UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|||
|
☒ |
|
Smaller reporting company |
|
||
|
|
|
|
|
|
|
Emerging growth company |
|
|
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 1, 2022, the registrant had
Table of Contents
|
|
Page |
PART I. |
|
|
Item 1. |
1 |
|
|
2 |
|
|
Consolidated Statements of Operations and Comprehensive Loss |
3 |
|
4 |
|
|
6 |
|
|
7 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
Item 3. |
32 |
|
Item 4. |
32 |
|
PART II. |
|
|
Item 1. |
35 |
|
Item 1A. |
35 |
|
Item 2. |
35 |
|
Item 3. |
35 |
|
Item 4. |
35 |
|
Item 5. |
35 |
|
Item 6. |
36 |
|
38 |
||
i
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. For example, all statements we make relating to: our ability to grow our business, expand access to our patients and our payors and invest in our platform; our plan to partner with additional hospital systems, large primary care groups and other specialist groups; our expectation that we will continue to open de novo center and acquire new centers; our growth rates and financial results; our plans and objectives for future operations, growth or initiatives; and strategies are forward-looking statements.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors and assumptions described in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the "SEC") on March 17, 2022, including, among other things:
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this report. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise, except as required by law.
ii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
LIFESTANCE HEALTH GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the quarterly period ended September 30, 2022
1
LIFESTANCE HEALTH GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except for par value)
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
CURRENT ASSETS |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Patient accounts receivable, net |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
NONCURRENT ASSETS |
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Other noncurrent assets |
|
|
|
|
|
|
||
Total noncurrent assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
||
CURRENT LIABILITIES |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued payroll expenses |
|
|
|
|
|
|
||
Other accrued expenses |
|
|
|
|
|
|
||
Current portion of contingent consideration |
|
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
NONCURRENT LIABILITIES |
|
|
|
|
|
|
||
Long-term debt, net |
|
|
|
|
|
|
||
Other noncurrent liabilities |
|
|
|
|
|
|
||
Contingent consideration, net of current portion |
|
|
|
|
|
|
||
Deferred tax liability, net |
|
|
|
|
|
|
||
Total noncurrent liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|||
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
||
Preferred stock – par value $ |
|
|
|
|
|
|
||
Common stock – par value $ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Accumulated other comprehensive income |
|
|
|
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total stockholders' equity |
|
|
|
|
|
|
||
Total liabilities and stockholders’ equity |
|
$ |
|
|
$ |
|
||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
2
LIFESTANCE HEALTH GROUP, INC.
consolidated statements of operations and comprehensive loss
(unaudited)
(In thousands, except for Net Loss per Share)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
TOTAL REVENUE |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Center costs, excluding depreciation and |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
LOSS FROM OPERATIONS |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gain (loss) on remeasurement of contingent |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Transaction costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other expense |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Total other expense |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
LOSS BEFORE INCOME TAXES |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
INCOME TAX BENEFIT |
|
|
|
|
|
|
|
|
|
|
|
|
||||
NET LOSS |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Accretion of Redeemable Class A units |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
NET LOSS AVAILABLE TO COMMON |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
NET LOSS PER SHARE, BASIC AND DILUTED |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Weighted-average shares used to compute basic and |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
NET LOSS |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
OTHER COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unrealized gains on cash flow hedge, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
||||
COMPREHENSIVE LOSS |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
3
LIFESTANCE HEALTH GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
(In thousands)
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated Other Comprehensive |
|
|
Accumulated |
|
|
Total Stockholders' |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
||||||
Balances at June 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock upon |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Forfeitures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
Total Stockholders' |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
|||||
Balances at June 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Balances at September 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated Other Comprehensive |
|
|
Accumulated |
|
|
Total Stockholders' |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
||||||
Balances at December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock upon |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Forfeitures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
4
LIFESTANCE HEALTH GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE UNITS AND STOCKHOLDERS'/MEMBERS’ EQUITY
(unaudited)
(In thousands)
|
Class A Redeemable Units |
|
|
|
Class A-1 Common Units |
|
Class A-2 Common Units |
|
Class B Common Units |
|
Common Stock |
|
Additional |
|
Accumulated |
|
Total Stockholders'/ |
|
|||||||||||||||||||||||
|
Units |
|
Amount |
|
|
|
Units |
|
Amount |
|
Units |
|
Amount |
|
Units |
|
Amount |
|
Units |
|
Amount |
|
Capital |
|
Deficit |
|
Equity |
|
|||||||||||||
Balances at December 31, 2020 |
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
||||||||||||
Net loss |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Issuance of common units |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|||
Accretion of Redeemable Class A |
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|
Issuance of common units for |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|||
Vested Class B Profits Interests |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Conversion of Redeemable |
|
( |
) |
|
( |
) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
||||
Conversion of common units into |
|
— |
|
|
— |
|
|
|
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|||
Conversion of vested Class B |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
|
|
|
|
( |
) |
|
— |
|
|
— |
|
||
Conversion of unvested Class B |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
( |
) |
|
— |
|
|
— |
|
||
Issuance of common stock upon |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
||||
Endowment of shares to the |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
||||
Stock and unit-based |
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
|
||
Balances at September 30, 2021 |
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
||||||||||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
5
LIFESTANCE HEALTH GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Stock and unit-based compensation |
|
|
|
|
|
|
||
Loss on debt extinguishment |
|
|
|
|
|
|
||
Amortization of discount and debt issue costs |
|
|
|
|
|
|
||
(Gain) loss on remeasurement of contingent consideration |
|
|
( |
) |
|
|
|
|
Loss on disposal of assets |
|
|
|
|
|
|
||
Endowment of shares to LifeStance Health Foundation |
|
|
|
|
|
|
||
Change in operating assets and liabilities, net of businesses acquired: |
|
|
|
|
|
|
||
Patient accounts receivable, net |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
|
|
|
( |
) |
|
Accrued payroll expenses |
|
|
( |
) |
|
|
|
|
Other accrued expenses |
|
|
|
|
|
|
||
Net cash provided by (used in) operating activities |
|
$ |
|
|
$ |
( |
) |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Acquisitions of businesses, net of cash acquired |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
$ |
( |
) |
|
$ |
( |
) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Proceeds from initial public offering, net of underwriters |
|
|
|
|
|
|
||
Issuance of common units to new investors |
|
|
|
|
|
|
||
Proceeds from long-term debt, net of discount |
|
|
|
|
|
|
||
Payments of debt issue costs |
|
|
( |
) |
|
|
( |
) |
Payments of long-term debt |
|
|
( |
) |
|
|
( |
) |
Prepayment for debt paydown |
|
|
( |
) |
|
|
|
|
Payments of contingent consideration |
|
|
( |
) |
|
|
( |
) |
Taxes related to net share settlement of equity awards |
|
|
( |
) |
|
|
|
|
Net cash provided by financing activities |
|
$ |
|
|
$ |
|
||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
( |
) |
|
|
|
|
Cash and Cash Equivalents - Beginning of period |
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS – END OF PERIOD |
|
$ |
|
|
$ |
|
||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for taxes, net of refunds |
|
$ |
|
|
$ |
|
||
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND |
|
|
|
|
|
|
||
Equipment financed through capital leases |
|
$ |
|
|
$ |
|
||
Contingent consideration incurred in acquisitions of businesses |
|
$ |
|
|
$ |
|
||
Acquisition of property and equipment included in liabilities |
|
$ |
|
|
$ |
|
||
Issuance of common units for acquisitions of businesses |
|
$ |
|
|
$ |
|
||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
6
LIFESTANCE HEALTH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(In thousands, except per share/unit amounts)
NOTE 1 NATURE OF THE BUSINESS
Description of Business
LifeStance Health Group, Inc. (“LifeStance Health Group”) was formed as a Delaware corporation on
The Company operates as a provider of outpatient mental health services, spanning psychiatric evaluations and treatment, psychological and neuropsychological testing, and individual, family and group therapy.
Initial Public Offering
On June 14, 2021, the Company completed its IPO in which it issued and sold
Prior to the IPO, each of the holders of partnership interests in LifeStance TopCo contributed its partnership interests to LifeStance Health Group in exchange for shares of common stock (including shares of common stock issued as restricted stock subject to vesting) of LifeStance Health Group (the "Organizational Transactions"). Following the contribution of partnership interests, LifeStance TopCo became wholly-owned by LifeStance Health Group. The number of shares of common stock that each such holder of partnership interests in LifeStance TopCo received was determined based on the value that such holder would have received under the distribution provisions of the limited partnership agreement of LifeStance TopCo, with shares of common stock valued by reference to the IPO price. All
In connection with the IPO, the Company established the LifeStance Health Foundation, a non-profit organization that focuses on youth mental health, and the mental health of underrepresented minority communities, the underemployed and the uninsured. Concurrently with the closing of the IPO, the Company endowed the LifeStance Health Foundation through a combination of $
Following the effective date of the IPO, LifeStance Health Group consolidates the financial results of LifeStance TopCo, its wholly-owned subsidiaries and variable interest entities ("VIEs") and the financial statements for the periods prior to the IPO have been adjusted to combine the previously separate entities for presentation purposes. Prior to the IPO restructuring transactions, LifeStance Health Group had no operations.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are discussed in Note 2 "Summary of Significant Accounting Policies" in Item 15 of its Annual Report on Form 10-K for the year ended December 31, 2021. During the nine months ended September 30, 2022, there have been no significant changes to these policies other than the additions to the stock and unit-based compensation policy further described below.
Basis of Presentation and Principles of Consolidation
The Company has prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the SEC regarding interim financial reporting, which include the accounts of LifeStance Health Group, LifeStance TopCo, its wholly-owned subsidiaries and VIEs in which LifeStance TopCo has an interest and is the primary beneficiary. Pursuant to these rules and
7
regulations, the Company has omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly state its consolidated financial condition, results of operations and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s audited financial statements for the year ended December 31, 2021 in the Company's Annual Report on Form 10-K.
On May 14, 2020, affiliates of TPG acquired the majority of the equity interests of LifeStance Health Holdings, Inc. through certain newly formed subsidiaries ("TPG Acquisition"). Periods subsequent to the acquisition and prior to the IPO and restructuring transactions reflect the financial statements of LifeStance TopCo. Periods subsequent to the IPO and restructuring transactions reflect the financial statements of LifeStance Health Group. All periods subsequent to the TPG Acquisition have been presented as the financial statements of LifeStance Health Group.
Use of Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Variable Interest Entities
The Company evaluates its ownership, contractual and other interests in entities to determine if it has any variable interest in a VIE. These evaluations are complex, involve judgment, and the use of estimates and assumptions based on available information. If the Company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change.
The Company acquires and operates certain care centers which are deemed to be Friendly-Physician Entities (“FPEs”). As part of an FPE acquisition, the Company acquires
The contractual arrangements described above allow the Company to direct the activities that most significantly affect the economic performance of the FPEs. Accordingly, the Company is the primary beneficiary of the FPEs and consolidates the FPEs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support the Company provides to the FPEs (e.g., loans) and the provisions of the contractual arrangements and nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual profits or losses generated by the FPEs. Therefore, all income and expenses recognized by the FPEs are allocated to the Company. The Company does not hold interests in any VIEs for which the Company is not deemed to be the primary beneficiary.
As noted previously, the Company acquires 100% of the non-medical assets of the VIEs. The aggregate carrying values of the VIEs total assets and total liabilities not purchased by the Company but included on the consolidated balance sheets were not material at September 30, 2022 and December 31, 2021.
8
Stock and Unit-Based Compensation
Beginning in 2022, the Company granted restricted stock units ("RSUs") to certain employees and other service providers subject to certain service-based or service- and performance-based vesting conditions. The ultimate number of shares that are issued in respect of the performance-based RSUs are based on actual performance over a three or four-year performance period and ranging from zero to 100% of the performance-based RSUs subject to the award. Each fiscal year within the award period represents a separately vesting tranche of the award. For a portion of the performance-based RSUs, as the performance conditions have not been established beyond the first year of the award, a grant date has not yet been established for the remaining annual periods of these performance-based RSUs.
The performance-based RSUs are measured at fair value on their grant date. The related compensation expense for the performance awards is recognized on a straight line basis over the requisite service period for each separately vesting tranche of the award if and when the Company concludes that it is probable that the performance conditions will be achieved. At the end of each reporting period, the Company reevaluates the probability that the performance conditions will be achieved.
Beginning in 2022, the Company granted stock options to certain employees, which generally vest as one-third (1/3) of the underlying shares based on continued service over
For stock option awards issued with only time-based vesting conditions, the fair value is estimated on the date of grant using a Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company's expected dividend yield.
For stock option awards issued with time- and market-based vesting conditions, the grant date fair value is determined through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition may not be satisfied. A Monte Carlo simulation requires the use of various assumptions, including the underlying stock price, volatility and the risk-free interest rate as of the valuation date, corresponding to the length of the time remaining in the performance period, and expected dividend yield. The expected term represents the derived service period for the respective tranches, which is the longer of the specified service period or the period in which the market conditions are expected to be met.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company's unaudited consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and also issued subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20, ASU 2019-01, ASU 2020-02, and ASU 2020-05 (collectively, “ASC 842”). ASC 842 outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. ASC 842 is effective for private entities for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, inclusive of a one year deferral provided by ASU 2020-05. ASC 842 must be adopted using a modified retrospective method and early adoption is permitted. The Company is in the process of determining the impact of the adoption of ASC 842 on the Company’s consolidated financial statements and disclosures. The Company has organized an implementation group to ensure the completeness of its lease information, analyze the appropriate classification of leases under the new standard, implement a leasing software system and develop new processes to execute, approve and classify leases on an ongoing basis. However, given the Company’s current operating lease portfolio (see Note 13 and Note 14) the Company expects the recognition of the right-of-use assets and lease liabilities to have a material impact on the Company’s consolidated balance sheets.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326)-Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected
9
credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for private entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ASU 2016-03 will apply as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for private entities for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued and all other entities for periods for which financial statements have not yet been made available for issuance. The Company is in the process of evaluating the impact of the adoption of ASU 2019-12 on the Company’s consolidated financial statements and disclosures.
NOTE 3 ACQUISITIONS
During the three and nine months ended September 30, 2022 and 2021, the Company completed the acquisitions of
Total consideration transferred for these acquisitions consisted of the following:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cash consideration |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cash consideration to be paid |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration, at initial fair value |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Class A-2 common units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total consideration transferred |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The results of the acquired businesses have been included in the Company’s consolidated financial statements beginning as of their acquisition dates. It is impracticable to provide historical supplemental pro forma financial information along with revenue and earnings subsequent to the acquisition dates for acquisitions during the period due to a variety of factors, including access to historical information and the operations of acquirees being integrated within the Company shortly after closing and not operating as discrete entities within the Company’s organizational structure.
Fair Values of Assets Acquired and Liabilities Assumed
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the dates of acquisition:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Allocation of Purchase Price |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cash |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Patient accounts receivable |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets acquired |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total liabilities assumed |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fair value of net assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The fair value of assets and liabilities other than intangible assets approximate the carrying amounts as of acquisition dates.
10
The following table summarizes the fair values of acquired intangible assets as of the dates of acquisition:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Regional trade names (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Non-competition agreements (2) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Contingent Consideration
Under the provisions of the acquisition agreements, the Company may pay additional cash consideration in the form of earnouts, contingent upon the acquirees achieving certain performance and operational targets (see Note 6).
The following table summarizes the maximum contingent consideration based on the acquisition agreements:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Contingent consideration |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Maximum contingent consideration based on |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Goodwill
Goodwill represents the excess of the purchase price over the net identifiable assets acquired and liabilities assumed. Goodwill is primarily attributable to the assembled workforce, customer and payor relationships and anticipated synergies and economies of scale expected from the integration of the businesses. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the acquisition. Goodwill deductible for tax purposes is $
NOTE 4 INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, 2022 |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Weighted |
|
||||
Regional trade names |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|||
LifeStance trade names |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Non-competition agreements |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Total intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|||
December 31, 2021 |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Weighted |
|
||||
Regional trade names |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|||
LifeStance trade names |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Non-competition agreements |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Total intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|||
Gross carrying amount is based on the fair value of the intangible assets determined at acquisitions. Total intangible asset amortization expense consists of the following:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Amortization expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
11
NOTE 5 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Leasehold improvements |
|
$ |
|
|
$ |
|
||
Computers and peripherals |
|
|
|
|
|
|
||
Furniture, fixtures and equipment |
|
|
|
|
|
|
||
Medical equipment |
|
|
|
|
|
|
||
Construction in process |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Less: Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Total property and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense consists of the following:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Depreciation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
NOTE 6 FAIR VALUE MEASUREMENTS
Contingent Consideration
The Company measures its contingent consideration liability at fair value on a recurring basis using Level 3 inputs. The Company estimates the fair value of the contingent consideration liability based on the likelihood and timing of the contingent earn-out payments.
Valuation Technique |
|
Range of Significant Assumptions |
||||
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
Probability-weighted analysis |
|
Probability |
|
|
||
based earn-outs |
|
Discount rate |
|
|
||
As of September 30, 2022 and December 31, 2021, the Company adjusted the fair value of the contingent consideration liability due to remeasurement at the reporting date. See Note 14 for discussion of payment of contingent consideration made related to acquisitions, fair value adjustments, and a roll-forward of the contingent consideration balance from the prior year.
As disclosed in Note 3, the Company acquired several outpatient mental health practices during the three and nine months ended September 30, 2022 and 2021. The values of net tangible assets acquired, and the resulting goodwill and other intangible assets, were recorded at fair value. The majority of the tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were estimated by management or with the assistance of a third-party valuation expert primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. The Company developed estimates for the expected future cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, there were
Hedging Activities
The Company uses derivative financial instruments, including an interest rate swap, for hedging and non-trading purposes to manage its exposure to changes in interest rates. The Company entered into a hedge transaction (interest rate swap) using a derivative financial instrument for the purpose of hedging the Company’s exposure to interest rate risks, which the contractual terms of the hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. The objective of entering into the interest rate swap is to eliminate the variability of cash flows in the Secured Overnight Financing Rate ("SOFR") interest payments associated with variable-rate loan over the life of the loan. In August 2022, the Company entered into an interest rate swap agreement to pay a fixed rate of
The Company used the income approach to value the derivative for the interest rate swap using observable market data for all significant inputs and standard valuation techniques to convert future amounts to a single present value amount, assuming that
12
participants are motivated but not compelled to transact. This derivative instrument (interest rate swap) is designated and qualifies as a cash flow hedge, with the entire gain or loss on the derivative reported as a component of other comprehensive income. Amounts recorded in accumulated other comprehensive income are released to earnings in the same period that the hedged transaction impacts consolidated earnings within interest expense. The cash flows from the derivative treated as a cash flow hedge is classified in the Company’s consolidated statements of cash flows in the same category as the item being hedged.
The following table summarizes the location of the interest rate swap in the consolidated balance sheets as of September 30, 2022:
|
|
Consolidated balance sheets location |
|
September 30, 2022 |
|
|
Interest rate swap |
|
|
$ |
|
||
The amount of estimated cash flow hedge unrealized gains and losses that are expected to be reclassified to earnings in the next twelve months is not material.
Fair Value Measured on a Recurring Basis
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis:
September 30, 2022 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Financial Instrument |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swap asset |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Contingent consideration liability |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
December 31, 2021 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Financial Instrument |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration liability |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
NOTE 7 GOODWILL
Goodwill consists of the following:
|
|
Amount |
|
|
Balance as of December 31, 2021 |
|
$ |
|
|
Business acquisitions (Note 3) |
|
|
|
|
Measurement period adjustments |
|
|
( |
) |
Balance as of September 30, 2022 |
|
$ |
|
|
NOTE 8 LONG-TERM DEBT
On May 14, 2020, in connection with the TPG Acquisition, the Company entered into the Credit Agreement among LifeStance Health Holdings, Inc., Lynnwood Intermediate Holdings, Inc., Capital One, National Association, and each lender party thereto (the “May 2020 Credit Agreement”). The term loans and delayed draw loans were payable in quarterly principal and interest payments through
On May 4, 2022, the Company entered into a credit agreement (the “2022 Credit Agreement”) among LifeStance Health Holdings, Inc., Lynnwood Intermediate Holdings, Inc., Capital One, National Association, and each lender party thereto. The 2022 Credit Agreement established commitments in respect of a term loan facility of $
The proceeds from the 2022 Credit Agreement term loans were used to repay in full and extinguish the May 2020 Credit Agreement. The 2022 Credit Agreement term loans are treated as a new issuance of debt. In relation to the May 2020 Credit Agreement, the
13
Company recognized an extinguishment of debt charge within interest expense of $
In September 2022, the Company drew $
The 2022 Credit Agreement requires the Company to maintain compliance with certain restrictive financial covenants related to earnings, leverage ratios, and other financial metrics. The Company was in compliance with all debt covenants at September 30, 2022 and December 31, 2021.
Long-term debt consists of the following:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Term loans |
|
$ |
|
|
$ |
|
||
Delayed Draw loans |
|
|
|
|
|
|
||
Revolving loan |
|
|
|
|
|
|
||
Total long-term debt |
|
|
|
|
|
|
||
Less: Current portion of long-term debt |
|
|
( |
) |
|
|
( |
) |
Less: Unamortized discount and debt issue costs (1) |
|
|
( |
) |
|
|
( |
) |
Total Long-Term Debt, Net of Current Portion |
|
$ |
|
|
$ |
|
||
The current portion of long-term debt is included within other current liabilities on the unaudited consolidated balance sheets.
Interest expense consists of the following:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Future principal payments on long-term debt are as follows:
Year Ended December 31, |
|
Amount |
|
|
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
The fair value of long-term debt is based on the present value of future payments discounted by the market interest rates or the fixed rates based on current rates offered to the Company for debt with similar terms and maturities, which is a Level 2 fair value measurement. Long-term debt is presented at carrying value on the unaudited consolidated balance sheets. The fair value of long-term debt at September 30, 2022 and December 31, 2021 was $
Revolving Loan
Under the May 2020 Credit Agreement, the Company had a revolving loan commitment from Capital One in the amount of $
Under the 2022 Credit Agreement, the Company has a revolving loan commitment from Capital One in the amount of $
In September 2022, the Company drew $
14
NOTE 9 TOTAL REVENUE
The Company’s total revenue is dependent on a series of contracts with third-party payors, which is typical for providers in the health care industry. The Company has determined that the nature, amount, timing and uncertainty of revenue and cash flows are affected by the payor mix with third-party payors, which have different reimbursement rates.
The payor mix of fee-for-service revenue from patients and third-party payors consists of the following:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||||
|
|
Amount |
|
|
% of Total Revenue |
|
|
Amount |
|
|
% of Total Revenue |
|
|
Amount |
|
|
% of Total Revenue |
|
|
Amount |
|
|
% of Total Revenue |
|
||||||||
Commercial |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||||||
Government |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||||
Self-pay |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||||
Total patient service |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||||
Nonpatient service |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||||
Total |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||||||
Among the commercial payors, the table below represents insurance companies that individually represented
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Top one payor |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Top two payor |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Top three payor |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
NOTE 10 INCOME TAXES
The benefit for income taxes is as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Benefit for income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The effective tax rates are as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Effective tax rate |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
The difference between the Company’s effective tax rate and the U.S. statutory tax rate of
NOTE 11 STOCK AND UNIT-BASED COMPENSATION
2021 Equity Incentive Plan
Effective June 9, 2021, the Company’s Board of Directors (the "Board") and its stockholders as of that date adopted and approved the LifeStance Health Group, Inc. 2021 Equity Incentive Plan (the “2021 Equity Incentive Plan”). All equity-based awards subsequent to June 9, 2021 will be granted under the 2021 Plan. The 2021 Equity Incentive Plan permits the grant of awards or restricted or unrestricted common stock, stock options, stock appreciation rights, restricted stock units, performance awards, and other stock-based awards to employees and directors of, and consultants and advisors to, the Company and its affiliates.
The maximum number of shares of the Company’s common stock that may be delivered in satisfaction of awards under the 2021 Equity Incentive Plan was initially reserved at
15
Restricted Stock
The RSAs were issued as part of the Organizational Transactions (see Note 1).
The following is a summary of RSA transactions as of and for the nine months ended September 30, 2022:
|
|
Unvested Shares |
|
|
Weighted-Average |
|
||
Unvested, December 31, 2021 |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Unvested, September 30, 2022 |
|
|
|
|
$ |
|
||
Restricted Stock Units
The RSUs were granted in connection with the IPO and subsequent to the IPO. RSUs are accounted for as equity using the fair value method, which requires measurement and recognition of compensation expense for all awards granted to employees, directors and consultants based upon the grant-date fair value.
The following is a summary of RSU transactions as of and for the nine months ended September 30, 2022:
|
|
Unvested Shares |
|
|
Weighted-Average |
|
||
Outstanding, December 31, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Canceled and forfeited |
|
|
( |
) |
|
|
|
|
Outstanding, September 30, 2022 |
|
|
|
|
$ |
|
||
Stock Options
The following is a summary of stock option activity as of and for the nine months ended September 30, 2022:
|
|
Number of Options |
|
|
Weighted-Average |
|
|
Weighted-Average |
|
|
Aggregate Intrinsic Value |
|
||||
Outstanding, December 31, 2021 |
|
|
|
|
$ |
|
|
|
— |
|
|
$ |
— |
|
||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Outstanding, September 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
— |
|
|||
Vested or expected to vest at |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The total grant-date fair value of stock options granted during the nine months ended September 30, 2022 was $
The Company estimated the fair value of stock option grants with time-based vesting conditions using a Black-Scholes option-pricing model with the following assumptions presented on a weighted-average basis:
|
|
Nine Months Ended |
|
|
Risk-free interest rate |
|
|
% |
|
Volatility |
|
|
% |
|
Expected term (years) |
|
|
|
|
Expected dividend yield |
|
|
% |
|
Estimated fair value |
|
$ |
|
|
16
The Company estimated the fair value of stock option grants with time- and market-based vesting conditions using a Monte Carlo simulation that incorporate estimates of the potential outcomes of the market condition on the grant with the following assumptions:
|
|
Nine Months Ended |
|
|
Risk-free interest rate |
|
|
% |
|
Volatility |
|
|
% |
|
Expected service period (years) |
|
|
|
|
Expected dividend yield |
|
|
% |
|
Weighted-average fair value per option granted |
|
$ |
|
|
Stock and Unit-Based Compensation Expense
The Company recognized stock and unit-based compensation expense related to RSAs, RSUs, stock options, and the Class B Profits Interests within general and administrative expenses in the unaudited consolidated statements of operations and comprehensive loss as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Stock and unit-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
As of September 30, 2022, the Company had $
2021 Employee Stock Purchase Plan
Effective June 9, 2021, the Board and its stockholders as of that date adopted and approved the LifeStance Health Group, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”). The ESPP permits the grant to eligible employees of the Company and its participating subsidiaries of options to purchase shares of the Company’s common stock.
The aggregate number of shares of the Company common stock initially available for purchase pursuant to the exercise of options under the ESPP was
The ESPP will generally be implemented by a series of separate offerings referred to as “Option Periods”. Unless otherwise determined by the administrator, the Option Periods will be successive periods of approximately six months commencing on the first business day in January and July of each year, anticipated to be on or around January 1 and July 1, and ending approximately six months later on the last business day in June or December, as applicable, of each year, anticipated to be on or around June 30 and December 31. The last business day of each Option Period will be an “Exercise Date”. The administrator may change the Exercise Date, the commencement date, the ending date and the duration of each Option Period, in each case, to the extent permitted by Section 423 of the Internal Revenue Code; provided, however, that no option may be exercised after 27 months from its grant date.
As of September 30, 2022,
NOTE 12 STOCKHOLDERS’/MEMBERS’ EQUITY
Common Stock – Post-IPO
As discussed in Note 1, upon completion of the Company’s IPO in June 2021, the Company sold
In connection with the IPO, the Company increased its authorized shares from
Common Units - Pre-IPO
The former chief executive officer (“Former CEO”) had
17
or disability. As this was both outside of the Company’s control and probable to eventually occur, the redeemable Class A units subject to this Put Right were classified as mezzanine equity and carried at fair value (i.e., redemption price). There was a change to the fair value during the nine months ended September 30, 2021 of $
Class A-1 Common Units had equal voting rights. Class A-2 and Class B Common Units were nonvoting units.
Preferred Stock
In connection with the Company’s IPO, the Company authorized the issuance of
NOTE 13 RELATED PARTY TRANSACTIONS
The Company leases
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Rent expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
A summary of non-cancelable future minimum operating lease payments under these leases as of September 30, 2022 is as follows:
Year Ended December 31, |
|
Amount |
|
|
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
In addition, management fees to TPG and certain executives of the Company were identified as related party transactions. For the nine months ended September 30, 2021, the Company incurred related-party management fees of $
As part of the 2022 Credit Agreement restructuring, TPG provided arrangement and structuring services. The Company incurred related party fees of $
NOTE 14 COMMITMENTS AND CONTINGENCIES
Contingent Consideration relating to Acquisitions
For the nine months ended September 30, 2022, there were post-closing payments contingent upon the future performance of the Company’s recently acquired targets achieving certain agreed-upon performance metrics. Contingent consideration is recorded at fair value and was recognized in the purchase price allocation (see Note 3) of the acquired company.
The following table presents changes to the Company’s contingent consideration balance:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Additions related to acquisitions |
|
|
|
|
|
|
||
Payments of contingent consideration |
|
|
( |
) |
|
|
( |
) |
(Gain) loss on remeasurement |
|
|
( |
) |
|
|
|
|
Ending balance |
|
$ |
|
|
$ |
|
||
Leases with Third Parties
The Company leases its office facilities under operating leases expiring through
18
straight-line basis over the term of the lease.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Center costs, excluding depreciation and amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total rent expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
A summary of non-cancellable future minimum third-party operating lease payments under these leases as of September 30, 2022 is as follows:
Year Ended December 31, |
|
Amount |
|
|
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Professional Liability Insurance
The medical malpractice insurance coverage is subject to a $
Health Care Industry
The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, and government health care program participation requirements, reimbursement for patient services, and Medicare fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care providers. Violation of these laws and regulations could result in expulsion from government health care programs together with imposition of significant fines and penalties, as well as significant repayments for patient services billed.
Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. As a result of investigations by governmental agencies, various health care companies have received requests for information and notices regarding alleged noncompliance with those laws and regulations, which, in some instances, have resulted in companies entering into significant settlement agreements. Compliance with such laws and regulations may also be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. There can be no assurance that regulatory authorities will not challenge the Company’s compliance with these laws and regulations, and it is not possible to determine the impact (if any) such claims or penalties would have upon the Company. In addition, the contracts the Company has with commercial payors also provide for retroactive audit and review of claims.
Management believes that the Company is in substantial compliance with fraud and abuse as well as other applicable government laws and regulations. While no regulatory inquiries have been made, compliance with such laws and regulations is subject to government review and interpretation, as well as regulatory actions unknown or unasserted at this time.
General Contingencies
The Company is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions, injuries to employees, and natural disasters. These risks are covered by commercial insurance purchased from independent third parties. There has been no significant reduction in insurance coverage from the previous year in any of the Company’s policies.
Litigation
The Company may be involved from time-to-time in legal actions relating to the ownership and operations of its business. In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on the financial condition, results of operations, or cash flows of the Company.
In March 2020, the Company received a Civil Investigative Demand from the U.S. Attorney’s Office of the Northern District of Georgia involving an investigation of a laboratory arrangement. The Company does not believe that it is a target of the investigation or
19
that there is any material exposure based on its internal review. The Company does not know how the investigation will be resolved, to what extent it may be expanded, or whether the Company or its employees will be subject to further investigation, enforcement action or related penalties that could have an adverse impact on its business, results of operations and financial condition.
On August 10, 2022, a shareholder class action lawsuit captioned Nayani v. LifeStance Health Group, Inc., et al. was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company and certain executives and board members (the “LifeStance Defendants”), as well as the underwriters of the Company’s initial public offering (the “IPO”) (collectively, “Defendants”). The lawsuit alleges, in part, that the Defendants violated Section 11 of the Securities Act of 1933 (the “Securities Act”) because the IPO registration statement purportedly contained inaccurate and misleading statements and/or failed to disclose certain facts concerning patient visits and clinician retention. The lawsuit also asserts that the LifeStance Defendants violated Section 15 of the Securities Act because they are control persons of the Company. The lawsuit seeks unspecified monetary damages and purports to represent all shareholders who purchased the Company’s common stock pursuant to the IPO registration statement. Under the Private Securities Litigation Reform Act, applications to become lead plaintiff and lead counsel were due by October 11, 2022. The process to select a lead plaintiff is ongoing. The process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolution cannot be predicted. The Company has not recorded any material accruals for loss contingencies and in management's opinion no material range of loss is estimable for this matter as of September 30, 2022.
NOTE 15 NET LOSS PER SHARE
Prior to the IPO, as discussed in Note 1, the partnership interests of LifeStance TopCo included Redeemable Class A, Class A common and Class B units. The Class B Units were intended to be "profits interests" for U.S. federal income tax purposes. Prior to the IPO, each of the holders of partnership interests in LifeStance TopCo contributed its partnership interest to LifeStance Health Group in exchange for shares of common stock (including shares of common stock issued as RSAs subject to vesting) of LifeStance Health Group, with no changes in relative equity holder rights, rank or value before or after this exchange. As a result, the LifeStance TopCo equity exchange of common units was considered equivalent to a stock split and requires retrospective treatment for net loss per share purposes. All share and per share information has been retroactively adjusted to reflect the equity exchange for all periods presented. Vested Class B Profits Interests Units outstanding prior to the equity exchange were considered compensatory arrangements that were settled with shares of common stock at the time of the exchange and have been included as outstanding shares subsequent to that date.
The following table presents the calculation of basic and diluted net loss per share (“EPS”) for the Company’s common shares (on an as-converted basis):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net loss available to common stockholders'/members' |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted-average shares used to compute basic and |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The Company has issued potentially dilutive instruments in the form of RSAs, RSUs and stock options. The Company did not include any of these instruments in its calculation of diluted loss per share (on an as-converted basis) for the three and nine months ended September 30, 2022 and 2021 because to include them would be anti-dilutive due to the Company’s net loss during the period. See Note 11 for the issued, vested and unvested RSAs, RSUs and stock options.
|
|
As of September 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
RSAs |
|
|
|
|
|
|
||
RSUs |
|
|
|
|
|
|
||
Stock options |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
NOTE 16 SUBSEQUENT EVENTS
Acquisitions
Subsequent to September 30, 2022, the Company completed acquisitions of several outpatient mental health practices. The allocation of purchase price, including any fair value of contingent consideration, to the assets acquired and liabilities assumed as of the acquisition dates have not been completed.
20
For acquisitions completed subsequent to September 30, 2022, total contractual consideration included cash consideration of $
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and the accompanying notes as well as "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth under “Risk Factors” Part II, Item 1A in this Quarterly Report on Form 10-Q as well as those discussed in the Annual Report on Form 10-K for the year ended December 31, 2021, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
LifeStance Health Group, Inc. was formed as a Delaware corporation on January 28, 2021 for the purpose of completing an initial public offering (“IPO”) and related transactions in order to carry on the business of LifeStance TopCo, L.P. (“LifeStance TopCo”) and its consolidated subsidiaries and affiliated practices. LifeStance Health Group, Inc. wholly-owns the equity interest of LifeStance TopCo and operates and controls all of the business and affairs and consolidates the financial results of LifeStance TopCo and its wholly owned subsidiaries and affiliated practices. Unless the context otherwise indicates or requires, the terms "LifeStance Health Group", "LifeStance Health", "LifeStance", “we”, and “our” as used herein refer to LifeStance Health Group and its consolidated subsidiaries and affiliated practices.
Our Business
We are dedicated to improving the lives of our patients by reimagining mental health through a disruptive, tech-enabled in-person and virtual care delivery model built to expand access and affordability, improve outcomes and lower overall health care costs. We are one of the nation’s largest outpatient mental health platforms based on the number of clinicians we employ through our subsidiaries and our affiliated practices and our geographic scale, employing 5,431 licensed mental health clinicians as of September 30, 2022. We combine a personalized, digitally-powered patient experience with differentiated clinical capabilities and in-network insurance relationships to fundamentally transform patient access to mental health treatment. By revolutionizing the way mental health care is delivered, we believe we have an opportunity to improve the lives and health of millions of individuals.
Our model is built to empower each of the healthcare ecosystem’s key stakeholders—patients, clinicians, payors and primary care and specialist physicians—by aligning around our shared goal of delivering better outcomes for patients and providing high-quality mental health care.
22
COVID-19 Impact
With the COVID-19 pandemic placing an unprecedented strain on daily life, existing trends in mental health care have worsened dramatically since the beginning of the pandemic. The pandemic and post-pandemic measures have resulted in dramatically increasing stressors and leading to poorer overall mental and physical health.
While the impact of the COVID-19 pandemic has increased stressors associated with mental health, we believe that a combination of factors contribute to our total patient visits and related revenue, including, among others, long-term trends in reduced stigmatization of mental health. Even before the pandemic, we saw the need to have a platform supported by leading technology to give us the ability to treat patients virtually or in-person.
We believe COVID-19 represents a paradigm shift in the importance of and focus on mental health care. We have seen significant increase in patient demand as well as payor and employer adoption of mental health coverage options during the pandemic and it is now integrated into health care offerings more than ever before. However, as the pandemic has surged and waned, we believe there has been some impact on our operations due to patient and clinician illness, resulting in cancellations of appointments, deferrals and fewer appointments initially scheduled.
Key Factors Affecting Our Results
Expanding Center Capacity and Visits Within Existing Centers
We have built a powerful organic growth engine that enables us to drive growth within our existing footprint.
Our Clinicians
As of September 30, 2022, we employed 5,431 psychiatrists, advanced practice nurses, psychologists and therapists through our subsidiaries and affiliated practices. We generate revenue on a per visit basis as clinical services are rendered by our clinicians. As our existing centers mature, we grow our physical capacity by leveraging our hybrid clinical model to increase our average clinicians per center, effectively expanding the four walls of our centers. Recruiting new clinicians and retaining existing clinicians in our existing centers enables us to see more patients per center by expanding our patient visit capacity. We believe our fully employed model offers a superior value proposition compared to independent practice. Our network relationships provide clinicians with ready access to patients. We also enable clinicians to manage their own patient volumes. Our platform promotes a clinically-driven professional culture and streamlines patient access and care delivery, while optimizing practice administration processes through technology. We believe we are an employer of choice in mental health, allowing us to employ highly qualified clinicians.
We believe we have significant opportunity to grow our employed clinician base—we estimate there are approximately 650,000 mental health clinicians in the United States, providing us with a meaningful runway to grow from our current base of 5,431 clinicians employed through our subsidiaries and affiliated practices, as of September 30, 2022. To capitalize on this opportunity, we have developed a rigorous and exclusive in-house national clinician recruiting model that works closely with our regional clinical teams to select the best candidates and fulfill capacity in a timely manner. As we grow our clinician base, we can grow our business, expand access to our patients and our payors and invest in our platform to further reinforce our differentiated offering to clinicians. We have available physical capacity to add clinicians to our existing centers, as well as an opportunity to add new clinicians with the roll-out of de novo centers and acquire additional clinicians through our acquisition strategy. Our virtual care offering also allows clinicians to see more patients without investments in incremental physical space, expanding our patient visit capacity beyond in-person only levels.
Our Patients
We believe our ability to attract and retain patients to drive growth in our visits and meet the availability of our clinician base will enable us to grow our revenue. We believe we have a significant opportunity to increase the number of patients we serve in our existing markets. In 2021, our clinicians treated more than 570,000 unique patients through 4.6 million visits. We believe our ability to deliver more accessible, flexible, affordable and effective mental health care is a key driver of our patient growth. We believe we provide a superior and differentiated mental health care experience that integrates virtual and in-person care to deliver care in a convenient way for our patients, meeting our patients where they are. Our in-network payor relationships allow our patients to access care without significant out-of-pocket cost or delays in receiving treatment. We treat mental health conditions across the clinical spectrum through a clinical approach that delivers improved patient outcomes. We support our patients throughout their care continuum with purpose-built technological capabilities, including online assessments, digital provider communication, and seamless internal referral and follow-up capabilities.
We utilize multiple strategies to add new patients to our platform, including our primary care and specialist physician relationships, internal referrals from our clinicians, our payor relationships and our dedicated marketing efforts. We have established a large network of national, regional and local payors that enables their members to be referred to us as patients. Payors refer patients to our platform to drive improvement in health outcomes for their members, reduction in total medical costs and increased member satisfaction and retention. Within our markets, we partner with primary care practice groups, specialists, health systems and academic institutions to refer patients to our centers and clinicians. Our local marketing teams build and maintain relationships with our
23
referring partner networks to create awareness of our platform and services, including the opening of new centers and the introduction of newly hired clinicians with appointment availability. We also use online marketing to develop our national brand to increase brand awareness and promote additional channels of patient recruitment.
Our Primary Care and Specialist Physician Referral Relationships
We have built a powerful patient referral network through partnerships with primary care physicians and specialist physician groups across the country. We deliver value to our provider partners by offering a more efficient referral base, delivering improved outcomes for our mutual patients, and enabling more integrated care and lower total health care costs. As we continue to scale nationally, we plan to partner with additional hospital systems, large primary care groups and other specialist groups to help streamline their mental health network needs and drive continued patient growth across our platform. Our vision over time is to further integrate our mental health care services with those of our medical provider partners. By co-locating and driving towards integration with primary care providers, we can enhance our clinician’s access to patients. We anticipate that we will continue to grow these relationships while evolving our offering toward a fully-integrated care model in which primary care and our mental health clinicians work together to develop and provide personalized treatment plans for shared patients. We believe these efforts will help to further align our model with that of other health care providers, increasing our value to them and driving new opportunities to partner to grow our patient base.
Our Payors
Our payor relationships, including national contracts with multiple payors, allow payors access to our services through in-network coverage for their members. We believe the alignment of our model with our payor partners’ population health objectives encourages third-party payors to partner with us. We believe we deliver value to our payor partners in several ways, including access to a national clinician employee base, lower total medical costs, measurable outcomes, and stronger member and client value proposition through the offering of in-network mental health services. The strength of our payor relationships and our value proposition allowed us to secure rate parity between in-person and virtual visits, either by contract or payor policy. To expand this network and grow access to covered patients, we continue to establish new payor relationships and national contracts while also seeking to drive regional rate improvement for our patients and clinicians. We believe our payor relationships differentiate us from our competitors and are a critical factor in our ability to expand our market footprint in new regions by leveraging our existing national payor relationships. As we continue to grow, we believe our scale, breadth and access will continue to be enhanced, further strengthening the value of our platform to payors.
Expand our Center Base Within Existing and New Markets
We believe we have developed a highly replicable playbook that allows us to enter new markets and pursue growth through multiple vectors. We typically identify new markets based on the core characteristics of patient population demographics, substantial clinician recruiting opportunities, untreated patient communities and a diverse group of payors. To enter new markets, we seek to open de novo centers or acquire high-quality practices with a track record of clinical excellence and in-network payor relationships. Once we enter a new market, our powerful organic growth engine drives our growth through de novo openings, center expansions, clinician recruiting and tuck-in acquisitions. We anticipate focusing on continued expansion, both in our existing markets and in new geographies, where mental health care remains a large unmet need.
De Novo Builds
Our de novo center strategy is a central component of our organic growth engine to build our capacity and increase density in our existing MSAs. From our inception in 2017 through September 30, 2022, we have successfully opened 307 de novo centers, including 81 de novo centers in 2022, 106 de novo centers in 2021 and 78 de novo centers in 2020. We believe there is a significant opportunity to use de novo center openings to address potential patient need in our existing markets and new markets that we have determined are attractive to enter. We systematically locate our centers within a given market to ensure convenient coverage for in-person access to care. We believe our successful de novo program and national clinician recruiting team can support additions of new centers and clinicians.
In 2021, we transitioned to a more sustainable design for all new de novo centers going forward that reimagines the mental healthcare experience for both patients and clinicians while reinforcing our commitment to sustainability.
Acquisitions
We have built a proprietary pipeline of acquisition targets, providing us with significant opportunities to scale through potential acquisitions. We believe the highly fragmented nature of the mental health market provides us with a meaningful opportunity to execute on our acquisition playbook. We seek to acquire select practices that meet our standards of high-quality clinical care and align with our mission. We believe our guiding principle of creating a national platform built with a patient and clinician focus makes us a partner of choice for smaller, independent practices. Our acquisition strategy is deployed both to enter new markets and in our existing markets. In new markets, acquisitions allow us to establish a presence with high-quality practices with a track record of clinical excellence and in-network payor relationships that can be integrated into our national platform. In existing markets, acquisitions allow
24
us to grow our geographic reach and clinician base to expand patient access. For newly acquired centers, we typically fully integrate them into our operational and technology infrastructure within four to six months following an acquisition.
Center Margin
As we grow our platform, we seek to generate consistent returns on our investments. See “—Key Metrics and Non-GAAP Financial Measures—Center Margin” for our definition of Center Margin and reconciliation to loss from operations. We believe this metric best reflects the economics of our model as it includes all direct expenses associated with our patients’ care. We seek to grow our Center Margin through a combination of (i) growing revenue through clinician hiring and retention, patient growth and engagement, hybrid virtual and in-person care, existing office expansion, and in-network reimbursement levels, and (ii) leveraging on our fixed cost base at each center. For acquired centers, we also seek to realize operational, technology and reimbursement synergies to drive Center Margin growth.
Investments in Growth
We will continue to focus on long-term growth through investments in our centers and technology. In addition, we expect our general and administrative expenses to increase in the foreseeable future due to our planned investments in growth initiatives and public company infrastructure.
Key Metrics and Non-GAAP Financial Measures
We evaluate the growth of our footprint through a variety of metrics and indicators. The following table sets forth a summary of the key financial metrics we review to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
217,560 |
|
|
$ |
173,835 |
|
|
$ |
630,182 |
|
|
$ |
477,516 |
|
Revenue growth |
|
|
25 |
% |
|
|
70 |
% |
|
|
32 |
% |
|
* |
|
|
Loss from operations |
|
|
(38,839 |
) |
|
|
(124,668 |
) |
|
|
(164,162 |
) |
|
|
(172,594 |
) |
Center Margin |
|
|
60,293 |
|
|
|
52,052 |
|
|
|
174,325 |
|
|
|
147,258 |
|
Net loss |
|
|
(37,853 |
) |
|
|
(120,452 |
) |
|
|
(168,908 |
) |
|
|
(199,167 |
) |
Adjusted EBITDA |
|
|
15,379 |
|
|
|
10,694 |
|
|
|
42,493 |
|
|
|
37,813 |
|
* Denotes not meaningful due to lack of comparability between partial periods.
Center Margin and Adjusted EBITDA are not measures of financial performance under GAAP and are not intended to be substitutes for any GAAP financial measures, including revenue, loss from operations or net loss, and, as calculated, may not be comparable to companies in other industries or within the same industry with similarly titled measures of performance. Therefore, non-GAAP measures should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
Center Margin
We define Center Margin as loss from operations excluding depreciation and amortization and general and administrative expenses. Therefore, Center Margin is computed by removing from loss from operations the costs that do not directly relate to the delivery of care and only including center costs, excluding depreciation and amortization. We consider Center Margin to be an important measure to monitor our performance relative to the direct costs of delivering care. We believe Center Margin is useful to investors to measure whether we are sufficiently controlling the direct costs of delivering care.
Center Margin is not a financial measure of, nor does it imply, profitability. The relationship of loss from operations to center costs, excluding depreciation and amortization is not necessarily indicative of future profitability from operations. Center Margin excludes certain expenses, such as general and administrative expenses, and depreciation and amortization, which are considered normal, recurring operating expenses and are essential to support the operation and development of our centers. Therefore, this measure may not provide a complete understanding of the operating results of our Company as a whole, and Center Margin should be reviewed in conjunction with our GAAP financial results. Other companies that present Center Margin may calculate it differently and, therefore, similarly titled measures presented by other companies may not be directly comparable to ours. In addition, Center Margin has limitations as an analytical tool, including that it does not reflect depreciation and amortization or other overhead allocations.
25
The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Center Margin:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss from operations |
|
$ |
(38,839 |
) |
|
$ |
(124,668 |
) |
|
$ |
(164,162 |
) |
|
$ |
(172,594 |
) |
Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
17,884 |
|
|
|
13,777 |
|
|
|
50,311 |
|
|
|
38,779 |
|
General and administrative expenses (1) |
|
|
81,248 |
|
|
|
162,943 |
|
|
|
288,176 |
|
|
|
281,073 |
|
Center Margin |
|
$ |
60,293 |
|
|
$ |
52,052 |
|
|
$ |
174,325 |
|
|
$ |
147,258 |
|
Adjusted EBITDA
We present Adjusted EBITDA, a non-GAAP performance measure, to supplement our results of operations presented in accordance with GAAP. We believe Adjusted EBITDA is useful in evaluating our operating performance, and may be helpful to securities analysts, institutional investors and other interested parties in understanding our operating performance and prospects. Adjusted EBITDA is not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to companies in other industries or within the same industry with similarly titled measures of performance. Therefore, our Adjusted EBITDA should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net income or loss.
We define Adjusted EBITDA as net loss excluding interest expense, depreciation and amortization, income tax benefit, gain (loss) on remeasurement of contingent consideration, stock and unit-based compensation, management fees, transaction costs, offering related costs, CEO transition costs, litigation costs, and other expenses. We include Adjusted EBITDA in this Quarterly Report because it is an important measure upon which our management assesses, and believes investors should assess, our operating performance. We consider Adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis.
However, Adjusted EBITDA has limitations as an analytical tool, including:
26
A reconciliation of net loss to Adjusted EBITDA is presented below for the three and nine months ended September 30, 2022 and 2021. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Adjusted EBITDA in conjunction with net loss.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
(37,853 |
) |
|
$ |
(120,452 |
) |
|
$ |
(168,908 |
) |
|
$ |
(199,167 |
) |
Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
4,189 |
|
|
|
3,503 |
|
|
|
14,763 |
|
|
|
35,309 |
|
Depreciation and amortization |
|
|
17,884 |
|
|
|
13,777 |
|
|
|
50,311 |
|
|
|
38,779 |
|
Income tax benefit |
|
|
(4,353 |
) |
|
|
(8,751 |
) |
|
|
(10,106 |
) |
|
|
(15,300 |
) |
(Gain) loss on remeasurement of contingent |
|
|
(1,176 |
) |
|
|
906 |
|
|
|
(562 |
) |
|
|
1,463 |
|
Stock and unit-based compensation expense |
|
|
34,870 |
|
|
|
120,689 |
|
|
|
152,235 |
|
|
|
150,809 |
|
Management fees (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,445 |
|
Loss on disposal of assets |
|
|
144 |
|
|
|
— |
|
|
|
144 |
|
|
|
— |
|
Transaction costs (2) |
|
|
210 |
|
|
|
126 |
|
|
|
507 |
|
|
|
3,656 |
|
Offering related costs (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,747 |
|
Endowment to the LifeStance Health Foundation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,000 |
|
CEO transition costs |
|
|
494 |
|
|
|
— |
|
|
|
494 |
|
|
|
— |
|
Litigation costs (4) |
|
|
104 |
|
|
|
— |
|
|
|
104 |
|
|
|
— |
|
Other expenses (5) |
|
|
866 |
|
|
|
896 |
|
|
|
3,511 |
|
|
|
2,072 |
|
Adjusted EBITDA |
|
$ |
15,379 |
|
|
$ |
10,694 |
|
|
$ |
42,493 |
|
|
$ |
37,813 |
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Acquired center integration (1) |
|
$ |
641 |
|
|
$ |
755 |
|
|
$ |
1,854 |
|
|
$ |
1,670 |
|
Former owner fees (2) |
|
|
49 |
|
|
|
106 |
|
|
|
336 |
|
|
|
262 |
|
Other (3) |
|
|
176 |
|
|
|
35 |
|
|
|
1,321 |
|
|
|
140 |
|
Total |
|
$ |
866 |
|
|
$ |
896 |
|
|
$ |
3,511 |
|
|
$ |
2,072 |
|
27
Results of Operations
The following table sets forth a summary of our financial results for the three and nine months ended September 30, 2022 and 2021:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
TOTAL REVENUE |
|
$ |
217,560 |
|
|
$ |
173,835 |
|
|
$ |
630,182 |
|
|
$ |
477,516 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Center costs, excluding depreciation and |
|
|
157,267 |
|
|
|
121,783 |
|
|
|
455,857 |
|
|
|
330,258 |
|
General and administrative expenses |
|
|
81,248 |
|
|
|
162,943 |
|
|
|
288,176 |
|
|
|
281,073 |
|
Depreciation and amortization |
|
|
17,884 |
|
|
|
13,777 |
|
|
|
50,311 |
|
|
|
38,779 |
|
Total operating expenses |
|
$ |
256,399 |
|
|
$ |
298,503 |
|
|
$ |
794,344 |
|
|
$ |
650,110 |
|
LOSS FROM OPERATIONS |
|
$ |
(38,839 |
) |
|
$ |
(124,668 |
) |
|
$ |
(164,162 |
) |
|
$ |
(172,594 |
) |
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gain (loss) on remeasurement of contingent |
|
|
1,176 |
|
|
|
(906 |
) |
|
|
562 |
|
|
|
(1,463 |
) |
Transaction costs |
|
|
(210 |
) |
|
|
(126 |
) |
|
|
(507 |
) |
|
|
(3,656 |
) |
Interest expense |
|
|
(4,189 |
) |
|
|
(3,503 |
) |
|
|
(14,763 |
) |
|
|
(35,309 |
) |
Other expense |
|
|
(144 |
) |
|
|
— |
|
|
|
(144 |
) |
|
|
(1,445 |
) |
Total other expense |
|
$ |
(3,367 |
) |
|
$ |
(4,535 |
) |
|
$ |
(14,852 |
) |
|
$ |
(41,873 |
) |
LOSS BEFORE INCOME TAXES |
|
|
(42,206 |
) |
|
|
(129,203 |
) |
|
|
(179,014 |
) |
|
|
(214,467 |
) |
INCOME TAX BENEFIT |
|
|
4,353 |
|
|
|
8,751 |
|
|
|
10,106 |
|
|
|
15,300 |
|
NET LOSS |
|
$ |
(37,853 |
) |
|
$ |
(120,452 |
) |
|
$ |
(168,908 |
) |
|
$ |
(199,167 |
) |
Total Revenue
Total revenue increased $43.8 million, or 25%, to $217.6 million for the three months ended September 30, 2022 from $173.8 million for the three months ended September 30, 2021. This was primarily due to an increase composed of $42.5 million of patient service revenue due to the increase in patient visits and $1.3 million of nonpatient revenue.
Total revenue increased $152.7 million, or 32%, to $630.2 million for the nine months ended September 30, 2022 from $477.5 million for the nine months ended September 30, 2021. This was primarily due to an increase composed of $149.0 million of patient service revenue due to the increase in patient visits and $3.7 million of nonpatient revenue.
Operating Expenses
Center costs, excluding depreciation and amortization
Center costs, excluding depreciation and amortization increased $35.5 million, or 29%, to $157.3 million for the three months ended September 30, 2022 from $121.8 million for the three months ended September 30, 2021. This was primarily due to a $30.1 million increase in center-based compensation due to the increase in clinicians and visits and a $5.4 million increase in occupancy costs consisting of center rent and utilities and other operating expenses consisting of office supplies and insurance due to the increase in centers.
Center costs, excluding depreciation and amortization increased $125.6 million, or 38%, to $455.9 million for the nine months ended September 30, 2022 from $330.3 million for the nine months ended September 30, 2021. This was primarily due to a $105.2 million increase in center-based compensation due to the increase in clinicians and visits and a $20.4 million increase in occupancy costs consisting of center rent and utilities and other operating expenses consisting of office supplies and insurance due to the increase in centers.
General and administrative expenses
General and administrative expenses decreased $81.7 million, or 50%, to $81.2 million for the three months ended September 30, 2022 from $162.9 million for the three months ended September 30, 2021. This was primarily due to a decrease of $83.7 million in salaries, wages and employee benefits, which included an decrease of $85.8 million in stock and unit-based compensation expense primarily relating to RSAs and the RSUs granted at the time of IPO and slightly offset by increases of $1.1 million in occupancy costs and $0.9 million in other operating expenses, including professional services and insurance.
General and administrative expenses increased $7.1 million, or 3%, to $288.2 million for the nine months ended September 30, 2022 from $281.1 million for the nine months ended September 30, 2021. This was primarily due to increases of $20.5 million in salaries, wages and employee benefits, which included an increase of $1.4 million in stock and unit-based compensation expense and
28
$4.6 million in occupancy costs and slightly offset by a decrease of $18.0 million in other operating expenses, including professional services and insurance related to our IPO and contribution to the LifeStance Health Foundation.
Depreciation and amortization
Depreciation and amortization expense increased $4.1 million to $17.9 million for the three months ended September 30, 2022 from $13.8 million for the three months ended September 30, 2021. This was primarily due to the amortization of intangibles and depreciation during the periods.
Depreciation and amortization expense increased $11.5 million to $50.3 million for the nine months ended September 30, 2022 from $38.8 million for the nine months ended September 30, 2021. This was primarily due to the amortization of intangibles and depreciation during the periods.
Other Expense
Gain (loss) on remeasurement of contingent consideration
Gain (loss) on remeasurement of contingent consideration increased $2.1 million to a $1.2 million gain for the three months ended September 30, 2022 from a $0.9 million loss for the three months ended September 30, 2021. This was primarily due to changes in the weighted probability of achieving the performance and operational targets.
Gain (loss) on remeasurement of contingent consideration increased $2.1 million to a $0.6 million gain for the nine months ended September 30, 2022 from a $1.5 million loss for the nine months ended September 30, 2021. This was primarily due to changes in the weighted probability of achieving the performance and operational targets.
Transaction costs
Transaction costs increased $0.1 million to $0.2 million for the three months ended September 30, 2022 from $0.1 million for the three months ended September 30, 2021. Transaction costs increased primarily due to higher fees related to corporate transactions.
Transaction costs decreased $3.2 million to $0.5 million for the nine months ended September 30, 2022 from $3.7 million for the nine months ended September 30, 2021. Transaction costs decreased primarily due to lower fees related to corporate transactions.
Interest Expense
Interest expense increased $0.7 million to $4.2 million for the three months ended September 30, 2022 from $3.5 million for the three months ended September 30, 2021. This increase was primarily due to higher borrowings outstanding during the period.
Interest expense decreased $20.5 million to $14.8 million for the nine months ended September 30, 2022 from $35.3 million for the nine months ended September 30, 2021. This decrease was primarily due to lower borrowings outstanding during the period as a result of our voluntary prepayment of outstanding borrowings with proceeds from our IPO, which occurred in the second quarter of 2021.
Other Income (Expense)
Other expense increased to $0.1 million for the three months ended September 30, 2022 from $0 for the three months ended September 30, 2021.
Other expense decreased to $0.1 million for the nine months ended September 30, 2022 from $1.4 million for the nine months ended September 30, 2021 primarily due to the termination of the management services as a result of our IPO during the second quarter of 2021.
Income Tax Benefit
Income tax benefit decreased $4.4 million to $4.4 million for the three months ended September 30, 2022 from a $8.8 million benefit for the three months ended September 30, 2021 primarily due to taxable loss and non-deductible equity awards for the three months ended September 30, 2022.
Income tax benefit decreased $5.2 million to $10.1 million for the nine months ended September 30, 2022 from $15.3 million for the nine months ended September 30, 2021 primarily due to taxable loss and non-deductible equity awards for the nine months ended September 30, 2022.
Liquidity and Capital Resources
We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital needs, capital expenditures, including to execute on our de novo strategy, contractual obligations, debt service, acquisitions, settlement of contingent considerations obligations, and other commitments with cash flows from operations and other sources of funding. Our principal sources of liquidity to date have included cash from operating activities, cash on hand and amounts available under the 2022
29
Credit Agreement. We had cash and cash equivalents of $90.3 million and $148.0 million as of September 30, 2022 and December 31, 2021.
We believe that our existing cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to acquire new centers and expand into new markets and the expansion of marketing activities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations and financial condition would be adversely affected.
Our future obligations primarily consist of our debt and lease obligations. We expect our cash generation from operations and future ability to refinance or secure additional financing facilities to be sufficient to repay our outstanding debt obligations and lease payment obligations. As of December 31, 2021 and September 30, 2022, there was an aggregate principal amount of $161.2 million outstanding under the May 2020 Credit Agreement and $220.5 million outstanding under the 2022 Credit Agreement, respectively. As of September 30, 2022, our non-cancellable future minimum operating third-party lease payments totaled $299.0 million, and our non-cancellable future minimum operating related-party lease payments totaled $6.1 million.
Debt
May 2020 Credit Agreement
On May 14, 2020 and in connection with the TPG Acquisition, LifeStance Health Holdings, Inc., one of our subsidiaries, entered into the May 2020 Credit Agreement. The May 2020 Credit Agreement provides for senior secured credit facilities in the form of (i) $37.5 million original and delayed draw principal amount of Closing Date Term B-1 Loans and $222.5 million original and delayed draw principal amount of Closing Date Term B-2 Loans, and (ii) $20.0 million of Revolving Commitments. On November 4, 2020, we entered into the First Amendment to the May 2020 Credit Agreement which, among other things, provided for incremental credit facilities in the form of $16.6 million original principal amount of First Amendment Term B-1 Loans and $98.4 million original principal amount of First Amendment Term B-2 Loans. On February 1, 2021, we entered into the Second Amendment to the Credit Agreement, which provided for incremental delayed draw term loans in the aggregate principal amount of $50.0 million. On April 30, 2021, we entered into the Third Amendment to the Credit Agreement, which provided for incremental delayed draw term loans in the aggregate principal amount of $70.0 million. On May 16, 2022, in connection with the closing of the 2022 Credit Agreement, the outstanding debt on the May 2020 Credit Agreement was repaid in full.
Borrowings under the May 2020 Credit Agreement were subject to variable interest rates determined at LIBOR plus 3.00% to 7.09%. We were required to make quarterly principal and interest payments through May 14, 2026. Under the terms of the May 2020 Credit Agreement, we were subject to a requirement to maintain a Total Net Leverage Ratio as of the last day of each fiscal quarter to not exceed 8.00:1.00, which maximum level steps down to 7.25:1.00 beginning with the fiscal quarter ending June 30, 2022 and to 7.00:1.00 beginning with the fiscal quarter ending June 30, 2023. We were in compliance with the financial covenants since the inception of the May 2020 Credit Agreement through payoff.
2022 Credit Agreement
On May 4, 2022, LifeStance Health Holdings, Inc., one of our subsidiaries, entered into the 2022 Credit Agreement. The 2022 Credit Agreement establishes commitments in respect of a senior secured term loan facility of $200.0 million (the “Term Loan Facility”), a senior secured revolving loan facility of up to $50.0 million (the “Revolving Facility”) and a senior secured delayed draw term loan facility of up to $100.0 million (the “Delayed Draw Term Loan Facility”).
The loans under the Term Loan Facility and the Delayed Draw Term Loan Facility bear interest at a rate per annum equal to (x) adjusted term SOFR (which adjusted term SOFR is subject to a minimum of 0.75%) plus an applicable margin of 4.50% or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.50% above the federal funds effective rate and (iii) one-month adjusted term SOFR (which adjusted term SOFR is subject to a minimum of 0.75%) plus 1.00%) plus an applicable margin of 3.50%. The loans under the Revolving Facility bear interest at a rate per annum equal to (x) adjusted term SOFR plus an applicable margin of 3.25% or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.50% above the federal funds effective rate and (iii) one-month adjusted term SOFR plus 1.00%) plus an applicable margin of 2.25%.
The 2022 Credit Agreement also contains a maximum First Lien Net Leverage Ratio financial maintenance covenant that requires the First Lien Net Leverage Ratio as of the last day of each fiscal quarter to not exceed 8.50:1.00. First Lien Net Leverage Ratio means the ratio of (a) Consolidated First Lien Secured Debt outstanding as of the last day of the test period, minus the
30
Unrestricted Cash Amount on such last day, to (b) Consolidated EBITDA for such Test Period, in each case on a pro forma basis. As of September 30, 2022, we were in compliance with all financial covenants under the 2022 Credit Agreement.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
(in thousands) |
|
|
|
|
|
|
||
Net cash provided by (used in) operating activities |
|
$ |
16,871 |
|
|
$ |
(21,215 |
) |
Net cash used in investing activities |
|
|
(109,165 |
) |
|
|
(114,514 |
) |
Net cash provided by financing activities |
|
|
34,601 |
|
|
|
329,023 |
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(57,693 |
) |
|
$ |
193,294 |
|
Cash and cash equivalents, beginning of period |
|
|
148,029 |
|
|
|
18,829 |
|
Cash and cash equivalents, end of period |
|
$ |
90,336 |
|
|
$ |
212,123 |
|
Cash Flows Provided By (Used In) Operating Activities
During the nine months ended September 30, 2022, operating activities provided $16.9 million of cash, primarily impacted by our $168.9 million net loss and $206.9 million in non-cash charges. This was partially offset by changes in our operating assets and liabilities of $21.1 million. During the nine months ended September 30, 2021, operating activities used $21.2 million of cash, primarily impacted by our $199.2 million net loss and $207.2 million in non-cash charges. This was partially offset by changes in our operating assets and liabilities of $29.2 million.
Cash Flows Used In Investing Activities
During the nine months ended September 30, 2022, investing activities used $109.2 million of cash, primarily resulting from our business acquisitions totaling $40.3 million and purchases of property and equipment of $68.9 million. During the nine months ended September 30, 2021, investing activities used $114.5 million of cash, primarily resulting from our business acquisitions of $58.7 million and purchases of property and equipment of $55.8 million.
Cash Flows Provided By Financing Activities
During the nine months ended September 30, 2022, financing activities provided $34.6 million of cash, resulting primarily from net borrowings of $237.5 million under the 2022 Credit Agreement, partially offset by payments of loan obligations of $181.2 million, a prepayment for the debt paydown under the May 2020 Credit Agreement of $1.6 million, payments of debt issue costs of $7.3 million and payments of contingent consideration of $12.3 million. During the nine months ended September 30, 2021, financing activities provided $329.0 million of cash, resulting primarily from our IPO of net proceeds of $548.9 million, borrowings of $98.8 million under the May 2020 Credit Agreement, partially offset by payments of loan obligations of $311.1 million, payments of debt issue costs of $2.4 million and payments of contingent consideration of $6.3 million.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements included elsewhere in this Quarterly Report include the results of (i) LifeStance TopCo, L.P., its wholly-owned subsidiaries and variable interest entities consolidated by LifeStance TopCo, L.P. in which LifeStance TopCo, L.P. has an interest and is the primary beneficiary for the period prior to the completion of the IPO and (ii) LifeStance Health Group, Inc., its wholly-owned subsidiaries and variable interest entities consolidated by LifeStance Health Group, Inc. in which LifeStance Health Group, Inc. has an interest and is the primary beneficiary for the period ended September 30, 2022. Preparation of the consolidated financial statements requires our management to make judgments, estimates and assumptions that impact the reported amount of total revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical when (1) the estimate made in accordance with GAAP is complex in nature or involves a significant level of estimation uncertainty and (2) the use of different judgments, estimates and assumptions have had or are reasonably likely to have a material impact on the financial condition or results of operations in our consolidated financial statements. Actual results could differ materially from those estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. For a description of our policies regarding our critical accounting estimates, see “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our critical accounting estimates or methodologies to our consolidated financial statements.
Recently Adopted and Issued Accounting Pronouncements
Recently issued and adopted accounting pronouncements are described in Note 2 to our unaudited consolidated financial statements.
31
Emerging Growth Company Status
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our unaudited consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earlier to occur of: (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of the IPO, (b) in which we have total annual gross revenue of $1.235 billion or more, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th; and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.
Interest Rate Risk
Our primary market risk exposure is changing prime rate-based interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control.
As of September 30, 2022, we had an aggregate principal amount of $220.5 million under our credit facilities. In the current economic environment, we manage interest expense using a mixture of variable-rate debt and a fixed-interest-rate swap. In August 2022, the Company entered into a hedge transaction (interest rate swap) using a derivative financial instrument for the purpose of hedging the Company’s exposure to interest rate risks, which the contractual terms of the hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. The objective of entering into the interest rate swap is to eliminate the variability of cash flows in the Secured Overnight Financing Rate interest payments associated with variable-rate loan over the life of the loan under our credit facilities. As of September 30, 2022, a 100 basis point increase or decrease in market interest rates over a twelve-month period would result in a change to interest expense of $2.2 million.
Inflation Risk
Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, as a result of the material weaknesses in internal control over financial reporting described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022 due to the material weaknesses described below.
32
Previously Reported Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As previously reported in the Annual Report on Form 10-K for the year ended December 31, 2021, in connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2019, we identified material weaknesses in our internal control over financial reporting, which continue to exist as of September 30, 2022. The material weaknesses we identified were as follows:
We did not design and maintain an effective control environment commensurate with our financial reporting requirements due to an insufficient complement of resources in the accounting/finance and IT functions, with an appropriate level of knowledge, experience and training. This material weakness contributed to the following additional material weaknesses:
These material weaknesses resulted in material misstatements related to the identification and valuation of intangible assets acquired in business combinations that impacted the classification of intangible assets and goodwill, related impacts to amortization and income tax expense, and the restatement of our previously issued annual consolidated financial statements as of and for the years ended December 31, 2019 and 2018 with respect to such intangibles assets acquired in business combinations. Additionally, these material weaknesses could result in a misstatement of substantially all of the financial statement accounts and disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected.
These IT deficiencies did not result in a material misstatement to our consolidated financial statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, we have determined these deficiencies in the aggregate constitute a material weakness.
Remediation Plan for Material Weaknesses
We are in the process of designing and implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies which led to the material weaknesses. As of September 30, 2022, our remediation measures are ongoing and include the following:
33
We have made progress towards designing and implementing the plan to remediate the material weaknesses and will continue to review, revise, and improve the design and implementation of our internal controls as appropriate. Although we have made enhancements to our control procedures, these material weaknesses will not be considered remediated until our controls are operational for a sufficient period of time, tested, and management concludes that these controls are operating effectively.
We intend to evaluate current and projected resource needs on a regular basis and hire additional qualified resources as needed. Our ability to maintain qualified and adequate resources to support our business and our projected growth will be a critical component of our internal control environment.
Changes in Internal Control over Financial Reporting
We are taking actions to remediate the material weaknesses relating to our internal control over financial reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
34
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
For a discussion of certain legal proceedings in which we are involved, please read Note 14, Commitments and Contingencies, to our unaudited consolidated financial statements in this report, which is incorporated into this item by reference.
Item 1A. Risk Factors.
There have been no material changes to our risk factors as previously disclosed under Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Use of Proceeds from Initial Public Offering of Common Stock
On June 14, 2021, we completed the initial public offering of our common stock pursuant to a Registration Statement (File No. 333-256202), which was declared effective on June 9, 2021.
There has been no material change in the use of proceeds as described in the final prospectus for our IPO filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, with the SEC, on June 11, 2021 and our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
35
Item 6. Exhibits.
|
|
|
|
Description of Exhibit Incorporated Herein by Reference |
|
|||
Exhibit Number |
|
Description |
|
Form |
File No. |
Exhibit |
Filing Date |
Filed Herewith |
|
|
|
|
|
|
|
|
|
10.1*+ |
|
|
|
|
|
|
X |
|
10.2*+ |
|
|
|
|
|
|
X |
|
10.3*+ |
|
|
|
|
|
|
X |
|
10.4* |
|
|
|
|
|
|
X |
|
10.5*+ |
|
|
|
|
|
|
X |
|
10.6*+ |
|
|
|
|
|
|
X |
|
10.7*+ |
|
|
|
|
|
|
X |
|
10.8*+ |
|
|
|
|
|
|
X |
|
10.9*+ |
|
Letter Agreement, dated September 7, 2022, between LifeStance Health Group, Inc. and Danish Qureshi |
|
|
|
|
|
X |
10.10*+ |
|
|
|
|
|
|
X |
|
31.1* |
|
|
|
|
|
|
X |
|
31.2* |
|
|
|
|
|
|
X |
|
32.1* |
|
|
|
|
|
|
X |
|
32.2* |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
36
|
|
|
|
Description of Exhibit Incorporated Herein by Reference |
|
|||
Exhibit Number |
|
Description |
|
Form |
File No. |
Exhibit |
Filing Date |
Filed Herewith |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
|
|
* Filed herewith.
+ Indicates a management contract or compensatory plan, contract or arrangement.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
LifeStance Health Group, Inc. |
|
|
|
|
|
Date: November 9, 2022 |
|
By: |
/s/ J. Michael Bruff |
|
|
|
J. Michael Bruff |
|
|
|
Chief Financial Officer and Treasurer (principal financial and accounting officer) |
38