MarketWatch First Take: Does anyone want to buy bankrupt SmileDirectClub?

But the company, which has been controversial and combative ever since it went public in 2019, may have an extremely hard time finding a buyer.

SmileDirectClub said in court documents that its liquidity challenges were initially caused by lower sales during the pandemic, when — even though it had touted itself as a tele-dentistry company — supply-chain disruptions, forced store closures and a shortage of workers affected its ability to fulfill orders. While tele-health was the buzzword during the pandemic, SmileDirectClub saw its revenue fall 12% in 2020, 3% in 2021 and a steep drop of 26% in 2022.

SDC said inflation hit its lower- to middle-income customers, who are its targeted customers for teeth straighteners.

A legal judgment in a long-running case against its former supply partner, Align, appears to have pushed SDC to making its bankruptcy filing. In early August, SDC said in its quarterly earnings call with analysts that its cash from operations, less cash from investing, was negative-$28 million.

“The company’s liquidity challenges were further exacerbated by a longstanding
dispute with Align,” said Troy Crawford, SDC’s chief financial officer, in a court declaration filed on Friday. In August, a Santa Clara, Calif., Superior Court judge reaffirmed an arbitration decision in favor of Align, which awarded the company $63 million over a dispute relating to a supply agreement between the companies.

“SDC may appeal, but in order to do so, SDC would be required to obtain a bond of 150% of the judgment, or over $94 million,” Align said in a statement in August after the arbitration award was stayed by the court. “If SDC’s appeal fails, SDC would be obligated to pay Align the judgment plus interest, at the rate of 10% per annum (approximately $17,000 per day).”

Those extra cost details were not specified in SDC’s court filing, which only said that it “vigorously disagrees with the Align judgment” and said the costs associated with the litigation negatively impacted its liquidity and its ability to negotiate with third parties.

In its bankruptcy documents, SmileDirectClub $890.6 million in total outstanding liabilities. Its biggest creditor is a group of holders of unsecured convertible senior notes, due 2026, now valued at $747 million, with Wilmington Trust as the trustee. Other liabilities include $6.56 million owed to legal advisors, including two white shoe law firms, Sullivan Cromwell and Skadden Arps, and an HPS credit facility of around $138 million. SDC said in a court hearing it had about $5 million in cash and it listed the $63 million Align judgment in a detailed list of creditors as “disputed.”

Matthew  Debbage, CEO of the Americas and Asia for Creditsafe, said in an email that SDC’s days beyond terms (DBT)– a calculation of how long it takes a company to pay its bills — has been erratic this year, and increased gradually until it reached 43 days in July. “This consistent increase signals the company was likely having financial issues that could have stemmed from declining sales, cash-flow problems and internal financial mismanagement,” he said.

Creditsafe, a provider of company credit reports, ranks the company as a “D” risk level, meaning it is a very high risk to any companies that work with it.

SDC said in its filing that as its liquidity worsened, it hired FTI Consulting, investment bankers Centerview Partners and the Kirkland & Ellis LLC law firm to explore financing opportunities and restructuring solutions. In July, Centerview began a robust financing process, reaching out to its existing creditors, various third-party lenders and investors, looking for financing for the company.

“Although Centerview ran a comprehensive and wide-reaching marketing process that resulted in outreach to over 60 parties and at least 20 parties expressing potential interest in the business, these efforts did not result in any actionable proposals,” Crawford’s legal declaration stated.

Now the debtors will begin a 60-day marketing process, conducted by Centerview, and if they are unable to arrange a deal that will “preserve the business as a
going concern,” they will pursue an orderly liquidation through a chapter 11 plan of reorganization.

Christopher Lopez, the federal bankruptcy judge assigned to the case, approved an $80 million financing facility to fund operations, including paying its 1,800 employees and some of its expenses.

But based on SmileDirectClub’s past aggressive business tactics, as it made campaigns out of fighting some vocal critics of its business practices, including the state of California and others, the business may not be worth saving. At one point the company even had non-disclosure agreements it required customers to sign, in order to receive a refund for its treatment plans. SDC also filed a $2.85 billion defamation lawsuit against NBC after it aired an investigation into consumer complaints about the company.

From 2019: SmileDirectClub stock bounces after scathing report from short seller

Investors and SDC employees should probably not get their hopes up that the company can recover. It tried to run fast and break things, and upend the expensive orthodontia field, but from my perspective, it always came across as a smarmy, overly aggressive company that created a flawed product and service.

Updated Oct. 3 with details on liabilities and comments by Creditsafe