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Oral care is incredibly important, especially as you age. Because of this, it should come as no surprise that there are a number of companies dedicated to providing goods and services aimed at making sure your teeth and mouth remain healthy. One such business is SmileDirectClub ( NASDAQ:SDC ). However, times have not been particularly good for this enterprise. After seeing rapid growth through its 2019 fiscal year, the company has started exhibiting sales declines year after year. The 2022 fiscal year is unlikely to be an exception. On top of this, cash flows are significantly negative and, in some ways, even worsening. Absent a major change in the trajectory of the enterprise, it's unlikely to deliver attractive value for its investors moving forward. In fact, instead of leaving shareholders smiling, there is a high probability that the company will only put a frown on their faces.

Today, SmileDirectClub describes itself as an oral care company and as the creator of the first medical technology platform aimed at teeth straightening. To be more specific, the business generates revenue in a couple of different ways. First, it offers a clear aligner treatment that targets the orthodontics market. These aligners help customers with teeth that are mildly or moderately misaligned by helping to straighten them out over time. The company sells these products for a price of $1,950, which management claims is up to 60% less than what traditional orthodontic solutions cost.

Generally speaking, a customer, before buying one of these aligners, takes one of three different paths. Sometimes, a member will visit a dentist's office that is partnered up with the company. As at the end of its 2021 fiscal year, the firm had partnerships with roughly 650 dental practices across the regions in which it operates. A second option is to book an appointment to take free, in-person 3D oral images at one of the SmileShops or popup locations the company has spread across the US, Puerto Rico, Canada, Australia, the UK, and Ireland. The company's network of SmileShops number 188 in all, plus it has around 60 popup locations each month that are operational. Instead, they have the option to request a doctor-prescribed impression kit online that can then be mailed directly to their home. With this scenario, they are able to share their current teeth alignment data with the company in question. From there, the business then determines whether or not the individual is a good candidate for their aligners.

The company also has some digital-only properties worth mentioning. One of these is called SmileCheck, which management describes as a proprietary central data repository for all of the medical records, business transactions, and communications of its clients. On top of this, the company also has a specialty financing program called SmilePay that allows its customers to make monthly payments for the aligners they purchased. This typically involves a $250 down payment and an average monthly payment of $89 for a time frame of roughly 19 months. As of the end of its 2021 fiscal year, the business had 32 issued US patents, seven allowed US with patent applications, and an untold number of global and US patents that are pending.

Author - SEC EDGAR Data

For a few years, SmileDirectClub exhibited significant growth. Back in 2017, for instance, the business generated revenue of just $146 million. By 2019, sales had grown to $750.4 million. Understandably, during the pandemic, sales dropped, coming in at just $656.8 million in 2020. That would have been fine if the pain stopped there. But it didn't. In 2021, revenue fell further to $637.6 million. The worst thing is that the company expects this trend to continue for the 2022 fiscal year even though the COVID-19 pandemic is largely over. In the first quarter of the year, sales of $157.6 million came in far weaker than the $199.5 million experienced one year earlier. Total revenue for 2022 should be between $600 million and $650 million, with the midpoint of this implying a year-over-year decrease of 2%.

During this time, SmileDirectClub has also seen a lot of pain on its bottom line. Between 2017 and 2019, the firm's net loss worsened, growing from $32.8 million to $114.5 million. Losses improved to some degree in 2020, totaling $78.4 million for the year. But then, in 2021, the company lost $102.4 million. That pain has continued into the 2022 fiscal year. During the first quarter, its net loss was $22.6 million. Admittedly, this was better than the $28.9 million the company lost the same quarter one year earlier. However, as I demonstrated already, sales also worsened for the year. So while the net loss might be smaller, the net profit margin improved only slightly, going from a negative 14.5% of sales to a negative 14.3%.

When it comes to analyzing the company, we should also look at other profitability metrics. Unfortunately, none of these show anything good. Operating cash flow was sent from negative $30.3 million in 2017 to negative $333.2 million in 2019. The picture improved in 2020, but the firm still managed to see a net outflow of $83.6 million for that year. In 2021, the net outflow was negative to the tune of $141.5 million. Even if we adjust for changes in working capital, the situation shows no real improvement. In fact, using this approach, 2021 was the worst year for the business, with a net outflow of $133.2 million. A similar trajectory can be seen when looking at EBITDA. It ultimately worsened from a negative $21.1 million in 2017 to a negative $163 million last year.

Author - SEC EDGAR Data

For the 2022 fiscal year, things are not looking great. Operating cash flow went from a negative $28.3 million in the first quarter of 2021 to a negative $61.3 million the same quarter this year. If we adjust for changes in working capital, it would have been even worse, going from a negative $10.2 million to a negative $45.5 million. Meanwhile, the EBITDA for the company also worsened, going from a positive $4.9 million to a negative $34.4 million. When it comes to profitability, the only guidance management gave relates to adjusted EBITDA. This should be between negative $25 million and negative $75 million. While this would be a nice improvement over what the company has seen in the past few years, it still is rather telling when a business can manipulate a non-GAAP metric all they want and still see a significant negative for the year.

It would be one thing if SmileDirectClub had a significant amount of cash on hand. But that is also not the case. In fact, the company currently has debt in excess of cash of $594.8 million. This means that the firm has very little in the way of wiggle room during these tough times. As such, it may even come to pass that the firm might have to issue additional shares, heavily diluting shareholders, if it is to remain running if something else doesn't change for the better soon.

Based on all the data provided, I cannot help but say that SmileDirectClub is not the kind of prospect I would want to buy into. It is true that a turnaround for the enterprise could result in significant upside for shareholders. But beyond a potential improvement in EBITDA for the current fiscal year, I don't see anything that is really promising when it comes to that possibility. Because of this, I cannot do anything other than rate the enterprise a ‘strong sell’ at this time.

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This article was written by

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.