LifeStance Health Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Financial amounts below are in millions unless stated otherwise. LifeStance provides outpatient mental health services and reported 6,132 clinicians employed through its subsidiaries and affiliated practices at quarter-end.
Financial performance
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $259.6 | $209.5 | $512.2 | $412.6 |
| Revenue growth | 24% | 31% | 24% | 36% |
| Center costs, excluding D&A | $186.6 | $149.7 | $369.6 | $298.6 |
| Center Margin | $73.0 | $59.8 | $142.6 | $114.0 |
| Loss from operations | ($48.4) | ($60.5) | ($82.5) | ($125.3) |
| Net loss | ($45.5) | ($68.7) | ($79.7) | ($131.1) |
| Adjusted EBITDA | $14.1 | $14.6 | $24.2 | $27.1 |
| Net loss per share, diluted | ($0.13) | ($0.19) | ($0.22) | ($0.37) |
Q2 operating margin was approximately negative 18.6% of revenue, versus negative 28.9% a year earlier. Center Margin was approximately 28.1% of revenue, versus 28.6%; Adjusted EBITDA margin was approximately 5.4%, versus 7.0%. Center Margin and Adjusted EBITDA are non-GAAP measures, not substitutes for GAAP profitability.
- Revenue: Q2 growth reflected a $50.4 million increase in patient service revenue, attributed primarily to more visits; nonpatient revenue declined $0.3 million. Commercial payors accounted for 91% of revenue, government payors 4%, and self-pay 4%. Two commercial payors individually represented 19% and 13% of revenue.
- Expenses and earnings: Q2 center costs grew 25%, slightly faster than revenue, primarily due to higher clinician compensation and occupancy costs. General and administrative expense fell 2%, mainly because IPO-related stock compensation was lower, partly offset by higher salaries, occupancy and other expenses. Q2 stock-based compensation was $33.1 million, down from $57.5 million.
- Cash flow: H1 operating activities used $8.3 million, compared with $11.1 million provided in H1 2022. Investing used $39.1 million, including $19.3 million of property and equipment purchases and $19.8 million for acquisitions. Financing provided $18.4 million. Cash decreased $29.0 million to $79.6 million.
- Liquidity and debt: Cash and cash equivalents were $79.6 million at June 30, down from $108.6 million at year-end 2022. Debt principal was $257.8 million, compared with $234.0 million at year-end; net carrying value was $248.7 million. The $50 million revolving facility had no balance outstanding at quarter-end. The company was in compliance with its debt covenants.
- Balance sheet: Current assets were $237.9 million and current liabilities $180.9 million. Total assets were $2.171 billion; stockholders’ equity was $1.495 billion. Non-cancellable future operating lease payments totaled $296.3 million.
Changes versus the prior comparable period
- Revenue increased 24% in both Q2 and H1, but growth slowed from 31% in Q2 2022 and 36% in H1 2022.
- GAAP operating and net losses narrowed year over year. However, Adjusted EBITDA decreased about 4% in Q2 and 11% in H1, despite revenue growth.
- Operating cash flow shifted from positive to negative in H1. Investing cash outflow was lower than a year earlier, reflecting reduced capital expenditures and acquisition spending.
- No acquisitions closed in Q2 2023; three practices were acquired in H1, versus six in H1 2022.
Outlook, risks and unusual items
- Management stated that existing cash and cash equivalents were expected to fund operating and capital needs for at least 12 months from issuance of the financial statements, without additional financing. This assessment depends on assumptions; the company cautioned it may need additional debt or equity financing.
- The filing gives no numerical revenue, earnings or cash-flow guidance. Management describes growth plans involving clinician recruitment and retention, visits, payor relationships, de novo centers, acquisitions and investment in technology and infrastructure; it expects G&A expenses to increase with planned investments.
- Management cited clinician recruitment and retention, reimbursement rates and payor access, regulation, reliance on affiliated practices, competition, cybersecurity and IT, and indebtedness among the principal business risks. Interest-rate exposure is partly hedged: a swap fixed the rate on approximately 94.5% of the term loan previously exposed to SOFR. Management said a 100-basis-point rate change would not be material; future inflation could still adversely affect results.
- A shareholder class action filed in 2022 alleges IPO registration statement misstatements or omissions concerning patient visits and clinician retention. The company cannot predict the outcome and recorded no material accrual; management said no material loss range was estimable. The filing also describes healthcare regulatory and payor audit risks, with no regulatory inquiries reported.
- Controls: Disclosure controls were concluded to be ineffective as of June 30, 2023 because previously reported material weaknesses in financial reporting controls remained unremediated. The weaknesses involve accounting/finance and IT resources, accounting policies and controls, and IT general controls. Remediation was ongoing; effectiveness had not yet been established.
- The company expects to become a large accelerated filer on January 1, 2024 and cease to qualify as an emerging growth company, increasing reporting and compliance requirements and costs.
- Q2 included $3.4 million of litigation costs and $3.7 million of special charges excluded from Adjusted EBITDA, as well as $2.0 million of strategic initiative costs. Investors should consider these exclusions alongside GAAP results.
Important facts for investors to verify
- Whether visit growth, clinician capacity and reimbursement rates can sustain revenue growth as year-over-year growth moderates.
- Whether center-cost growth and the gap between positive Center Margin/Adjusted EBITDA and continuing GAAP losses improve over time.
- Cash conversion, receivables and liquidity needs, including capital spending, lease commitments, acquisition earnouts and debt service.
- Debt availability, variable-rate exposure, covenant headroom and the terms or timing of any future financing.
- Progress and independent testing of remediation for the material weaknesses, especially ahead of the company’s large-accelerated-filer requirements.
- Developments in the shareholder litigation and any healthcare regulatory, reimbursement or payor-audit matters.