No Images? Click here Smiles Inclusive Limited - (SIL)Trading Halt and Capital RaisingFollowing its third “Please Explain” notice from the stock market in quick succession, SIL has again placed its shares in a trading halt pending its release of an announcement about the outcome of the institutional component of the accelerated entitlement offer. Unless the ASX decides otherwise, the securities will remain in trading halt until the commencement of normal trading on Wednesday 25th September 2019. 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. Did somebody have a hunch about a capital raising? What Does this Capital Raising Mean? It appears that SIL or the brokers close to it have conjured up institutional or professional investors to subscribe capital! If so, it is expected that the institutional placement will have to be accompanied by an entitlement offer to its ordinary shareholders to give them the opportunity of not being swamped and diluted to the point at which control of the company changes hands. It currently has 53.46 million shares on issue which last traded at 6 cents which represents current market capitalisation of $3.2 million. It won’t 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 (of which many may be reluctant). 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. Hence, there is a strong probability of control of the company being taken away. SIL desperately needs to substantially strengthen its balance sheet via a significant capital raising. It is probable that behind the scenes its bankers with close to $24 million of exposure were urging SIL to raise more capital in order to have a sufficient buffer to give the bank lender confidence that their ongoing interest payments will be made as a condition of continuing to support it. The fact that SIL’s auditors have been unable to sign off its 2019 financial results to date also indicates serious concerns. Where banks have a lot of capital on the line and develop serious concerns about a company, which has already breached its banking covenants, they can and do force companies into administration and/or liquidation in order to recover what they can from its sale of assets. In this case, SIL’s main assets would be the goodwill of its dental practices, some of which are only part owned. It is usual for administrators and liquidators to sell assets for less than would be achieved if those assets were able to be presented to their markets in an orderly manner over time as opposed to a quick sale. We await notification as to the result of the institutional part of the capital raising with interest and will be even more interested to see what the placement conditions are on the additional equity capital raising expected to be offered to its existing shareholders. It would also be interesting to be able to have enough information to form a view as to how tough the conditions imposed on SIL were in order to get the institutions to promise to come up with the capital in this placement. We assume that the company/its brokers and advisors have already received an indication of possible support from institutions which may include professional investors. Massive dilution of original share value is inevitable. It is likely that after this capital raising a small group of institutions and/or professional investors, however defined, will effectively control the company and that original investors including dentists who accepted share scrip for equity in their practices will have suffered a massive dilution of share value. Given SIL’s inability to produce audited end of year financials as yet, the company’s directors would seem to have had no choice but to pursue this capital raising urgently. The board’s other possible alternative may have been to place SIL into administration themselves. SIL’s founder, Mike Timoney, who was subsequently removed from the position of CEO and who failed to win an election for board positions, will have seen the original equity he was granted for his efforts in putting together the company IPO and float substantially diluted. There is a salutary lesson for would be dental entrepreneurs hoping to make a financial killing by getting groups of practices together in the hope that they can on sell at a bigger price, or in other entrepreneurs extracting promises from sufficient dentists that they will sell their practices into a venture conditional upon that venture successfully concluding an initial public offer and stock market listing. There is a huge lesson for dentists faced with enticing presentations as to what they may receive after stock market listing if they accept share scrip in some dental entrepreneurs’ scheme rather than cash for their practices. They should review carefully the disaster which unfolded for practice owners who sold all or part of their practices to SIL for share scrip and who now wholeheartedly wish that they had never heard of this company. Best wishes to all Dentists, GRAHAM MIDDLETON The Synstrat Group are Australia's most experienced Dental practice business advisers, accountants, practice valuers and licensed financial advisers. The information contained herein is of a general nature and no specific action should be taken without individual advice. Synstrat Management Pty Ltd P. 03 9843 7777 ABN 57 006 295 325 If you are not the intended recipient of this communication please delete and destroy all copies of this message and telephone Synstrat on +61 3 9843 7777 immediately. 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