I've been following this SmileDirectClub (SDC) insanity over the past week. SDC has become another unicorn with its horn removed for ivory and the body turned into equal parts glue and dog food.
Yesterday, news hit that SmileDirectClub was suing the Dental Board of California. The crux of the issue between the company and the Board revolves around the conduct of the Board towards SDC. Management claims the Board is harassing SmileDirectClub and its customers as well raiding SmileShop stores without cause, and attempting to regulate areas over which it has no authority. The end goal is to eliminate the competition and threat arising from SDC.
So, why did SDC stock get hammered on this?
Within the lawsuit, SDC discusses how the Board conducted a state-wide coordinated "raid" of SmileShop stores in May 2018. The problem is this item was not disclosed in the company's S-1. Within its S-1, SDC does state the company periodically receives communication from state agencies about the company's business activities, licensing, etc, and such matters are routinely concluded with no financial or operational impact on SDC. They added there are currently no actions with any agency that would reasonably be expected to have a material adverse effect on SDC's operations, financial condition, results, or liquidity.
That means investors are left to accept the company deemed this event, these raids, as routine and having no material impact. Given they received a no evidence of violation notice on 6/20/19, closing at least a portion of the matter from May 2018, I suppose it could be argued. Still, it weakens the lawsuit against the Board a bit in terms of pursuing any damages, financially. Obviously, it wouldn't have an impact on punitive damages or the company trying to obtain relief for the cost of the suit and attorney's fees. Unfortunately, the company does list, "For actual, direct, incidental, and consequential damages according to proof and in such amounts as will be proven at trial..."
Therein lies the rub for me.
If there are actual damages, then I would think this needs to be disclosed in the S-1. Of course, the underwriters and company would want to follow it with the no evidence of violation finding along with additional follow-up or thoughts.
And if it ended there, then maybe, just maybe, I could understand management's and the underwriter's decision to leave out this issue, but the company added there was another incident on July 1, 2019, when a member of the Board inspected a SmileBus under the guise the mobile location was providing dental services without a license.
Again, nothing has come about from this, but not disclosing it and having the information come to market in the manner of which it has creates terrible optics for the company.
Overall, I believe the shorts have blown this out of proportion as a risk to the company in terms of the raids. I'm not talking about the products or how state's view teledentistry, but in regards to the raids themselves. They don't appear to have uncovered anything illegal or nefarious. The situation does call into question management of SDC as a whole though which is nothing you want in a time of unicorn hunting. The underlying volatility has turned SmileDirectClub into a fantastic daytrading/scalping stock, but until management can provide answers to the above, I can't consider it for anything more than a trade, so I'm on the sidelines with it for now.