SUNLINK HEALTH SYSTEMS INC - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2021

OR

For the transition period from                      to                     

Commission File Number 1-12607

SUNLINK HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices)

(Zip Code)

(770) 933-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 filings 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 (of for such shorter period that the registrant was required to submit 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, 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 Exchange Act).    Yes   ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

 The number of Common Shares, without par value, outstanding as of May 13, 2021 was 6,920,053 . 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See notes to condensed consolidated financial statements.

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SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE EARNINGS (LOSS)

(In thousands, except per share amounts)

(Unaudited)

See notes to condensed consolidated financial statements.

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SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED MARCH 31, 2021

(all dollar amounts in thousands except per share amounts)

(Unaudited)

Note 1. –Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements as of March 31, 2021 and for the three and nine month periods ended March 31, 2021 and 2020 have been prepared in accordance with Rule 10-01 and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and, as such, do not include all information required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated June 30, 2020 balance sheet included in this interim filing has been derived from the audited financial statements at that date but does not include all the information and related notes required by GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements included in the SunLink Health Systems, Inc. (“SunLink”, “we”, “our”, “ours”, “us” or the “Company”) Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on September 28, 2020. In the opinion of management, the Condensed Consolidated Financial Statements, which are unaudited, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the periods indicated. The results of operations for the three and nine month periods ended March 31, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

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 subsidiary of the Company owns or operates any particular asset, business or property. Each operation and business described in this filing is owned and operated by a distinct and indirect subsidiary of SunLink Health System, Inc.

Note 2. – Business Operations

SunLink Health Systems, Inc., through subsidiaries, owns businesses which are providers of healthcare services in certain markets in the United States. SunLink’s subsidiaries’ businesses are composed of two business segments:

Healthcare Services

Pharmacy

The Pharmacy segment is composed of three operational areas which are conducted primarily in markets in     south Louisiana:

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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.

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. Such government health and safety protocols and guidance are 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 were placed on leave or in quarantine.

In late December 2020, we began receiving allotments of COVID-19 vaccine and have vaccinated patients, providers, employees, and staff in accordance with the protocols and guidelines in the states where we operate that requested the vaccination.  Not all such individuals have been vaccinated to date and some individuals have not consented to vaccination. We are also vaccinating members of the community that have requested a vaccination as we have COVID-19 vaccine available.

In our Healthcare businesses, we have experienced material reductions in demand and lost revenues due to the COVID-19 outbreak. There has been 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 in the quarter ended June 30, 2020 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 during much of the pandemic, especially with respect to access to personal protective equipment, cleaning supplies and COVID-19 testing materials, which continue to be more expensive compared to pre-pandemic prices. We continue to monitor supplies and seek additional sources of many supply items. A reduction in the availability of qualified employees has also occurred and despite good faith efforts to do so, we 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 reduced sales trends in certain areas, increased costs, and reduced staff.  Many of our primary physician referral sources have been operating at substantially reduced capacity.  Until these referral sources are at full capacity, we believe the COVID-19 pandemic will continue to affect the demand for DME products and Retail and Institutional Pharmacy drugs and products. Reductions in employee hours have been made in response to the lower demand. Nursing homes and other customers of such Institutional Pharmacy services are currently being adversely affected by the continuation 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 certain public and governmental responses to it have negatively affected our last five fiscal quarters results.

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During the period from April 1, 2020 to March 31, 2021, our Healthcare and Pharmacy segments received $5,070 in general and targeted Provider Relief Fund (“PRF”) distributions. During the quarter ended June 30, 2020, we also received $3,234 in Paycheck Protection Programs (“PPP”) loans, administered by the SBA. Both the PRF and PPP funds are provided for under the CARES Act and we have received a total of $8,304 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 designated, allowable healthcare-related expenses and capital expenditures attributable to COVID-19,  and for “Lost Revenues” (as defined by HHS). Such 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 have been met. HHS has released “CARES Act Provider Relief Fund Frequently Asked Questions (“FAQ”) numerous times since April 3, 2020 to clarify PRF requirements and has provided expansive examples of the reporting requirements in efforts to demonstrate amounts of the PRF received that may be considered to have been earned and which may be retained. The Company continues to review and analyze the FAQ. Of the $5,070 of PRF COVID-19 related distributions received during the period from April 1, 2020 through March 31, 2021,  we have reported $3,459 as other income in our consolidated statement of operations for our nine months ended March 31, 2021 related to COVID-19 related expenses and Lost Revenues. Our uses of PRF consisted of COVID-19 personal protective equipment, allowable capital expenditures and salary expenses for allowable patient care activities. The Lost Revenues were calculated as the reduction of patient care revenues in calendar 2020 compared to the calendar 2020 budget and to actual patient care revenues of calendar 2019 in accordance with the latest guidance from HHS.  Based upon the current HHS guidance, at the end of the quarter ended June 30, 2021, we will calculate the change of patient revenues for the period of January 1, 2021 to June 30, 2021 compared to the actual patient care revenue of the period January 1, 2020 to June 30, 2020. If the period January 1, 2021 to June 30, 2021 is less than the same period for calendar 2020, the decrease is eligible to be recognized as Lost Revenue in the quarter ended June  30, 2021. The unrecognized amounts of the PRF are recorded under the caption “Unearned CARES Act Funds” in our consolidated balance sheets. We will continue to monitor compliance with 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 PRF received may be impacted and we and may have to return the unutilized portion of those funds, if any, in the future.

Forgiveness of PPP loans may be available if the loans were 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 PPP loan proceeds was amended to allow for a 24-week utilization period. The borrowing subsidiaries must apply for loan forgiveness with the lending bank within ten months after the end of the allowable use period. The forgiveness applications are to be reviewed by both the lender and the SBA and a loan forgiveness amount, if any, 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 has applied for (but has not received) forgiveness for $287 of its $3,234 of PPP loans and has recorded no income relating to the PPP loans through March 31, 2021.

Going forward, the Company is unable to determine the extent to which the COVID-19 pandemic will continue to affect its assets and operations. 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; existing and potential government assistance that may be provided; and the requirements of  PRF receipts and PPP loans, including our ability to retain such PRF received and obtain forgiveness of the PPP Loans.

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 next twelve months. However, if the COVID-19 pandemic continues for an extended

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period, or if we are unable to retain PRF funds received and obtain forgiveness of the PPP Loans, we expect to experience significant losses and additional financial assistance will likely be required.  

Note 3. – Discontinued Operations

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

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

Sold Hospitals – Subsidiaries of the Company have sold substantially all the assets of five hospitals (“Sold Hospitals”) during the period July 2, 2012 to March 17, 2019. The loss before income taxes of the Sold Hospitals results primarily from the effects of retained professional liability insurance and claims expenses and settlement of a lawsuit.

Life Sciences and Engineering Segment —SunLink retained a defined benefit retirement plan which covered substantially all the employees of this segment when the segment was sold in fiscal 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and related tax benefit or expense is reflected in the results of operations for this segment for the three and nine months ended March 31, 2021 and 2020, respectively.

The components of pension expense for the three and nine months ended March 31, 2021 and 2020, respectively, were as follows:

SunLink contributed $75  to the plan in the nine months ended March 31, 2021 and expects to contribute an additional $25 during the last fiscal quarter of the fiscal year ending June 30, 2021.

Note 4. – Shareholders’ Equity

Stock-Based Compensation – For the three months ended March 31, 2021 and 2020, the Company recognized  no stock-based compensation for options issued to employees and directors of the Company. For the nine

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months ended March 31, 2021 and 2020, the Company recognized  $0 and $28, respectively, of stock-based compensation for options issued to employees and directors of the Company. The fair value of the share options granted was estimated using the Black-Scholes option-pricing model.  There were no share options granted during the three and nine months ended March 31, 2021. There were 50,000 share options granted under the 2011 Director Stock Option Plan during the nine months ended March 31, 2020. During the three months ended March 31, 2021, 60,000 share options were exercised in a cash-less option  exchange which resulted in an additional 20,732 commons shares being issued.  

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.  As of March 31, 2020, a total of 87,534 shares had been repurchased at a cost of approximately $101. The chart below shows by month the total shares repurchased and average price per share paid for the 2019-2020 Program through March 31, 2020 and for the 2019-2020 Program in total.

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.

Note 5. – Revenue and Accounts Receivables

Revenues by payor were as follows for the three and nine months ended March 31, 2021 and 2020:

Revenue relating to positive settlements of prior year Medicare and Medicaid cost reports of $69 and $107 were recorded in the nine months ended March 31, 2021 and 2020, respectively.

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Note 6. – Intangible Assets

Intangibles consist of the following, net of amortization:

Amortization expense was $7 and $29 for the three months ended March 31, 2021 and 2020, respectively. Amortization expense was $21 and $87 for the nine months ended March 31, 2021 and 2020, respectively.

Note 7. – Long-Term Debt

Long-term debt consisted of the following:

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 is 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 were 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 the allowable use of loan proceeds was amended from eight weeks to 24-weeks. The borrowing subsidiaries must apply for loan forgiveness with the bank within eleven months after the allowable use period. As of the date of this filing, the Company has applied for loan forgiveness (but has not received) for $287 of its PPP loans. 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 our 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.  

Note 8. – Income Taxes

Income tax benefit of $ 62 and $47 (all state tax  benefit) was recorded for continuing operations for the three and nine months ended March 31, 2021, respectively. No income tax expense was recorded for continuing operations for the three and nine months ended March 31, 2020.

Of the CARES Act provisions, the most material income tax considerations related to the Company are related 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 the preparation of the March 31, 2021 financial statements, PRF (to the extent the applicable terms and conditions required to retain the funds are met “Retainable PRF”) are fully includable in taxable income in the Company’s tax returns in the fiscal year received.   Due to the enactment of the Consolidated Appropriations Act, 2021, on December 27, 2020, Congress specifically allows the deduction of any expenses associated with forgiven PPP loan proceeds.  It is the Company’s assumption at March 31, 2021 that all PPP Loan  associated expenses will be deductible for income tax. The Company has sufficient federal and state net operating

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losses for the period to cover the resulting provisional March 31, 2021 taxable income, The three and nine months ended March 31, 2021 current tax benefit, as booked, represents the reversal of state income tax accrued for expenses related to PPP loan forgiveness that will be tax deductible that were previously considered not tax deductible until the enactment of the Consolidated Appropriations Act, 2021, on December 27, 2020 .

Because Retainable PRF is includable in the tax year received, the Company included $4,586 of Retainable PRF in taxable income for its tax year ended June 30, 2020 and is including $485 of the Retainable PRF received during the nine months ended March 31, 2021, in taxable income relating to its tax year ended June 30, 2021. The Company is projecting a taxable loss for the period ended June 30, 2021 notwithstanding inclusion of the $485 of Retainable PRF.

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

At March 31, 2021, consistent with the above process, we evaluated the need for a valuation allowance against our deferred tax assets and determined that it was more likely than not that none of our deferred tax assets would be realized. As a result, in accordance with ASC 740, we recognized a valuation allowance of $8,445 against the deferred tax asset so that there is no net long-term deferred income tax asset or liability at March 31, 2021. We conducted our evaluation by considering available positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. Also, more significant weight was given to evidence that directly related to our current financial performance as compared to less current evidence and future performance.

The principal negative evidence that led us to determine at March 31, 2021 that all the deferred tax assets should have full valuation allowances was the projected current fiscal year tax loss as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Services Segment businesses operate and the Federal income tax net operating loss carry-forward of approximately $19,017. The net operating loss carry-forward includes the $5,070 of Retained PRF received through March 31, 2021.  

For Federal income tax purposes, at March 31, 2021, the Company had approximately $19,017 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 Tax Cut and Jobs Act on December 22, 2017, federal net operating loss carryforwards generated in taxable years beginning after December 31, 2017 now have no expiration date. The Company’s returns for the periods prior to the fiscal year ended June 30, 2017 are no longer subject to potential federal and state income tax examination.

Note 9. – Leases

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

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in determining the appropriate lease term. The components of lease cost and rent expense for the three and nine months ended March 31, 2021 and 2020 are as follows:  

Supplemental balance sheet information relating to leases was as follows:

Supplemental cash flow and other information related to leases as of and for the three and nine months ended March 31, 2021 and 2020 are as follows:

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Commitments relating to non-cancellable operating and finance leases as of March 31, 2021 for each of the next five years and thereafter are as follows:

Note 10. – Accrued Sales Tax

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 such sales taxes for any period subsequent to those covered by such amended returns have been paid on the related reimbursement received with respect to 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 claiming refunds for such sales taxes. Refunds have been received from two taxing authorities in the amounts claimed on amended returns for such authorities. Accordingly, amounts claimed and received from these two taxing authorities were recorded as revenues in the fiscal quarter ended December 31, 2019 in the amount of $359. The Company’s position with respect to such refunds claimed from other local taxing authorities is still uncertain as these claim are under audit by such local taxing authorities and such claims have not yet been determined probable of collection; therefore, no amount is recorded as a receivable by the Company at March 31, 2021 for such other local taxing authorities. In addition, the Company has continued to accrue the amounts for sales tax estimates from such other taxing authorities in amounts it believes would be payable if its amended returns and continuing position were challenged and the Company were not to prevail.  The unpaid sales tax accrued as a liability at March 31, 2021 is $1,824 compared to $1,411 at June 30, 2020.

Note 11. – Commitments and Contingencies

Contractual obligations, commitments and contingencies related to outstanding debt and interest in continuing operations at March 31, 2021 were as follows:

Contingencies do not reflect potential amounts for claims, litigation and other uncertainties, which matters are not probable or cannot be estimated, such as for certain professional liabilities and contract matters, including those relating to prior assets sales.

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In March 2021, the Company announced that its wholly-owned subsidiary, Trace Regional Hospital, implemented its Trace Forward Capital Plan (“Plan”) totaling $2,000 to expand upgrade and improve its physical plant, patient care ancillary services and support areas.  The Plan is being funded from Trace’s cash on hand, a portion of which was funded by various provisions of the CARES Act. As of March 31, 2021, approximately $404 has been spent and approximately $916 has been committed to be spent on the various projects of the Plan.

Note 12. – Related Party Transactions

A director of the Company is a member of a law firm which provides services to SunLink. The Company expensed an aggregate of $85 and $33 for legal services to this law firm in the three months ended March 31, 2021 and 2020, respectively.   The Company expensed an aggregate of $156 and $213 for legal services to this law firm in the nine months ended March 31, 2021 and 2020, respectively.  Included in the Company’s condensed consolidated balance sheets at March 31, 2021 and June 30, 2020 is $81 and $6, respectively, of amounts payable to this law firm.        

Note 13. – Asset Sales   

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 nine months ended March 31, 2020.

Note 14. – Financial Information by Segment

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 SunLink’s chief executive officer and other members of SunLink’s 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). At the beginning of the current fiscal year, the Company modified the approach to certain assets, and expense allocations to calculate segment assets, operating profit and depreciation and amortization. All prior year amounts have been

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changed to consistently apply the changed allocation method used in the current year. Segment information as of March 31, 2021 and 2020 and for the three and nine months then ended is as follows:

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share and admissions data)

Forward-Looking Statements

This Quarterly Report and the documents that are incorporated by reference in this Quarterly Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as “may,” “believe,” “will,” “seeks to”, “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on the current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. Throughout Item 2, SunLink Health Systems, Inc., and its consolidated subsidiaries are referred to on a collective basis as “SunLink”, “we”, “our”, “ours”, “us” or the “Company.” This drafting style is not meant to indicate that SunLink Health Systems, Inc. or any particular subsidiary of SunLink Health Systems, Inc. owns or operates any asset, business, or property. Healthcare services, pharmacy operations and other businesses described in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors that could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance, and achievements to differ materially from those anticipated, include, but are not limited to:

General Business Conditions