LifeStance Health Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. LifeStance provides outpatient mental health services through in-person and virtual care. Unless noted otherwise, financial figures below are in millions of dollars; the filing reports them in thousands.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $217.6 | $173.8 | $630.2 | $477.5 |
| Revenue growth | 25% | — | 32% | — |
| Operating loss | $(38.8) | $(124.7) | $(164.2) | $(172.6) |
| Net loss | $(37.9) | $(120.5) | $(168.9) | $(199.2) |
| Net loss per share, basic and diluted | $(0.11) | $(0.35) | $(0.48) | $(0.73) |
| Center Margin (non-GAAP) | $60.3 | $52.1 | $174.3 | $147.3 |
| Adjusted EBITDA (non-GAAP) | $15.4 | $10.7 | $42.5 | $37.8 |
Q3 operating loss was about 17.9% of revenue, versus 71.7% a year earlier; Center Margin was about 27.7% of revenue versus 29.9%, and Adjusted EBITDA was about 7.1% versus 6.2%. For the nine months, operating loss was about 26.1% of revenue versus 36.1%; Center Margin was about 27.7% versus 30.8%, and Adjusted EBITDA was about 6.7% versus 7.9%. Center Margin and Adjusted EBITDA are non-GAAP measures and exclude costs that remain important to the business.
- Cash flow: Nine-month operating cash flow was $16.9 million, compared with cash used of $21.2 million in 2021. Investing used $109.2 million, including $68.9 million of property and equipment purchases and $40.3 million for acquisitions. Financing provided $34.6 million. Cash declined $57.7 million to $90.3 million.
- Balance sheet and liquidity: At September 30, cash was $90.3 million, current assets $252.6 million and current liabilities $112.3 million. Long-term debt, net of discounts and current portion, was $212.0 million; gross debt principal was $220.5 million. The company said existing cash and cash equivalents should fund operating and capital needs for at least 12 months, while noting actual needs could vary and additional financing might be required.
- Debt and rate exposure: The May 2022 credit agreement provides a $200 million term loan, up to $50 million revolving facility and up to $100 million delayed-draw facility. The company had drawn $6 million on the revolver and $14.5 million of delayed-draw loans. It reported compliance with covenants. An interest-rate swap fixes the rate at 3.24% on $189 million of debt through September 2025; the filing estimates a 100-basis-point rate move would change annual interest expense by $2.2 million.
Material changes versus the prior period
- Revenue rose 25% in Q3 and 32% for the nine-month period, primarily from higher patient visits. Commercial payors represented 91% of revenue in both periods.
- Center costs rose 29% in Q3 and 38% year to date, driven mainly by clinician compensation, more visits and higher occupancy costs. As a result, Center Margin grew in dollars but declined as a share of revenue year to date.
- Q3 general and administrative expense fell 50%, largely because stock-based compensation was $85.8 million lower than in Q3 2021, when IPO-related awards drove expense. Nine-month G&A increased 3%; therefore, the quarterly decline should not be read as a comparable reduction in underlying operating costs.
- Nine-month interest expense declined to $14.8 million from $35.3 million, primarily reflecting lower borrowings after 2021 IPO proceeds were used to repay debt. The new credit agreement was entered into in May 2022 and replaced the prior facility.
- The company employed 5,431 licensed clinicians at quarter end and reported completing six practice acquisitions in the first nine months of 2022, including three in Q3.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided in the filing. Management describes plans to expand through clinician recruiting and retention, de novo centers, acquisitions, and partnerships with payors and medical providers, and expects continued investment in growth and public-company infrastructure.
- Key stated risks include recruiting and retaining clinicians, reimbursement rates and payor restrictions, healthcare regulation, dependence on affiliated practices, competition, cybersecurity and information systems, and the company’s indebtedness. Patient or clinician illness and related appointment cancellations have also affected operations.
- Operating lease commitments to third parties totaled $299.0 million, plus $6.1 million for related-party leases. Adoption of lease-accounting standard ASC 842 was expected to materially affect the balance sheet.
- A shareholder class action filed in August 2022 alleges IPO registration-statement misstatements or omissions concerning patient visits and clinician retention. The company had not recorded a material accrual and said the outcome could not be predicted. A separate U.S. Attorney’s Office investigation concerning a laboratory arrangement remained unresolved; the company said it did not believe it was a target or had material exposure, but could not predict the outcome.
- Disclosure controls were deemed ineffective as of September 30, 2022 because previously reported material weaknesses in financial reporting and IT controls remained unremediated. Remediation work was ongoing; management said the weaknesses would not be considered remediated until controls had operated and been tested effectively.
- Other notable items include $34.9 million of Q3 stock-based compensation, a $3.4 million debt-extinguishment charge recorded in the first half of 2022, and subsequent acquisitions funded with $18.7 million of credit-facility financing plus contingent consideration of up to $2.5 million.
Important facts for investors to verify
- Whether patient visits, clinician recruitment and retention, and revenue growth continue to support the expansion plan.
- Whether center-cost growth and the year-to-date decline in Center Margin as a percentage of revenue improve, while distinguishing non-GAAP measures from GAAP results.
- Cash use, acquisition and capital-spending plans, debt draws and interest costs, covenant headroom, and the assumptions behind management’s 12-month liquidity assessment.
- Developments in the securities class action and laboratory-arrangement investigation, and whether any material financial exposure emerges.
- Progress in remediating internal-control material weaknesses and the potential balance-sheet effects of ASC 842 adoption.