Too Broke to Smile: SmileDirectClub Chapter 11 Deep Dive

Welcome to the 127th Pari Passu Newsletter. 

Over the last few weeks, we covered restructurings of solid businesses which found themself in tough situations. Today, we are studying a broken business model.

The COVID-19 pandemic engendered increased usage of telehealth services following the shutdown of physical locations. What was originally an involuntary change became a willing shift to virtual and hybrid care as patients discovered more affordable and convenient options [27]. 

Below, we’re going to dive into a case of DTC dental care and use SmileDirectClub as an opportunity to learn about regulatory challenges in healthcare, the effect of unresolved legal disputes, and insider DIP financing. We’ll see how its business model became the company’s downfall and how it never recovered from its failed IPO in 2019. 

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Company Overview

SmileDirectClub (“SmileDirect”) was the first omnichannel telehealth platform to sell dental aligners and other affordable oral health products and services directly to consumers (DTC) [15]. The company launched its website in May 2014 by friends Alex Fenkell and Jordan Katzman and went public in September 2019 [1]. SmileDirect soared to prominence with bold marketing and a promise to revolutionize affordable orthodontics [1]; the company’s flagship product, clear aligners, sold for a starting price of $1,850 [3], far less than the $3,000–$8,000 price tag for traditional metal braces and Invisalign [5] [6]. The company’s primary customer base was low-to-middle-class income patients [12]. 

Rather than a direct provider of dental services, the company functioned as a Dental Support Organization; the company offered a suite of dental-related products and services via a network of 49 independent, third-party professional corporations (PCs). These PCs, owned by licensed dentists, are responsible for delivering aligner treatments to SmileDirect customers, operating under various contractual agreements while leveraging the company’s telehealth platform [1]. SmileDirect served over two million customers in its nine years of operation [3]. 

Business Model 

SmileDirectClub's hybrid business model combined DTC teledentistry with in-person professional care. Customers could begin their treatment by either ordering an at-home impression kit or visiting a SmileShop (a SmileDirect-owned retail location) for an in-person scan. All aspects of the company’s patient journey were overseen by licensed dental professionals, ensuring that both remote and in-office services meet clinical standards. 

SmileDirect had a vertically integrated supply chain, controlling everything from a customer’s initial website visit to the final manufacturing and delivery of aligners. The company’s competitive advantage was a function of three main factors that spanned across both online and in-person offerings [1]: 

1. Robust Partner Network (PN) – Patients could visit partner locations (the 49 PCs mentioned above) owned by over 1,150 independent dentists and orthodontists to get their teeth scanned or take physical impressions. Treating Doctors (also in the PN) then assessed and prescribed aligners. The PN network regularly monitored progress remotely through virtual check-ins. 

2. Proprietary technology – The SmileDirect Mobile Application provided patients with custom progress tracking, notifications, and customer support. The app used SmileMaker AI Technology, which allowed customers to scan their teeth and create an interactive 3D model, generating a treatment plan within minutes of uploading. 

3. Continued product innovation – In addition to the aligners, SmileDirect offered an array of other products. Notable offerings included Nighttime Clear Aligners (aligners that only need to be worn for ten hours at night), Comfort Sense Technology (enabling a smoother fit using laser precision-cutting), SmileOS (a new planning system for dental professionals launched in 2021 to optimize efficiency and accuracy of treatments), and CarePlus (a hybrid initiative for customers who wanted in-person treatment in addition to the company’s telehealth services). In 2022, SmileDirect launched whitening kits and strips as part of a broader strategy to expand into the oral care market. 

DTC Teledentistry 

SmileDirect’s first customer channel was its DTC teledentistry service. Customers could either use the company’s mobile app (powered by proprietary SmileMaker technology) to take 3D scans of their teeth or request an at-home impression kit to mail back to one of SmileDirect’s partner labs. Scans only took around thirty minutes to complete, giving customers full temporal autonomy over the process. Once approved by one of SmileDirect’s licensed dentists / orthodontists, the company manufactured and shipped aligners directly to customers [1]. 

SmileShops and Physical Footprint

As SmileDirect’s reputation grew, the company opened its first SmileShop in-person treatment center in 2016 in New York. SmileShops were company-run locations, distinct from independent Partner Network locations. By 2019, the company had significantly scaled its footprint through partnerships with CVS and Walgreens, which more than doubled the number of SmileShops. At its peak, SmileDirect operated over 144 SmileShops globally, including multiple locations across Texas and major international markets such as Canada, the UK, and Australia [1]. 

Payment and Satisfaction Policies 

To ensure financial accessibility, SmileDirect introduced SmilePay in 2018, a flexible payment plan that allows customers to pay the cost of their treatment in installments. For example, a patient could make a $250 down payment along with $85 monthly payments to cover the cost of a $1,895 treatment. 60-70% of the company’s customers use this option, benefiting from a streamlined, in-house financing model that avoids the friction caused by third-party financiers. SmilePay played a critical role in retaining customers and driving conversions. 

To further instill confidence in its products, SmileDirect also provided a Lifetime Smile Guarantee, giving customers a full refund within thirty days if they are unsatisfied. Beyond that period, customers could receive a partial refund or free additional aligners for adjustments [1]. 

Regulatory Hurdles 

While DTC dental care provided an affordable alternative to otherwise costly treatments, orthodontists and dental professionals had been skeptical of DTC treatments since SmileDirect’s inception. Critics argued that because patients take their own dental impressions or scans without an in-person evaluation, underlying oral health issues, like gum disease, may go undetected and lead to complications [2].

These concerns were not entirely unique to SmileDirect, but the company’s rapid growth brought it into the spotlight. As we will see later, regulatory hurdles would end up being one of the key factors leading to the company’s filing. 

Pre-Distress Financials 

Prior to its IPO in 2019, SmileDirect raised $380mm through an institutional private placement of equity capital (selling private shares directly to institutional investors), yielding the company a $3.2bn valuation in 2018 [14]. In the fifth largest US IPO in 2019 [13], SmileDirect then raised $1.35bn, boosting the company’s valuation to $9bn [11]. We will analyze SmileDirect’s failed IPO despite its high initial valuation later, but for now let’s take a look at SmileDirect’s financials from before FY 2020 to provide a snapshot of what the company looked like pre-COVID and pre-stress: 

The vast majority of revenue came from sales of clear aligners. From FY 2017-2019, the company experienced high revenue growth, bringing in $146mm, $423mm, and $750mm, respectively [16]. This is consistent with how quickly the company’s customer base grew, as unique aligner shipments increased from 258,278 to 453,053 from FY 2018 to FY 2019 [17]. Gross profit saw a similar trend, surging from $82mm in 2017 to $289mm in 2018 to $572mm in 2019, with respective gross profit margins at 56%, 68%, and 76% [16]. 

The company had reported net losses since 2017 (negative $33mm in 2017, negative $75mm in 2018, negative $115mm in 2019) [16], which wasn’t that uncommon for fast-growing companies. However, the fact that EBITDA, operating income, and net income have all been negative since 2017 suggests that even with its focus on rapid expansion, SmileDirectClub had struggled to achieve profitability at any level.

Even so, we can try to contextualize SmileDirect’s losses. Like many other disruptive companies (e.g. Uber), SmileDirect likely focused on scaling first, then improving margins later. This is most evident through three factors, the first two of which each made up around half of the company’s revenue throughout 2017 – 2019, while the third contributed to delayed cash collection [19]: 

1. High Marketing and Selling Expenses – Marketing and selling expenses included omni-channel advertising campaigns and customer acquisition costs as well as sales team expenses and SmileShop operations. These expenses more than doubled each year, increasing from $64mm in 2017 to $481mm in 2019. In each year, marketing and selling expenses constituted around half of all revenues [19]; this aggressive spending underscores SmileDirect’s push for rapid expansion, prioritizing visibility and market share over profitability. 

2. High General and Administrative Expenses – General and Administrative Expenses totaled $48mm, $122mm, and $581mm from 2017-2019. The majority of this category comprised of the two primary forms of worker compensation: wages and equity-based compensation. From the beginning of 2017 to the end of 2019, the number of SmileDirect’s employees increased from around 200 to 6,000. Wages paid to workers made up 40% of the overall G&A expense increase ($30mm out of $74mm) from 2017 – 2018. This increase in wages was due to “the expansion of [the company’s] headcount” [19], reflecting SmileDirect’s short-term goal of expansion. Equity-based compensation (non-cash awards like stock or stock options given in lieu of cash salaries) also falls under this category and totaled $7mm, $20mm, and $350mm from 2017 – 2019; while equity-based compensation is not a linear function of headcount, we can assume the sharp rise in equity based compensation reflects the same hiring. surge that drove up wages. Throughout 2017 – 2019, wages and compensation made up over half of overall G&A expenses; G&A as a whole made up around half of revenues during this time period.

3. Increasing Days Sales Outstanding – Days Sales Outstanding (DSO) is a way to measure how long it takes, on average, for a company to collect payments from its accounts receivables after a sale. DSO is calculated by dividing accounts receivables by total revenue and then multiplying that by 365. In their FY 2019 10-K, the company attributeed the increase in accounts receivables to the introduction of SmilePay (introduced in 2018). Accounts receivables were $114mm in FY 2018 and $239mm in FY 2019, and revenues were $423mm in FY 2018 and $750mm in FY 2019. This translates to an increase in DSO from 98 days to 116 days from 2018 to 2019. While this is not a huge increase, it still highlights how SmileDirect’s installment model delayed cash collection and ultimately contributed to a strain in liquidity. 

However, unlike other high-growth companies, SmileDirect’s long-term profitability turnaround failed to materialize due to operational and legal setbacks, which we will discuss in the next section. 

Events Leading to Distress

Despite its early growth, SmileDirect faced significant challenges due to its failed IPO, the COVID-19 pandemic, and legal battles. With both categories of challenges draining financial resources concurrently, SmileDirect quickly fell into a severe liquidity crisis. 

Failed IPO

We briefly mentioned earlier that the company went public in September 2019. In the same day, shares dropped 28%, making SmileDirect the worst unicorn IPO of the year and worst first-day performance than any other major U.S. listing in the last two decades [22], [18]. Just one month after the company’s IPO, its stock plummeted 60% from $23 per share to around $9 per share [21], [22]. 

This failed IPO can largely be attributed to investors’ skepticism of the company’s business model. Prominent investors, including well-known short seller Hindenburg Research, raised early red flags about SmileDirectClub’s model. Hindenburg described SmileDirect’s business as a “low-cost, high volume assembly line,” arguing that the company was oversimplifying a medically sensitive process in pursuit of scale and cost efficiency [33]. The core of their concern was that trying to industrialize a complex healthcare service, which normally required extensive hands-on clinical oversight, posed not only ethical and safety risks but also heightened financial and legal exposure. 

Legal and regulatory headwinds soon substantiated these concerns. Even before the company’s IPO, SmileDirect was entangled in legal disputes with business groups representing dentists and orthodontists, who accused it of misleading consumers and delivering substandard care through its mail-in model. Regulatory scrutiny also intensified; for example, California enacted Assembly Bill 1519 in October 2019, which strengthened patient safety in teledentistry and increased requirements around in-person care accompanying teledentistry services [22]. These mounting legal challenges and evolving regulations signaled systemic risks to SmileDirect’s core operating model, casting serious doubt on the long-term viability of the company’s growth strategy. This significantly weakened investor confidence during what should have been a positive turning point for SmileDirect. 

Ongoing Litigation

The decrease in demand highlighted a larger issue that had constantly been a topic of discussion throughout SmileDirect’s lifetime: the legality / long-term viability of the company’s business model. Below is a timeline of major legal disputes, all of which challenge the safety and oversight of SmileDirect’s DTC treatments: 

April 2019: American Dental Association Petitions the FDA [8]

The American Dental Association (ADA) filed a citizen petition (a formal request submitted by an individual or organization to a government agency requesting action on a specific regulatory issue) urging the FDA to block SmileDirect’s aligner sales. The ADA accused the company of bypassing the FDA’s “by prescription only” requirement, which mandates that Class II medical devices, including clear aligners and teeth impression materials, be dispensed only with a licensed provider’s prescription. The ADA argues that the company put patients at risk by avoiding comprehensive, in-person dental exams:

September 2019 – December 2019: Class-Action Lawsuits 

There were multiple class-action lawsuits filed against SmileDirect in the latter half of 2019, consisting of both securities class action (lawsuit filed by investors) and consumer class action (lawsuit filed by consumers) lawsuits [1]. The securities class actions alleged false and misleading statements in SmileDirect’s IPO registration which led to financial losses for investors. For example, the securities lawsuit filed in Michigan claimed that SmileDirect had failed to disclose regulatory and compliance risks, risks associated with the company’s business model, and efficacy of product treatments. Investors in Tennessee also claimed that the company had exaggerated its growth potential while downplaying rising customer acquisition costs. Investors viewed the lack of these disclosures as an exaggeration of the company’s growth potential. The omission / misrepresentation of facts regarding the safety and legality of SmileDirectClub’s products and services had a direct impact on their investments. This ultimately led to a 44% decline from $23 / share to $12.94 / share by the commencement of the Michigan securities class action alone [9]. Three consumer class actions were also filed in the Middle District of Tennessee by dentists, orthodontists, and consumers, alleging false advertising and unlicensed dental practices, among other claims. 

December 2022: District of Columbia Attorney General’s Lawsuit 

The D.C. Attorney General accused SmileDirect of violating the D.C. Consumer Protection Procedures Act (CPPA) by using non-disclosure agreements (NDAs) framed as “General Releases” to suppress negative customer experiences. The suit claimed that the company’s Lifetime Smile Guarantee was deceptive, forcing customers to sign NDAs before receiving refunds. The suit was settled in June 2023, with SmileDirect releasing over 17,000 customers from NDAs, paying $500,000 to the D.C. government, and ceasing to require NDAs for refunds [10]. Below is an excerpt from the NDA agreement customers had to sign [11]:

“Releasor shall not post on social media any information or reviews regarding the Transaction… and shall take all steps necessary to delete or eliminate any such postings made prior to the date of this General Release…Releasor further covenants and agrees that he/she will not make, publish, or communicate any statements or opinions that would disparage, create a negative impression of, or in any way be harmful to the business or business reputation of SDC…”

Align Litigation [1]

In addition to countless legal disputes, SmileDirect became entangled in a years-long legal battle with Align Technology, a clear aligner tech company. Align and SmileDirect started off as business partners, with Align acquiring a 19% stake in SmileDirect and becoming its exclusive aligner supplier in 2016. Trouble started in 2019 when Align was found to have violated a non-compete agreement by producing its own Invisalign product and copying SmileDirect’s SmileShop business concept. Align was forced to shut down its physical stores and return its stake in SmileDirect. But in 2020, Align turned around and sued SmileDirect for breaching their exclusive supply contract. An arbitrator ruled in Align’s favor in May 2023, forcing SmileDirect to pay $63mm in damages by September 2023. Already facing a severe liquidity crisis, this payment pushed SmileDirect to file for bankruptcy in the same month the payment to Align was due. 

Weak Demand

Ongoing litigation against SmileDirect during the 2019 – 2022 time period, regardless if the cases amounted to financial losses for the company (settlement costs were negligible, and we could not find exact figures for legal expenses incurred during this time), likely led to increasing consumer skepticism, which contributed to weak demand. 

Before discussing this in detail, we will first acknowledge the pandemic’s effect on SmileDirect’s product demand. Like other discretionary spending businesses, SmileDirect was hit hard by the COVID-19 pandemic. Recall that the company’s core demographic was low-to-middle-class income individuals; many of them stopped buying SmileDirect’s products as their financial pressures mounted. At the same time, the company was forced to shut down its SmileShops and manufacturing facilities, so the company shifted to focus on its teledentistry channel. Though SmileDirect produced its aligners in-house, the company still sourced raw materials from third-party suppliers. Global supply chain disruptions delayed the procurement of these raw materials, causing a delay in fulfilling orders for aligners [1]. As a result, SmileDirect was forced to shift from its SmileShops, which accounted for around 90% of total revenue, to focus more on its DTC services, ultimately leading to a drop of 37% in the company’s revenue from $750mm in FY 2019 to $471mm in FY 2022[16] [24]. 

More than the pandemic, however, it seems that SmileDirect never really had enough demand to justify its costs. Between 2020 – 2022, the high General & Administrative and Selling & Marketing expenses that we mentioned earlier continued to individually make up half of the company’s revenue; the fact that these two expense buckets alone ate up nearly all revenue suggests that SmileDirect’s business model and (lack of enough) consumer interest was fundamentally unequipped to scale profitably, regardless of external shocks. 

Debt Obligations and Cash Burn 

In addition to the company’s waning demand, high expenses, and general negative outlook due to increasing legal entanglements, SmileDirect was also carrying a hefty amount of debt. The company nearly doubled its debt each year from 2019–2021; in February 2021, SmileDirect increased its debt load by $747.5mm in February 2021 through the issuance of zero-interest convertible notes in an attempt to raise capital without taking on additional cash interest burdens [1]. 

By the end of 2022, the company had total debt of $849mm. While leverage is typically expressed as a function of debt and EBITDA, we have to make a few adjustments to SmileDirect’s negative EBITDA to get a better understanding of SmileDirect’s debt load. Let’s assume a 20% normalized EBITDA margin (based on observed normalized EBITDA margins for comparable companies) and do a rough calculation of what leverage would be. In 2019, the company had revenue of $750mm. This translates to a normalized EBITDA of $150mm. In 2019, the company also had total debt of $209mm, making pre-distressed leverage ratio 1.4x ($209mm / $150mm). With $471mm in revenue in 2022, SmileDirect’s implied leverage ratio would be 9x ($849mm / (20% * $471mm)) [16]. 

Our 9x leverage figure above is on a normalized margin. While 9x implied leverage was already overbearing, the situation was actually much worse. At the start of 2021, the company had a cash balance of $317mm, which was around the average quarterly figure since the 2019 IPO [16]. There was an increase to $435mm at the end of Q1 2021 from $317mm in Q4 2020, and starting from Q1 2021 until the end of 2022, the company was burning through an average of $45mm cash per quarter [16]. Additionally, SmileDirect’s EBITDA margin had fallen to negative 39% by the end of 2022, meaning there was no real capacity for the company to service its debt at all [16]. 

Prepetition Restructuring Efforts 

As SmileDirect’s debt load became unsustainable due to the company’s sustained net losses and high cash burn rate by early 2023, it was clear the company had to pursue initiatives to attempt an out-of-court restructuring. Below is the company’s capital structure upon its October 2023 filing date: 

To address the company’s inability to manage its debt, SmileDirect worked with Centerview Partners to explore a few options:

First, the company tried to refinance the senior secured HPS Credit Facility through a renewed asset-based lending facility, junior capital, or DIP structure in July 2023. As a quick note, we want to point out that any refinancing would require HPS’s consent or participation because they held the existing senior secured credit facility. This fact will become relevant very shortly. From July 2023 – September 2023, the company reached out to 61 potential lenders but received only one proposal [1]. SmileDirect’s poor financial performance did not help its position; the singular proposal received failed to address SmileDirect’s liquidity needs, so the refinancing failed [20]. 

Back in February 2021, the company raised $747.5mm through the issuance of zero-interest convertible notes in an attempt to raise capital without taking on additional cash interest burdens. Of the total proceeds, $650mm was raised from the original convertible notes and $97.5mm came from capped call transactions, which provided incremental financing. In SmileDirect’s case, the company likely generated these proceeds by selling higher-strike capped call options after buying initial call options to offset potential dilution from the convertible notes. The convertible notes were issued at a strike price of around $18 per share [29]. By mid-2023, SmileDirect’s stock was trading at $0.50 [16], a clear indicator that there was no realistic prospect of conversion. By the time the company tried to refinance the HPS Credit Facility in July 2023, these convertible notes had already become a major liability, accounting for 84% of the company’s total debt load. Thus, SmileDirect tried to negotiate an exchange agreement with the holders of the Convertible Notes that would provide $85mm in new capital. While HPS approved the amendment to effectuate this transaction, the holders of the Convertible Notes declined to pursue this option, so this solution failed [1]. 

As a hypothetical, we want to take a moment to illustrate how HPS could have blocked either of the first two attempts of an out-of-court restructuring from happening, even if other relevant parties wanted to pursue these solutions.  To understand why, let’s take a quick look at SmileDirect’s corporate structure: 

SmileDirect set up a special purpose vehicle (SPV), SDC U.S. SmilePay SPV, to be the borrower under the HPS Credit Facility. This SPV was bankruptcy-remote, meaning that its assets (substantially all of SmileDirect’s customer receivables and IP) were not available for restructuring negotiations [1]. Because of this, HPS had direct control over the SPV’s valuable assets since they were not subject to potential concessions in the case of a filing. From HPS’s perspective, there was no incentive to refinance because its collateral was protected, while any amendment would only weaken its repayment priority. 

As a final resort, SmileDirect turned to Cluster Holdco (an investment entity established and owned by SmileDirect’s cofounder David Katzman) to obtain a secured promissory note to extend the company’s liquidity runway [1]. A secured promissory note pledges specific collateral to a claim, though it may not be the highest priority in the repayment hierarchy like a senior secured loan would be. Secured promissory notes give lenders collateral-backed protection while also allowing the borrower to access financing at lower interest rates than unsecured debt. Despite the new secured promissory note, it quickly became evident that the company would need to file for Chapter 11 due to its rapid cash burn and dwindling cash balance.

Chapter 11 Filing

Recall from the previous sections that SmileDirect was operating with negative EBITDA and $890mm debt with around $45mm quarterly cash burn. Following its failed out-of-court restructuring initiatives, SmileDirect filed for Chapter 11 in September 2023. Upon filing, the company had just $5mm in cash [26] with a quarterly cash burn of around $45mm since Q1 2021 [16]; in October 2023, market cap dropped to $65mm [20]. 

Unique Insider DIP Financing 

After SmileDirect filed for bankruptcy, the company secured insider-led DIP financing. The DIP provided up to $80mm in total funding, structured as a super-priority first-lien priming loan. With the DIP in place, the company planned to initiate a 60-day marketing process for the sale of its equity or assets.  The terms of the DIP were attractive, with a 17.5% PIK interest rate, 5% upfront PIK fee, and 5% exit PIK fee with no backstop fees. The components of the DIP facility were broken down as follows [1]: 

• $20mm in new money provided by the DIP lenders. This was essentially a $20mm loan provided by the founders of SmileDirect so that the company could continue operations during the initial weeks of Chapter 11.

• $5mm rollup of the Secured Promissory Note owed to Cluster.

• $30mm of additional funding contingent on satisfying the Delayed-Draw Condition. This condition required SmileDirectClub to meet a net cash flow test (whether cash inflows exceed cash outflows over a set period) and secure an actionable bid (credible, binding offer for a sale of assets) within 60 days.

• $25mm accordion feature made available to convertible note holders. An accordion feature in a credit facility allows the borrower to increase the total amount of available financing without amending the entire credit agreement; this is typically done by bringing in new lenders or letting existing lenders contribute more capital. 

The reason this DIP structure was unique was because the DIP lender, Cluster Holdco, was owned by SmileDirect’s CEO. This is highly significant because it effectively turned the founders from equityholders (who typically recover little to nothing in bankruptcy), into secured, super-priority creditors.

Let’s take a step back and use this as an opportunity to break insider DIP financing. DIP financing can come from one of two sources: third-party and insider DIP lenders. Third-party DIP lenders are independent investors seeking high-risk returns, while insider DIP lenders are existing stakeholders trying to protect their financial interests. 

While traditional insider DIP financing is common as third-parties are rarely willing to lend to distressed companies, this extent of insider DIP financing is what makes SmileDirect’s case fascinating. Typically, insider DIP financing comes from existing major creditors like sponsors or prepetition secured lenders. In this case, the nature of Cluster’s ownership (the fact that they were owned by the company’s founders) allowed the SmileDirect founders to retain significant influence over restructuring decisions like asset sales and creditor recoveries. This curtails the power of third-parties, allowing Cluster to benefit dually from financial protections and increased influence over the Chapter 11 process. These two factors are what make SmileDirect’s insider DIP financing particularly aggressive compared to more conventional cases. 

HPS Forbearance Agreement 

We covered forbearance agreements in our Tuesday Morning deep dive. As a quick review, a forbearance agreement is a temporary arrangement where a lender agrees to delay enforcement actions, like declaring defaults, to give the borrower more time to restructure. 

Under this agreement, HPS agreed to forbear from exercising remedies on various defaults, including liquidity covenants, bankruptcy defaults, and restrictions on incurring additional debt — any of which could have allowed HPS to seize assets from the SPV. In exchange, SmileDirectClub had to "true up" its borrowing base by making cash payments into a restricted reserve account at the SPV, both immediately before the filing and on a weekly basis thereafter. The agreement also imposed strict cash control mechanisms, requiring SmileDirectClub to notify HPS before releasing funds from the reserve account, along with enhanced reporting obligations on loan balances and DIP facility transactions. Rather than enforcing defaults immediately, HPS was likely trying to protect its collateral value by allowing SmileDirect to continue operating. 

Failed Insider Asset Sale and Liquidation

Both the DIP facility and HPS forbearance agreement were contingent on a November 23, 2023 deadline for actionable bids, meaning this was the date that SmileDirect would have to find potential buyers to acquire the company’s assets to avoid liquidation [1]. After failing to secure actionable bids by this deadline, the founders made a last-ditch effort to save the company through infusing $30mm of new debt and $25mm of new equity in exchange for 100% ownership of the reorganized company [32]. This $55mm insider-led asset purchase was rejected by the court, and the company was forced to liquidate in December 2023 [2]. The case was officially converted to a Chapter 7 in January 2024 [31]  

The company is selling its clear aligner production lines, Tennessee production facility, $1.9mm in spare parts, and $10mm in inventory, among other assets [30]. The exact liquidation analysis supplement has not yet been provided, but we can assume from the values here that only secured creditors (i.e. HPS) will receive any form of recovery after the DIP is fully repaid.  

Implications 

The downfall of SmileDirect is a textbook case study of trying to scale an unsustainable business model in a highly regulated industry. The company’s attempt to disrupt traditional orthodontic care through affordable DTC services ended up massively contributing to the company’s inability to turn a profit; as this Medium article aptly notes a fundamental flaw in SmileDirect’s business model: “the customer’s economic struggle become the company’s struggle.” 

As for SmileDirect’s existing customers, a recent settlement at the end of 2024 determined that $4.8mm in refunds would be distributed to around 28,000 customers (approximately $171 per customer) who were charged for payments even after the company stopped providing its services [28]. Because the company no longer exists, the Lifetime Smile Guarantee will also be terminated. The company has since encouraged customers to continue their care at their local dental or orthodontist offices [2].  

Beyond SmileDirect itself, this case serves as a broader warning for the long-term viability of DTC healthcare models and the role of insider financing in bankruptcy. Notably, the company’s inability to secure any third-party buyers and the founders’ unsuccessful attempt to save the company through an insider asset sale raises implications for unsecured creditors who may perceive these processes as self-serving rather than value-maximizing. 

[1], [2], [3], [4], [5], [6], [7], [8], [9], [10], [11], [12], [13], [14], [15], [16], [17], [18], [19], [20], [21], [22], [23], [24], [25], [26], [27], [28], [29], [30], [31], [32], [33] 

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