SmileDirectClub, Inc. (NASDAQ:SDC) Q2 2023 Earnings Call Transcript

SmileDirectClub, Inc. (NASDAQ:SDC) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Greetings and welcome to the SmileDirectClub’s Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, mr. Jonathan Fleetwood, Director of Investor Relations. Thank you, Mr. Fleetwood. You may begin.

Jonathan Fleetwood: Thank you, operator. Good morning. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on SmileDirectClub, please refer to the company’s SEC filings, including the risk factors described therein. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today. I refer you to our Q2 2023 earnings presentation for a description of certain forward-looking statements. We undertake no obligation to update such information except as required by applicable law. In this conference call, we also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow.

Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. I’m joined on the call today by Chief Executive Officer and Chairman, David Katzman and Chief Financial Officer, Troy Crawford. Let me now turn the call over to David.

David Katzman: Thanks, Jonathan and good morning, everyone. Thank you for joining us today. I want to begin my comments by congratulating the entire SDC team for delivering on both of our two key 2023 strategic initiatives by expanding the launch of our mobile scanning SmileMaker platform from Australia to now include the U.S. market and leveraging our growing SmileShop footprint to drive upsells for our CarePlus offering. our innovative technology-driven solutions combined with disciplined cost management allowed us to deliver solid results despite the continuing challenging economic backdrop impacting our core customer. Our Q2 revenue of $102 million, decreased $24 million from the prior-year period. However, adjusted EBITDA improved by $10 million and free cash flow by $8 million, compared to the prior year.

This marks the fourth straight quarter of year-over-year adjusted EBITDA improvement and fifth straight quarter of year-over-year free cash flow improvement. Let me provide more insights regarding our two key transformative initiatives that have started to show how they can drive meaningful efficiencies and growth. First, I’ll start with our SmileMaker platform, or an SMP. SMP is our mobile 3D scanning technology that allows customers to begin their teeth straightening journey by digitally capturing 2D images of their existing smile on a mobile device and submitting the images to our enhanced artificial intelligence engine to develop an automated 3D draft treatment plan. After our pilot launch of SMP in Australia at the end of November, we made a number of enhancements and modifications, and launched our latest updated version in the U.S. on a limited basis for the first time in late May on the iOS platform.

Android is still being worked on, but we expect a fast follow later this month. Since the U.S. launch, the app has consistently been in the top 10 in the Apple’s Store medical category. We will continue to get learnings from different uses for SMP as we test different marketing channels and customer demographics. An exciting enhancement that we have now developed to be used with SMP is the launch of our new AI capability that creates photorealistic after renderings, showing the new alignment of the teeth in the consumer’s mouth. This provides customers with a more enhanced visualization of what the final result will look like in their mouth. Additionally, our draft custom smile plans are sent via text to SMP users, which promote viral sharing of the customer’s potential new smiles, providing the opportunity for consumers to drive additional SMP referrals.

Leveraging all the benefits of SMP together drives improved financial performance on top of our core business. SMP is showing signs of driving stronger marketing efficiencies through tangible benefits by reducing our cost per lead. Now, turning to our second growth initiative. we are excited about developments with our premium service CarePlus, priced at $3,900. this elevated service model allows both dentists and orthodontists, and specifically, the underpenetrated General Practitioners market to utilize SDC aligners and our robust telehealth platform to meet the demands of the more traditional orthodontic customers’ higher income, households and parents of teens, who desire added access to in-person dental professionals, but also want the convenience of telehealth for follow-up care.

We believe that this offering will position SDC to capture a larger piece of the higher income consumer and teen markets, as well as provide a premium option for our existing customers, who want the option of both virtual and in-person care, along with other CarePlus only benefits. from our private launch learnings in the U.S., we identified and have implemented a go-to-market strategy that leverages our growing SmileShop footprint to expand the CarePlus offering to consumers. In our pilot SmileShops, we have seen a meaningful take rate by our existing customers, who opt in to CarePlus with the added benefits despite the higher price point. By the end of August, our team members at all U.S. SmileShop locations will have the ability to provide our customers with a dual journey and their appointment, educating consumers and driving awareness and insights for both our traditional care offerings, as well as our premium CarePlus offering.

This provides an upsell opportunity to consumers for our CarePlus solution from our trained SmileShop team members, who can then refer customers to a nearby partner network location for their CarePlus journey. Feedback has been positive from dental practitioners as this provides a steady referral of CarePlus customers to drive additional revenue streams to the practice, but with the bulk of the sales process being completed by SmileShop team members. we also plan on piloting CarePlus in the UK in the back half of the year. as we scale our CarePlus offering from our pilot launch, we also continue to make progress in growing our partner network programs, the exclusive channel through which our customers will be able to receive our CarePlus offering.

We ended the quarter with 1,156 active locations, compared to 1,095 locations last quarter, continuing to build our coverage for a foundational presence in all key markets to support our CarePlus solution by providing the customer with a short commute for an in-person visit. This is a strong value proposition for our partner network by leveraging the sales efforts of SmileShops to drive CarePlus consumers to their practices and benefit from the full sales and marketing firepower of SDC. we continue to manage our business with our commitment to rigorous financial discipline, with the benefits of the discipline paying off. Although the second quarter top-line results followed our typical seasonal downward Q1 to Q2 revenue trends. we were able to deliver stronger bottom-line and improved cash flow results based on our continued focus on our underlying cost structure.

As I mentioned in my opening remarks, this marks the fourth straight quarter of year-over-year adjusted EBITDA improvement and fifth straight quarter of year-over-year free cash flow improvement. We continue to have discussions with interested parties to improve our liquidity position by expanding our ABL facility, backed by our successful SmilePay Collateral, as well as other interested investors, who see the value in SDC as the leader in affordable teeth straightening, especially with the successful launch of our two key initiatives. I want to thank all of our team members, who have worked long hours to bring these two important initiatives to the market. It’s been a long road, but worth the sacrifice as SMP and CarePlus begin to pay off.

Every single one of you is responsible for bringing over 2 million new smiles to customers and saving them collectively over $6 billion. While we continue to face a difficult and unpredictable macroeconomic environment for our core business, our dedication to maintaining financial discipline through our cost controls and cash deployments, and the addition and initial success of our new initiatives will enable us to manage our business throughout 2023. We have the solutions, technology platforms, team members, business strategies and financial discipline to achieve our operational and financial targets. And now, I’ll turn the call over to Troy, who will provide more detail on our Q2 results. Troy?

Troy Crawford: Thank you, David. I will cover our financial results for the quarter. Please be sure to review our supplemental materials posted to our investor website, which provides additional details on everything I will cover. Let me begin by thanking the entire SDC team for maintaining cost focus, which keeps us on track to hit our target of positive adjusted EBITDA next quarter and positive free cash flow in the fourth quarter this year. While the quarter’s results reflect the impact of a continued macroeconomic headwinds affecting our core customers, our restructuring plans drove meaningful improvements in our cost structure and free cash flow. As David mentioned, for the last four consecutive quarters, we have improved the year-over-year EBITDA.

in the current quarter, we improved adjusted EBITDA by $10 million and improved free cash flow by $8 million despite a $24 million year-over-year decline in revenue from the second quarter of 2022, compared to the current quarter. revenue for the second quarter was $102 million, which is a decrease of 15% sequentially and a decrease of 19% on a year-over-year basis. The sequential decline was within our guidance range and was driven by the typical seasonal trend coming off of the new Year — new Year effect from Q1. The sequential decline improved compared to the last year despite our Q1 results overperforming our expectations. aligner revenue was driven by our shipment of over 46,750 initial aligners in the quarter at an ASP of $1,976. We have been focused on reduced discounting and other efficiencies in our revenue processes, which has driven our ASP to an all time-high.

As a result of the introduction of the CarePlus initiative, as well as price increases that were launched in late July, we expect the ASP to continue to increase. providing some details on the other revenue items, implicit price concessions were 10% of gross aligner revenue, down from 11% in the first quarter. The percentage recognized in the current quarter is in line with our historical performance with some improvements since the first quarter. The consistency we have seen in the IPC continues to show that we have not seen any material change in the quality of our receivables despite challenging macroeconomic conditions. Reserves and other adjustments, which include impression kit revenue, refunds and sales tax came in at 10% of gross aligner revenue, compared to 9% in the first quarter.

Financing revenue, which is interest associated with our SmilePay program, came in at approximately $7 million, which is consistent with Q1 2023 and down approximately $2 million year-over-year due to the lower accounts receivable balance. Other revenue and adjustments, which includes net revenue related to retainers, whitening and other ancillary products came in at $19 million, an increase of approximately $1 million over both the first quarter of 2023 and the prior-year quarter. The increase in other revenue was primarily driven by an increase in retainer sales, which, as we grow our customer base, is becoming a larger percentage of overall revenue. Now, turning to SmilePay. in Q2, the share of initial aligner purchases financed through our SmilePay program came in at 66.4%, which is above the historical levels of approximately 60% and is reflective of the impact the difficult macroeconomic environments having on our core customer.

Our SmilePay program is an important component to drive affordability with our customer base, and overall, the program has continued to perform well with our delinquency rates in Q2, consistent with historical levels. the fact that we keep a credit card on file and have a low monthly payment gives us the confidence that SmilePay will continue to perform well. Turning to the results on the cost side of the business. gross margin for the quarter was 71.6%, which was down from 72.5% in the first quarter. The lower gross margin rate was driven primarily by the deleveraging of fixed cost in our manufacturing process on lower sales. marketing and selling expenses came in at $50 million, or a 49% of net revenue in the quarter, compared to $71 million, or a 57% of net revenue in the second quarter of 2022.

The $21 million and 800 basis point year-over-year decrease, in terms of both dollars and rate, represent improvements in marketing efficiency across the business, largely driven by advanced media targeting. With these improvements, we are continuing to drive lower customer acquisition costs for our legacy business. In addition, with the soft launch of our SmileMaker app, we are seeing significant improvements in cost per lead and cost per app download. With a focus on efficiency and reduced lead costs, we are continuing to optimize spend across multiple channels to achieve the right balance of high funnel leads and bottom funnel aligner sales. on SmileShops, we had 128 permanent locations as of quarter-end, which is an increase of 20 shops since the first quarter of 2023, and we held 58 pop-up events over the course of the quarter for a total of 186 location sites.

The new SmileShops will allow the company to efficiently expand its reach without cannibalizing existing outlets and to service incremental customer demand generated by new channels like the AI-powered SmileMaker platform, as well as our CarePlus initiative. We will continue to analyze our store portfolio for expansion opportunities to support our CarePlus growth, leveraging our dual journey strategy that provides our SmileShop team members the opportunity to upsell our CarePlus offering. Our end goal is to increase customer access to our solutions through the scaling of our partner network channel, expansion of our SmileShop footprint and the market adoption of our SmileMaker app. We now have 1,156 North America partner network locations that are active or pending training.

The partner network team has been focused on optimizing productivity and preparing for our broader CarePlus solution launch based on the learnings from our test launch in four markets beginning in February. our partner network footprint will both scale our operations for our traditional care business, but will also serve as the key channel as our CarePlus premium service offering is rolled out to all U.S. SmileShop markets this month. General and administrative expenses were $60 million in the quarter, compared to $72 million in the second quarter of 2022 and $65 million in the first quarter of 2023. The decrease from the prior-year quarter and last quarter was driven by the cost savings initiatives we put in place at the beginning of the year, as well as a continued focus on cost control.

As of the end of the second quarter, most of the G&A cost control initiatives have been completed. However, you will see the full effect of the savings in Q3 and Q4 2023 as the execution of the initiatives took place throughout Q2 ’23. This will result in lower G&A costs throughout the rest of the year and maintain our focus on right-sizing our overall operating expenses based on core revenue expectations. other expenses include interest expense of $8.5 million, of which $7.1 million is related to the secured debt facility issued in April 2022, and $1.4 million is related to the deferred loan costs associated with the convert we issued in 2021. Additionally, the one-time costs related to lease abandonment, impairment and other store and restructuring costs, were $8.5 million consisting primarily of costs related to our restructuring actions, including severance, as well as store and facility closure costs.

In other expenses, we recognized losses of $0.3 million, primarily due to unrealized foreign currency translation adjustments recorded in the quarter. All of the above produced adjusted EBITDA of negative $14 million in the first quarter, which is a $10 million improvement over the second quarter of 2022 despite a $24 million decrease in revenue. for the full year, adjusted EBITDA has improved by $18 million, compared to the prior year. This quarter represents our fourth consecutive quarter of reporting improving year-over-year adjusted EBITDA results, and as we are on track for a continued improvement and delivering positive adjusted EBITDA in the third quarter. our second quarter net loss was $54 million, which is an $11 million improvement over the prior-year period.

Breaking out adjusted EBITDA regionally for the second quarter, the U.S. and Canada came in at negative $6 million and rest of world adjusted EBITDA was negative $8 million. Moving to the balance sheet. we ended the second quarter with $58 million in cash and cash equivalents, $179 million in net accounts receivable and $137 million drawn on our $255 million debt facility with HPS. Cash from operations for the second quarter was negative $18 million, while cash spent on investing for the quarter was negative $10 million. Free cash flow for the second quarter, defined as cash from operations less cash from investing was negative $28 million, which is an $8 million improvement over the second quarter of 2022. on a year-to-date basis, our free cash flow has improved by over $43 million as our focus on rigorous financial discipline has improved our efficiency.

Our free cash flows continued to consistently improve as we have progressed through the year and we just posted our fifth consecutive quarter of improving year-over-year free cash flow. We are also maintaining our financial goals for the year as the cost changes we have put in place continue to drive us towards positive adjusted EBITDA in the third quarter of 2023 and positive free cash flow by the fourth quarter. We recognize that in this difficult sales environment, we needed to realign our cost structure to attain EBITDA profitability on our core business, and any upside that we see from our initiative launches will be additive to the results at a very high efficiency level. As noted in our earnings press release, we have updated our 2023 guidance that we originally provided on February 28, 2023.

The changes in guidance relate primarily to the new initiatives SMP and CarePlus, which have launched and while not fully available across our network until later this quarter, they will begin to impact our overall volume expectations as we progress throughout the back half of the year. As a result, we are adding the new initiatives to our core guidance and adjusting our sales guidance up for the year. The new initiatives were somewhat delayed this year compared to the original expectations due to our continued focus on launching in a way that was best for our customers while meeting our efficiency goals. at the same time, challenges to the consumer spending and sustained high inflation continue to impact our overall expected demand in 2023 as to our core business.

We started the year with an expectation that the inflationary environment would somewhat improve and we have not seen that play out so far. We have also invested in additional SmileShops, as they are a key component in returning to growth and driving our SmileMaker and CarePlus initiatives. As a result, these added costs, as well as the sales impact from a cautionary environment; offset the margin added for the new initiatives. However, we still expect to deliver positive EBITDA in Q3 of ’23 and positive free cash flow in Q4 of ’23 based on our original guidance. for full-year 2023, revenue and costs and the investment outlook now include contributions from the 2023 rollout of the SmileMaker platform and the launch of the CarePlus solution, which we continue to scale and expect to contribute to revenue and adjusted EBITDA in the back half of the year.

For our full-year 2023 guidance, we expect to deliver revenue between $425 million and $475 million, gross margin between 73% and 76%, adjusted EBITDA between negative $40 million and negative $10 million, driven largely by the top-line revenue results with positive adjusted EBITDA achieved by the third quarter. CapEx between $30 million and $35 million and our one-time costs from our reorganization action in January of 2023, between $12 million and $15 million. related to our balance sheet and general liquidity, the founders of SDC entered into a revolving credit agreement in the amount of $10 million to provide working capital to help fund the newly launched SMP and CarePlus growth initiatives as the company continues to work toward restructuring its balance sheet.

As we have discussed previously, the goal of any future financing transaction that company would enter into will be focused on improving our capital structure by bringing in additional funding while lowering our overall debt. With that, I would like to turn the call back over to David for some closing remarks.

David Katzman: Thanks, Troy. We look forward to continued market adoption of our SmileMaker platform and fully rolling out our careplus offering to all U.S. SmileShop locations this month and launching in the UK in the back half of the year. We will continue delivering on our mission to democratize access to a smile each and every person loves. I’m proud of our team’s long-term focus on developing and making these innovations a reality. And now, we are at the exciting stage in bringing these solutions to the market through multiple channel options convenient to each customer’s unique preference. We will continue to update the market with additional insights regarding these initiatives, along with any of our other innovations, achievements and key milestones. Thank you for joining today. With that, I’ll turn the call back over to the operator for Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Michael Ryskin with bank of America. Please proceed with your question.

Unidentified Analyst: Hi. thanks for taking the question. This is Peter on for Mike. Can you discuss the contribution embedded in the second half guide from SmileMaker and CarePlus in terms of dollars and volume? And can you kind of discuss the confidence that you have that you’re not cannibalizing the prior existing business there? Thanks.

David Katzman: Yes, I can cover that. While we typically don’t break out what SmileMaker and CarePlus can contribute in the back half of the year, we are modeling some of that now. But with those two initiatives just in the early launch phase to not quite launched, I think, it’s too early to give that guidance just yet. And quite frankly, with SMP, they can almost morph into an order coming from two different ways through both our typical smile assessment or through the app itself. So, there’s a little bit of mix there too, which we’re working through to understand if you started on the app, you could finish in a different way and vice versa as well, especially in these early stages. So, we haven’t broken out the impact of those yet for the back half of the year.

As we get there, we’ll start to provide more color on what each of those initiatives is actually contributing to the bottom line. one of the things you’ll see is that from an ASP standpoint, you’ll see our ASP increasing in the back half of the year. We actually had a record during this quarter and with the price increases we put in place on the whole aligner business, as well as what CarePlus can contribute in the back half of the year, we’ll see higher ASPs associated with that. But we do expect that those initiatives will contribute to the back half of the year, the extent to which that happens and how we break those out, I think, is a little bit yet to be determined, just based on what we see with the actual results as we go throughout the back half of the year.

Unidentified Analyst: Okay. And then I guess on the path to profitability and cash flow is the $10 million credit agreement, is that enough to bridge you to becoming fully cash flow positive, even if OpEx cuts maybe lead to further revenue declines or kind of what’s the next option or two that could be available if you need more financing beyond that? Thanks.

David Katzman: Yes. So, we are very focused on liquidity improvement. Definitely, the reason we entered into the $10 million founder funded line of credit was to provide that bridge. There’s opportunities for that to be increased as well. We have to work through our ABL agreement to do that. But we are focused on those things as well. As you know, I think what we’ve released previously; we’ve got a process going on right now. We’ve been working closely with bankers on finding additional liquidity and kind of restructuring the balance sheet. Those discussions have continued on and are very productive. There are a lot of interested parties out there. I think it’s up to us really to find that optimal financing transaction out there.

As we’ve announced previously, one of the goals of that future financing transaction would be to improve the capital structure while lowering our overall debt. And I think we have lots of options out there to us, including working with current investors, as well as others. So, we’ve been able to manage the cash flow and the capital, some of the mitigating things we have out there. I think you’d mentioned is that we’ve been on a cost-cutting initiative to make sure that our G&A expenses are consistent with kind of our core revenue guidance. And we’ve got the new initiatives that are launching that will start to contribute to the profitability in the back half of the year. And then I think, as we’ve also announced, we’ve got three [ph] positive EBITDA.

So, we’ve been on kind of a long path towards getting back to positive EBITDA and growth, and we’re focused on Q4 as well to try to reduce that overall cash burn, kind of consistent with working on the overall capital structure as well.

Unidentified Analyst: All right. thank you, guys.

Operator: Thank you. And our next question comes from the line of Robbie Marcus with JPMorgan. Please proceed with your question.

Robbie Marcus: Oh, great. Thanks for taking the questions. Maybe, to follow up on the first question. From our end, it looks like you were pretty much in line with consensus numbers and then ended up raising sales guidance for the year. I appreciate there are some new efforts coming in the back half. but any kind of tangible commentary, you could put around how much is ascribed to that and then to get to the middle and high end of the guidance range implies a pretty big step-up in third and fourth quarter. What are some of the assumptions underlying the middle and top-end of guidance versus the low end?

David Katzman: Yes. It was a little bit of a mix definitely, when we looked at the back half of the year. as we’re launching these new initiatives, we felt like it was the right time to start including those new initiatives in our results. Like I’d said previously, there’s a little bit of a mix there in the fact that you could be impacting as a customer, our sales results either coming through SMP, the SmileMaker app or coming through our traditional online, what we call a Smile assessment coming to our web page. And there’s a little bit of mix there when we first initially do this, because it takes sometimes months for a customer to ultimately convert. And they could have started with us on a Smile assessment and then end up using the SmileMaker app to actually convert.

So, there’s a little bit of mix going in there and that’s why we’re hesitant to kind of break it out now. But wait until we see how some of these metrics start to play out and then we can provide more guidance. As far as how we break out the new initiatives and the sales associated with those, we effectively added in the new initiatives and then we actually reduced kind of the core guidance in the back half of the year. We assumed in our original plan at the beginning of the year that the economy would somewhat improve. in the back half, we had a very challenging fourth quarter last year. We don’t expect that to repeat this year. And so as you look at kind of Q3 and Q4, we did see a little bit of weakness. So, we effectively took down our core guidance.

But much of that was offset certainly by the new initiatives. And when you talk about looking at Q2 to Q3 to Q4, there is a little bit of step-up there, most of that being driven by the SmileMaker app as well as carePlus. we’ve also got price increases that we’ve got in the marketplace right now as well. So, those things help to drive those sales in the back half as well. If you think about from Q2 to Q3, I don’t expect a lot of drop-off from Q2 to Q3. and I think we would see a little bit of an increase as well throughout the year as the initiatives kind of take hold.

Robbie Marcus: Great. I appreciate that. And then maybe, one follow-up for me. I think pretty much since the IPO and you went public, I’ve seen referrals as a percentage of sales or new patients at about 20%. Why do you think that metric hasn’t ticked up higher over time? Thanks.

Troy Crawford: Yes. I can take that one, Robbie. It’s been consistent, right. So, it’s based on our legacy business and how people are able to refer. I think what’s exciting is what we are seeing I mentioned in my paired remarks is that we’re getting a lot of sharing of the app, especially when someone gets their new smile. If they take the app or go through the app, you come out the other side with a treatment plan. And now, we actually have the image of your mouth with your new smile, your actual teeth, showing how they’re going to move and see the actual positioning. And that’s what people are excited about. And so I think you’re going to start to see that number tick up based on what we’re seeing from people getting excited and sharing on social media, sharing across their platforms, whether it’s showing a friend, a spouse, their parents, how excited they are about their new smile.

And I think that will start to drive this 20% number up. But I agree with you, it’s been steady. It’s something that will really help with CAC and our overall acquisition costs if we can get our customers and our champions out there. And I think we have the tool to do it with SmileMaker.

Robbie Marcus: Great. Thanks a lot.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Jonathan Block: Thanks, guys. Good morning. Troy, I believe you said 137 of the 250 HPS is drawn. but what are the remaining if I’ve got that right, what 113 can be drawn? Call it per ARs and covenants. And then just a quick look through your filing, your 10-Q, the ongoing litigation with a line. It states that you’re now on the hook for a pretty material payment, I think it’s $63 million to align. I know that’s not call it final-final, but it seems pretty far down the road. So maybe, you can talk about the next steps there. And what happens with the balance sheet if that were to be finalized.

Troy Crawford: Well, to answer, take the first part of that question related to ABL. It is somewhat limited. It’s a complicated calculation on how we get to what the actual borrowing base is. but it is somewhat limited on the upside; it’s linked to accounts receivable. To the extent that the accounts receivable is not growing, it limits our ability to draw more on the ABL itself. That being said, again, I think we’ve been able to manage liquidity pretty well. And this additional funding that’s coming from the line of credit from the founders, the intent is that that could be expanded as well. So that’s kind of our path towards what we would consider a bigger transaction that could be in the future. As we look to restructure the balance sheet long-term.

related to align itself, there’s not a final award yet. It’s not been confirmed and it’s not payable at this time. We’ve filed petitions to vacate that award. We continue to vigorously defend against that. There’s some work remaining to be done. We’ve had some oral arguments last week and there’s additional oral arguments that are possible. We’re kind of waiting for the judge to get through much of that in the California State Court. but we continue to look at that as something that we feel like is an incorrect judgment, but we’ll see how that plays out long-term. We could fund that in multiple ways. But ultimately, it probably wouldn’t be due for quite some time as we continue to defend against it.

David Katzman: I’ll just add Troy. I’m sorry, Jon. Also, there’s appeal rights. We’re in the state court right now. We expect a good outcome. but if not, there is the option for us to appeal that judgment, which we will do. Also, going back to the HPS facility, we have been in conversations with HPS to expand that. but also other ABL facilities we have in negotiations or conversations, I would say, with other ABL facilities that are looking at providing an expansion to what we currently have with HPS. So, there’s lots of options out there. I think with our initiatives in market now and it’s not conceptual anymore, it’s actually happening. Like we said, all 100 plus U.S. SmileShops will be able to offer the dual journey to our customers, which is a really nice upsell at $3,900.

And you guys will start to see that in our AOV as it increases quarter over quarter. And also, the efficiencies of SmileMaker. What we’re seeing with SmileMaker, we had talked about in previous conference calls. While it’s a good conversion driver, it also is showing us that for dollar spent in market, more customers are interacting with the brand. So, our lead cost is down versus our typical Smile assessment approach. So, you spend a dollar in the market and the number of people that are downloading the app is much greater than the people that were interacting with the Smile assessment. So either way, you get there, whether you increase conversion or you lower your lead costs, it improves your CAC.

Jonathan Block: Thanks for that, David. And that’s actually a really good segue to my second question. Since you already just answered it, but the 1H trends were roughly $222 million. The implied 2H at the midpoint of your guide is about the same as 1H. The gross margin should go a bit higher per the guide. But can you elaborate on how you call it, get enough efficiency on OpEx to turn the corner on EBITDA? The guidance sort of implies you generate $15 million of positive EBITDA in 2H to get to the midpoint of the guidance. Is it all sort of that sales and marketing? Because you’ve done a great job on G&A, but it does seem to be sort of run rating per the slides at like that, 55-ish mid-50s over the past two quarters to three quarters. So, what’s the biggest lever to pull? And is it the S&M due to the better conversion rates that you just alluded to? Thanks, guys.

Troy Crawford: Yes, I can take that. It’s a combination of a lot of things. And again, it’s been somewhat of a journey for us to get from where we announced in Q1 what these initiatives were and what the cost savings initiatives that we put in place as well. So, it’s been a little bit of a journey for us. So, I think it’s a combination of things. So, you’re right that the new initiatives will start to drive more sales. They’re very efficient. So, if you think about things like CarePlus, the additional dollars that we get from CarePlus at $3,900 versus our $2,250 product, those flow through to EBITDA at a very high efficiency rate. So, the additional dollars that we drive with CarePlus flow through at about 60%. We don’t expect that we have to spend a lot more marketing to drive these new initiatives.

It’s really fed by what our store associates can sell in market to our customers and kind of that upsell opportunity there. So, not only are we seeing what David explained is, lower lead acquisition costs coming from SMP, but we’re also able to drive additional sales through stores themselves without the additional marketing. So, it flows through theirs. And we do expect to see lower selling and marketing costs in the future as we drive that efficiency. we’ve kind of driven down to a certain level and I kind of consider that efficiency that we’ve driven thus far to kind of be more consistent throughout the end of the year, we will spend a little bit more money on smileShops. We’ve opened up some additional smileShops. but again, we consider that profitable investment.

because that additional spend, we have there will drive higher conversion in our stores. And it’s just a better experience overall for our customer. And then from a G&A perspective, we’ve driven G&A down from last year, certainly Q1 was lower, Q2 was lower than that. But all of the initiatives that we talked about at the beginning of the year were still in process in Q2. So, we continue to believe we’ll have savings from a run rate standpoint from Q2 into Q3 and Q4 as well. So, it’s a combination of all those things that are driving the higher EBITDA in Q3 and Q4 as well.

Operator: Thank you. We have reached the end of our question-and-answer session. And with that, this will conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.