Smiles omits cash burn in capital raise pitch

With its FY19 results still unaudited and its most recent $323,344 cash position omitted in the investor pitch, dental care company Smiles Inclusive (ASX: SIL) has today announced plans to raise $3.3 million - roughly the value of its most recent market capitalisation - so it can execute a turnaround strategy. 

The company will be issuing around 66.6 million shares at five cents each, representing more than a 25 per cent premium to the low of less than four cents on Friday after an abnormally high 1.4 million shares were offloaded.

Once SIL shares came out of a trading halt on Friday they quickly rose to five cents before the market closed. On Monday they had reached six cents each by the time a trading halt was called.

Synstrat Group dental business advisor Graham Middleton, who raised concerns about serious issues at Smiles Inclusive prior to its IPO last year and subsequent collapse, was suspicious of Monday's announcement that another capital raising would be on the cards.

"It is interesting to note that SIL shares traded at 4.3 cents just before its pause in trading on Friday 20th September 2019 and traded at 6.0 cents on Monday morning 23rd September 2019 prior to the above announcement," Middleton said.

"Did somebody have a hunch about a capital raising?"

Middleton emphasised given the company only had a market capitalisation of $3.2 million, it would not take a very large institutional placement to "snatch control away from its existing shareholders unless existing shareholders are offered the opportunity to subscribe substantially to the capital raising and choose to do so".

"In a way this is the ultimate insult having contributed $1 per share of subscribed capital, and seeing it eroded to 6 cents per share (and a recent low of 3.8 cents) there must be a strong probability of existing shareholders deciding that throwing further money into what has appeared to become a black hole is not something that they are sympathetic to," he said.

"Hence, there is a strong probability of control of the company being taken away."

In today's announcement, Smiles notes it owes $19 million to its primary banker National Australia Bank (ASX: NAB). In its current financial position the Gold Coast group points to its unaudited cash position of $1.595 million as at 30 June, rather than its more recent update of just above $300,000.

A clarification to the ASX last week demonstrated that between June and 13 September, Smiles was burning through an average of $130,000 per week. If that average projected into the future, the company's cash balance today would be around the $100,000 mark.

The company also claims today that its revenue from June to August was 7 per cent higher year-on-year, despite a soft August. However, a source close to Business News Australia indicates this can be almost entirely explained by the acquisition of Future Care - whose vendor Arthur Bushell claims he is still owed hundreds of thousands of dollars from the sale - and a practice in Coolangatta, QLD.

In other words, this 7 per cent rate is not like-for-like and does not give much indication about revenue growth, let alone profitability.

Smiles says it expects the offer will be underwritten by Morgans, and that the cost of the offer alone will be around $250,000. 

Of the $3.3 million the group plans to raise, $890,000 will go towards retiring debt associated with equipment purchases approved prior to 28 February 2019, $675,000 will be for the repayment of temporary banking facilities, and the remaining $1.5 million will be split between capital expenditure and working capital.

One of Smiles joint venture partners in Perth, Dr John Camacho, has also raised concerns about the SIL share trades that took place between Friday and Monday.

"Yesterday we reported to ASX and ASIC two suspicious share trades that drove the Smiles share price up 50 per cent from 4 cents to 6 cents in between the two trading halts, last Friday and this Monday morning," says Camacho.

"In less than one hour of total trading time (15mins on Friday and 45 mins on Monday) two large trades conducted that drove the price up 50 per cent and above the capital raising price."

"The capital raising, a 1 for 1 at 5 cents, clearly leaked out. It is why a concerned shareholder sold 1.4m shares on Friday. For Smiles to tell the ASX it had no explanation for the share price movement on Friday defies belief," adds Brisbane-based JVP Arthur Walsh.

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