10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2024

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

For the transition period from to

Commission File Number 1-12607

SUNLINK HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

    Georgia

    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)

(Zip Code)

(770) 933-7000

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered Symbol(s)
Common Shares without par value	SSY	NYSE American

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 November 12, 2024 was 7,040,603.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	September 30,
	2024			June 30,
	(unaudited)			2024
ASSETS
Current Assets:
Cash and cash equivalents	$	7,529		$	7,170
Receivables - net		3,011			3,371
Inventory		1,547			1,553
Current assets held for sale		1,915			1,959
Prepaid expense and other assets		1,614			1,611
Total current assets		15,616			15,664
Property, plant and equipment, at cost		12,498			12,683
Less accumulated depreciation		(10,182	)		(9,874	)
Property, plant and equipment - net		2,316			2,809
Noncurrent Assets:
Intangible asset		1,180			1,180
Right of use assets		473			516
Other noncurrent assets		44			443
Total noncurrent assets		1,697			2,139
TOTAL ASSETS	$	19,629		$	20,612
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,338		$	1,905
Accrued payroll and related taxes		1,351			955
Current operating lease liabilities		339			331
Other accrued expenses		823			1,022
Total current liabilities		3,851			4,213
Long-Term Liabilities
Noncurrent liability for professional liability risks		139			49
Long-term operating lease liabilities		146			197
Other noncurrent liabilities		69			180
Total long-term liabilities		354			426
Commitments and Contingencies
Shareholders’ Equity
Preferred Shares, authorized and unissued, 2,000 shares		0			0
Common Shares, without par value:
Issued and outstanding, 7,041 shares at September 30, 2024 and 7,041 at June 30, 2024		3,521			3,521
Additional paid-in capital		10,747			10,747
Retained earnings		929			1,478
Accumulated other comprehensive income		227			227
Total Shareholders’ Equity		15,424			15,973
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	19,629		$	20,612

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE EARNINGS (LOSS)

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended
	September 30,
	2024			2023
Net revenues	$	7,923		$	8,555
Costs and Expenses:
Cost of goods sold		4,475			4,771
Salaries, wages and benefits		3,078			2,617
Supplies		34			34
Purchased services		319			286
Other operating expenses		804			906
Rent and lease expense		94			91
Depreciation and amortization		313			300
Operating Loss		(1,194	)		(450	)
Other Income (Expense):
Gains on sale of assets		694			2
Interest income, net		58			22
Loss from Continuing Operations before income taxes		(442	)		(426	)
Income Tax Expense		0			2
Loss from Continuing Operations		(442	)		(428	)
Loss from Discontinued Operations, net of tax		(107	)		(916	)
Net Loss		(549	)		(1,344	)
Other comprehensive income		0			0
Comprehensive Loss	$	(549	)	$	(1,344	)
Loss Per Share:
Continuing Operations:
Basic	$	(0.06	)	$	(0.06	)
Diluted	$	(0.06	)	$	(0.06	)
Discontinued Operations:
Basic	$	(0.02	)	$	(0.13	)
Diluted	$	(0.02	)	$	(0.13	)
Net Loss:
Basic	$	(0.08	)	$	(0.19	)
Diluted	$	(0.08	)	$	(0.19	)
Weighted-Average Common Shares Outstanding:
Basic		7,041			7,033
Diluted		7,041			7,033

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Common Shares				Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total Shareholders’ Equity
	Shares		Amount
JUNE 30, 2024		7,041	$	3,521	$	10,747	$	1,478		$	227	$	15,973
Net loss		0		0		0		(549	)		0		(549	)
SEPTEMBER 30, 2024		7,041	$	3,521	$	10,747	$	929		$	227	$	15,424



JUNE 30, 2023		7,032	$	3,516	$	10,746	$	3,005		$	150	$	17,417
Share options exercised		9		5		1		0			0		6
Net loss		0		0		0		(1,344	)		0		(1,344	)
SEPTEMBER 30, 2023	$	7,041	$	3,521	$	10,747	$	1,661		$	150	$	16,079

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months
	September 30,
	2024			2023
Net Cash Used in Operating Activities	$	(915	)	$	(1,137	)
Cash Flows Provided by (Used in) Investing Activities:
Expenditures for property, plant and equipment - continuing operations		(191	)		(476	)
Expenditures for property, plant and equipment - discontinued operations		0			(53	)
Proceeds from sale of property, plant and equipment - continuing operations		401			5
Proceeds from sale of investment in minority owned equity investment		1,064			0
Net Cash Provided by (Used in) Investing Activities		1,274			(524	)
Cash Flows Provided by (Used in) Financing Activities:
Proceeds from share options exercises		0			6
Payments on long-term debt - discontinued operations		0			(11	)
Net Cash Used in Financing Activities		0			(5	)
Net Increase (Decrease) in Cash and Cash Equivalents		359			(1,666	)
Cash and Cash Equivalents Beginning of Period		7,170			4,486
Cash and Cash Equivalents End of Period	$	7,529		$	2,820
Supplemental Disclosure of Cash Flow Information:
Cash Paid (Received) for:
Interest	$	(58	)	$	(22	)
Income taxes	$	0		$	43
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities	$	37		$	18

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED SEPTEMBER 30, 2024

(all dollar amounts in thousands except per share amounts)

(Unaudited)

Note 1. –Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements as of September 30, 2024 and for the three month periods ended September 30, 2024 and 2023 have been prepared in accordance with Rule 8-03 and Article 8-03 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, 2024 balance sheet included in this interim filing has been derived from the audited consolidated financial statements at that date but does not include all the information and related notes required by GAAP for complete consolidated 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, 2024, filed with the SEC on September 30, 2024. 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 month period ended September 30, 2024 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 condensed consolidated financial statements, SunLink Health Systems, Inc., and its consolidated subsidiaries are referred to on a collective basis as “SunLink”, “we”, “our”, “ours”, “us” or the “Company.” This drafting style is not meant to indicate that SunLink Health Systems, Inc. or any particular subsidiary of 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 Systems, Inc.

Note 2. – Business Operations

The Company’s continuing operations are composed of a pharmacy business and an information technology (“IT”) business.

The pharmacy business, is composed of four operational areas conducted in three locations in southwest Louisiana:

· Retail pharmacy products and services, consisting of retail pharmacy sales.

· 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 extended care and rehabilitation centers, 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.

A subsidiary, SunLink Health Systems Technology (“SHST Technology”), provides information technology (“IT”) services to outside customers, primarily in rural healthcare settings, and to SunLink subsidiaries.

COVID-19 Pandemic

The Company’s operations for the three months ended September 30, 2024 continued to be negatively impacted by the effects of the aftermath of the COVID-19 pandemic, although mitigated somewhat from prior quarters, including among other factors, difficulty hiring qualified employees, rising labor and supply costs, and supply chain challenges resulting in inability to obtain pharmacy and DME products on a timely, cost effective basis.

Note 3. – Discontinued Operations

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

Sale of Trace Regional Hospital, medical office building, three patient clinics, and Trace Extended Care operations – On January 22, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. (“Southern”), reached revised agreements (the "Revised Agreements") for the sale of Trace Regional Hospital, a vacant medical office building and three (3) patient clinics in Chickasaw County, MS, (collectively “Trace”) to Progressive Health of Houston, LLC (“Progressive”) pursuant to which (i) Southern sold certain personal and intangible property to Progressive for $500 under to an asset purchase agreement ('Trace Hospital Assets Sale"), (ii) entered into a six-month net lease of the real property of the hospital, medical office building and the clinics real property (the "Trace Real Estate") for $20 per month, (iii) entered into a contract to sell the Trace real estate to Progressive (the "Trace Real Estate Sale") for $2,000 and (iv) engaged Progressive under a management agreement to manage the operations of Trace pending receipt of certain regulatory approvals, which were received February 29, 2024. The Company recorded a loss of $962 on the Trace Hospital Assets Sale during the year ended June 30, 2024, which included sale expenses of $174. The Trace Real Estate Sale was completed on October 9, 2024. The Company reported an additional asset impairment reserve of $44 in the quarter ended September 30, 2024 for transaction expenses incurred at the sale date. SunLink earlier reported an impairment loss of $1,974 at December 31, 2023 to reduce the net value of the Trace hospital assets to the estimated sale proceeds under the revised agreement. An impairment reserve of $1,739 remains at September 30, 2024 for the Trace Real Estate Sale assets. On June 3, 2024, the Company's indirect subsidiary, Southern Health Corporation of Houston, Inc. and an affiliate completed the sale of its Trace Extended Care & Rehab senior care facility ('Trace Extended Care") and related real estate in Houston, Mississippi for approximately $7,100 (the "Trace Extended Care Facility Sale"). The net proceeds of approximately $6,522 have been retained for working capital and general corporate purposes. The Company recorded a gain of $5,584 during the fiscal year ended June 30, 2024 on the Trace Extended Care Facility Sale, which included sale expenses of $578.

Sold Hospitals– Subsidiaries of the Company have sold substantially all the assets of five (5) other hospitals (“Sold Facilities”) during the period July 2, 2012 to March 17, 2019. The loss before income taxes of the Sold Facilities 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 year 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 discontinued operations for this segment for the three months ended September 30, 2024 and 2023, respectively.

The components of pension expense for the three months ended September 30, 2024 and 2023, respectively, were as follows:


	Three Months Ended
	September 30,
	2024			2023
Interest cost	$	9		$	11
Expected return on assets		(13	)		(9	)
Amortization of prior service cost		0			0
Net pension (income) expense	$	(4	)	$	2

Per the Actuarial Valuation Report for the plan year beginning July 1, 2024, no minimum contribution amount is required for the pension plan year ended June 30, 2025. As such SunLink did not make any contributions to the plan during the three months ended September 30, 2024 and does not plan contribute any funds during the last nine months of the fiscal year ending June 30, 2025.

Statements of operations from discontinued operations for the three months ended September 30, 2024 and 2023. The results below primarily reflect the reporting of Trace as discontinued operations as a result of the Company's Revised agreement to sell Trace and its sale of Trace Extended Care, are as follows:


	Three Months Ended
	September 30,
	2024			2023
Net Revenues	$	16		$	2,672
Costs and Expenses:
Salaries, wages and benefits		11			1,898
Supplies		0			289
Purchased services		44			706
Other operating expense		24			528
Rent and lease expense		0			34
Depreciation and amortization		0			133
Operating Loss		(63	)		(916	)
Other Income (Expense):
Impairment loss of Trace Hospital Real Estate and related sale expenses		(44	)		0
Loss from Discontinued Operations before income taxes		(107	)		(916	)
Income Tax Expense		0			0
Loss from Discontinued Operations, net of tax	$	(107	)	$	(916	)

Details of assets and liabilities held for sale at September 30, 2024 and June 30, 2024, are as follows:


	September 30,			June 30,
	2024			2024
Property, plant and equipment, net	$	3,654		$	3,654
Impairment reserve		(1,739	)		(1,695	)
Total assets held for sale	$	1,915		$	1,959

Note 4. – Shareholders’ Equity

Stock-Based Compensation – For the three months ended September 30, 2024 and 2023, the Company recognized no stock-based compensation for options issued to employees and directors of the Company. There were no shares issued as a result of options exercised during the three months ended September 30, 2024. There were 9,000 shares issued as a result of options exercised during the three months ended September 30, 2023.

Note 5. – Revenue and Accounts Receivable

Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by 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 is shown below.

Revenues by payor were as follows for the three months ended September 30, 2024 and 2023:


	Three Months Ended
	September 30,
	2024		2023
Medicare	$	3,719	$	3,830
Medicaid		1,726		1,650
Retail and Institutional Pharmacy		1,796		1,704
Private Insurance		467		1,170
Self-pay		197		180
Other		18		21
Total Net Revenues	$	7,923	$	8,555

The revenues for the three months ended September 30, 2023 includes $321 of prior period sales tax refunds.

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

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 condensed consolidated financial statements are recorded at the amount expected to be ultimately received from these payors.

Receivables and Provision for Credit Losses

The Company adopted Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 326, Financial Statements – Credit Losses (“Topic 326”) with an adoption date of July 1, 2023. This standard requires a financial asset (or a group of financial assets) measured at amortized cost basis, to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial assets. The Company evaluates the valuation of accounts receivable concessions allowances 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. The model is based on the credit losses expected to arise over the life of the asset based on the Company’s expectations as of the balance sheet date through analyzing historical customer data as well as taking into consideration current and estimated future economic trends. The Company adopted Topic 326 and determined it did not have a material financial impact.

The roll forward of the allowance for credit losses for the three months ended September 30, 2024 and 2023, was as follows:



	Three Months Ended			Three Months Ended
	September 30,			September 30,
	2024			2023
June 30, balance	$	240		$	532
Concession allowance expense		61			79
Write-offs		(45	)		(203	)
September 30, balance	$	256		$	408

Note 6. – Intangible Assets

As of September 30, 2024 and June 30, 2024, intangible assets consist solely of an indefinite-lived trade name of $1,180 relating to its Carmichael acquisition.

Note 7. – Asset Sales

On August 2, 2024, the Company sold its all its minority equity ownership investment in a subsidiary to the majority owner for cash of $1,064 which resulted in a pre-tax gain on the sale of $665 for the quarter ended September 30, 2024.

On September 6, 2024, the Company sold 24.7 acres of undeveloped land in Ellijay, GA, for cash of $401 which resulted in a pre-tax gain on the sale of $29 for the quarter ended September 30, 2024.

Note 8. – Income Taxes

No income tax expense was recorded for continuing operations for the three months ended September 30 2024. Income tax expense of $2 (all state income taxes) was recorded for continuing operations for the three months ended September 30, 2023.

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 September 30, 2024, 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 $8,183 against the deferred tax asset so that there is no net long-term deferred income tax asset at September 30, 2024. 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. A long-term deferred tax liability of $69 is recorded within other noncurrent liabilities in the accompanying condensed consolidated balance sheet of September 30, 2024 to reflect the deferred tax liability for the non-amortizing trade name intangible asset.

The principal negative evidence that led us to determine at September 30, 2024 that all the deferred tax assets should have full valuation allowances was historical tax losses and the projected current fiscal year tax loss. For purposes of evaluating our valuations allowances, the Company’s history of losses represent significant historical negative evidence and we have recognized none of our federal income tax net operating loss carry-forward of approximately $26,502.

For federal income tax purposes, at September 30, 2024, the Company had approximately $26,502 of estimated net operating loss carry-forwards available for use in future years subject to the possible limitations of the provisions of Internal Revenue Code Section 382. These net operating loss carryforwards expire primarily in fiscal year 2025 through fiscal year 2038; however, with the enactment of the Tax Cut and Jobs Act on December 22, 2017, federal net operating loss carryforwards generated in taxable years beginning after December 31, 2017 now have no expiration date. The Company’s returns for the periods prior to the fiscal year ended June 30, 2020 are no longer subject to potential federal and state income tax examination. Net operating loss carry-forwards generated in tax years prior to June 30, 2020 are still subject to redetermination in potential federal income tax examination.

Note 9. – Leases

The Company, as lessee, has operating leases relating to its pharmacy operations, certain medical equipment, and office equipment. All lease agreements generally require the Company to pay maintenance, repairs, property taxes and insurance costs, all of 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 three months ended September 30, 2024 and 2023 are as follows:


		Three Months Ended

SEC Form 10-Q filed by SunLink Health Systems Inc.