Smiles Inclusive loss deepens to $31 million as chairman flags debt risk

Smiles Inclusive loss deepens to $31 million as chairman flags debt risk

After launching a capital raise despite only offering investors unaudited results to go by, waning dental company Smiles Inclusive's (ASX: SIL) has come out with another shocker today.

In late August the group surprised the market with a $19 million loss, but that turned out to be an understatement.

In fact, statutory results show the Gold Coast company recorded a loss of $31 million in FY19 and its chairman David Usasz has flagged a "significant risk" Smiles won't meet debt covenants with National Australia Bank (ASX: NAB). 

"In March 2019 National Australia Bank (NAB) advised the Group that they were in breach of financial covenants, and have agreed to a conditional waiver and extension of the existing facilities until the end of November 2019," he says.

"In addition the Group may not achieve the financial improvements as envisaged by the turnaround plan and the entitlement offer may not be completed as expected, including any additional capital raising initiatives that may be required in the future.

"These conditions give rise to material uncertainties that may cast doubt upon the Group's ability to continue as a going concern."

Usasz says if the group does not continue as a going concern, it may not be able to realise its asets and extinguish liabilities in the ordinary course of operations. 

Before the announcement was released, two antagonistic joint venture partners (JVPs) had crafted a letter of complaint to the ASX as Smiles had failed to meet the 30 September deadline to release its results. 

In that letter Arthur Walsh and John Camacho alleged the company's loss for FY19 should have been reported as $36 million. Their estimate may have been off, but it was still closer to the reality than the Gold Coast group's announcement on August 30.

The company notes impairment of goodwill and property, plant and equipment of $31.1 million, and pits the underlying loss after tax at $4.3 million.

"The group is in the initial stages of its Turnaround plan and although there are early signs of improvements - management accounts for July 2019 showed a small return to EBITDA - a significant amount of work needs to be completed to restore the respect of the Group's Joint Venture Partners, shareholders and other stakeholders," the group said.

Against a backdrop of cash burn Smiles is undergoing a $3.3 million capital raising to pay down debt and temporary banking facilities, while a $19 million debt to Smiles' primary banker National Australia Bank (ASX: NAB) looms large. 

From the institutional entitlement offer only $640,000 was raised, and the retail component of the entitlement offer will open tomorrow. 

Partners and former partners call Smiles' finances into question

In their letter to the ASX, Walsh and Camacho allege misleading information and disclosures from Smiles Inclusive "on multiple occasions that violate ASX's own framework".

"Smiles is a public company asking shareholders and members of the public for more money. A public Company that has run out of cash," they said.

"SIL's alleged EBITDA for July and repeated messages of 'sales growth' contained both in SIL's response to ASX and the Offer document are directly at odds with a known fact, namely the Company's ongoing consistent monthly cash burn rate.

"We believe Smiles will go bust in the next two months despite a capital raise."

Meanwhile, the former owners of Future Care Dental Group (FCDG) have continued calls to receive the remaining funds from their sale of the business to Smiles for $1.1 million in December 2018.

"In response to our letter of demand, the best the Smiles CEO Tony McCormack could return fire with was some vague words about acknowledgement there is a dispute," says Arthur Bushell.

"There is a dispute, for sure, Smiles owes us $330,000. And that's before interest and costs."

Another former owner of FCDG, Christian Perez, alleges McCormack told the Smiles board on 18 April to "Arrange to briefly defer the balance of purchase monies owing in FCMD $330,000 due 21 April until 1 May".

"Which part of this statement personally authored by the Smiles CEO would the CEO like to dispute?" asks Perez.

"If the likes of the NAB, Macquarie and Morgans want to have any chance of getting the rest of their money back they will need to include us when it comes to working out who gets what from the rights issue."

"We may not be a big fish in the grand scheme of things relative to Smiles losing $36m in FY19, but we are a humpback whale relative to Smiles dwindling cash reserves," adds Bushell.

Smiles does not specifically refer to the FCDG dispute in its report today, but it does mention it is the subject of a "number of possible actions or claims".

"It is currently not possible to determine whether the threatened actions will result in legal proceedings and what the financial impact of them, if any, may be for the Group in the future," the company says.

"In the event the legal proceedings are initiated, the Group intends to defend its position."

One of two legal proceedings noted includes employment and contract disputes with Totally Smiles Mobile Dentistry, also known as Smiles on Site.

"The Group continues to have settlement discussions with the partners and has provided $255,000 for costs and claims," says Usasz.

Smiles also notes legal proceedings by the group against founder and former chief executive officer Mike Timoney alleging unlawful payments and transactions.

Timoney was voted off the board in May, and today's report shows he sold off all his 9.67 million shares in SIL in FY19, as did former chairman David Herlihy his 500,000 shares in the company. However, the company founder disputes Smiles' statement about his share sales. 

The remuneration report shows Timoney received an income of $236,344 for the year while Herlihy received $81,000.

In FY19 CEO Tony McCormack received an income of $102,886 and chairman David Usasz earned $76,066. The latter is reported as having 1.75 million SIL shares.

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