Smiles partner alleges impairment charges short by $26m

Smiles partner alleges impairment charges short by $26m

After aching dental company Smiles Inclusive (ASX: SIL) was interrogated by the ASX last week about its woeful results, the sharemarket operator asked when the group became aware of an impairment charge of $13.7 million.

To put this figure into context, the Gold Coast-based group recorded a net loss of $18.9 million for FY19 and its current market capitalisation at six cents a share is just $3.2 million.

Plagued by board tussles, disgruntled creditors and disappointing financial results, it has almost been a year since now CEO Tony McCormack conducted a review of the business which ultimately led to the ousting of its founder Mike Timoney.

In that time shares in the group have fallen to one sixteenth of their former value. Since the start of this financial year alone they have dropped by two thirds, and the market has demonstrated little belief in the board's turnaround strategy. 

One partner who sold his business to Smiles believes the company's mobile dentistry business will be squeezed out of schools in New South Wales and Victoria due to the implementation of similar Medicare-backed schemes by state governments. 

Now others are questioning Smiles' response to the ASX query last week, which joint venture partner (JVP) John Camacho describes as "somewhat bizarre".

Aggrieved partners question Smiles Inclusive's solvency

Chairman David Usasz said Smiles became aware it would be subject to the $13.7 million impairment after the close of trade on 30 August - a date on which the company released its preliminary final report at 6:54pm with that charge included.

"Matters considered have historically been and will continue to be both positive and negative, and performance at a practice level has historically been subject to some inconsistency," Usasz told the ASX.

"The accounting treatment for a business that owns 56 distinct dental practices operating independently across the country is inherently complex, and determining impairments is particularly difficult where some practices are performing better than others at different times of the year.

"SIL has and continues to work constructively with its auditor and met with its auditor to discuss impairment on the afternoon of 30 August 2019."

Moreover those results were unaudited, with Usasz adding the auditor - who is understood to be KPMG - "has not expressed a definitive view on impairment".

Today, Camacho has expressed an alternative view on the impairment in a press release.

"Simple maths shows Smiles goodwill impairment should be closer to $40 million, not $14 million," says Camacho.

"The dental practices, before a whopping $11 million of other costs, make $4 million EBITDA a year. A typical dental practice sells for 4x-5xs. Its not rocket science to work out what the correct goodwill number is ($16-$20 million).

"Nor does it take long to calculate, certainly not six months. Smiles has had the numbers at its finger tips for ages. So why did Smiles delay?"

Another JVP Arthur Walsh highlights last year's audit was done by 23 August, and asks why the 2019 audit is taking so long.

"When thinking about goodwill Smiles advised ASX and shareholders to take a look at Smiles share price. We have. At 6 cents a share, if there was any doubt as to the correct goodwill number the enterprise value for the whole of Smiles at $28 million should help focus the debate," he says.

"We are disappointed that it took us writing to ASIC before KPMG somewhat reluctantly agreed to receive our concerns, albeit in writing, not in person.

"Undeterred we will continue to press for full transparency and are greatly encouraged by ASIC's desire to better understand violations of Smiles whistle blower policies.

"Fundamentally, is the company trying to raise much needed cash off the back of ambiguous unaudited preliminary numbers?"

Camacho also points out that after being drilled by the ASX, Smiles admitted it got its first half results wrong.

"The Company in fact did not make an underlying profit, it actually made a loss. Smiles was forced by the ASX to restate its FY19 results relating to 1H FY19," he says.

"It doesn't stop there. Results in the second half of the year fell off a cliff. Not that you would know that from reading the preliminary results," adds Walsh.

"Unlike the interim results where detailed financial metrics were released, on 30 August the Company failed to disclose any performance numbers for the last six months of FY19."

Camacho says he and Walsh have again written to ASIC with a host of fresh concerns in relation to Smiles' response to the ASX.

"We are further concerned by today's news ASIC has recently warned KPMG over its handling of goodwill write downs at four major clients," adds Camacho, in reference to an article published in The Australian today. 

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