SmileDirectClub’s Bankruptcy Filing Raises Doubts about Acquisition Opportunities

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The sudden and unexpected bankruptcy filing by SmileDirectClub (SDC), the controversial tele-dentistry company, has left investors questioning the company’s future prospects and the likelihood of a successful acquisition.

Although SDC has been embroiled in controversy since its initial public offering in 2019, its search for a buyer may prove to be an uphill battle.

According to court documents, SmileDirectClub attributes its liquidity challenges to a combination of factors, including lower sales during the pandemic. Despite promoting itself as a tele-dentistry company, supply chain disruptions, forced store closures, and a shortage of workers hampered SDC’s ability to fulfill orders. As a result, the company saw its revenue decline by 12% in 2020, followed by an additional 3% drop in 2021. However, the most significant blow came in 2022 when SDC experienced a steep decline of 26%.

SDC highlights that its lower- to middle-income customers, who are the primary target for teeth straighteners, were further impacted by inflation. This financial strain undoubtedly contributed to SDC’s current predicament.

The final straw for SmileDirectClub appears to be a legal judgment against its former supply partner, Align. In August, a Santa Clara Superior Court judge upheld an arbitration decision in favor of Align. The judgment awarded Align $63 million for a dispute stemming from a supply agreement between the two companies. SDC’s Chief Financial Officer, Troy Crawford, acknowledged the dispute in a court declaration filed on Friday and expressed the subsequent impact it had on the company’s liquidity.

Align emphasized the potential consequences of an unsuccessful appeal by SDC, stating that they would be required to pay the judgment plus interest at a rate of 10% per annum. This would amount to approximately $17,000 per day. However, SDC’s court filing did not provide specific details about these additional costs but stated that the litigation expenses had certainly affected their liquidity and ability to negotiate with third parties.

The road to recovery and finding a potential buyer may prove challenging for SmileDirectClub as it grapples with financial obstacles and ongoing legal disputes. Only time will tell if the company can overcome these hurdles and reclaim its position in the tele-dentistry industry.

SDC Faces Challenges in Improving Liquidity

SmileDirectClub (SDC) has encountered liquidity issues, prompting the company to seek the assistance of FTI Consulting, Centerview Partners, and the Kirkland & Ellis LLC law firm. These firms have been tasked with exploring potential financing opportunities and restructuring solutions. In July, Centerview initiated a thorough financing process, engaging with current creditors, third-party lenders, and investors in search of funding for the company.

Despite extensive efforts by Centerview, which involved reaching out to more than 60 parties and eliciting interest from around 20 potential investors, no actionable proposals have materialized, according to Crawford’s legal declaration.

Consequently, the debtors will commence a 60-day marketing process overseen by Centerview. If they fail to arrange a deal that would allow the business to continue operating, they will pursue an orderly liquidation through a chapter 11 plan of reorganization.

To support ongoing operations, including employee payments and expenses, federal bankruptcy judge Christopher Lopez has granted approval for an $80 million financing facility.

However, considering SmileDirectClub’s controversial past actions, which include aggressive campaigns against critics, such as the state of California, the prospects for the company’s recovery appear uncertain. Previously, the company even required customers to sign non-disclosure agreements in exchange for receiving refunds. Additionally, SmileDirectClub pursued a $2.85 billion defamation lawsuit against NBC following a consumer complaints investigation.

From 2019: SmileDirectClub stock experiences volatility after critical report from short seller

Investors and employees of SmileDirectClub should exercise caution in anticipating the company’s ability to bounce back. While it aimed to disrupt the orthodontia field with its fast-paced approach, the company’s practices and flawed product have often been questioned and criticized.

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