What happened
Shares of SmileDirectClub (SDC 18.18%) were plunging today, down 19.7% as of 3:15 p.m. ET, following the release of the company's second-quarter earnings report last night.
While there were actually some mild positives within the company's profit trajectory and guidance, SmileDirect missed both revenue and profit estimates. Perhaps more dire, the company is quickly running out of cash and has a heavy debt burden. While management is hopeful to get to cash-flow positivity by the fourth quarter, investors appear skeptical it will be able to pull it off.
So what
In the second quarter, SmileDirect reported revenue of $101.8 million, down 19.1% year over year, and a loss per share of $0.13, both of which missed analyst estimates.
Ongoing losses and cash burn really aren't good, especially since the company only has a little less than $29 million in cash on its balance sheet, compared with $863.4 million in debt.
In the release, the company noted that CEO David B. Katzman has provided it with a $10 million revolving credit facility to meet its short-term capital needs as SmileDirect aims to restructure its balance sheet.
That "restructuring" could potentially entail a dilutive equity raise to get cash and maybe pay off debt, which would be especially painful given that SmileDirect's stock has plunged to just $0.61 per share as of this writing, down from $23 at its 2019 initial public offering.
Image source: Getty Images.
Now what
Things look pretty dire for SmileDirect, but there is a ray of hope. While the losses look ugly, they have been trending in the right direction. Encouragingly, Katzman forecasts the company will achieve positive adjusted earnings before interest, taxes, depreciation, and amortization in the third quarter and positive free cash flow in the fourth quarter. It also says something that he is putting his own personal money somewhat at risk, albeit in a revolving credit facility.
The company also rolled out its AI-powered SmileMaker Platform, a mobile scanning app, in May in the U.S., after testing it in Australia late last year. The app allows customers to instantly see their potential transformation after scanning their mouth and bite with a smartphone. That simple on-ramp for customers has the potential to reduce friction and get revenue going back in the right direction.
Still, while SmileDirect's aligners are a lower-cost option than traditional braces, they are still a high-ticket item at nearly $2,000 on average. So the current high interest rate environment is still a challenge.
The new app and depressed stock price offer the potential for home-run gains, but with economic uncertainty abounding and a potential equity raise in the near future, SmileDirect is an extremely risky bet that could also go to zero, or close to it.
