Smiles confirms $1.25m cash burn in Q1

Embattled dental care group Smiles Inclusive (ASX: SIL) has revealed its cash burn averaged more than $416,000 per month in the first quarter of FY20, which is more than the amount of cash it held in the bank at the end of the period.

After recently completing a $3.3 million capital raise of which $2 million had to come from sub-underwriters, Smiles announced today its cash outflows totalled $12.963 million for the September quarter.

The company forecasts a slightly lower cash outflow for the current quarter at $12.7 million, but that difference is largely explained for by non-underlying redundancy costs, legal costs and professional fees associated with Smiles' turnaround strategy.

"Cash outflows from operating activities (excluding non-underlying costs) have improved by $1.642 million from the same quarter in FY19, driven by reductions in overhead and operating expenses," the company said.

Meanwhile, cash inflows from operating activities were similar quarter-on-quarter at $12.963 million, and represented a slight improvement year-on-year.

Overall, the net cash outflow stood at $1.25 million with around $345,000 cash in the bank as at 30 September. This compares to the $323,344 Smiles released as at 13 September.

After already surprising the market with a $19 million loss for FY19 in August, Smiles caused shockwaves again on 1 October with the loss deepening to $31 million and chairman David Usasz has flagged a "significant risk" the company won't meet debt covenants with National Australia Bank (ASX: NAB).

Law firm Holding Redlich has confirmed proceedings are underway for a potential class action against SIL on behalf of aggrieved joint venture partners (JVPs) Dr John Camacho and Dr Arthur Walsh, while the former owners of Future Care Dental Group (FCDG) lodged a claim over alleged non-payment.

In response to today's announcement, Walsh claims the latest results reveal sales "fell off a cliff in August and September", down around 8 per cent year-on-year.

"On top of this we learned yesterday that staff's super payments since July, without their knowledge, are now paid quarterly in arrears, not monthly. Things are going from bad to worse," says Walsh.

"Smiles Directors' disdain for continuous disclosure has finally caught up with them. Last week's Rights Issue was a disaster. Two-thirds of Smiles new stock was left with the underwriters."

Walsh raised questions about who the new shareholders are that account for 30 per cent of the Smiles register.

"Is it Morgans? To date no notices have been submitted to ASX."

On 30 October the company did reveal on the ASX that director Peter Evans had acquired $89,300 worth of shares in 10 October, while other directors Peter Fuller and David Usasz had acquired $74,459 and $7,500 respectively.

These take-ups represent around 3 per cent of the total market capitalisation of the company in total.

"On the recurring issue of disclosure, yet again Smiles shareholders have been misled. Only when we complained to the ASX this week did Smiles Directors disclose their true underwriting activity," Walsh claims

"The Smiles Directors did not sub-underwrite the rights issue as they claimed in the Offer document.

"Mr Usasz said he would underwrite $97k, he actually shelled out just $7.5k. Likewise, Mr Fuller said he would underwrite $200k, he actually took up $74k."

Camacho claims it is clear Smiles shareholders have lost faith in Smiles Board.

"Of 1,400 existing shareholders only a handful took up their rights. This contrasts sharply with the alleged 800 plus who voted for the Chairman in May at the EGM. From 800 supporters to zero in just 4 months?

Camacho also alleges Smiles directors applied for Safe Harbour protection from Smiles insolvency. When asked to respond to these allegations on 16 October, Smiles declined to comment.

"Just 7 days after issuing 54million more shares, this week the Directors asked Smiles shareholders for authority to issue yet more shares," says Camacho.

"Smiles continues to haemorrhage cash and now undisclosed changes to Super payments and Directors looking after themselves personally. Where is this all heading?"

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