Aggrieved partners question Smiles Inclusive's solvency

Aggrieved partners question Smiles Inclusive's solvency

Three partners of dental practice Smiles Inclusive (ASX: SIL) have criticised the company over the alleged non-payment to creditors and are seeking clarity over its solvency.

Joint venture partners (JVPs) John Camacho and Arthur Walsh announced today they had written to the Australian Securities and Investments Commission (ASIC) at length about the matter, claiming Smiles' board and management have refused to answer simple questions regarding the operation's solvency.

At the same time, Arthur Bushell of Future Care Mobile Dental Services claims his company is still owed $330,000 from a $1.1 million transaction when the business was sold to Smiles.

"As late as the 18th of April there is evidence that Smiles was slated to pay us the funds owing. No mention was made to us of any issues relating to the payment until we raised the matter," Bushell tells Business News Australia.

"In publicly available information Smiles confirmed it had working operating funds of approximately $641,000. Our debt was in excess of 50 per cent of those funds.

"If they had paid us, or indeed any of the major debtors, there would have not been sufficient funds to continue operating. That means they were insolvent," he alleges, in reference to the situation by the end of April.

Bushell notes the company's cash position has since been lifted by $1.2 million from a capital raising, but questions how long that can last in light of Smiles Inclusive's operating costs. 

In a previous interview the Future Care representative claimed Smiles' mobile care businesses would face great difficulties in New South Wales following the state government's introduction of a Medicare-covered scheme that is in direct competition. Since then the Victorian government has introduced a similar scheme, putting the group's future revenue prospects under further strain.

In a press release this morning, Camacho and Walsh noted that in addition to their notifications to ASIC they had also put Smiles' auditor KPMG "on notice".

"We have advised both parties of serious issues regarding documented behaviours by Smiles surrounding non-payment to creditors, a function of and motivated by the Company's insolvent position," the pair claimed.

"This week is a true test of KPMG's objectivity and independence as an auditor," adds Walsh.

Walsh claims that despite Smiles' own whisteblower policies, he and Camacho's retained positions as dentists with the group were allegedly openly threatened if they continued to speak out publicly.

Both Walsh and Camacho form part of a bloc with founder and former CEO Mike Timoney, and they have all been at odds with the current management under CEO Tony McCormack and chairman David Usasz.

Timoney was voted off the board by shareholders at an extraordinary general meeting (EGM) held in May and an attempt to install Camacho as a director was voted down.

SIL shares have fallen to less than a tenth of their former value since October 2018, spurred by steady declines in performance and results forecasts with a loss of at least $500,000 on the cards for FY19.

In the company's prospectus for its April 2018 initial public offering (IPO) it signalled a pro forma NPAT forecast of $5.8 million for FY18, while in August last year Smiles said FY19 NPAT would be at least $6 million.

In a quarterly report for 30 June, Smiles noted negative net operational cash flows of $7.1 million.

At the start of this month, Usasz and McCormack noted a turnaround strategy was on track, claiming with the support of JVPs, staff, bankers and suppliers they aimed to bring performance back to "acceptable levels" in FY20.

They explained conditional agreement had been reached with National Australia Bank (ASX: NAB) to extend facilities, initially to the end of November 2019.

The group highlighted expectations for $1.5 million in savings from the sacking of half its support staff, and indicated another employee was due to leave soon.

Smiles also pointed to a review underway into opportunities for further price hikes in its patient fees.

Usasz and McCormack claimed the mobile dentistry business, which was temporarily closed due to operating performance, had been progressively reactivated.

"Litigation initiated by and against the JVPs has been stayed, pending negotiations to resolve," they said.

"Several key opportunities that will support the future potential and growth of the mobile business have been identified and are being pursued. A General Manager for this was appointed on 22 July 2019."

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