SmileDirectClub (SDCCQ) Risk Analysis
Risk Overview Q2, 2023
Source: the company's latest filing for the period ended Jun 30, 2023, filed Aug 08, 2023
Risk Change Over Time
- Share Price & Shareholder Rights - Risk 1Our Class A common stock could be delisted from NASDAQ, which would seriously harm the liquidity of our Class A common stock.
NASDAQ requires listing issuers to comply with certain standards in order to remain listed on its exchange. If, for any reason, NASDAQ should delist our Class A common stock from trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our stockholders: - the liquidity and marketability of our Class A common stock;- the market price of our Class A common stock;- our ability to obtain financing for the continuation of our operations;- the number of institutional and general investors that will consider investing in our Class A common stock;- the number of market makers in our Class A common stock;- the availability of information concerning the trading prices and volume of our Class A common stock; and - the number of broker-dealers willing to execute trades in shares of our Class A common stock. On November 18, 2022, we received a letter from the Listing Qualifications Staff of NASDAQ indicating that, based upon the closing bid price of our Class A common stock, for the prior 30 consecutive business days, the common stock was below the $1.00 minimum bid price requirement for continued listing on NASDAQ pursuant to the NASDAQ listing rules (the "Minimum Bid Requirement"). As a result, we were notified by NASDAQ that we are not in compliance with the Minimum Bid Requirement. This notice had no immediate effect on the continued listing status of our common stock on NASDAQ, and our listing remains fully effective. In accordance with the NASDAQ listing rules, we have been provided an initial compliance period of 180 calendar days, or until May 17, 2023, to regain compliance with the Minimum Bid Requirement. If we do not regain compliance within the allotted compliance periods, including any extensions that may be granted by NASDAQ, NASDAQ will provide notice that our Class A common stock will be subject to delisting. We would then be entitled to appeal NASDAQ's determination, but there can be no assurance that NASDAQ would grant our request for continued listing. We intend to monitor the closing bid price of our Class A common stock and consider available options to regain compliance with the Minimum Bid Requirement and continue listing on NASDAQ. In addition, if we cease to be eligible to trade on NASDAQ, we may have to pursue trading on a less recognized or accepted market, such as the over the counter markets, our stock may be traded as a "penny stock" which would make transactions in our stock more difficult and cumbersome, and we may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as less attractive investments with higher associated risks, such that existing or prospective institutional investors may be less interested in, or prohibited from, investing in our common stock. This may also cause the market price of our Class A common stock to further decline.
- Debt & Financing - Risk 2Our subsidiaries have recently incurred secured debt, which may adversely impact our business, results of operations, and financial condition.
SPV and SmileDirectClub, LLC have entered into a secured term loan agreement among SPV, as borrower, SmileDirectClub, LLC, as the seller and servicer, the lenders from time to time party thereto, and HPS Investment Partners, LLC, as administrative agent and collateral agent (as disclosed herein) (the "Loan Agreement"). The terms of the Loan Agreement contain various restrictions and covenants which could, among others, have such adverse consequences as to: - limit our subsidiaries' ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;- limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and - place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.
- Debt & Financing - Risk 3Our subsidiaries have substantial debt which is secured by the assets of our wholly-owned special purpose subsidiary, SPV, and guaranteed on a limited basis by SmileDirectClub, LLC and SDC Financial LLC. If there is an occurrence of an uncured event of default, the lenders can foreclose on SPV's assets, which would significantly and adversely impact our value.
The outstanding debt under the Loan Agreement is secured by a first-priority security interest in all or substantially all of the assets of SPV and is guaranteed on a limited basis by SmileDirectClub, LLC and SDC Financial LLC. In the event SPV is unable to make payments on such secured debt, when due, the lenders may, among other things, foreclose on SPV's assets, which consists of certain receivables, cash, intellectual property and related assets. The ability to make payments on outstanding debt under the Loan Agreement, when due, will depend upon the ability to make profit from operations and to raise additional funds through equity or debt financings. At the moment, we have no funding commitments that have not been previously disclosed, and we may not obtain any in the future.
- Debt & Financing - Risk 4The Loan Agreement contains covenants that restrict the business of our subsidiaries, the breach of which may result in the acceleration of debt outstanding under the Loan Agreement and could adversely affect our financial position or results of operations and our ability to raise additional capital.
The Loan Agreement contains various restrictions and covenants that limit our flexibility in operating our business, including restrictions on the ability of SPV to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, make investments and pay dividends and other distributions. The Loan Agreement also provides that an event of default shall occur if, among other things, the minimum liquidity of SDC Financial LLC, its consolidated subsidiaries and certain other entities is less than $50 million as of the last day of any month. If any of the covenants are breached such that an event of default occurs, the Loan Agreement allows the collateral agent to declare repayment of then outstanding debt to be immediately due. A breach of the covenants and acceleration of repayment obligations could have a material adverse effect on our business, financial condition and results of operations and prospects.
Risk Highlights Q2, 2023
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 75
- Share Price & Shareholder Rights - Risk 1Provisions in our organizational documents regarding exculpation and indemnification of our directors and officers may result in substantial expenditures by us and may discourage lawsuits against our directors and officers.
Our amended and restated certificate of incorporation and amended and restated bylaws, to the maximum extent permissible under Delaware law, eliminate the personal liability of our directors and officers to us and our stockholders for damages for breach of fiduciary duty. These provisions may discourage us, or our stockholders through derivative litigation, from bringing a lawsuit against any of our current or former directors or officers for any breaches of their fiduciary duties, even if such legal actions, if successful, might benefit us or our stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws will provide that we will, to the fullest extent permitted by Delaware law, indemnify our directors and officers for costs or damages incurred by them in connection with any threatened, pending, or completed action, suit, or proceeding brought against by reason of their positions as directors and officers. We are also party to indemnification agreements with each of our directors and executive officers and maintain directors' and officers' insurance. These indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against our directors or officers
- Share Price & Shareholder Rights - Risk 2Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for certain disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on our behalf, (ii) action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us or our stockholders, creditors, or other constituents, (iii) action asserting a claim against us or any our directors or officers arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws, or (iv) action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine, provided, however, that, in the event that the Court of Chancery of the State of Delaware lacks subject matter jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall, with limited exceptions, be another state or federal court located within the State of Delaware. Any person or entity purchasing or otherwise acquiring any interest in our shares of capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation described above. This choice of forum provision may limit a stockholder's ability to bring claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or employees, which may discourage such lawsuits against us and our directors, officers, and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
- Share Price & Shareholder Rights - Risk 3Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay attempts to acquire us that stockholders might consider favorable.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the merger or acquisition of us more difficult without the approval of our board of directors. Among other things, these provisions: - allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;- preclude stockholder action by written consent at any time when the Voting Group controls, in the aggregate, less than 30% of the voting power of our stock entitled to vote generally in the election of directors, unless such action is unanimously recommended by the board;- provide that our bylaws may be amended or repealed only by a majority vote of our board of directors or by the affirmative vote of the holders of at least 66 2/3% of the votes which all our stockholders would be entitled to cast in any annual election of directors; and - establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings. Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay, or prevent a transaction involving a change in control of us, including actions that our stockholders may deem advantageous, or could negatively affect the market price of our Class A common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions that stockholders desire.
- Share Price & Shareholder Rights - Risk 4Pursuant to the Voting Agreement, David Katzman, our Chairman and Chief Executive Officer, controls a majority of the voting power of shares of our common stock eligible to vote in the election of our directors and on other matters submitted to a vote of our stockholders, and his interests may conflict with ours or our stockholders' in the future.
Holders of our Class A common stock and our Class B common stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, with each share of Class A common stock entitling the holder to one vote and each share of Class B common stock entitling the holder to ten votes. Certain trusts affiliated with David Katzman, our Chairman and Chief Executive Officer, Steven Katzman, our Chief Operating Officer, Jordan Katzman and Alexander Fenkell, our co-founders, and certain of their affiliated trusts and entities (collectively, the "Voting Group") are party to a Voting Agreement (the "Voting Agreement"), pursuant to which the Voting Group has given David Katzman, sole voting, but not dispositive, power over the shares of our Class B common stock beneficially owned by the Voting Group. Accordingly, pursuant to the Voting Agreement, David Katzman controls a majority of the voting power of shares of our common stock eligible to vote in the election of our directors and on other matters submitted to a vote of our stockholders. So long as 9.4% of shares of Class B common stock remain outstanding, the holders of our Class B common stock will be able to control the outcome of matters submitted to a stockholder vote. Even when the Voting Group ceases to own shares of our common stock representing a majority of the total voting power, for so long as the Voting Group continues to own a significant percentage of our common stock, David Katzman, through his voting power, will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval. Accordingly, for such period of time, David Katzman will have significant influence with respect to our management, business plans, and policies, including the appointment and removal of our officers. In particular, until the earlier of (i) the ten-year anniversary of the consummation of our initial public offering or (ii) the date on which the shares of Class B common stock held by the Voting Group and their permitted transferees represent less than 15% of the Class B common stock held by the Voting Group and their permitted transferees as of immediately following the consummation of our initial public offering, David Katzman will be able to cause or prevent a change of control of us or a change in the composition of our board of directors and could preclude any unsolicited acquisition of us. The concentration of voting power could deprive stockholders of an opportunity to receive a premium for their shares of Class A common stock as part of a sale of us and ultimately might affect the market price of our Class A common stock. David Katzman and Camelot Venture Group ("Camelot"), with which he and certain other members of the Voting Group are affiliated, engage in a broad spectrum of activities. While the SDC Financial LLC Agreement restricts the Continuing LLC Members from engaging in certain competing business activities, David Katzman and Camelot may engage in activities where their interests conflict with our interests or those of our stockholders.
- Share Price & Shareholder Rights - Risk 5If we or the Pre-IPO investors sell substantial amounts of shares of our Class A common stock, the market price of our Class A common stock could decline.
The sale of a substantial number of shares of our Class A common stock in the public market, or the perception that such sales could occur could adversely affect the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price we deem appropriate. In addition, subject to certain limitations and exceptions, pursuant to certain provisions of the SDC Financial LLC Agreement, the holders of LLC Units following the consummation of our initial public offering and the reorganization transactions in connection with our initial public offering ("Continuing LLC Member") may exchange LLC Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for certain subdivisions (stock splits), combinations, or purchases of Class A common stock. All of the LLC Units and shares of Class B common stock are exchangeable for shares of our Class A common stock. Each of our directors and officers, and substantially all of our Pre-IPO investors, entered into lock-up agreements with the underwriters of our initial public offering that restricted their ability to sell or transfer their shares of Class A common stock. This agreement expired on March 9, 2020. In addition, on September 16, 2019, we filed a registration statement on Form S-8 under the Securities Act to register 44,259,239 shares of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock that may be issued from time to time pursuant to our Omnibus Plan and SPP. Accordingly, shares of Class A common stock registered under such registration statement if, when, and to the extent issued under these plans, will be available for sale in the open market. We are party to a Registration Rights Agreement with Pre-IPO investors, whereby, following the initial public offering and the expiration of the related 180-day lock-up period, we may be required to register under the Securities Act the sale of shares of our Class A common stock held by Pre-IPO investors, including shares that may be issued to Continuing LLC Members upon exchange of their LLC Units. Shares of Class A common stock registered pursuant to the Registration Rights Agreement will also be available for sale in the open market upon such registration unless restrictions apply. As restrictions on resale end, the market price of our Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities.
- Share Price & Shareholder Rights - Risk 6The dual-class structure of our common stock may adversely affect the trading market for our Class A Shares.
S&P Dow Jones' criteria for inclusion of shares of public companies on certain indices, including the S&P 500, excludes companies with multiple classes of shares from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any exclusion from such indices could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
- Share Price & Shareholder Rights - Risk 7If securities or industry analysts cease to publish research or reports about our business, or publish negative reports, the market price of our Class A common stock could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume of our Class A common stock to decline. Moreover, if one or more of the analysts who cover us downgrades our Class A common stock, or if our reporting results do not meet their expectations, the market price of our Class A common stock could decline. Some securities analysts have downgraded our Class A common stock since our initial public offering.
- Share Price & Shareholder Rights - Risk 8The trading price of shares of our Class A common stock has declined significantly since our initial public offering and may continue to be volatile.
The market price of our Class A common stock has declined significantly since our initial public offering and may continue to be highly volatile and subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market, or political conditions, could reduce the market price of shares of our Class A common stock regardless of our operating performance. The market price of shares of our Class A common stock may be affected by a number of potential factors, including variations in our quarterly operating results or dividends, if any, to stockholders, adverse publicity surrounding our business, additions or departures of key management personnel, failure to meet analysts' earnings estimates, publication of research reports about us and our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures, or capital commitments, adverse publicity about the industries we participate in, or individual scandals. In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company's securities, securities class action litigation has often been instituted against these companies. Such litigation could result in substantial costs and diversion of our management's attention and resources. See "We are the subject of purported class action lawsuits, and additional litigation may be brought against us in the future."
- Share Price & Shareholder Rights - Risk 9We are a "controlled company" within the meaning of the corporate governance standards of NASDAQ. As a result, we qualify for, and rely on, exemptions from certain corporate governance standards.
Pursuant to the Voting Agreement, David Katzman, our Chairman and Chief Executive Officer, controls a majority of the voting power of shares eligible to vote in the election of our directors. Because more than 50% of the voting power in the election of our directors is held by an individual, group, or another company, we are a "controlled company" within the meaning of the corporate governance standards of NASDAQ. As a controlled company, we have elected not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our Class A common stock: - a majority of our board of directors consists of "independent directors," as defined under the rules of such exchange;- our board of directors has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and - our board of directors has a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities. The majority of our directors are not independent and, other than the audit committee, our board committees are not composed entirely of independent directors. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ.
- Share Price & Shareholder Rights - Risk 10Our Class A common stock could be delisted from NASDAQ, which would seriously harm the liquidity of our Class A common stock.
NASDAQ requires listing issuers to comply with certain standards in order to remain listed on its exchange. If, for any reason, NASDAQ should delist our Class A common stock from trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our stockholders: - the liquidity and marketability of our Class A common stock;- the market price of our Class A common stock;- our ability to obtain financing for the continuation of our operations;- the number of institutional and general investors that will consider investing in our Class A common stock;- the number of market makers in our Class A common stock;- the availability of information concerning the trading prices and volume of our Class A common stock; and - the number of broker-dealers willing to execute trades in shares of our Class A common stock. On November 18, 2022, we received a letter from the Listing Qualifications Staff of NASDAQ indicating that, based upon the closing bid price of our Class A common stock, for the prior 30 consecutive business days, the common stock was below the $1.00 minimum bid price requirement for continued listing on NASDAQ pursuant to the NASDAQ listing rules (the "Minimum Bid Requirement"). As a result, we were notified by NASDAQ that we are not in compliance with the Minimum Bid Requirement. This notice had no immediate effect on the continued listing status of our common stock on NASDAQ, and our listing remains fully effective. In accordance with the NASDAQ listing rules, we have been provided an initial compliance period of 180 calendar days, or until May 17, 2023, to regain compliance with the Minimum Bid Requirement. If we do not regain compliance within the allotted compliance periods, including any extensions that may be granted by NASDAQ, NASDAQ will provide notice that our Class A common stock will be subject to delisting. We would then be entitled to appeal NASDAQ's determination, but there can be no assurance that NASDAQ would grant our request for continued listing. We intend to monitor the closing bid price of our Class A common stock and consider available options to regain compliance with the Minimum Bid Requirement and continue listing on NASDAQ. In addition, if we cease to be eligible to trade on NASDAQ, we may have to pursue trading on a less recognized or accepted market, such as the over the counter markets, our stock may be traded as a "penny stock" which would make transactions in our stock more difficult and cumbersome, and we may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as less attractive investments with higher associated risks, such that existing or prospective institutional investors may be less interested in, or prohibited from, investing in our common stock. This may also cause the market price of our Class A common stock to further decline.
See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
