SunLink Health Systems, Inc. Announces Fiscal 2020 Fourth Quarter and Annual Results and COVID-19 Update

SunLink Health Systems, Inc. (NYSE American: SSY) today announced a loss from continuing operations of $600,000 (a loss of $0.09 per fully diluted share) for its fourth fiscal quarter ended June 30, 2020 compared to a loss of $1,143,000, (a loss of $0.16 per fully diluted share) for the quarter ended June 30, 2019. Net loss for the quarter ended June 30, 2020 was $679,000 (a loss of $0.10 per fully diluted share) compared to a net loss of $2,221,000 ($0.32 per fully diluted share) for the quarter ended June 30, 2019.

Consolidated net revenues from continuing operations for the quarters ended June 30, 2020 and 2019 were $10,689,000 and $10,899,000, respectively, a decrease of 1.9% in the current fiscal year's fourth quarter compared to the comparable quarter of the prior fiscal year. Net revenues decreased in the current fiscal quarter primarily due to decreased physician net revenues and decreased Pharmacy segment revenues resulting from decreased Retail and Institutional Pharmacy sales.

SunLink reported an operating loss for the quarter ended June 30, 2020 of $352,000, compared to an operating loss for the quarter ended June 30, 2019 of $966,000.

Loss from discontinued operations was $79,000 (or a loss of $0.01 per fully diluted share) for the quarter ended June 30, 2020 compared to a loss from discontinued operations of $1,078,000 ($0.15 per fully diluted share) for the quarter ended June 30, 2019.

For the fiscal year ended June 30, 2020, SunLink reported a loss from continuing operations of $586,000 ($0.08 per fully diluted share) compared to a loss from continuing operations of $1,996,000 (or a loss of $0.28 per fully diluted share) for the fiscal year ended June 30, 2019. For the fiscal year ended June 30, 2020, SunLink reported a net loss of $1,140,000 (or a loss of $0.16 per fully diluted share) compared to a net loss of $1,754,000 (or $0.25 per fully diluted share) for the fiscal year ended June 30, 2019. Loss from discontinued operations was $554,000 (or a loss of $0.08 per fully diluted share) for the fiscal year ended June 30, 2020 compared to earnings from discontinued operations of $242,000 ($0.03 per fully diluted share) for the fiscal year ended June 30, 2019. Results from discontinued operations in the current year include expenses incurred in connection with retained professional liability claims of hospitals previously sold. Earnings from discontinued operations for the fiscal year ended June 30, 2019 includes a pre-tax gain of $2,136,000 on the sale of a subsidiaries nursing home and related property.

SunLink had approximately 3% fewer fully diluted weighted average common shares outstanding for the year ended June 30, 2020 compared to the comparable period last year due to share repurchases in fiscal 2020 and 2019.

COVID-19 Pandemic Update

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.

Due to the COVID-19 pandemic, our Healthcare businesses have experienced material reductions in demand. 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 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.

Since the beginning of the COVID-19 pandemic, our Pharmacy business has also 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 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. The effect of the COVID?19 pandemic and public and governmental responses to it negatively affected our third and fourth quarter results.

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 Paycheck Protection Plan ("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 $3,234,000 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 a 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 repayable over two years at a 1% annual interest rate beginning two months after loan forgiveness is determined by the 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

Also, as part of CARES, two subsidiaries of the Company received total payments of approximately $4,586,000 under the Provider Relief Fund ("PRF"). These funds were allocated to Medicare facilities and providers affected by COVID-19 based on eligible providers patient net 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. Dept. of Health and Human Services ("HHS") on September 19, 2020, "Lost Revenues" are patient care revenues less patient care related expenses, capped at the provider's 2019 net gain from healthcare related sources or, up to a net zero gain/loss in 2020 if the provider reported negative net operating income in 2019.

As noted above, during the fourth quarter of fiscal 2020, our Healthcare and Pharmacy segments received funding of approximately $4,586,000 in general and targeted PRF distributions and $3,234,000 in PPP loans, administered by the SBA, both provided for under the CARES Act, for a total of $7,820,000 of such funding.

The distributions from the PRF are subject to repayment if we are unable 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 attributable to COVID-19. Such funds under the PRF are accounted for as government grants and are recognized on 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, the Company recognized $54,000 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 "Unearned CARES Act funds" 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 not assurance we will be able to do so, our ability to retain some or all of the distributions received will be adversely affected.

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.

SunLink Health Systems, Inc. is the parent company of subsidiaries that own and operate healthcare properties and businesses in the Southeast. Each of the Company's businesses is operated locally with a strategy of linking patients' needs with healthcare professionals. For additional information on SunLink Health Systems, Inc., please visit the Company's website.

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the company's business strategy. These forward-looking statements are subject to certain risks, uncertainties and other factors, which could cause actual results, performance and achievements to differ materially from those anticipated. Certain of those risks, uncertainties and other factors are disclosed in more detail in the company's Annual Report on Form 10-K for the year ended June 30, 2019 and other filings with the Securities and Exchange Commission which can be located at www.sec.gov.