Failed dental group Smiles Inclusive misled investors, court told

Failed Gold Coast dental group Smiles Inclusive overstated revenue and other financial data to attract investors to its IPO, according to court testimony.

Smiles Inclusive under pressure in public examination

Failed dental group Smiles Inclusive overstated revenue and other financial data to attract investors to its initial public offering, a court has heard.

A public examination of former Smiles directors, including chairman David Usasz, is underway in the Federal Court into the circumstances of the $91m collapse of the Gold Coast-based firm in 2020. Smiles, headed by chief executive Mike Timoney following the acquisition of smaller dental practices, listed in 2018 after raising $35m.

Although the IPO was an oversubscribed success story, Smiles swiftly fell victim to board infighting, the departure of key executives, profit downgrades and a crippling debt burden.

Among the company’s many troubles was court action by ASIC, lawsuits, suspension from the ASX and the sudden death of a dentist.

Mr Usasz, Mr Timoney and four other former directors and executives of Smiles Inclusive, and its subsidiary Totally Smiles, have been summoned after ASIC granted a public examination by two shareholders.

Mike Timoney

Mr Usasz, a former PwC partner, was questioned in the Federal Court on Monday about discrepancies in revenue figures given to the board’s due diligence committee compared with marketing material provided to investors. The committee was told Smiles would have revenue of $65m and 61 clinics. However, investors were promised revenue of $110m with 95 clinics.

“There’s quite a discrepancy between the minutes of the committee and what was said to potential investors,” lawyer Vicki Bell told the examination. “Are you able to explain the discrepancy?” Mr Usasz said Mr Timoney was “running this whole thing and unfortunately what was true and repeated by him wasn’t always the case.”

“Mike was very compelling with his ability to convince people that he had the answers,” Mr Usasz told the examination. Ms Bell said Mr Uzsas as a member of the due diligence committee would have been provided with copies of presentations and key presentations that were being given to investors. Mr Usasz told the court that he wished “that was the case but in everything Mike did it wasn’t always the case that we got everything that he did. And often it was much later.” Mr Usasz also was asked about a forecast for a 10 per cent increase in revenue from “day one” of the start of the company. “That’s much more than inflation, and it is significant,” said Ms Bell.

Smiles Inclusive under pressure

Mr Usasz said Mr Timoney was an “excellent salesman who said he could make every one of those (clinics) much more efficient. “He could easily change to allow them to make more money,” Mr Usasz said. Ms Bell asked Mr Uzsas whether he was aware of a report by one industry expert that referred to Smile’s “bizarre financial forecasts’ that “stretched credibility”. Mr Usasz said the report was probably not put in front of him by Mike Timoney because of personal enmity between the expert and Mr Timoney.

“He was someone who was an adviser in the dental area,” said Mr Usasz. “He’s not a broker. He’s a person who buys and sells dental practices and I know they disliked each other enormously.” Ms Bell also asked whether an impairment adjustment to the firm’s accounts should have been disclosed to the ASX head of a rights issue.

Mr Usasz said he did not have the full background of the impairment, but noted an “impairment is about the value at a certain time and based on the circumstances at that time.”

Mr Usasz told the court about the deterioration of the business after its listing, including an exodus of dentists on leave and others leaving the company permanently. “People stopped working for us and that was sad for everyone,” he said. He said the company was trading solvent up until the arrival of Covid-19 in 2020. He also denied he wanted to invest in a proposed deed company arrangement after the collapse of Smiles Inclusive. There are no allegations of wrongdoing by those called to appear at the public examination.