LifeStance Health Group, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. LifeStance provides outpatient mental health services through in-person and virtual care, with revenue primarily generated from patient visits reimbursed by commercial and government payors or paid directly by patients. This unaudited filing covers the quarter and six months ended June 30, 2022; financial amounts below are in millions unless otherwise stated. At quarter-end, the company reported 5,226 clinicians and had opened 68 de novo centers in 2022 to date.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $209.5 | $160.5 | $412.6 | $303.7 |
| Operating loss | ($60.5) | ($47.0) | ($125.3) | ($47.9) |
| Net loss | ($68.7) | ($70.0) | ($131.1) | ($78.7) |
| Adjusted EBITDA (non-GAAP) | $14.6 | $14.5 | $27.1 | $27.1 |
| Center Margin (non-GAAP) | $59.8 | $51.2 | $114.0 | $95.2 |
| Operating cash flow | Not separately presented for the quarter | $11.1 | ($7.0) |
Revenue grew 31% in Q2 and 36% in the first half, principally from increased patient visits. Q2 operating expenses rose to $270.0 million from $207.6 million. Center costs increased 37% in Q2, while general and administrative expenses rose 21%; the latter included $57.5 million of stock-based compensation in Q2. Operating margin was approximately (28.9)% in Q2 versus (29.3)% a year earlier; first-half operating margin deteriorated to approximately (30.4)% from (15.8)%. Center Margin as a share of revenue was approximately 28.6% in Q2 versus 31.9% in Q2 2021. These non-GAAP measures exclude costs and should be considered alongside GAAP results.
Q2 net loss was slightly narrower year over year despite the higher operating loss, helped by lower interest expense ($7.1 million versus $23.2 million). First-half net loss widened, while first-half interest expense fell to $10.6 million from $31.8 million. The filing attributes the interest comparison primarily to lower borrowings outstanding during the periods.
Cash and cash equivalents were $96.7 million at June 30, down from $148.0 million at year-end. First-half investing cash outflow was $88.9 million, including $53.8 million of property and equipment purchases and $35.1 million for acquisitions; financing provided $26.4 million. Management stated existing cash was expected to fund operating and capital needs for at least 12 months, while noting that actual needs could differ and additional financing might be required.
Gross debt was $211.0 million at June 30, including $200.0 million of term loans and $11.0 million drawn on the revolver; cash less gross debt was approximately $114.3 million net debt. The May 2022 refinancing replaced the prior facility with a $200 million term loan, a $50 million revolver and a $100 million delayed-draw facility. Term and delayed-draw borrowings bear variable-rate pricing, including adjusted SOFR plus 4.50%; the company was in compliance with covenants. A 100-basis-point rate move was estimated to change annual interest expense by $2.1 million. The company also disclosed $296.5 million of future minimum third-party operating lease payments and $4.4 million of related-party lease payments.
Material changes, outlook and risks
- Growth and costs: Q2 revenue growth was accompanied by faster growth in center costs. First-half G&A increased 75%, driven in part by an $87.2 million year-over-year increase in stock-based compensation. Adjusted EBITDA was broadly flat year over year for both Q2 and the first half.
- Acquisitions and investment: The company acquired four practices in Q2 and ten in the first half. After quarter-end it completed additional acquisitions with $5.35 million cash consideration and contingent consideration up to $3.95 million. Property and equipment purchases and center expansion are significant cash uses.
- Outlook: The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management described plans to expand through clinician recruitment and retention, de novo centers, acquisitions, payor and provider partnerships, and technology investment. It expects G&A expenses to increase in the foreseeable future as it invests in growth and public-company infrastructure.
- Key risks and contingencies: Risks include clinician recruitment and retention, payor reimbursement and access, regulation of healthcare and affiliated practices, competition, growth execution, cybersecurity and IT reliability, and debt obligations. The company disclosed a Civil Investigative Demand concerning a laboratory arrangement; it said it did not believe it was a target or had material exposure, but the matter’s outcome and scope were unknown. Healthcare and commercial payor audits may also result in repayments, penalties or other actions.
- Controls: Management concluded disclosure controls were not effective at June 30, 2022 because previously reported material weaknesses in accounting resources, financial reporting controls and IT general controls remained unremediated. Remediation efforts were ongoing; the weaknesses could permit material misstatements not to be prevented or detected timely.
- Other items: The company recorded a $3.38 million debt-extinguishment charge in connection with the refinancing. It reported $193.5 million of unrecognized compensation expense to be recognized over a weighted-average remaining service period of 1.6 years. A new executive severance and change-in-control policy and CEO compensation increases were approved after quarter-end.
Important facts for investors to verify
- Whether patient visits, clinician capacity and center growth can sustain revenue growth without further deterioration in center economics or operating losses.
- The recurring cash cost and potential dilution associated with substantial stock-based compensation, and how management’s non-GAAP measures reconcile to GAAP performance.
- Cash runway and funding needs given acquisition activity, capital expenditures, lease commitments, variable-rate debt and the remaining availability under credit facilities.
- Progress in remediating material weaknesses and the status or potential consequences of the laboratory-arrangement investigation and other regulatory or payor audits.
- Integration and performance of recent and subsequent acquisitions, including contingent consideration and any further financing required.