No images? Click here "Smiles Turned to Frowns as Dentist Drama Bites" The above article appeared in The Weekend Australia 2/3 May 2020. It was a scathing exposé of Smiles Inclusive Limited (Smiles). It quotes correspondence from Jane Ansin who completed a culture audit of Smiles writing to Mr Ross McEwan, the new CEO of National Australia Bank saying:- “Here is a commercial business you are banking with a $19 million (unsecured loan) that is being poorly run at best, it is called Smiles and it is a group of fifty joint venture dental practices who have been sold an absolute lemon.” “I have been doing some work with these very unhappy dentists, who are stuck. I just wanted to give you a heads up as I think potentially the relevant part of the National Australia Bank may not be dealing with this insolvent business as it possibly should be”. Reportedly Mr McEwan replied the next day promising to get his team on to it. The Australian goes on to describe dentists being locked out of their practices, payments to staff and suppliers being delayed, and banking covenants being breached. Smiles is on its third CEO in two years and is yet to release its half year accounts to 31 December 2019 as it attempts to achieve a sign off by its auditors. It shares have been suspended from trading on the ASX since late February having missed the deadline for lodgment of its audited accounts for the six months to 31 December. Its last traded share price on the ASX was 3.5 cents – a far cry from its IPO price of $1 per share two years earlier. Recently, a group of sixteen dentists sent a group email to Michelle Aquilina who was appointed CEO on the 14th April 2020 following the sudden resignation of her predecessor, informing her that they were terminating their service agreements with the company on the grounds of insolvency. According to The Australian, “how Smiles has continued to trade when it can’t pay its bills is a mystery to the dentists”. Perth dentist, Dr John Camacho, whose four practices generated more than 10% of Smiles total revenue, sent the letter to Miss Aquilina on behalf of the sixteen dentists, informing her that they were terminating their service agreements with the company. Smiles then released a statement to the ASX indicating that the majority of the sixteen dentists were unaware of Dr Camacho’s letter to the company. However, according to The Australian within hours of the ASX release going live fourteen of those sixteen dentists emailed Miss Aquilina individually confirming their intention to terminate their service agreements, drawing accusations that Smiles had deliberately misled the market about the exodus of dentists! This was followed by reports of lockouts and changing of locks. Smiles has reported net cash flow for the nine months to 31 March 2020 of negative $5,334,000 despite sale of two practices and capital raisings. It is still to produce its half yearly audited accounts to 31 December 2019. On 24 February 2020 in response to an ASX query, Smiles indicated that National Australia Bank had waived loan covenant breaches on the condition that it appointed Deloitte as an investigating accountant to produce ongoing review of its operations. According to the article Smiles is behind in its payments to dental suppliers, rent payments to landlords and has deferred some staff superannuation payments, as well as deferring commissions to some dental contractors. Overall, it is a sick and sorry mess and the upbeat pronouncements of current CEO Michelle Aquilina, its CEO of three weeks and her two predecessors ring hollow. It is a stark reminder to promoters of dental practice consolidations including investigating accountants who predict profits in prospectus’ as well as stockbrokers who sell shares in the IPO to their clients that consolidation of professional practices into operating companies is far riskier than many suppose. Indeed, there is a long list of failed professional practice consolidations. It appears likely that Smiles will sink into administration followed by liquidation. For this not to occur would require a huge insertion of capital relative to the current capitalisation of its shares when last traded. Dental contractors will likely rank as unsecured contractors behind staff. Unless the company can extricate itself from this diabolical mess it seems inevitable that a liquidator will sell the individual dental practices with the most likely buyers being dentists who were joint venture partners or former owners. The situation is further complicated by the fact that in some cases the joint venture dentists and former practice owners own the dental premises and an act of putting a company into administration or liquidation may void the leases. While the total market capitalisation of this company when last traded was approximately $5 million including the value of shares issued since last traded, it is unlikely that any other corporate would attempt to take it over given the current condition of the practices. It is likely to mean that the value of its realisable assets may fall below its overall debt. A company or an individual investor buying the whole company would have to satisfy the National Australia Bank and also risk making themselves the target of a legal class action against the company. The level of due diligence required is probably a hurdle that would deter any potential buyers. Best wishes to dentists from all at Synstrat, Graham Middleton Services offered by Synstrat to dentists include practice valuation, practice accounting, strategic advice on practice acquisition, sale, partnership or associateship, financial planning including self-managed superannuation fund administration and advice and other services. 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. If you are the intended recipient of this communication you should not copy, disclose or distribute this communication without the authority of Synstrat. 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