Dental 3D Printing User SmileDirectClub Files for Chapter 11 Bankruptcy; Founders Extend $80M Lifeline

Pioneering teeth-straightening business SmileDirectClub (Nasdaq: SDC) has announced its filing for Chapter 11 bankruptcy in Texas amidst challenging financial circumstances. The decision comes as the company seeks to implement a comprehensive recapitalization strategy. With external financing avenues closed, the founders gave the company an $80 million rescue effort but will first use $20 million to boost their business over the next two months. However, if they can’t find a buyer or investor by November 23, 2023, they’ll sell off the company’s assets. In the meantime, everyone involved says they are working hard to keep the business alive because they “believe it has value.”

Financial freefall

SmileDirect’s pioneering use of multi jet fusion (MJF) technology, in collaboration with HP in 2019, marked them as a possible leader in indirect aligner production through 3D printing. The move positioned SmileDirect as possibly the largest user of MJF for this type of orthodontic production. Its SmileHouse, equipped with a fleet of over 60 3D printers, is one of the nation’s largest 3D printing hubs.

SmileDirectClub 3D prints aligners. Image courtesy of SmileDirectClub.

From 2016 to 2019, the Nashville, Tennessee-based business revealed growth, with revenues surging from $20.6 million to $750 million. However, the unexpected disruptions caused by the Covid-19 pandemic reversed this trajectory. With enforced store closures, shifting consumer habits, and alterations to its business model from physical SmileShops to direct-to-customer shipments, the company reported a net loss of $278 million by the end of 2020.

Financial problems continued and got worse over time. An extended legal dispute with rival Align Technology–which pioneered the use of 3D printing to create its Invisalign aligner system–added even more pressure, ending in a $63 million judgment against SmileDirect. Although the company challenged this outcome, it impacted its liquidity and third-party negotiation prospects.

Aiming to regain its market position, SmileDirect introduced two initiatives in 2023: an AI-powered platform and an upscale product line for wealthy customers. Despite their potential, the endeavors were overshadowed by escalating debts and the absence of third-party investments. When the Chapter 11 bankruptcy was declared, the company’s accumulated debt was an alarming $890.6 million.

Realigning finances

In support of the company’s Chapter 11 filings and initial motions, SmileDirect CFO Troy Crawford submitted a detailed declaration to Judge Christopher M. Lopez of the U.S. Bankruptcy Court for the Southern District of Texas. In the 51-page long document, he outlined the company’s financial history. Detailing the road to bankruptcy, Crawford emphasized how the brand had historically seen robust growth until the pandemic proved challenging. Despite a telehealth approach, factors, like store closures disrupted supply chains, labor shortages, and a shift in consumer spending influenced its primary customer segment, primarily the lower to middle-income bracket.

An evident shift occurred during the pandemic; while their SmileShops previously accounted for roughly 90% of total sales, the focus shifted towards shipping impression kits directly to consumers, causing a steep drop in sales. The fiscal strain culminated in a net loss of $278 million by the end of 2020, a trend that unfortunately persisted.

To offset these challenges, 2021 saw the company raise $747.5 million through convertible notes and other financial instruments. These proceeds helped fund the company’s international and operational growth. However, “with the convertible notes due in 2026, it faced immense difficulty obtaining any financing from its existing creditors or third parties to help right-size its capital structure,” explains Crawford.

SmileDirectClub Factory. Image courtesy of SmileDirectClub.

SmileDirect also employed cost-cutting strategies like trimming marketing budgets, halting certain underperforming global operations, and centering on core growth plans. These measures, however, didn’t prevent their liquidity from dwindling further. Then, on August 8, 2023, executives announced financial results for the second quarter of 2023, including a revenue decrease consecutively and year-over-year. Although net losses and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) improved, second-quarter metrics weren’t enough to bypass a bankruptcy filing.

“The company achieved five successive quarters of improved EBITDA and, through its financial discipline, was on a path towards becoming EBITDA positive in Q3 2023 and free cash flow positive by Q4 2023,” explained Crawford. “Despite these positive trends, the Company’s inability to raise any third-party financing, coupled with the Convertible Notes due 2026 and the Align judgment, completely hinders the company’s ability to fully realize the benefit of its promising initiatives. Hence the commencement of these chapter 11 cases.”

Debt dilemma

Despite current challenges, the recapitalization emphasizes the founders’ commitment to the company’s mission: democratizing high-end oral care.

Co-Founder David Katzman has an optimistic view: “At SmileDirectClub, we are committed to delivering a premium customer experience and helping over 2 million customers achieve a smile they love. We are taking this step today to help ensure we are well positioned to build upon the success of our SmileMaker Platform and CarePlus offering and to continue our mission of providing safe, convenient, and effective oral care to our customers. This transaction is designed to ensure our future financial structure reflects the talent of our team members and the quality of our business.”

SmileDirectClub uses HP Multi Jet Fusion 3D printers to make 50,000 mouth molds a day. Image courtesy of SmileDirectClub.

SmileDirect formally filed its Chapter 11 petition on September 29, 2023. A crucial subsequent hearing is scheduled for October 24, 2023. Unfortunately, with news of the firm’s bankruptcy filing, SmileDirect’s stock plummeted approximately 61% in after-hours trading on September 29, 2023, reaching an all-time low. By Tuesday, October 3, 2023, the stock had dipped even further, approximately 81.7% from its closing price on September 29, 2023. As legal proceedings advance, the future of SmileDirect hangs in the balance, and its resilience and adaptability will be tested in the coming months.

The Future of Dental Aligners

All of this is taking place as Align Technologies makes waves in the 3D printing industry with the acquisition of Cubicure. As part of a vertical integration strategy, the purchase will allow the inventor of clear aligners to develop viscous materials for the likely use of direct 3D printing of dental aligners.

Because Align relies on vat photopolymerization to make dental molds for its thermoformed devices, there’s the possibility for it to more easily switch to direct production of clear aligners using the same or similar techniques. Instead of 3D printing a mold of a patient’s teeth on which to form the ultimate product, it can simply print the aligner itself. Of course, this process will require using biocompatible materials and clearing regulatory hurdles.

By relying on MJF, SmileDirect placed itself on an alternative path in the aligner market. For AM analysts, like Additive Manufacturing Research, direct 3D printing of the devices was the preordained future for the segment. Being a powder-based process, however, MJF could not as immediately be used for direct production of aligners.

Nevertheless, MJF does bring key advantages to the manufacturing of these devices, specifically high throughput and sustainability. Whereas, photopolymers, as used by Align, are made from environmentally caustic materials that cannot be recycled, thermoplastic powder can be recycled. In the case of SmileDirect, it is able to recycle HP’s powders to a high degree. MJF also enabled the production of some 50,000 aligners daily when the operation began taking off circa 2019.

With that in mind, it seemed to be more the economic climate that hindered SmileDirect’s progress. Nonetheless, it’s far from over for the company. After all, the company has one of the largest install bases of MJF machines, capable of far more than indirect aligner manufacturing. As one of the most production-tailored technologies, with high throughput and material capabilities, SmileDirect may find other uses for MJF. Would it be so surprising for dental companies to grow beyond dental?