Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates made by management involve reserves for adjustments to net patient service revenues, evaluation of the recoverability of assets, including accounts receivable and intangible assets, and the assessment of litigation and contingencies, including income taxes and related tax asset valuation allowances, all as discussed in more detail in the remainder of these notes to the consolidated financial statements. Actual results could differ materially from these estimates.

Net Patient Service Revenue

Net Patient Service Revenue — Effective July 1, 2018, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”), which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented. ASC 606 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The adoption of the provisions of ASC 606 had no material impact on the Company’s current or historical financial position, results of operations or cash flows. Additionally, management does not anticipate that the provisions of ASC 606 will have a material impact on the amount or timing of when the Company recognizes revenue prospectively. However, in accordance with ASC 606, the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented. Subsequent material events that alter the payor’s ability to pay are recorded as bad debt expense. The Company’s revenue recognition and accounts receivable policies are more fully described in Note 4. Revenue Recognition and Accounts Receivable.

SunLink’s subsidiaries have agreements with third-party payors that provide for payments at amounts different from established charges. Payment arrangements vary and include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Patient service revenues are reported as services are rendered at the estimated net realizable amounts from patients, third-party payors, and others. Estimated net realizable amounts are estimated based upon contracts with third-party payors, published reimbursement rates, and historical reimbursement percentages pertaining to each payor type. Estimated reductions in revenues to reflect agreements with third-party payors and estimated retroactive adjustments under such reimbursement agreements are accrued during the period the related services are rendered and are adjusted in future periods as interim and final settlements are determined. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to accrue such revenue deductions. At June 30, 2020, there were no material claims or disputes with third-party payors.

Concentrations of Credit Risk

Concentrations of Credit Risk —SunLink’s Healthcare Services segment subsidiaries grant unsecured credit to their patients, most of who reside in the service area of the subsidiaries’ facilities and are insured under third-party agreements. Medicare and Medicaid patient accounts represent SunLink’s only significant concentrations of credit risk. For SunLink’s Healthcare Services segment, Medicare net revenues were approximately 52% and 49% of net revenues for the years ended June 30, 2020 and 2019, respectively. For SunLink’s Healthcare Services segment, Medicaid was approximately 32% and 33% net revenues for the years ended June 30, 2020 and 2019, respectively. For SunLink’s Healthcare Services segment, Medicare receivables were approximately 45% and 42% of receivables—net at June 30, 2020 and 2019, respectively, while Medicaid receivables were approximately 21% and 26% of receivables—net at June 30, 2020 and 2019, respectively.

SunLink’s Pharmacy segment subsidiary grants unsecured credit to individual customers and institutional customers. Individual customers primarily are insured under third-party agreements, including Medicare and Medicaid, while the institutional customers are granted credit according to their determined credit risk. Medicare receivables were approximately 23% and 17% of the Pharmacy segment’s receivables at June 30, 2020 and 2019, respectively, while Medicaid receivables were approximately 23% and 17% of the Pharmacy segment receivable at June 30, 2020 and 2019, respectively. Approximately 54% and 66% of the Pharmacy’s net receivables at June 30, 2020 and 2019, respectively, were private insurance and institutional customers’ receivables. Net revenues for the Pharmacy segment for the fiscal year ended June 30, 2020 and 2019 were approximately 37% and 35% Medicare, respectively, and approximately 28% and 29% Medicaid, respectively.

Cash and Cash Equivalents

Cash and Cash Equivalents —Cash and cash equivalents consist of all funds in banks and short-term liquid investments with an original maturity of three months or less. Cash deposited with commercial banks at June 30, 2020 was $11,178, of which approximately $10,384 totaled amounts greater than the federally insured limits. At June 30, 2020, the Company’s cash equivalents included $3,660 of overnight repurchase agreements.The Company accounts for these agreements as cash equivalents in accordance with FASB ASC 305-10-20. The investing of cash in amounts greater than the insurable limits with major well-capitalized financial institutions mitigates the risk of the deposited cash and the certificate of deposit. The overnight repurchase agreements are 102% collateralized by U. S. government backed securities with the Company’s U.S. bank. The U.S. Government backed collateralized securities are of high credit quality which mitigates any significant risk to the credit rating or interest rate risk of the agreements.

Inventory

Inventory —Inventory consists of medical and pharmacy supplies. Medical supplies are valued at the lower of cost or market, using the first-in, first-out method. Pharmacy supplies are stated at the lower of cost (standard cost method), or net realizable value. Use of this method does not result in a material difference from the methods required by generally accepted accounting principles in the United States of America.

Accounts Receivable

Accounts Receivable —Substantially all of SunLink’s subsidiaries’ receivables result from providing healthcare services to hospital facility patients and from providing pharmacy services and products to customers. The Company evaluates the valuation of accounts receivable based upon its historical collection trends, as well as its understanding of the nature and collectability of accounts based on their age and other factors.

Government Grant Accounting

Government Grant Accounting—As a result of the COVID-19 pandemic, SunLink subsidiaries have received grants from the U.S. government under the CARES Act as targeted Provider Relief Funds. We recognize the grants as we calculate the amounts of COVID-19 related costs and to offset the effect of COVID-19 Lost Revenues on a systematic and rational basis in the Consolidated Statement of Operations into other income once there is reasonable assurance that we can comply with the relevant conditions of the specific grant and the grant has been or be will be received. The amount of the grant recognized into other income at any point in time is based on the terms of the grant received. Any unearned portions of the grants are deferred and shown as a current liability on our balance sheet.

Property, Plant, and Equipment

Property, Plant, and Equipment —Property, plant, and equipment, including equipment subject to capital leases, is recorded at cost. Depreciation is recognized over the estimated useful lives of the assets, which range from 3 to 45 years, on a straight-line basis. Generally, furniture and fixtures are depreciated over 5 to 10 years, machinery and equipment over 10 years, and buildings over 25 to 45 years. Leasehold improvements and leased machinery and equipment are depreciated over the lease term or estimated useful life of the asset, whichever is shorter, and range from 5 to 15 years. For the Pharmacy segment, durable medical equipment is depreciated over 3 years. Expenditures for major renewals and replacements are capitalized. Expenditures for maintenance and repairs are charged to operating expense as incurred. When property items are retired or otherwise disposed of, amounts applicable to such items are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Depreciation expense totaled $1,350 and $1,369 for the years ended June 30, 2020 and 2019, respectively.

Leases

Leases— On July 1, 2019, the Company adopted cumulative accounting standard updates initially by the Financial Accounting Standards Board (“FASB”) that amended the accounting for leases and are codified as ASC 842. SunLink and its subsidiaries recognize right-of-use assets and lease liabilities for leases with terms greater than 12 months or leases that contain a purchase option that is reasonably certain to be exercised.  Leases are classified as either finance or operating leases.  This classification whether lease expense is recognized based on an effective interest method or on a straight-line method over the term of the lease.  Our right-of-use assets and liabilities primarily relate to office and warehouse facilities, healthcare equipment and office equipment.  Certain of our facility leases include one or more option to renew.  The exercise of lease renewal options is at our option.  None of our lease agreements contain material residual value guarantees.  

Risk Management

Risk Management —SunLink and its subsidiaries are exposed to various risks of loss from professional liability and other claims and casualties; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters (including earthquakes and hurricanes); and employee health, dental and accident benefits. Commercial insurance coverage is purchased for a portion of claims arising from such matters.

When, in management’s judgment, claims are sufficiently identified, a liability is accrued for estimated costs and losses under such claims, net of estimated insurance recoveries except where applicable laws, rules or regulations require us to report the gross estimate of potential or estimated losses.

The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition of a business. These amounts are based on actuarially determined estimates.

The Company self-insures for workers’ compensation risk. The estimated liability for workers’ compensation risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. The Company is also self-insured for employee health risks. The estimated liability for employee health risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported.

The Company accrues an estimate of losses resulting from workers’ compensation and professional liability claims to the extent they are not covered by insurance. These accruals are estimated quarterly based upon management’s review of claims reported and historical loss data.

The Company records a liability pertaining to pending litigation if it is probable a loss has been incurred and accrues the most likely amount of loss based on the information available. If no amount within the range of losses estimated from the information available is more likely than any other amount in the range of loss, the minimum amount in the range of loss is accrued. Because of uncertainties surrounding the nature of litigation and the ultimate liability to SunLink and its subsidiaries, if any, estimates are revised as additional facts become known.

Long-lived Assets

Long-lived Assets —SunLink and its subsidiaries periodically assesses the recoverability of assets based on its expectations of future profitability and the undiscounted cash flows of the related operations and, when circumstances dictate, adjust the carrying value of the asset to estimated fair value. These factors, along with management’s plans with respect to the operations, are considered in assessing the recoverability of long-lived assets.

Goodwill and Intangibles

Goodwill and Intangibles —Goodwill represents the cost of acquired businesses in excess of fair value of identifiable tangible and intangible net assets purchased. Goodwill has an indefinite life and is not subject to periodic amortization. However, goodwill is tested at least annually for impairment, using a fair value methodology, in lieu of amortization. Definite-life intangible assets are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 2 to 30 years. SunLink and its subsidiaries evaluate the reasonableness of the useful lives of intangible assets and they are tested for impairment as conditions warrant.

Income Taxes

Income Taxes —SunLink accounts for income taxes using an asset and liability approach and the recognition of deferred tax assets and liabilities for expected future tax consequences. SunLink considers all expected future events other than proposed enactments of changes in the income tax law or rates. When management determines that it is more likely than not that a portion of or none of the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies, management provides a valuation allowance for the portion not expected to be realized.

Share-Based Compensation

Share-Based Compensation —The Company has issued common share options to key employees and directors under various shareholder-approved plans. Share-based compensation expense of $28 and $1 for the fiscal years ended June 30, 2020 and 2019, respectively, was recorded in salaries, wages and benefits expense for share options issued to employees and directors of the Company. The fair value of the share options was estimated using the Black-Scholes option pricing model. The historical volatility is used to calculate the estimated volatility in this model.

Fair Value of Financial Instruments

Fair Value of Financial Instruments —The recorded values of cash, receivables, and payables approximate their fair values because of the relatively short maturity of these instruments. Similarly, the fair value of long-term debt is estimated to approximate the recorded value due to its current variable interest rate.

Fair Value Measurements

Fair Value Measurements —Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. Generally Accepted Accounting Principles (“GAAP”) fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

Level 1:  Quoted market prices in active markets for identical assets or liabilities.

Level 2:  Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level3:  Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability.

Earnings (Loss) per Share

Earnings (Loss) per Share —Earnings (loss) per common share is based on the weighted-average number of common shares and dilutive common share equivalents outstanding for each period presented, including vested and unvested shares issued under SunLink’s 2005 Equity Incentive Plan, and the 2011 Director Stock Option Plan. Common share equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Instead of a two-step impairment model, if the carrying amount of a reporting unit exceeds its fair value as determined in step one of the impairment test, an impairment loss is measured at the amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not believe adoption of this pronouncement will have a material impact on its financial position and results of operations.

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Subsequent Events

12 Months Ended

Jun. 30, 2020

Subsequent Events [Abstract]

Subsequent Events

19. SUBSEQUENT EVENTS

On August 26, 2020, the operations of the Pharmacy segment in Lake Charles, Louisiana, was struck by Hurricane Laura.  The facility suffered wind and rain damage and the local area suffered devastating winds and flooding.  The Pharmacy segment has been able to deliver its products to its customers as needed by this facility or by the facility in Crowley, Louisiana, but customer demand has decreased due to damage caused by the hurricane.  The cost of the damage to the leased facility in Lake Charles is the responsibility of the landlord.

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Earnings Per Share

12 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

Earnings Per Share

18. EARNINGS PER SHARE

(Share Amounts in Thousands)

Earnings (loss) per share and shares outstanding information for the years ended June 30, 2020 and 2019 is as follows:

	2020						2019
	Amount			Per Share Amount			Amount			Per Share Amount
Earnings (Loss) from continuing operations	$	(586	)				$	(1,996	)
Basic:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	(0.28	)
Diluted:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	(0.28	)
Earnings (loss) from discontinued operations	$	(554	)				$	242
Basic:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	0.03
Diluted:
Weighted-average shares outstanding		6,957		$	(0.08	)		7,149		$	0.03
Net Loss	$	(1,140	)				$	(1,754	)
Basic:
Weighted-average shares outstanding		6,957		$	(0.16	)		7,149		$	(0.25	)
Diluted:
Weighted-average shares outstanding		6,957		$	(0.16	)		7,149		$	(0.25	)
Weighted-average number of shares outstanding—basic		6,957						7,149
Effect of dilutive director, employee and guarantor options    and outstanding common share warrants		0						0
Weighted-average number of shares outstanding—diluted		6,957						7,149

Share options of14 and 31 for the years ended June 30, 2020 and 2019, respectively, are not included in the computation of diluted earnings per share because their effect would be antidilutive.

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Financial Information by Segments

12 Months Ended

Jun. 30, 2020

Segment Reporting [Abstract]

Financial Information by Segments

17. FINANCIAL INFORMATION BY SEGMENTS

Under ASC Topic No. 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our two reportable operating segments are Healthcare Services and Pharmacy.

We evaluate performance of our operating segments based on revenue and operating profit (loss).  Segment information for the fiscal years ended June 30, 2020 and 2019 is as follows:

	Healthcare Services			Pharmacy		Corporate and Other			Total
2020
Net Revenues from external customers	$	16,243		$	31,570	$	0		$	47,813
Operating profit (loss)		734			1,076		(2,139	)		(329	)
Depreciation and amortization		361			1,085		4			1,450
Assets		8,174			8,170		11,627			27,971
Expenditures for property, plant and equipment		296			888		1			1,185
2019
Net Revenues from external customers	$	15,453		$	30,165	$	0		$	45,618
Operating profit (loss)		(538	)		147		(1,923	)		(2,314	)
Depreciation and amortization		336			1,147		3			1,486
Assets		7,612			8,273		8,534			24,419
Expenditures for property, plant and equipment		309			961		2			1,272

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Related Parties

12 Months Ended

Jun. 30, 2020

Related Party Transactions [Abstract]

Related Parties

16. RELATED PARTIES

A director of the Company is a member of a law firm which provides services to SunLink. The Company has expensed an aggregate of $251 and $306 to the law firm in the fiscal years ended June 30, 2020 and 2019, respectively. Included in the Company’s consolidated balance sheets at June 30, 2020 and 2019 is $6 and $47 of amounts payable to the law firm.

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Sales Tax Payable

12 Months Ended

Jun. 30, 2020

Payables And Accruals [Abstract]

Sales Tax Payable

15. SALES TAX PAYABLE

During the fiscal year ended June 30, 2019, the Pharmacy segment business amended its sales tax position to claim exemption from sales taxes on any revenue from sales of products and services to beneficiaries of government insurance programs to the extent reimbursed by the administrators of such programs. No sales taxes are included in the related reimbursement received from sales of such products and services from the government payers’ insurance programs. The Company has filed amended sales tax returns for periods still open under the applicable statutes of limitations. Refunds have been received from two taxing authorities in the amounts claimed in all such amended returns. Accordingly, amounts claimed and received from these two taxing authorities were recorded as revenues in the year ended June 30, 2020 in the amount of $359. The Company’s position with certain other local taxing authorities is still uncertain and has not yet been determined probable of collection; therefore, the Company has continued to accrue the amounts for sales tax estimates that it believes would be payable if its amended returns and continuing position are challenged and the Company does not prevail. The sales tax accrued at June 30, 2020 was $1,411 compared to $843 at June 30, 2019.   

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Sale of Assets

12 Months Ended

Jun. 30, 2020

Sale Of Assets [Abstract]

Sale of Assets

14. SALE OF ASSETS

On December 20, 2019, the Company sold a medical office building and approximately 4 acres of land in Clanton, AL. After expenses, the Company received net proceeds from the sale of $204, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was $86 and is included in the Company’s results for the fiscal year ended June 30, 2020.

On September 9, 2019, the Company sold approximately 11.4 acres of undeveloped land in Fulton, MO. After expenses, the Company received net proceeds from the sale of $348, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property was $100 and is included in the Company’s results for the fiscal year ended June 30, 2020.

On October 11, 2018, the Company sold a vacant medical office building and approximately 2 adjacent acres of undeveloped land in Dahlonega, GA. After expenses, the Company received net proceeds from the sale of $935, which was retained for working capital and general corporate purposes. The pre-tax gain on the sale of property of $452 is included in the Company’s results for the fiscal year ended June 30, 2019.

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Economic Damages

12 Months Ended

Jun. 30, 2020

Commitments And Contingencies Disclosure [Abstract]

Economic Damages

13. ECONOMIC DAMAGES

The Pharmacy segment subsidiary asserted claims for economic damages in connection with the Deepwater Horizon Settlement Program related to the event which occurred in 2010. In January 2018, these claims were settled and a payment of approximately $22(net of costs and attorneys’ fees) for the year ended June 30, 2019 was received. The net settlement was recognized as a gain in the results for the year ended June 30, 2019.

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Document and Entity Information - USD ($)

12 Months Ended

Jun. 30, 2020

Sep. 24, 2020

Dec. 31, 2019

Document Information [Line Items]

Document Type

10-K

Amendment Flag

false

Document Period End Date

Jun. 30, 2020

Document Fiscal Year Focus

2020

Document Fiscal Period Focus

FY

Entity Registrant Name

SUNLINK HEALTH SYSTEMS INC

Entity Central Index Key

0000096793

Current Fiscal Year End Date

--06-30

Entity Well-known Seasoned Issuer

No

Entity Current Reporting Status

Yes

Entity Voluntary Filers

No

Entity Interactive Data Current

Yes

Entity Filer Category

Non-accelerated Filer

Entity Shell Company

false

Entity Small Business

true

Entity Emerging Growth Company

false

Entity Common Stock, Shares Outstanding

6,899,321

Entity Public Float

$ 4,383,480

Entity File Number

1-12607

Entity Incorporation, State or Country Code

OH

Entity Tax Identification Number

31-0621189

Entity Address, Address Line One

900 Circle 75 Parkway

Entity Address, Address Line Two

Suite 690

Entity Address, City or Town

Atlanta

Entity Address, State or Province

GA

Entity Address, Postal Zip Code

30339

City Area Code

770

Local Phone Number

933-7000

Document Annual Report

true

Document Transition Report

false

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement to be filed under Regulation 14A in connection with the Annual Meeting of Shareholders of SunLink Health Systems, Inc., scheduled to be held on November 11, 2020, have been incorporated by reference into Part III of this Report. The Proxy Statement or an amendment to this Annual Report will be filed with the Securities and Exchange Commission within 120 days after June 30, 2020.

Common Stock [Member]

Document Information [Line Items]

Trading Symbol

SSY

Title of 12(b) Security

Common Shares without par value

Security Exchange Name

NYSEAMER

Preferred Share Purchase Rights [Member]

Document Information [Line Items]

No Trading Symbol Flag

true

Title of 12(b) Security

Preferred Share Purchase Rights

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Employee Benefits

12 Months Ended

Jun. 30, 2020

Postemployment Benefits [Abstract]

Employee Benefits

12. EMPLOYEE BENEFITS

Defined Benefit Plans —No defined benefit plan is maintained for employees of either the Healthcare Services segment or the Pharmacy segment. Prior to 1997, SunLink maintained a defined benefit retirement plan covering substantially all of its domestic employees. Effective February 28, 1997, SunLink amended its domestic retirement plan to freeze participant benefits and closed the plan to new participants. Benefits under the frozen plan are based on years of service and level of earnings. SunLink funds the frozen plan, which is noncontributory, at a rate that meets or exceeds the minimum amounts required by the Employee Retirement Income Security Act of 1974.

Since the sale of SunLink’s life sciences and engineering segment businesses in the fiscal year ended March 31, 1999, net pension expense has been classified as an expense of discontinued operations.

At June 30, 2020, the plan’s assets were invested 47% in cash and short-term investments, 36% in equity investments and 17% in fixed income investments. The plan’s current investment policy of primarily investing in cash and short-term investments is based on the possible need for immediate liquidity as participants withdraw from the plan. The expected return on investment of 4% is based upon the plan’s historical return on assets. The plan expects to pay $52, $50, $61, $60, and $174 in pension benefits in the years ending June 30, 2021 through 2025, respectively. The plan expects to pay $363 in pension benefits for the years June 30, 2025 through 2029, in the aggregate. This assumes the plan participants elect to take monthly pension benefits as opposed to a lump sum payout when they reach age 65. The Company made a contributions of $132 and $107 to the plan during the years ended June 30, 2020 and 2019, respectively, and plans to make a contribution of $100 to the plan for the year ended June 30, 2021.

The components of net pension expense for all plans (comprised solely of one domestic plan) were as follows for the fiscal years ended June 30, 2020 and 2019:

	2020			2019
Service cost	$	0		$	0
Interest cost		47			56
Expected return on assets		(34	)		(36	)
Amortization of prior service cost		123			78
Settlement cost		0			39
Net pension expense	$	136		$	137
Weighted-average assumptions:
Discount rate		3.50	%		4.10	%
Expected return on plan assets		4.00	%		4.00	%
Rate of compensation increase		0.00	%		0.00	%

Summary information for the plans (comprised solely of one domestic plan) is as follows for the fiscal years ended June 30, 2020 and 2019:

	2020			2019
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,390		$	1,420
Interest cost		47			56
Actuarial loss		168			90
Benefits paid		(31	)		(176	)
Benefit obligation end of year	$	1,574		$	1,390
Change in Fair Value of Plan Assets:
Beginning fair value	$	827		$	895
Actual return (loss) on plan assets		(5	)		1
Employer contribution		132			107
Benefits paid		(31	)		(176	)
Plan assets at end of year	$	923		$	827
Funded status of the plans		(651	)		(563	)
Unrecognized actuarial loss		469			384
Accrued benefit cost	$	(182	)	$	(179	)
Amounts Recognized in Consolidated Balance Sheets
Accrued benefit cost		(182	)		(179	)
Accumulated other comprehensive loss*		469			384
Net amount recognized	$	(651	)	$	(563	)

* Accumulated other comprehensive loss represents minimum pension liability adjustments.

Defined Contribution Plan —SunLink has a defined contribution plan pursuant to IRS Section 401(k) covering substantially all domestic employees. SunLink matches a specified percentage of the employee’s contribution as determined periodically by its management. A match of $137 was provided for the fiscal year ended June 30, 2020. A match of $85 was provided for the fiscal year ended June 30, 2019. Plan expense for the defined contribution plan was $0 for the years ended June 30, 2020 and 2019.

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Income Taxes

12 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

11. INCOME TAXES

The provision (benefit) for income taxes on continuing operations are as follows:

	2020		2019
Current	$	296	$	0
Deferred		0		(82	)
Total income tax expense (benefit)	$	296	$	(82	)

Net deferred income tax assets recorded in the consolidated balance sheets are as follows:

	June 30,
	2020			2019
Net operating loss carryforward	$	6,078		$	6,766
Depreciation expense		(86	)		46
Allowances for receivables		131			125
Accrued liabilities		1,407			603
Intangible assets		585			877
Pension liabilities		165			141
Other		109			67
		8,389			8,625
Less valuation allowance		(8,389	)		(8,625	)
Net deferred income tax assets	$	0		$	0

The differences between income taxes on continuing operations at the Federal statutory rate and the effective tax rate were as follows:

	2020			2019
Income tax expense (benefit) at Federal statutory rate	$	(61	)	$	(436	)
Changes in valuation allowance—continuing operations		(369	)		378
U.S. state income taxes, net of federal benefit		175			(45	)
Permanent differences under CARES Act		582			0
Deferred tax rate changes		(34	)		32
Other		3			(11	)
Total income tax expense (benefit)—continuing operations	$	296		$	(82	)

Key income tax provisions of the CARES Act include new health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code.  The corporate income tax provisions of the CARES Act include allowing the carryback of net operating losses (“NOL”) generated in recent tax years, temporary removal of the 80% NOL usage limitation put in place under the Tax Cuts and Jobs Act (“TCJA”) enacted on December 27, 2017, temporary favorable adjustments to the business interest expense limitation calculated under Sec. 163(j), and the acceleration of refundable Alternative Minimum Tax (“AMT”) credits.

Of the CARES Act provisions, the most material income tax considerations relating to the Company, are relating to the amounts received as general and targeted PRF and amounts received under the PPP loans.  Based on the latest published IRS guidance as of preparation of the June 30, 2020 financial statements, the PRF is be fully includable in taxable income and any amounts of income or expense related to the PPP loans will be excluded for tax purposes.  The result of including the PRF in taxable income and disallowing PPP loan expenses for the period is a total addition to taxable income of $7,303.  The Company has sufficient federal and state net operating losses for the period to cover the resulting provisional June 30, 2020 taxable income, except in Mississippi, the source of the substantial majority of the Company’s PRF. The June 30, 2020 current tax expense, as booked represents Mississippi state income tax.  The Company will continue to monitor the latest available IRS guidance on these funds for treatment on the June 30, 2020 tax return filing, which is due April 15, 2021. The Company elected to treat remaining available AMT credits as fully refundable as of the 2018 tax year as allowed by the CARES Act.  As of June 30, 2020 the Company has made use of this election in order to claim and received all remaining refundable AMT credits in the amout of $305.

We believe that the remainder of the corporate income tax provisions of the CARES Act will not have a material impact on the Company after June 30, 2020. Due to the Company’s history of losses , there is no potential for the carryback of NOLs.  The temporary removal of the 80% income limitation on NOL usage has no impact as the Company has substantial NOLs generated in years prior to the enactment of the TCJA not subject to this 80% limitation. The Company also does not have any interest expense disallowed under Sec. 163(j) after consideration of the PRF and PPP loan adjustments discussed previously that would be impacted by the CARES Act.

In accordance with the FASB 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 June 30, 2020, consistent with the above process, we evaluated the need for a valuation 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 $8,389 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability at June 30, 2020. 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 plans.

The principal negative evidence that led us to determine at June 30, 2020 that all the deferred tax assets should have full valuation allowances was the three-year cumulative pre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Services Segment businesses operate.

For Federal income tax purposes, at June 30, 2020, the Company had approximately $17,500 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 2023 through fiscal 2038; however, with the enactment of the TCJA 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, 2017 are no longer subject to potential federal and state income tax examination.

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Shareholders' Equity

12 Months Ended

Jun. 30, 2020

Federal Home Loan Banks [Abstract]

Shareholders' Equity

10. SHAREHOLDERS’ EQUITY

Employee and Directors Stock Option Plans —The 2011 Director Stock Option Plan was approved by SunLink’s shareholders at the Annual Meeting of Shareholders on November 7, 2011. This plan permits the grant of options to non-employee directors of SunLink for the purchase of up to 300,000 common shares through November 2021. Options for 50,000 shares were granted during the fiscal year ended June 30, 2020 and no options were granted during the fiscal year ended June 30, 2019. No options have been exercised under this plan. Options outstanding under the plan were 300,000 shares at June 30, 2020. 

The 2005 Equity Incentive Plan approved by SunLink’s shareholders on November 7, 2005 permitted the grant of options to employees, non-employee directors and service providers of SunLink for the purchase of up to 800,000 common shares plus the number of unused shares under its 2001 Plans, which were 30,675. No options have been exercised under this Plan. No option shares were granted during the fiscal years ended June 30, 2020 and 2019, respectively. Options for 165,000 shares were forfeited during the fiscal year ended June 30, 2020. Options outstanding under this Plan were 180,000 at June 30, 2020. No additional awards may be granted under this Plan.

The activity of Company’s share options is shown in the following table:

	Number of Shares			Weighted- Average Exercise Price		Range of Exercise Prices
Options outstanding June 30, 2018		651,000		$	1.52	$0.71 - $2.51
Granted		0		N/A		N/A
Forfeited		(56,000	)		1.46	$0.71 - $2.51
Options outstanding June 30, 2019		595,000		$	1.53	$0.71 - $2.09
Granted		50,000		1.38		1.38
Forfeited		(165,000	)		2.01	$1.79 - $2.09
Options outstanding June 30, 2020		480,000		$	1.35	$0.71 - $1.79
Options exercisable June 30, 2019		595,000		$	1.52	$0.71 - $2.51
Options exercisable June 30, 2020		480,000		$	1.35	$0.71 - $1.79

For the fiscal years ended June 30, 2020 and 2019, the Company recognized $28 and $1, respectively, of compensation expense for share options issued. As of June 30, 2020, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans.

Information with respect to stock options outstanding and exercisable at June 30, 2020 is as follows:

Exercise Prices		Number Outstanding		Weighted-Average Remaining Contractual Life (in years)		Number Exercisable
$	0.71		15,000		3.21		15,000
$	1.21		60,000		6.21		60,000
$	1.22		190,000		2.18		190,000
$	1.38		50,000		9.20		50,000
$	1.49		90,000		4.18		90,000
$	1.67		50,000		1.36		50,000
$	1.79		25,000		5.20		25,000
			480,000		3.90		480,000

No options were exercised during the years ended June 30, 2020 and 2019. As of June 30, 2020, and 2019, the aggregate intrinsic value of options outstanding and options exercisable were $132 and $74, respectively.

Common Share Purchase Transactions

2019-2020 Common Share Repurchase Program – On October 8, 2019, the Company announced a share repurchase program (“2019-2020 Program”) approved by its Board of Directors which authorized the Company to purchase up to $750 of its common shares in the open market. On March 24, 2020, the Company announced that it had suspended the 2019-2020 Program in light of the COVID-19 pandemic and on June 1, 2020, the Company terminated the 2019-2020 program. The total number of shares that have been purchased under the Plan is 87,534 and the cost of such shares was approximately $101. The chart below shows by month the total shares repurchased and average price per share paid for the 2019-2020 Program.

	Total Shares		Average Price
	Purchased		Per Share Paid
November 2019		935	$	1.17
December 2019		2,879		1.18
January 2020		4,272		1.15
February 2020		33,873		1.22
March 2020		45,575		1.09
Total		87,534	$	1.15

2018 Common Share Repurchase Program – On November 29, 2018, the Company announced a share repurchase program (“2018 Program”) approved by its Board of Directors, which authorized the Company to purchase up to 300,000 shares of its common shares.  On December 13, 2018, the Company announced it had purchased the 300,000 shares authorized under the program, and that its Board of Directors had authorized an additional 450,000 shares to be purchased under the 2018 Program. The total number of shares that was purchased under the 2018 Program was 359,959 and the cost of shares purchased was approximately $372. The chart below shows by month the total shares repurchased and average price per share paid for the 2018 Program prior to its termination.

	Total Shares		Average Price
	Purchased		Per Share Paid
November 2018		1,235	$	1.14
December 2018		358,724		1.03
Total		359,959	$	1.03

Accumulated Other Comprehensive Loss —Information with respect to the balances of each classification within accumulated other comprehensive loss is as follows:

	Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Loss
June 30, 2018	$	(177	)	$	(177	)
Current period change		(76	)		(76	)
June 30, 2019	$	(253	)	$	(253	)
Current period change		(86	)		(86	)
June 30, 2020	$	(339	)	$	(339	)

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Long-Term Debt

12 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

Long-Term Debt

9. LONG-TERM DEBT

Long-term debt consisted of the following:

	June 30,
	2020			2019
CARES Act Paycheck Protection Plan Loans	$	3,234		$	0
Trace RDA Loan		0			2,999
Capital lease obligations		124			159
Total		3,358			3,158
Less unamortized debt costs		0			(195	)
Less current maturities		(1,401	)		(2,836	)
	$	1,957		$	127

CARES Act Paycheck Protection Plan Loans—The CARES Act was enacted by the U.S. government on March 27, 2020. As part of the CARES Act, the PPP loan program was established and administered by the SBA. In April and May 2020, subsidiaries of the Company received approximately $3,234 of PPP loans through its regular bank. Forgiveness of PPP loans may be available if the loans are used to pay wages, rent, utilities and interest on certain debt during the eight-week period following receipt of the loan proceeds and subject to other Federally-established terms and conditions. During July 2020, the period for loan proceeds use was amended to allow for a 24-week period. The borrowing subsidiaries must apply for loan forgiveness with the bank within ten months after the allowable use period. The forgiveness applications will be reviewed by both the lending bank and SBA and a loan forgiveness amount, if any, will be determined. There can be no assurance, however, that any of the PPP loans to us will be forgiven, or if forgiven, the amount of such forgiveness. Loan proceeds not forgiven are payable over two years at a 1% annual interest rate. Prior to the July amendment, the two-year loan repayment begins six months after the loan was funded by SBA.

Trace RDA Loan— Southern Health Corporation of Houston, Inc. (“Trace”)’ a wholly owned subsidiary of the Company, closed on a $9,975 Mortgage Loan Agreement (“Trace RDA Loan”) with a bank, dated as of July 5, 2012. During the year ended June 30, 2020, the Company paid the entire outstanding balance of the Trace RDA Loan, which was scheduled to be repaid in July 2027. The pre-payment was made with cash on hand. The Company recorded a non-cash loss on early extinguishment of debt relating to the pre-payment of $178 during the fiscal year ended June 30, 2020. The Trace RDA Loan had a term of 15 years with level monthly payments of principal and interest. The Trace RDA Loan interest rate was the prime rate (as published in the Wall Street Journal) plus 1% with a floor of 5.5%. The Trace RDA Loan was collateralized by real estate and equipment of Trace. The Trace RDA Loan contained various covenants, terms and conditions, including financial restrictions and limitations, and affirmative and negative covenants and is guaranteed by SunLink. At June 30, 2019, Trace was not in compliance with the debt service coverage, fixed charge coverage and funded debt to EBITDA ratios and the entire outstanding amount of the Loan was classified as a current liability.

Debt Commitments —Annual required payments of debt and contractual commitments for interest on long-term debt are shown in the following table. The interest rate on variable interest debt is calculated at the interest rate at June 30, 2020.

	Debt		Interest
2021	$	1,401	$	45
2022		1,904		33
2023		39		2
2024		14		0
2025		0		0
2026 and after		0		0
Total	$	3,358	$	80

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Intangible Assets

12 Months Ended

Jun. 30, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Intangible Assets

8. INTANGIBLE ASSETS

SunLink’s Pharmacy segment has intangible assets related to its Carmichael acquisition, which consists of:

Intangible assets:
	June 30,
	2020			2019
Pharmacy segment
Trade Name	$	1,180		$	1,180
Customer Relationships		1,089			1,089
Medicare License		623			623
		2,892			2,892
Accumulated Amortization		(1,638	)		(1,539	)
Total	$	1,254		$	1,353

Impairment testing —During the fourth quarters of fiscal 2020 and 2019, we completed our annual impairment test of certain intangible assets and no impairment was indicated.

The Trade Name intangible asset under the Pharmacy segment is a non-amortizing intangible asset. Customer Relationships intangible asset is being amortized over 12 years and Medicare License intangible asset is being amortized over 15 years. Amortization expense was $ 99 and $117 for the fiscal years ended June 30, 2020 and 2019, respectively.

Annual amortization of amortizing intangibles for the next five years is as follows:

2021	$	26
2022		26
2023		22
2024		0
2025 and thereafter		0
Total	$	74

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Impairment of Long-Lived Assets

12 Months Ended

Jun. 30, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Impairment of Long-Lived Assets

7. IMPAIRMENT OF LONG-LIVED ASSETS

Impairment of Note Receivable and Land Acquisition— In conjunction with the settlement of a lawsuit, the Company received a five-year promissory note in the principal amount of $600 maturing in October 2019. The note was secured by a non-recourse mortgage on an approximately 25 acres of unimproved land in Ellijay, Georgia.  The terms of the Note and mortgage provide that if the owner of the real property did not pay the note at maturity, then the Company could foreclose and take title of the real property. The market value of the note was estimated to be $500 when received based on an appraisal of the real property at that time. A subsequent appraisal of the real property reduced the value of the property to $371. As a result, an impairment of the note of $129 was recorded in the fourth quarter of the fiscal year ended June 30, 2019. The owners/obligors of the note conveyed the real property to the Company in lieu of payment of the note on November 1, 2019.  

Impairment of Intangible Assets— See Note 8. Intangible Assets for discussion of impairment analysis of Intangible Assets.

Impairment analysis —For the purposes of these analyses, our estimates of fair value are based on a combination of the income approach, which estimates the fair value based on future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices. Estimates of fair value for reporting units fall under Level 3 of the fair value hierarchy. Estimates of future discounted cash flows are based on assumptions and projections we believe to be currently reasonable and supportable. These assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns.

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Leases

12 Months Ended

Jun. 30, 2020

Leases [Abstract]

Leases

6. LEASES

On July 1, 2019, the Company adopted cumulative accounting standard updates initially issued by the FASB that amend the accounting for leases and are codified as ASC 842. These lease accounting changes require operating leases be recorded on the balance sheet through the recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right-of-use (“ROU”) asset.  The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. Leases with an initial term of 12 months or less which do not have an option to purchase the underlying asset that is deemed reasonably certain to be exercised are not recorded on the balance sheet; rather, rent expense for these leases is recognized on a straight-line basis over the lease term, or when incurred if a month-to-month lease. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company’s incremental borrowing rate is utilized. Our lease agreements do not contain any material residual value guarantees.

The Company elected the amended transition requirements allowed for by the FASB in ASU 2018-11, which provides relief from requirements to recast prior comparative periods under ASC 842. As a result, the prior year comparative financial statements have not been restated to reflect the adoption of ASC 842. Additionally, the Company elected the “package of practical expedients” available in ASC 842 whereby an entity need not reassess expired contracts for lease identification or classification as a finance or operating lease, or reassess the initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. Certain of the Company’s lease agreements have lease and non-lease components, which for the majority of leases the Company accounts for separately when the actual lease and non-lease components are determinable. For equipment leases with immaterial non-lease components incorporated into the fixed rent payment, the Company accounts for the lease and non-lease components as a single lease component in determining the lease payment.

The adoption of ASC 842 on July 1, 2019 resulted in the Company recording $1,423 of operating lease liabilities and an equal amount of ROU assets with no impact on retained earnings. The adoption did not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows for the fiscal year ended June 30, 2020.

The Company has operating leases and a financing lease relating to its pharmacy operations, medical office buildings, certain medical equipment and office equipment. All lease agreements generally require the Company to pay maintenance, repairs, property taxes and insurance costs, which are variable amounts based on actual costs. Variable lease costs also include escalating rent payments that are not fixed at commencement but are based on an index determined in future periods over the lease term based on changes in the Consumer Price Index or other measure of cost inflation. Some leases include one or more options to renew the lease at the end of the initial term, with renewal terms that generally extend the lease at the then market rental rates. Leases may also include an option to buy the underlying asset at or a short time prior to the termination of the lease. All such options are at the Company’s discretion and are evaluated at the commencement of the lease, with only those that are reasonably certain of exercise included in determining the appropriate lease term. The components of lease cost and rent expense for the fiscal year ended June 30, 2020 are as follows:

	Fiscal Year Ended
Lease Cost	June 30, 2020
Operating lease cost:
Operating lease cost	$	593
Short-term rent expense		5
Variable lease cost		3
Total operating lease cost	$	601
Finance lease cost:
Amortization right-of-use assets	$	36
Interest on finance lease liabilities		9
Total finance lease cost	$	45

Supplemental balance sheet information relating to leases was as follows:

		As of
	Balance Sheet Classifications	June 30, 2020
Operating Leases:
Operating Lease ROU Assets	ROU Assets	$	970
Finance Leases:
Finance Lease ROU Assets	Property, plant and equipment		203
Accumulated amortization	Accumulated depreciation		43
Current finance lease liabilities	Current maturities of long-term debt		34
Long-term finance lease liabilities	Long-term debt		90

Supplemental cash flow and other information related to leases as of and for the year ended June 30, 2020 are as follows:

	Fiscal Year Ended
Other information	June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	593
Operating cash flows from finance leases	9
Financing cash flow from finance leases	32
Right-of-use assets obtained in exchange for new finance lease liabilities	0
Right-of-use assets obtained in exchange for new operating lease liabilities		1,498
Weighted-average remaining lease term:
Operating leases	3.75
Finance leases	3.41
Weighted-average discount rate:
Operating leases		6.54	%
Finance leases		5.49	%

Commitments relating to non-cancellable operating and finance leases as of June 30, 2020 for each of the next five years and thereafter are as follows:

Payments due within	Operating Leases			Finance Leases
1 year	$	406		$	42
2 years		275			42
3 years		115			42
4 years		106			13
5 years		101			0
Over 5 years		74			0
Total minimum future payments		1,077			139
Less: Imputed interest		(105	)		(15	)
Total liabilities		972			124
Less: Current portion		(365	)		(34	)
Long-term liabilities	$	607		$	90

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Inventory

12 Months Ended

Jun. 30, 2020

Inventory Disclosure [Abstract]

Inventory

5. INVENTORY

Inventory consisted of the following:

	June 30,
	2020		2019
Healthcare Services segment, supplies inventory	$	152	$	157
Pharmacy segment, goods held for sale		1,714		1,859
	$	1,866	$	2,016

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Revenue Recognition and Accounts Receivables

12 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Revenue Recognition and Accounts Receivables

4. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLES

Effective July 1, 2018, the Company adopted the provisions of ASC) 606, “Revenue from Contracts with Customers” which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented. ASC 606 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The adoption of the provisions of ASC 606 had no material impact on the Company’s current or historical financial position, results of operations or cash flows. Additionally, management does not anticipate that the provisions of ASC 606 will have a material impact on the amount or timing of when the Company recognizes revenue prospectively. However, in accordance with ASC 606 the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented. Subsequent material events that alter the payor’s ability to pay are recorded as bad debt expense.

Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. A reconciliation of disaggregated revenue to segment revenue is disclosed in Note 17. Financial Information by Segment.

The Company’s service specific revenue recognition policies are as follows:

Healthcare Services

The Company’s revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rates, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.

Pharmacy

The Company’s revenue is derived primarily from providing pharmacy goods and services to patients and is recognized on the date goods and services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. Revenue is recognized when control of the promised goods or services are transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Each prescription claim represents a separate performance obligation of the Company, separate and distinct from other prescription claims under customer arrangements. Significant portions of the revenue from sales of pharmaceutical and medical products are reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and reduces revenue at the revenue recognition date, to properly account for the variable consideration due to anticipated differences between billed and reimbursed amounts. Accordingly, the total net revenues and receivables reported in the Company’s financial statements are recorded at the amount expected to be ultimately received from these payors.

Medicare Revenue

Net healthcare services revenue is recorded under the Medicare prospective payment system based on an episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a patient, regardless of whether the same provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.

The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Revenue is also adjusted for estimates for variable consideration. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.

In addition to revenue recognized on completed services, the Company also recognizes a portion of revenue associated with services in progress. Services in progress are days of care that begin during the reporting period but were not completed as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of services in progress at the end of the reporting period, expected Medicare revenue per episode and its estimate of the average percentage complete based on services performed.

Non-Medicare Revenue

The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for service-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon the negotiated terms.

Revenue is recorded on an accrual basis based upon the date of service at amounts equal to its established or estimated per-visit rates, and adjusted for estimates for variable consideration, as applicable.

Practical Expedients and Exemptions

The Company’s contracts with its patients have an original duration of one year or less, therefore, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs, and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

The Company’s revenues by payor were as follows for the years ended June 30, 2020 and 2019:

	2020		2019
Medicare	$	20,013	$	18,183
Medicaid		13,956		13,871
Retail and Institutional Pharmacy		6,465		6,649
Managed Care & Other Insurance		6,742		6,220
Self-pay		498		505
Rent		16		63
Other		123		127
Total Net Revenues	$	47,813	$	45,618

Net revenues included an increase of $139 for the year ended June 30, 2020 from the settlement of prior year Medicare and Medicaid cost reports. Net revenues included a decrease of $15 for the year ended June 30, 2019 from the settlement of prior year Medicare and Medicaid cost reports. 

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Discontinued Operations

12 Months Ended

Jun. 30, 2020

Discontinued Operations And Disposal Groups [Abstract]

Discontinued Operations

3. DISCONTINUED OPERATIONS

All of the businesses discussed below are reported as discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation.

Parkside Nursing Home — On March 17, 2019, a subsidiary of the Company sold its Parkside Ellijay Nursing Home (“Parkside”) and related real estate for $7,300. The pre-tax gain on the sale was $2,136.The net proceeds of the sale were retained for working capital and general corporate purposes.

Sold Hospitals – Subsidiaries of the Company have sold substantially all of the assets of four hospitals (“Other Sold Hospitals”) during the period July 2, 2012 to August 19, 2016. The income (loss) before income taxes of the Other Sold Hospitals results primarily from the effects of prior year Medicare and Medicaid cost report settlements and retained professional liability claims expenses.

Life Sciences and Engineering Segment —SunLink retained a defined benefit retirement plan which covered substantially all of the employees of the segment when this 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 fiscal years ended June 30, 2020 and 2019.

Results for all the businesses included in discontinued operations are presented in the following table:

Discontinued Operations—Summary Statement of Earnings Information

	2020			2019
Net Revenues:
Parkside	$	11		$	5,574
Sold Hospitals		26			(581	)
	$	37		$	4,993
Loss Before Income Taxes:
Parkside	$	(246	)	$	(756	)
Sold Hospitals		(172	)		(919	)
Life sciences and engineering		(136	)		(137	)
Loss before income taxes		(554	)		(1,812	)
Gain on Sale:
Parkside		0			2,136
Gain on Sale		0			2,136
Income tax expense		0			82
Earnings (Loss) from discontinued operations	$	(554	)	$	242