SmileDirectClub Reports Second Quarter 2021 Financial Results

August 9, 2021 at 4:01 PM EDT

NASHVILLE, Tenn., Aug. 09, 2021 (GLOBE NEWSWIRE) -- SmileDirectClub, Inc. (Nasdaq: SDC), the next generation oral care company with the first medtech platform for teeth straightening, today announced its financial results for the second quarter ended June 30, 2021.

Second Quarter 2021 Financial Highlights

  • Total revenue of $174 million, an improvement of 62.7% over the prior year period.
  • Net loss of $(55) million, an improvement of 41.6% over the prior year period.
  • Adjusted EBITDA of $(22) million, a decrease of $2 million over the prior year period.
  • Diluted EPS of $(0.14), a 44.0% improvement over the prior year period.

Key Operating Metrics

  • Unique aligner shipments of 90,006.
  • Average aligner gross sales price (“ASP”) of $1,885 for the second quarter of 2021, compared to $1,817 for the second quarter of 2020.

“We have a singular focus on maximizing our global opportunity and extending our leading telehealth platform for orthodontia through a persistent emphasis on customer experience, improving consumer perception around credibility, driving positive sentiment with our Challenger campaign, and investing in innovation,” said David Katzman, Chief Executive Officer and Chairman of SmileDirectClub.

SmileDirectClub Chief Financial Officer Kyle Wailes added, “The short-term headwinds from residual impacts of the April cyber-attack, the lasting economic effects from COVID on our target demographic and the slower scaling of some of our new international markets due to COVID prevented us from achieving our anticipated second quarter results. Our planned overinvestment in marketing to relaunch in Germany and Spain later this year, combined with continued execution on expanding customer acquisition channels, in particular the professional channel, should help us drive controlled and profitable growth consistent with our long-term targets.”

Business Outlook

While there continue to be short-term headwinds associated with macroeconomic factors and impacts associated with the cyber-attack, SmileDirectClub’s long-term revenue growth targets as well as the opportunity to leverage its vertically integrated platform and unique, difficult-to-replicate assets remain unchanged. The focus continues to be to provide the best Club Member experience, and to drive controlled and profitable growth. SmileDirectClub remains the low-cost provider, with brand presence, no pricing pressure, and no real competitor that provides an end-to-end vertically integrated platform for the consumer.

As consumers are considering straightening their teeth, they do three things as part of their research on which provider they should choose: one, they search online, two, they ask their dentist, and three, they ask a friend or family member. The Company continues to make significant investments across these three areas to organically become the leader in teeth straightening. Online, it is making significant investments in brand credibility, driven by the Challenger campaign, which drives home its compelling value proposition, and evidenced by its consumer sentiment and brand credibility, is working. With dentists, the partner network is off to a good start, and the Company will be making significant investments in the channel in the coming quarters. And lastly, on friends and family, our customer experience continues to improve, and we expect that to pay off in higher referrals in the coming quarters.

In addition to these investments in influencing consumer decision making, the Company will continue to make strategic investments in international growth and in penetrating new demographics to drive controlled growth, while also executing against its profitability goals. Lastly, favorable industry dynamics continue to increase with broader acceptance of telehealth and specifically tele-dentistry, minimal penetration against the total addressable market, a number of recent regulatory wins that should help remove barriers to access to care, and clear aligners gaining share in the overall industry.

Full Year 2021 Guidance

For the year ended December 31, 2021, the Company expects total revenue to be in the range of $750 million to $800 million. While macroeconomic trends persisted into July 2021 from a demand perspective, the Company notes that its business can be highly variable on a month-to-month or quarter-to-quarter basis. For example, March 2021 was one of the best months SmileDirectClub has had for gross orders, which the Company believes was correlated with the timing of stimulus payments, along with other factors.

The assumptions underlying the $750 million revenue estimate include:

  • Expectations for a higher Q4 than Q3, driven by typical seasonality experienced in Q4, along with a small ramp in Germany and Spain.
  • A continuation of the macroeconomic headwind that was evident in the latter half of Q2 into Q3.

The assumptions underlying the $800 million revenue estimate include (Note that this does not assume all of these occur, but that there is some combination of the factors below):

  • As noted above, expectations for a higher Q4 than Q3, driven by typical seasonality experienced in Q4.
  • Return of normal consumer spending patterns for the Company’s target demographic (return to a normal macroeconomic environment).
  • Success with its Challenger Campaign – which officially launched in July 2021 with the Company’s TV spots.
  • Success with reallocating marketing dollars from Facebook to TV.
  • Success in Germany and/or Spain as the Company relaunches those markets with enhanced marketing spend in the second half of this year.
  • Greater Partner Network adoption. The Company has a professional network of dental partners with 1,800 locations and 500 of them are already active or pending training. SmileDirectClub plans to invest significantly in the Partner Network in the second half of this year.

The full year 2021 margin outlook is based on the following:  

  • On COGS, SmileDirectClub is making good progress on manufacturing automation, with its second-generation machines producing approximately 85% of all aligner orders and plans to manufacture approximately 90% of all orders on the Gen2 line by the end of Q3. Streamlining the cost profile through operational efficiencies will improve the Company’s margin profile and will provide a consistently superior customer experience that upholds the brand promise.
  • Gross margin (as a percentage of total revenues) in the mid-70% range through the second half of 2021.
  • Sales & marketing (as a percentage of total revenues) in the range of 50% to 55% through the second half of 2021. The SmileShops function primarily as fulfillment centers instead of sources of demand generation.   As of quarter end, the Company had 135 permanent shops open, and held 153 pop-up events over the course of the quarter for a total of 288 location sites.   SmileDirectClub continues to see its shops performing well with higher utilization, a key part of meeting the Company’s long-term financial targets. The strategy of temporary pop-up locations has been successful, allowing SmileDirectClub to fulfill demand without the addition of fixed locations and associated costs. Additionally, marketing and selling expenses in the quarter reflect significant investment in brand building to support long-term growth in international markets. Revenue from rest of world markets (defined as markets outside the U.S. and Canada, “ROW”) came in at approximately 16.4% of total revenue for Q2, which was impacted by the slower scaling of some the Company’s larger markets due to lingering effects from COVID. SmileDirectClub intends to overinvest in international markets during the second half of 2021, which will include relaunching in Germany and Spain, and into 2022. This level of investment will temporarily place the Company above its long-term target range. SmileDirectClub is focused on investment overseas, where 75% of the total market opportunity lies and where the competitive landscape is highly fragmented.
  • General and administrative expenses (expressed in dollars) are expected to slightly grow seasonally to support growth in the second half of 2021 and in preparation for Q1 2022 growth.
  • On liquidity, SmileDirectClub retains approximately $377 million of cash on the balance sheet, providing ample liquidity to support its growth initiatives, while also investing in R&D and innovation.

Conference Call Information

SmileDirectClub Second Quarter 2021 Conference Call Details
  
Date:August 9, 2021
Time:4:30 p.m. ET (1:30 p.m. PT)
Dial-In: 1-877-407-9208 (domestic) or 1-201-493-6784 (international)
Webcast: Visit “Events and Presentations” section of the company’s IR page at http://investors.smiledirectclub.com or a direct link to the webcast.

A replay of the call may be accessed from 7:30 p.m. ET on Monday, August 9, 2021 until 11:59 pm ET on Monday, August 23, 2021 by dialing 1-844-512-2921 (domestic) or 1-412-317-6671 (international) and entering the replay PIN: 13721598. A copy of the 2021 second quarter results supplemental earnings presentation and an archived version of the call, when completed, will also be available on the Investor Relations section of SmileDirectClub’s website at investors.smiledirectclub.com. 

Forward-Looking Statements

This earnings release contains forward-looking statements. All statements other than statements of historical facts may be forward-looking statements. Forward-looking statements generally relate to future events and include, without limitation, projections, forecasts and estimates about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. Some of these statements may include words such as “expects,” “anticipates,” “believes,” “estimates,” “targets,” “plans,” “potential,” “intends,” “projects,” and “indicates.”

Although they reflect our current, good faith expectations, these forward-looking statements are not a guarantee of future performance, and involve a number of risks, uncertainties, estimates, and assumptions, which are difficult to predict. Some of the factors that may cause actual outcomes and results to differ materially from those expressed in, or implied by, the forward-looking statements include, but are not necessarily limited to: the ongoing assessment of the cyber incident, material legal, financial and reputational risks resulting from such incident and the related operational disruptions; the duration and magnitude of the COVID-19 pandemic and related containment measures; our management of growth; the execution of our business strategies, implementation of new initiatives, and improved efficiency; our sales and marketing efforts; our manufacturing capacity, performance, and cost; our ability to obtain future regulatory approvals; our financial estimates and needs for additional financing; consumer acceptance of and competition for our clear aligners; our relationships with retail partners and insurance carriers; our R&D, commercialization, and other activities and expenditures; the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks; laws and regulations governing remote healthcare and the practice of dentistry; our relationships with vendors; the security of our operating systems and infrastructure; our risk management framework; our cash and capital needs; our intellectual property position; our exposure to claims and legal proceedings; and other factors described in our filings with the Securities and Exchange Commission, including but not limited to our Annual Report on Form 10-K for the year ended December 31, 2020 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.

New risks and uncertainties arise over time, and it is not possible for us to predict all such factors or how they may affect us. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. We are under no duty to update any of these forward-looking statements after the date of this earnings release to conform these statements to actual results or revised expectations. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this earnings release.

About SmileDirectClub

SmileDirectClub, Inc. (Nasdaq: SDC) (“SmileDirectClub”) is an oral care company and creator of the first medtech platform for teeth straightening. Through its cutting-edge telehealth technology and vertically integrated model, SmileDirectClub is revolutionizing the oral care industry, offering consumers the ability to get clinically safe and effective treatment but without the 3x markup. SmileDirectClub’s mission is to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. SmileDirectClub is headquartered in Nashville, Tennessee and operates in the U.S., Canada, Australia, New Zealand, United Kingdom, Ireland, Germany, Austria, Hong Kong, Singapore, Spain and Mexico. For more information, please visit SmileDirectClub.com.

Investor Relations:
Tripp Sullivan
SCR Partners, LLC
investorrelations@smiledirectclub.com 

Media Relations:
Kim Atkinson
Vice President, Communications
press@smiledirectclub.com 

SmileDirectClub, Inc.
Condensed Consolidated Balance Sheets
(in thousands)

 June 30,December 31,
20212020
ASSETS  
Cash$376,648   $316,724   
Accounts receivable214,316   221,973   
Inventories32,948   29,247   
Prepaid and other current assets18,092   12,832   
Total current assets642,004   580,776   
Accounts receivable, non-current75,286   71,355   
Property, plant and equipment, net199,944   189,995   
Operating lease right-of-use asset30,378   31,176   
Other assets12,772   11,487   
Total assets$960,384   $884,789   
LIABILITIES AND EQUITY  
Accounts payable$22,638   $36,848   
Accrued liabilities98,788   100,589   
Deferred revenue24,575   26,619   
Current portion of long-term debt10,681   15,664   
Other current liabilities6,814   6,821   
Total current liabilities163,496   186,541   
Long-term debt, net of current portion733,414   392,939   
Operating lease liabilities, net of current portion26,584   27,771   
Other long-term liabilities2,814   43,400   
Total liabilities926,308   650,651   
Commitment and contingencies  
Equity  
Class A common stock, par value $0.0001 and 118,672,409 shares issued and outstanding at June 30, 2021 and 115,429,319 shares issued and outstanding at December 31, 202012   11   
Class B common stock, par value $0.0001 and 269,243,501 shares issued and outstanding at June 30, 2021 and 270,908,566 shares issued and outstanding at December 31, 202027   27   
Additional paid-in-capital433,927   483,393   
Accumulated other comprehensive loss(128) (102) 
Accumulated deficit(238,668) (192,879) 
Noncontrolling interest(178,714) (73,932) 
Warrants17,620   17,620   
Total equity34,076   234,138   
Total liabilities and equity$960,384   $884,789   

SmileDirectClub, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)

 Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenue, net$162,587   $94,409   $351,389   $278,337   
Financing revenue11,594   12,664   22,253   25,386   
Total revenues174,181   107,073   373,642   303,723   
Cost of revenues45,860   48,776   93,821   108,553   
Gross profit128,321   58,297   279,821   195,170   
Marketing and selling expenses95,943   34,518   193,066   176,842   
General and administrative expenses85,042   68,689   166,120   159,718   
Lease abandonment and impairment of long-lived assets—   24,633   —   24,633   
Other store closure and related costs536   4,476   1,664   4,476   
Loss from operations(53,200) (74,019) (81,029) (170,499) 
Interest expense1,939   10,050   19,505   14,072   
Loss on extinguishment of debt—   13,781   47,631   13,781   
Other expense (income)130   (1,765) 1,042   3,159   
Net loss before provision for income tax expense (benefit)(55,269) (96,085) (149,207) (201,511) 
Provision for income tax expense (benefit)(12) (1,419) 1,695   555   
Net loss(55,257) (94,666) (150,902) (202,066) 
Net loss attributable to noncontrolling interest(38,377) (67,867) (105,113) (146,017) 
Net loss attributable to SmileDirectClub, Inc.$(16,880) $(26,799) $(45,789) $(56,049) 
     
Earnings (loss) per share of Class A common stock:    
Basic$(0.14) $(0.25) $(0.39) $(0.52) 
Diluted$(0.14) $(0.25) $(0.39) $(0.53) 
     
Weighted average shares outstanding:    
Basic118,344,050109,048,411117,656,599   106,819,870
Diluted387,609,677385,133,303387,246,120   384,492,628

SmileDirectClub, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)

 Six Months Ended June 30,
20212020
Operating Activities  
Net loss$(150,902) $(202,066) 
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation and amortization33,169   25,357   
Deferred loan cost amortization3,041   1,666   
Equity-based compensation27,167   27,217   
Loss on extinguishment of debt47,631   13,594   
Paid in kind interest expense3,324   1,771   
Asset impairment and related charges—   25,915   
Changes in ROU asset798   4,070   
Changes in operating assets and liabilities:  
Accounts receivable3,726   33,887   
Inventories(3,701) (10,140) 
Prepaid and other current assets(6,572) (4,009) 
Accounts payable(11,998) (6,001) 
Accrued liabilities(2,990) (13,184) 
Deferred revenue(2,044) 16,084   
Net cash used in operating activities(59,351) (85,839) 
Investing Activities  
Purchases of property, equipment, and intangible assets(45,303) (47,861) 
Net cash used in investing activities(45,303) (47,861) 
Financing Activities  
IPO proceeds, net of discount and related fees—   (1,155) 
Proceeds from warrant exercise—   922   
Repurchase of Class A shares to cover employee tax withholdings(6,260) (4,529) 
Proceeds from stock purchase plan632   —   
Repayment of HPS Credit Facility(396,497) —   
Payment of extinguishment costs(37,701) —   
Proceeds from HPS Credit Facility and Warrants, net—   388,000   
Borrowings of long-term debt747,500   16,807   
Payments of issuance costs(21,179) (11,336) 
Purchase of capped call transactions(69,518) —   
Final payment of Align arbitration(43,400) —   
Principal payments on long-term debt(4,609) (180,762) 
Payments of finance leases(5,182) (4,997) 
Other(83) 1,263   
Net cash provided by financing activities163,703   204,213   
Effect of exchange rates change on cash and cash equivalents875   —   
Increase in cash59,924   70,513   
Cash at beginning of period316,724   318,458   
Cash at end of period$376,648   $388,971   

Use of Non-GAAP Financial Measures

This earnings release contains certain non-GAAP financial measures, including adjusted EBITDA (“Adjusted EBITDA”). We provide a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure below and in our Current Report on Form 8-K announcing our quarterly earnings results, which can be found on the SEC’s website at www.sec.gov and our website at investors.smiledirectclub.com.

We utilize certain non-GAAP financial measures, including Adjusted EBITDA, to evaluate our actual operating performance and for planning and forecasting of future periods.

We define Adjusted EBITDA as net loss, plus depreciation and amortization, interest expense, income tax expense (benefit), equity-based compensation, loss on extinguishment of debt, impairment of long-lived assets, abandonment and other related charges and certain other non-operating expenses, such as one-time store closure costs associated with our real estate repositioning strategy, severance and other labor costs, and unrealized foreign currency adjustments. We use Adjusted EBITDA when evaluating our performance when we believe that certain items are not indicative of operating performance. Adjusted EBITDA provides useful supplemental information to management regarding our operating performance, and we believe it will provide the same to members/stockholders.

We believe that Adjusted EBITDA will provide useful information to members/stockholders about our performance, financial condition, and results of operations for the following reasons: (i) Adjusted EBITDA is among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions and (ii) Adjusted EBITDA is frequently used by securities analysts, investors, lenders, and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

Adjusted EBITDA does not have a definition under GAAP, and our definition of Adjusted EBITDA may not be the same as, or comparable to, similarly titled measures used by other companies. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. A reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, is set forth below.

SmileDirectClub, Inc.
Reconciliation of Net Loss to Adjusted EBITDA
(in thousands)

 Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(unaudited)
Net loss$(55,257) $(94,666) $(150,902) $(202,066) 
Depreciation and amortization16,709   13,916   33,169   25,357   
Total interest expense1,939   10,050   19,505   14,072   
Income tax expense (benefit)(12) (1,419) 1,695   555   
Lease abandonment and impairment of long-lived assets—   24,633   —   24,633   
Other store closure and related costs536   4,476   1,664   4,476   
Loss on extinguishment of debt—   13,781   47,631   13,781   
Equity-based compensation12,008   10,821   27,167   27,217   
Other non-operating general and administrative losses (gains)1,601   (1,880) 2,513   4,705   
Adjusted EBITDA$(22,476) $(20,288) $(17,558) $(87,270)