LifeStance Health Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unless otherwise stated, dollar amounts below are in millions. The company provides outpatient mental health services through in-person and virtual care. Q3 2021 comparisons are against Q3 2020; the filing cautions that periods around the May 2020 TPG acquisition are not fully comparable because the accounting basis changed.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Change / context |
|---|---|---|---|
| Revenue | $173.8 | $102.0 | Up 70%; growth was primarily attributed to more patient visits. |
| Operating loss / income | $(124.7) | $2.7 | Q3 2021 included sharply higher general and administrative expense. |
| Net loss | $(120.5) | $(3.3) | Basic and diluted loss per share was $(0.35), versus $(0.01). |
| Center Margin (non-GAAP) | $52.1 | $33.1 | About 29.9% and 32.5% of revenue, respectively; the company says this measure excludes G&A and depreciation and amortization. |
| Adjusted EBITDA (non-GAAP) | $10.7 | $15.0 | Down despite revenue growth; excludes, among other items, stock-based compensation and interest. |
- Nine-month revenue: $477.5, comprising $473.9 of patient service revenue and $3.7 of nonpatient revenue. The filing does not present a directly comparable nine-month 2020 period on the same accounting basis.
- Nine-month net loss: $199.2; operating loss was $172.6. Nine-month Adjusted EBITDA was $37.8.
- Expenses and unusual items: Q3 G&A was $162.9 versus $19.5 a year earlier and included $120.7 of stock-based compensation, largely related to IPO-related award conversions and vesting. Nine-month stock-based compensation was $150.8. Q3 center costs, excluding depreciation and amortization, were $121.8, up 77% year over year.
- Cash flow: For the nine months, operating activities used $21.2; investing activities used $114.5, including $58.7 for acquisitions and $55.8 for property and equipment. Financing activities provided $329.0, including IPO proceeds and debt repayments. Cash and cash equivalents increased by $193.3 to $212.1.
- Debt and liquidity: Long-term debt principal was $161.6 at September 30, down from $373.8 at December 31, 2020; the balance-sheet carrying amount, net of current portion and issuance costs, was $157.4. No revolving loan balance was outstanding. Current assets were $328.3 and current liabilities $105.2. The company reported compliance with debt covenants.
Material changes and business developments
- The June 2021 IPO generated $548.9 of net proceeds for the company. Proceeds funded a voluntary $294.0 debt prepayment; the company recorded a $14.4 debt extinguishment charge in Q2. The IPO also resulted in conversion of pre-IPO partnership interests into common stock.
- The company reported 4,375 clinicians at September 30, 2021, and said it opened 92 de novo centers during 2021 through that date. It completed 17 practice acquisitions in the first nine months of 2021.
- Commercial payors represented 91% of Q3 revenue. The largest payor accounted for 19%, and the top five commercial payors together accounted for 63%, creating payor concentration exposure.
- Minimum future third-party operating lease payments totaled $129.6; related-party lease payments totaled $12.7. The company expects adoption of lease accounting standard ASC 842 to materially affect its balance sheet.
Outlook, risks, and controls
- Outlook: No formal financial guidance is provided. Management said available cash was expected to fund operating and capital needs for at least the next 12 months, while noting that growth, acquisition, expansion, and marketing needs could increase capital requirements and that additional financing may be needed.
- Management commentary: The company described clinician recruitment and retention, patient visits, center expansion, acquisitions, reimbursement rates, and payor relationships as important growth drivers. It viewed increased mental health demand during the COVID-19 pandemic as supportive, but noted labor-market pressures and uncertainty over the duration of temporary telehealth regulatory changes.
- Risks: Key exposures include recruiting and retaining clinicians, reimbursement changes, dependence on affiliated practices and payors, healthcare regulation, competition, execution of rapid growth and acquisitions, cybersecurity and IT reliability, and existing debt. Floating-rate debt creates interest-rate sensitivity; management estimated a 100-basis-point rate change would alter annual interest expense by $1.6.
- Contingencies: Acquisitions include contingent earn-out obligations; the reported fair value liability was $17.1 at quarter-end. Management said it was not aware of malpractice claims expected to exceed coverage limits and did not expect ordinary-course litigation to have a material adverse effect.
- Financial reporting controls: Management concluded disclosure controls were not effective at September 30, 2021 because previously reported material weaknesses in accounting/finance resources, formal controls, and IT general controls remained under remediation. The filing states no material changes in internal control over financial reporting occurred during the quarter.
- Subsequent events: After quarter-end, the company completed several practice acquisitions; contractual consideration included $35.0 of cash funded through credit facility financing and contingent consideration with a maximum value of $2.5.
Most important facts for investors to verify
- Whether revenue and patient-visit growth translate into improved operating performance, given the Q3 operating loss and lower Adjusted EBITDA.
- The recurring versus IPO-related nature of stock-based compensation and its expected dilution and expense impact.
- Clinician hiring and retention, center utilization, and the returns from de novo openings and acquisitions.
- Payor concentration, reimbursement rates, and the durability of telehealth coverage and rate parity.
- Cash use, acquisition funding, debt service and covenant headroom, including sensitivity to interest rates.
- Progress and testing of the remediation plan for material weaknesses in financial reporting and IT controls.