Smiles Inclusive blames $19m loss on relationship breakdowns

Smiles Inclusive blames $19m loss on relationship breakdowns

The plaque is accumulating on Smiles Inclusive's (ASX: SIL) financial results after the dental practice announced losses had ballooned by 281 per cent in FY19 to $18.9 million.

In the late hours of Friday the Gold Coast-based group released its unaudited results citing a $13.7 million impairment of assets.

Putting that aside, the underlying loss also worsened by 60 per cent to $4.5 million.

Revenue reportedly skyrocketed 405 per cent to $30.6 million and there is little explanation given about what caused that surge, but a source close to some JVPs believes it is because there were only two months of trading in FY18. 

In relation to the poor result there were however explanations aplenty. 

The Smiles board blames an unsuccessful integration of the business, a breakdown of relationships with some joint venture partners (JVP) which led to a low level of engagement, and operational issues within the mobile division which led to its temporary closure.

In an update in early August Smiles Inclusive said the mobile division had been reactivated, but one partner who had sold his business to Smiles and claims to still have $330,000 owed to him was sceptical about the claim.

Operational aspects aside, the company's mobile division focused on schools will likely come under heavy competitive pressure from two similar Medicare-supported schemes announced fairly recently in New South Wales and Victoria. 

Smiles added litigation issues had distracted management from the operations of the business and resulted in significant legal costs.

"The unsuccessful implementation of the business model has resulted in poor financial performance and required the development of a Turnaround plan. The Turnaround plan has been independently reviewed on behalf of our financiers and is being implemented," thecompany said.

"Turnaround initiatives have included a substantial reduction in support offices staffing levels, the benefits of which will flow through in FY20.

"Management accounts for July 2019 show a return to a small profit at an EBITDA level, however the management team expects that there will be some volatility in financial performance over coming months, as the Turnaround gains momentum."

The result came days after Smiles partners had raised questions about the company solvency alleging high operational costs while most of the cash on hand came from a recent capital raising. 

As at 30 June Smiles had cash of $1.6 million and drawn debt of $24 million, while its goodwill after impairment losses was at just over $49 million.

Dr John Camacho of Perth and Dr Arthur Walsh of Brisbane are two JVPs who have been outspoken against the Smiles Inclusive's management, with Camacho himself having been part of an attempted board coup that failed in May.

Walsh has previously alleged he and Camacho's positions as dentists with the group were openly threatened if they continued to speak out publicly.

He says Friday's result is "far worse than any of us imagined and contrary to prior Company guidance".

"We estimate the Company is still losing $600k a month, every month, contrary to the misleading words of the Company," he says in a press released sent this morning.

"Furthermore, it is no coincidence these disastrous results were released late on a Friday evening after everybody had gone home."

Camacho has raised questions as to why Smiles' accounts were not audited on time and whether they could be worse still once subjected to independent scrutiny.

"We continue to assert that Smiles is trading while insolvent. Dentists and other unsecured creditors remain at risk," he says.

"The unaudited numbers make no sense whatsoever. Smiles is losing serious money, but management still has goodwill on the balance sheet at $50m. We continue to seek a meeting with KPMG, Smiles auditor."

Camacho emphasises Smiles has issued a profit downgrade of around $3 million every three months for the past year.

"As dentists inside the business, we and other Smiles dentists see the truth. There is no substance or credible merit to the infamous turnaround plan whatever the latest version of the plan we are on," he says.

"Friday's grim news confirms behaviours evident in late April when an innocent and significant creditor was hoodwinked due to a lack of cash," alleges Walsh.

"Friday's dire results only reinforces a class action focused on last year's IPO that was underwritten by Morgans and KPMG were the investigating accountants to the float."

From a level of $0.93 in late October last year, the company's share price has dropped dramatically to less than a tenth of that value in response to the constant downgrades in financial performance.

On Tuesday last week SIL shares opened at $0.10 each, but by the market close on Friday they were trading at just $0.075.

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