2nd Red Flag

On the 23rd of May the CEO's address announced "The company is also starting to implement a Management Services and Pre-construction Consultancy model. Mayfield will shortly take over formal management services of two (2) centres located in Melbourne ". As a shareholder that was a positive announcement and vindication there was demand for their management services. What was omitted at the time was the two centres were actually owned by Michelle and Dean Clarke. This is explained in Note 9 of the FY17 half years released on the 30th of August.

Note 9. Related party transactions Transactions with related parties Managed services agreements During the half-year the Company entered into agreements to manage two childcare centres owned by Dean and Michelle Clarke, directors of the Company. The agreements are initially for 12 months, with options to renew. Pricing is on commercial, arms-length bases. Revenue of $120,000 (2016: Nil) has been recognized from these contracts during the reporting period.

I would have thought full disclosure at the time of the announcement of their interests would have been good corporate governance. The $120,000 revenue for the period seems quite very high if it was for June alone. Annualized that's $720K revenue per centre. Were there any pre payments ? On the 18th of September the acquisition of Michelle Clark's childcare centre was announced. This centre must be Cranbourne as it was announced as being in the Southern suburbs and owned by Michelle. Below in an excerpt from the Prospectus.

Michelle Clarke is the sole director of a trustee company which owns and operates a Childcare Centre (which is not a Mayfield Childcare Centre) in Cranbourne, Victoria. Further, Dean Clarke and Michelle Clarke are the directors and Michelle Clarke is the secretary of a trustee company which owns and operates a Childcare Centre (which is not a Mayfield Childcare Centre) in St Kilda, Victoria. The beneficiaries of the respective trusts include Michelle Clarke and Dean Clarke.

This raises a number of questions. What value of yearly management services fee will now discontinue for the Cranbourne centre ? They have bought EBITDA but have also lost revenue with the purchase. Given the total EBITDA for the centre is $480K it's looking more like a pre payment for management services. I have no information and no basis for this statement, just a hunch Just seems all very cute to me. Put a managed service agreement into operation of a centre owned by a director and not declare at the time ( May 23rd ) Then some 3.5 months later buy the centre from yourself ( Michelle Clarke in her capacity as a director ). Presumably the managed service agreement would have led to cost savings in the centre. That's why Mayfield buys centres and manages them as they can operate them more efficiently. With the increased cost efficiencies there is a higher EBITDA that may or may not be offset by the cost of the managed service agreement. However at the time of sale I presume there would be no ongoing managed service agreement cost as the entity that operated the managed service agreement, Mayfield, is the purchaser. I presume the independent expert's report will cover off on these points. The final point is Mayfield now receive management service income for the St Kilda centre that Michelle and Dean Clarke own privately. The more resources and energy Mayfield management direct to the St Kilda centre to increase the occupancy and cost efficiency of the centre, the more shareholders will pay if it is vended into Mayfield, like Cranbourne was, on an all cash deal. If the managed service agreement has a mechanism to share in the potential profit uplift then that would be a good outcome for shareholders. Just we don't have any details of the management service agreement with the St Kilda centre or the Cranbourne centre