SUNLINK HEALTH SYSTEMS INC

ITEM 1A. RISK FACTORS

Risk Fa 

Information regarding risk factors appears in Managements Discussion and Analysis of Financial Condition and Results of Operations  Forward-Looking Statements in Part I  Item 2 of this Quarterly Report on Form 10-Q and in Risks Factors Relating to an Investment in SunLink

Inin Part I  Item 1A of the Companys Annual Report on Form 10-K for the year ended June 30, 2024 (the Annual Report). We believe there have been no material changes from the risk factors previously disclosed in the Annual Report except as set forth below under Risks Related to the Merger and Risks Related to Regional and the Combined Company after Completion of the Merger.

In addition to the matters set forth herein, the reader should carefully consider, in addition to the other information set forth in this Quarterly Report on Form 10-Q, the risk factors discussed in our Annual Report that could materially affect our business, financial condition or future results. Such risk factors are expressly incorporated herein by reference. The risks described in our Annual Report are not the only risks facing our Company. In addition to risks and uncertainties inherent in formation regarding risk factors appears in MDA  Forward-Looking Statementward-looking statements contained in this Quarterly Report on Form 10-Q, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Whenever we refer to SunLink, Company, we," "our, or us in this Item 1A, we mean SunLink Health Systems, Inc. and its subsidiaries, unless the context suggests otherwise.

On April 15, 2025, the Company and Regional Health Properties, Inc. (Regional) jointly announced that they have entered into an amended and restated agreement and plan of merger (the merger agreement), pursuant to which SunLink is to merge with and into Regional (the merger) in exchange for the issuance to SunLinks shareholders of an aggregate of approximately 1,595,401 shares of Regional common stock and 1,408,121 shares of Regionals newly-authorized Series D 8% Cumulative Convertible Redeemable Participating Preferred Shares (the Regional Series D Preferred Stock) with an initial liquidation preference of $12.50 per share. The merger agreement has been approved by each companys board of directors and completion of the transaction remains subject to the receipt of the approvals of the shareholders of both Regional and SunLink, regulatory approvals and satisfaction of customary closing conditions. The merger agreement is further described in the Companys Current Report on Form 8-K filed with the SEC on April 18, 2025.

There are a number of risks and uncertainties relating to the merger. Because of these risks and uncertainties, iwe have supplemented the risk factors previously disclosed in Part I  Item 2 of t1A of the Annual Report to add the risk factors below. For more information regarding the merger, SunLinks shareholders are encouraged to read the preliminary joint proxy statement / prospectus filed on Form S-4 by Regional on May 5, 2025 (the Preliminary Joint Proxy Statement / Prospectus). Neither the Form S-4, nor the Preliminary Joint Proxy Statement / Prospectus contained therein, is incorporated by reference into, or constitutes a part of, this Quarterly Report on Form 10-Q.

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Risks and in MDA - Risks Factors Relating to an Investment in Related to the Merger 

The value of the Regional common stock in the merger consideration is subject to changes based on fluctuations in the value of Regional common stock. The value of the merger consideration is highly dependent on the value of the Regional Series D Preferred Stock. 

The market value of Regional common stock will fluctuate during the period before the date of the special meeting of SunLink shareholders to be held in connection with the proposed merger (the SunLink special meeting) and during the period before the time SunLink shareholders receive merger consideration in the form of Regional common stock and Regional Series D Preferred Stock, as well as thereafter. In addition, the value of the merger consideration is highly dependent on the value of the Regional Series D Preferred Stock. Accordingly, at the time of the SunLink special meeting, SunLink shareholders will not be able to determine the market value of the per share merger consideration they would receive upon the effective time of the merger. Neither Regional nor SunLink in Part I  Item 1As permitted to terminate the merger agreement as a result of any increase or decrease in the market price of Regional common stock or SunLink common stock. 

It is impossible to accurately predict the market price of tRegional common stock at the Companys Annual Report on Form 10-K for the year effective time of the merger and, therefore, impossible to accurately predict the value of the Regional common stock that SunLink shareholders will receive in the merger. Because the Regional Series D Preferred Stock is a newly issued security which is not yet listed or traded, there is no current market value for such stock. This risk is heightened by the fact that the parties anticipate that the closing will occur in the summer of 2025, unless terminated in accordance with the merger agreement or otherwise agreed. The market price for Regional common stock may fluctuate both prior to the effective time of the merger and thereafter for a variety of reasons, including, among others, the results of operations of Regional and the developments in its business, market assessments of the likelihood that the merger will be completed, and the expected timing of the merger. Many of these factors are beyond Regionals and SunLinks control. 

The merger is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete the merger could have a material adverse effect on us. 

The completion of the merger is subject to a number of conditions, including, among other things, (i) the receipt of the required approvals from the shareholders of SunLink; (ii) the receipt of the required approvals from the shareholders of Regional; (iii) no governmental entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any order or law which is in effect and which has the effect of making the merger illegal or otherwise prohibiting consummation of the merger or imposing, individually or in the aggregate, a burdensome condition; (iv) the registration statement on Form S-4 filed by Regional of which the Preliminary Joint Proxy Statement/Prospectus forms a part shall have been declared effective by the SEC under the Securities Act of 1933, as amended, and shall not be the subject of any stop order or pended ing or threatened (in writing) action seeking a stop order; (v) the shares of Regional common stock and Regional Series D Preferred Stock issuable pursuant to the merger shall have either (a) been authorized for trading on the over the counter (OTC) markets upon official notice of issuance or (b) have been authorized for listing on the NYSE American LLC (the NYSE American) upon official notice of issuance; (vi) the accuracy of each partys representations and warranties in the merger agreement, subject to certain materiality qualifications; and (vii) each partys performance, in all material respects, with its covenants required to be performed by it under the merger agreement prior to the closing of the merger.

The failure to satisfy all of the required conditions could delay the completion of the merger for a significant period of time or prevent completion from occurring at all. Any delay in completing the merger could cause Regional not to realize some or all of the benefits, or realize them on a different timeline than expected, that Regional expects to achieve if the merger is successfully completed within the expected timeframe. There can be no assurance that the conditions in the merger agreement will be satisfied or (to the extent permitted) waived or that the merger will be completed. In addition, subject to limited exceptions, either Regional or SunLink may terminate the merger agreement if the merger has not been consummated by 5:00 p.m., Eastern time, on June 30, 2024. We believe5. 

If the merger is not completed, we may be materially adversely affected, without realizing any of the benefits of having completed there h merger, and we will be subject to a number of risks, including the following: 

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the market price of the SunLink common stock could decline;

we could owe a reimbursement fee to Regional under certain circumstances;

if the merger agreement is terminated and we seek another business combination, we may not find a party willing to enter into a transaction on terms comparable to or more attractive been no materithan the terms agreed to in the merger agreement;

time and resources, financial and other, committed by us and our management to matters relating to the merger could otherwise have been devoted to pursuing other beneficial changes from topportunities;

we may experience negative reactions from the financial markets or from our customers, suppliers, regulators or employees;

we will be required to pay our costs relating to the merger, such as legal, accounting, financial advisory, filing, printing and mailing fees, whether or not the merger is completed, subject to the risk factors previously deimbursement fee;

we are subject to restrictions on the conduct of our business prior to the effective time of the merger, as set forth in the merger agreement, which may prevent us from making certain acquisitions or taking other actions during the pendency of the merger; and

reputational harm due to the adverse perception of any failure to successfully complete the merger.

In addition, if the merger is not completed, we could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the merger agreement. Any of these risks could materially and adversely impact our respective financial condition, financial results and stock price. 

The merger agreement contains provisions that limit our ability to pursue alternatives to the merger, could disclosed in such Annual Report eourage a potential acquirer from making a favorable alternative transaction proposal and, in specified circumstances, could require us to pay a reimbursement fee to Regional. 

The merger agreement contains provisions that make it more difficult for us to engage in any alternative transaction with a third party. The merger agreement contains certain provisions that restrict the our ability to, among other things, solicit or knowingly induce (including by providing any material non-public information concerning us to any person or group for the purpose of facilitating any proposals or offers relating to any SunLink acquisition proposal) or knowingly assist any proposal or offer that constitutes or would reasonably be expected to lead to a SunLink acquisition proposal or engage in any negotiations with respect thereto.

In some circumstances, upon termination of the merger agreement, we would be required to reimburse Regional for all reasonable out-of-pocket fees and expenses incurred or paid by Regional in connection with the negotiation of the merger agreement and the consummation of any of the transactions contemplated by the merger agreement in an amount not to except as set forth herein.
 

ed $250,000.

These provisions could discourage a potential third-party acquiror or merger partner that might have an interest in acquiring all or a significant portion of SunLink or pursuing an alternative company transaction from considering or proposing such a transaction, even if it were prepared to pay consideration with a higher per share value than the value proposed to be received in the merger or would result in greater value to the SunLink shareholders relative to the terms and conditions of the merger agreement. In particular, the reimbursement fee, if applicable, could result in a potential third-party acquiror or merger partner proposing to pay a lower price to the SunLink shareholders than it might otherwise have proposed to pay absent such a fee. 

The support and lock-up agreements could discourage a third party from pursuing an alternative transaction involving us. 

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In addition to the matters set forth herein, connection with the transactions contemplated by the merger agreement, on January 3, 2025, the directors and executive officers of Regional (collectively, the Supporting Regional Shareholders) entered into a support and lock-up agreement with Regional and SunLink (the Regional support and lock-up agreement), pursuant to which the Supporting Regional Shareholders agreed to vote, at a special meeting of Regional shareholders to be held in connection with the proposed merger, shares of Regional common stock owned by them (i) in favor of the adoption of the merger agreement and transactions contemplated thereby, including the readmerger, (ii) in any other circumstances upon which a resolution or other approval is required under should carefuthe organizational documents of Regional or otherwise sought with respect to the merger agreement or the transactions contemplated thereby, including the merger, in each case, to the extent necessary to consummate the transactions contemplated thereby, to vote, consent or approve, (iii) against and withhold consent with respect to any merger, purchase of all or substantially considerall of Regionals assets or other business combination transaction (other than the merger agreement and transactions contemplated thereby, in addition to tcluding the merger), and (iv) against any proposal, action or agreement that would reasonably be expected to (A) impede, frustrate, prevent or nullify any provision of the Regional support and lock-up agreement, the omerger agreement, the merger or ther information other transactions contemplated thereby, (B) result in a breach in any respect of any covenant, representation, warranty or any other obligation or agreement of Regional under the merger agreement, (C) result in any of the conditions set forth in this report, the risk factors discussed in our Annual RepArticle VI of the merger agreement not being fulfilled or (D) change in any manner the dividend policy or capitalization of, including the voting rights of any class of capital stock of, Regional (provided, however, that the foregoing shall not apply to the establishment by Regional of the Regional Series D Preferred Stock or the issuance of the merger consideration).

In addition, on January 3, 2025, in connection with the transactions contemplated by the merger agreement, certain directors and executive officers of SunLink (the Supporting SunLink Shareholders) entered into a support and lock-up agreement with Regional and SunLink (the SunLink support and lock-up agreement), pursuant to which the Supporting SunLink Shareholders agreed to vote, at the SunLink special meeting, shares of SunLink common stock owned by them (i) in favor of the adoption of the merger agreement and transactions contemplated thereby, including the merger, (ii) in any other circumstances upon which a resolution or other approval is required under the organizational documents of SunLink or otherwise sought with respect to the merger agreement or the transactions contemplated thereby, including the merger, in each case, to the extent necessary to consummate the transactions contemplated thereby, to vote, consent or approve, (iii) against and withhold consent with respect to any merger, purchase of all or substantially all of SunLinks assets or other business combination transaction (other than the merger agreement and transactions contemplated thereby, including the merger), and (iv) against any proposal, action or agreement that would reasonably be expected to (A) impede, frustrate, prevent or nullify any provision of the Regional support that could materially affect our business, financial condition or future resultsand lock-up agreement, the merger agreement, the merger or the other transactions contemplated thereby, (B) result in a breach in any respect of any covenant, representation, warranty or any other obligation or agreement of SunLink under the merger agreement, (C) result in any of the conditions set forth in Article VI of the merger agreement not being fulfilled or (D) change in any manner the dividend policy or capitalization of, including the voting rights of any class of capital stock of, SunLink. 

The existence of the support and lock-up agreements could discourage a third party from pursuing an alternative transaction involving us. 

Each party is subject to contractual restrictions while the merger is pending, which could adversely affect each partys business and operations. 

Under the terms of the merger agreement, SunLink is subject to certain restrictions on the conduct of its business prior to the effective time of the merger which may adversely affect its and its subsidiaries ability to execute certain of its business strategies, maintain business relationships, or manage risks associated with its business, operations, technology, infrastructure or compliance functions, including the ability in certain cases to acquire or dispose of assets, incur indebtedness, undertake capital expenditures, engage with regulators or settle actual or potential claims. Such risk factors are elimitations could adversely affect SunLink prior to the effective time or the merger. 

Under the terms of the merger agreement, Regional is subject to certain restrictions on the conduct of its business prior to the effective time of the merger which may adversely affect its and its subsidiaries ability to execute certain of its business strategies, maintain business relationships, or manage risks associated with its business, operations, technology, infrastructure or compliance functions, including the ability in certain cases to acquire or dispose of 

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assets, incur indebtedness, undertake capital expendituressly incorporated herein by reference, engage with regulators or settle actual or potential claims. Such limitations could adversely affect Regional prior to the effective time of the merger. 

Each of the risks described above may be exacerbated by delays or other adverse developments with respect to the completion of the merger. 

The announcement and pendency of the merger could divert the attention of management and cause disruptions in the businesses of Regional and SunLink, which could have an adverse effect on the business and financial results of both Regional and SunLink. 

Management of both Regional and SunLink may be required to divert a disproportionate amount of attention away from their respective day-to-day activities and operations, and devote time and effort to consummating the merger. The risks described , and adverse effects, of such disruptions and diversions could be exacerbated by a delay in our Annual Report are not tthe completion of the merger. These factors could adversely affect the financial position or results of operations of Regional and SunLink, regardless of whether the merger is completed. 

Regional and SunLink will incur direct and indirect costs as a result of the merger. 

Regional and SunLink will incur substantial expenses in connection with and as a result of completing the merger, including advisory, legal and other transaction costs, and, following the only riscompletion of the merger, Regional expects to incur additional expenses in connection with combining the companies. A majority of these costs have already been incurred or will be incurred regardless of whether the merger is completed. Factors beyond SunLinks facing our Company. In addition to risks and uncerand Regionals control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately. Management of Regional and SunLink continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the merger. Although Regional and SunLink expect that the realization of benefits related to the merger will offset such costs and expenses over time, no assurances can be made that this net benefit will be achieved in the near term, or at all. 

Litigation that may be filed against Regional, SunLink, the members of Regionals board of directors, the members of SunLinks board of directors or the officers of Regional or SunLink could result in substantial costs and could adversely affect Regionals and SunLinks ability to complete the merger on a timely basis or at all. 

Shareholders of Regional and/or SunLink may file lawsuits against Regional, SunLink and/or the directors or officers of either company in connection with the merger. One of the conditions to the closing is no governmental entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any order or law which is in effect and which has the effect of making the merger illegal or otherwise prohibiting consummation of the merger or imposing, individually or in the aggregate, a burdensome condition. If any plaintiff were successful in obtaintiesing an injunction prohibiting the completion of the merger, then such inherenjunction may delay or prevent the consummation of the merger and could result in forward-looking statements contained in significant costs to Regional and/or SunLink, including any cost associated with the indemnification of directors and officers of each company. Regional and SunLink may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger. Such litigation could have an adverse effect on the financial condition and results of operations of Regional and SunLink and could prevent or delay the completion of the merger. 

Sales of Regional common stock and Regional Series D Preferred Stock after the completion of the merger may cause the market price of such shares to fall. 

Based on the number of shares of SunLink common stock outstanding as of the date of filing of this Quarterly Report on Form 10-Q, additional risks and uncertainties not currently known nd assuming no exercise by SunLink shareholders of any appraisal rights, and assuming no adjustments for any Cash Surplus (as defined in the merger agreement), as may be adjusted for any Regional Debt Distress (as defined in the merger agreement), and assuming no anti-dilution adjustments as contemplated by the merger agreement, we expect Regional to issue approximately 1,595,401 shares of Regional common stock and 1,408,121 shares of Regional Series D Preferred Stock to SunLink shareholders pursuant to the merger and 100,000 shares of Regional common stock to Mr. Robert Thornton pursuant to an employment agreement to be entered into between Mr. Thornton and Regional at the closing of the merger. The Regional Series D Preferred Stock is convertible at any time into Regional common stock at an initial exchange ratio of 1.1330 share of Regional common 

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sto us or that we currently deem to be immaterial also may mack for every three shares of Regional Series D Preferred Stock, which ratio is subject to adjustment as set forth in the Articles of Amendment of Regional which will establish the Regional Series D Preferred Stock. The form of the Articles of Amendment is Annex E to the merger agreement. 

The actual number of shares of Regional common stock to be issued and reserved for issuance pursuant to the merger will be determined at completion of the merger based on the exchange ratio for the merger, the conversion ratio of the Regional Series D Preferred Stock, the number of shares of SunLink common stock outstanding at that time, and the number of additional shares of Regional Series D Preferred Stock issued, if any, as a result of any Cash Surplus, as such may be adjusted for any Regional Debt Distress. 

Many former SunLink shareholders may decide not to hold the shares of Regional common stock and Regional Series D Preferred Stock they will receive in the merger. Such sales of Regional common stock and Regional Series D Preferred Stock could have the effect of depressing the market price for such shares, and may take place promptly following the merger. 

SunLink shareholders likely have dissenterially adversely as rights in the merger. 

If the merger agreement is adopted by SunLink shareholders, SunLink shareholders who do not vote in favor of the approval of the merger agreement and who properly demand payment of fair cash value of their shares of common stock are expected to be entitled to dissenters rights in connection with the merger under Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code (the GBCC). In addition, SunLinks obligation to consummate the merger is subject to the condition that the holders of not more than 2,000,000 shares of SunLink common stock (excluding directors and officers of SunLink and its subsidiaries) who are entitled to, have properly exercised, and not withdrawn or waived, dissenters rights with respect to their SunLink common stock in accordance with the GBCC prior to the effect our business, financial condive date of the merger. Neither SunLink nor Regional can predict the number of SunLink shareholders who will seek payment of fair cash value of their shares. 

Risks Related to Regional and the Combined Company after Completion of the Merger 

Regional may fail to realize all of the anticipated benefits of the merger or those benefits may take longer to realize than expected. 

The full benefits of the merger may not be realized as expected or may not be achieved within the anticipated time frame, or at all. Failure to achieve the anticipated benefits of the merger could cause dilution to the earnings per share of Regional, decrease or delay the expected accretive effect of the merger, and negatively impact the price of Regional common stock and other securition and/es. In addition, there may be liabilities that Regional underestimated or odid not discover in the course of performing its due diligence investigating results. Whenever we refer to on of SunLink. 

There is a risk that the businesses of Regional and SunLink will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, including the risk that Regional is unable to successfully integrate the pharmacy business of SunLinks pharmacy subsidiaries. 

SunLink shareholders will have a reduced ownership and voting interest after the merger and will exercise less influence over the policies of Regional following the merger than they now have on the policies of SunLink, Company, we. 

Immediately following completion of the merger, former SunLink shareholders will have a reduced ownership and voting interest in Regional than they currently have in SunLink. Consequently, SunLink shareholders, as a general matter, will have less influence over the management and policies of Regional after the effective time of the merger than they currently exercise over the management and policies of SunLink.

Regional common stock and Regional Series A preferred stock are currently suspended from trading on the NYSE American. 

As of the date the Preliminary Joint Proxy Statement/Prospectus was filed by Regional with the SEC, shares of Regional common stock and Regional Series A preferred stock were listed on NYSE American under the symbols 

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RHE and RHE-PA," "our, or us in this Item 1A, we mean SunLink Health Systems, Inc. and its subsidia respectively. However, the shares of Regional common stock and Regional Series A preferred stock have been suspended from trading on the NYSE American and trade on OTCQB under the symbols RHEP and RHEPA, respectively. 

Under the merger agreement, it is a condition to the obligations of both Regional and SunLink to close the merger that the shares of Regional common stock and Regional Series D Preferred Stock issuable pursuant to the merger shall have either (i) been authorized for trading on the OTC markets upon official notice of issuance or (ii) have been authorized for listing on the NYSE American upon official notice of issuance. In addition, under the merger agreement, Regional has agreed to use reasonable best efforts to cause the Regional common stock to be issued in the merger to be approved for (i) trading on the OTC prior to the merger becoming effective, subject to official notice of issuance, and thereafter (ii) for listing on NYSE American until the listing is achieved. Regional also agreed to use reasonable best efforts to cause the Regional Series D Preferred Stock to be issued in the merger to be approved for trading on the OTC within sixty days after the merger becoming effective, subject to official notice of issuance. 

We cannot assure you that Regional will be able to meet all initial listing requirements of the NYSE American. Even if the Regional common stock is listed on the NYSE American, Regional may be unable to maintain the listing of the Regional common stock on the NYSE American in the future if Regional cannot remain in compliance with the continued listing standards. 

If Regional fails to meet the listing requirements and the NYSE American does not list the Regional common stock on the exchange, Regional could face significant material adverse consequences, including: 

a limited availability of market quotations for the Regional common stock;

reduced liquidity for the Regional common stock;

a determination that the Regional common stock is a penny stock which will require brokers trading in the Regional common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for the Regional common stock;

a limited amount of news and analyst coverage; and

a decreased ability to issue additional securities or obtain additional financing in the future.

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as covered securities. If the Regional common stock securities are not listed on the NYSE American and remain on the OTC, such securities would not qualify as covered securities and Regional we would be subject to regulation in each state in which we offer our securities because states are not preempted from regulating the sale of securities that are not covered securities. 

There is currently no public market for the Regional Series D Preferred Stock to be received in the merger. 

We cannot assure you that an active trading market for the Regional Series D Preferred Stock will develop after the merger or, if one develops, that it will be sustained. In the absence of a public market, you may be unable to liquidate an investment in the Regional Series, unless t D Preferred Stock. Because the Regional Series D Preferred Stock would be newly issued when the merger is completed, an active trading market for the newly issued Regional Series D Preferred Stock would not have developed prior to the issuance of such shares. Consequently, the context suggests otinitial trading price of Regional Series D Preferred Stock, if any, will be determined by the market and no assurance can be given as to whether these shares will trade at or above the liquidation price. The initial trading price, if any, of Regional Series D Preferred Stock will not necessarily bear any relationship to Regional assets or financial condition or any other established criteria of value. 

Even if an active trading market develops for Regional Series D Preferred Stock after the effective time, the trading volume of such stock may fluctuate and cause significant price variations to occur after the effective time.

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The market prices of Regional common stock or Regional Series D Preferred Stock may decline as a result of the merger. 

The market prices of Regional common stock or Regional Series D Preferred Stock may decline as a result of the merger if, among other things, the costs of the merger are greater than expected, Regional does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts or the effect of the merger on Regionals financial position, results of operations or cash flowise.s is not consistent with the expectations of financial or industry analysts. Any of these events may make it more difficult for Regional to sell equity or equity-related securities and have an adverse impact on the prices of Regional common stock or Regional Series D Preferred Stock.