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, 2022. 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, 2022, 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.
Unless stated otherwise or the context otherwise requires, the terms "we," "us," "our," "our business," "LifeStance" and "our Company" and similar references refer to LifeStance Health Group, Inc. and its consolidated subsidiaries and affiliated practices. References to "our employees" and "our clinicians" refer collectively to employees and clinicians, respectively, of our subsidiaries and affiliated practices. References to "our patients" refer to the patients treated by such clinicians.
Our Business
We are reimagining mental health through a disruptive, tech-enabled care delivery model built to expand access, address 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 5,961 licensed mental health clinicians as of March 31, 2023. Our patient-focused platform combines a personalized, digitally-powered patient experience with differentiated clinical capabilities and in-network insurance relationships to fundamentally transform patient access and 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.
•Patients - We are the front-door to comprehensive outpatient mental health care. Our clinicians offer patients a full spectrum of outpatient services to treat mental health conditions. Our in-network payor relationships improve patient access by allowing patients to access care without significant out-of-pocket cost or delays in receiving treatment. Our personalized, data-driven comprehensive care meets patients where they are, through convenient virtual and in-person settings. 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.
•Clinicians - We empower clinicians to focus on patient care and relationships by providing what we believe is a superior workplace environment, as well as clinical and technology capabilities to deliver high-quality care. We offer a unique employment model for clinicians in a collaborative clinical environment, employing our clinicians through our subsidiaries and affiliated practices. Our integrated platform and national infrastructure reduce administrative burdens for clinicians while increasing engagement and satisfaction.
•Payors - We partner with payors to deliver access to high-quality outpatient mental health care to their members at scale. Through our extensive scale, we offer payors a pathway to reduce overall cost of care in the broader healthcare system while supporting improved physical and mental health outcomes.
•Primary care and specialist physicians - We collaborate with primary care and specialist physicians to enhance patient care. Primary care is an important setting for the treatment of mental health conditions—primary care physicians are often the sole contact of patients with a mental illness and, in many instances where patients have a chronic condition, specialist physicians step into the role of primary physicians. We partner with primary care physicians and specialist physician groups across the country to provide a mental healthcare network for referrals and, in certain instances, through virtual and physical co-location to improve the diagnosis and treatment of their patients.
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 declines in overall mental and physical health.
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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, including due to patient and clinician illness, which resulted 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 March 31, 2023, we employed 5,961 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. We generate lower revenue and experience lower clinician productivity in periods that have fewer business days than other periods. Recruiting new clinicians and retaining existing clinicians enables us to see more patients by expanding our patient visit capacity. We believe our dedicated employment 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 from our current base of 5,961 clinicians employed through our subsidiaries and affiliated practices, as of March 31, 2023. 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 expand capacity in a timely manner. As we grow our clinician base, we can grow our business, expand access for our patients and 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. 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 2022, our clinicians treated more than 680,000 unique patients through 5.7 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 outpatient 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 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 pathways, delivering
18
improved outcomes for our shared 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 and specialty 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 and revenue opportunities.
Our Payors
Our payor relationships, including national contracts with multiple payors, allow 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, 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 to support continued investment in our differentiated model for delivering mental healthcare. 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.
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 metropolitan statistical areas. From our inception in 2017 through March 31, 2023, we have successfully opened 319 de novo centers, including 3 de novo centers in 2023, 90 de novo centers in 2022, and 106 de novo centers in 2021. 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. We continue to utilize a more sustainable design for all new de novo centers that reimagines the mental healthcare experience for both patients and clinicians while reinforcing our commitment to sustainability.
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 us to grow our geographic reach and clinician base to expand patient access.
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.
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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 March 31, |
|
|
|
2023 |
|
|
2022 |
|
(in thousands) |
|
|
|
|
|
|
Total revenue |
|
$ |
252,589 |
|
|
$ |
203,095 |
|
Revenue growth |
|
|
24 |
% |
|
|
42 |
% |
Loss from operations |
|
|
(34,093 |
) |
|
|
(64,851 |
) |
Center Margin |
|
|
69,602 |
|
|
|
54,202 |
|
Net loss |
|
|
(34,242 |
) |
|
|
(62,328 |
) |
Adjusted EBITDA |
|
|
10,104 |
|
|
|
12,482 |
|
Center Margin and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles ("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.
The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Center Margin:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
(in thousands) |
|
|
|
|
|
|
Loss from operations |
|
$ |
(34,093 |
) |
|
$ |
(64,851 |
) |
Adjusted for: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
19,069 |
|
|
|
15,684 |
|
General and administrative expenses (1) |
|
|
84,626 |
|
|
|
103,369 |
|
Center Margin |
|
$ |
69,602 |
|
|
$ |
54,202 |
|
(1)Represents salaries, wages and employee benefits for our executive leadership, finance, human resources, marketing, billing and credentialing support and technology infrastructure and stock-based compensation for all employees.
20
Adjusted EBITDA
We present Adjusted EBITDA, a non-GAAP performance measure, to supplement our results of operations presented in accordance with generally accepted accounting principles, or 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-based compensation, loss on disposal of assets, transaction costs, executive transition costs, litigation costs, strategic initiatives, 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:
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash used for capital expenditures for such replacements or for new capital expenditures;
•Adjusted EBITDA does not include the dilution that results from equity-based compensation or any cash outflows included in equity-based compensation, including from our repurchases of shares of outstanding common stock; and
•Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments.
A reconciliation of net loss to Adjusted EBITDA is presented below for the three months ended March 31, 2023 and 2022. 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 March 31, |
|
|
|
2023 |
|
|
2022 |
|
(in thousands) |
|
|
|
|
|
|
Net loss |
|
$ |
(34,242 |
) |
|
$ |
(62,328 |
) |
Adjusted for: |
|
|
|
|
|
|
Interest expense, net |
|
|
5,092 |
|
|
|
3,441 |
|
Depreciation and amortization |
|
|
19,069 |
|
|
|
15,684 |
|
Income tax benefit |
|
|
(4,037 |
) |
|
|
(6,676 |
) |
(Gain) loss on remeasurement of contingent consideration |
|
|
(1,037 |
) |
|
|
434 |
|
Stock-based compensation expense |
|
|
23,866 |
|
|
|
59,855 |
|
Loss on disposal of assets |
|
|
45 |
|
|
|
— |
|
Transaction costs (1) |
|
|
86 |
|
|
|
278 |
|
Executive transition costs |
|
|
160 |
|
|
|
— |
|
Litigation costs (2) |
|
|
403 |
|
|
|
— |
|
Strategic initiatives (3) |
|
|
407 |
|
|
|
— |
|
Other expenses (4) |
|
|
292 |
|
|
|
1,794 |
|
Adjusted EBITDA |
|
$ |
10,104 |
|
|
$ |
12,482 |
|
(1)Primarily includes capital markets advisory, consulting, accounting and legal expenses related to our acquisitions.
(2)Litigation costs include only those costs which are considered non-recurring and outside of the ordinary course of business based on the following considerations, which we assess regularly: (i) the frequency of similar cases that have been brought to date, or are expected to be brought within two years, (ii) the complexity of the case, (iii) the nature of the remedy(ies) sought, including the size of any monetary damages sought, (iv) the counterparty involved, and (v) our overall litigation strategy.
(3)Represents costs, such as third-party consulting costs and one-time costs, that are not part of our ongoing operations related to our systems strategic initiatives.
(4)Primarily includes costs incurred to consummate or integrate acquired centers, certain of which are wholly-owned and certain of which are affiliated practices, in addition to the compensation paid to former owners of acquired centers and related expenses that are not reflective of the ongoing operating expenses of our centers. Acquired center integration and
21
other are components of general and administrative expenses included in our unaudited consolidated statements of operations and comprehensive loss. Former owner fees is a component of center costs, excluding depreciation and amortization included in our unaudited consolidated statements of operations and comprehensive loss. These costs are summarized for each period in the table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
(in thousands) |
|
|
|
|
|
|
Acquired center integration (1) |
|
$ |
109 |
|
|
$ |
598 |
|
Former owner fees (2) |
|
|
38 |
|
|
|
227 |
|
Other (3) |
|
|
145 |
|
|
|
969 |
|
Total |
|
$ |
292 |
|
|
$ |
1,794 |
|
(1)Represents costs incurred pre- and post-center acquisition to integrate operations, including expenses related to conversion of compensation model, legacy system costs and data migration, consulting and legal services, and overtime and temporary labor costs.
(2)Represents short-term agreements, generally with terms of three to six months, with former owners of acquired centers, to provide transition and integration services.
(3)Primarily includes severance expense unrelated to integration services.
Results of Operations
The following table sets forth a summary of our financial results for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
(in thousands) |
|
|
|
|
|
|
TOTAL REVENUE |
|
$ |
252,589 |
|
|
$ |
203,095 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
Center costs, excluding depreciation and amortization shown separately below |
|
|
182,987 |
|
|
|
148,893 |
|
General and administrative expenses |
|
|
84,626 |
|
|
|
103,369 |
|
Depreciation and amortization |
|
|
19,069 |
|
|
|
15,684 |
|
Total operating expenses |
|
$ |
286,682 |
|
|
$ |
267,946 |
|
LOSS FROM OPERATIONS |
|
$ |
(34,093 |
) |
|
$ |
(64,851 |
) |
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
Gain (loss) on remeasurement of contingent consideration |
|
|
1,037 |
|
|
|
(434 |
) |
Transaction costs |
|
|
(86 |
) |
|
|
(278 |
) |
Interest expense, net |
|
|
(5,092 |
) |
|
|
(3,441 |
) |
Other expense |
|
|
(45 |
) |
|
|
— |
|
Total other expense |
|
$ |
(4,186 |
) |
|
$ |
(4,153 |
) |
LOSS BEFORE INCOME TAXES |
|
|
(38,279 |
) |
|
|
(69,004 |
) |
INCOME TAX BENEFIT |
|
|
4,037 |
|
|
|
6,676 |
|
NET LOSS |
|
$ |
(34,242 |
) |
|
$ |
(62,328 |
) |
Total Revenue
Total revenue increased $49.5 million, or 24%, to $252.6 million for the three months ended March 31, 2023 from $203.1 million for the three months ended March 31, 2022. This was primarily due to an increase composed of $48.8 million of patient service revenue due to an increase in patient visits and $0.7 million of nonpatient revenue.
Operating Expenses
Center costs, excluding depreciation and amortization
Center costs, excluding depreciation and amortization increased $34.1 million, or 23%, to $183.0 million for the three months ended March 31, 2023 from $148.9 million for the three months ended March 31, 2022. This was primarily due to a $32.4 million increase in center-based compensation due to the increase in clinicians and visits and a $1.7 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 our number of centers.
General and administrative expenses
General and administrative expenses decreased $18.8 million, or 18%, to $84.6 million for the three months ended March 31, 2023 from $103.4 million for the three months ended March 31, 2022. This was primarily due to a decrease of $36.0 million in
22
stock-based compensation expense primarily relating to RSAs and the RSUs granted at the time of our initial public offering ("IPO") without a similar expense in 2023, which was offset by increases in salaries, wages and employee benefits of $11.2 million, $1.6 million in occupancy costs and $4.4 million in other operating expenses, including professional services.
Depreciation and amortization
Depreciation and amortization expense increased $3.4 million to $19.1 million for the three months ended March 31, 2023 from $15.7 million for the three months ended March 31, 2022. 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 $1.4 million to a $1.0 million gain for the three months ended March 31, 2023 from a $0.4 million loss for the three months ended March 31, 2022. This was primarily due to changes in the weighted probability of achieving the performance and operational targets.
Transaction costs
Transaction costs decreased $0.2 million to $0.1 million for the three months ended March 31, 2023 from $0.3 million for the three months ended March 31, 2022. Transaction costs decreased primarily due to fewer corporate transactions.
Interest Expense, net
Interest expense increased $1.7 million to $5.1 million for the three months ended March 31, 2023 from $3.4 million for the three months ended March 31, 2022. This increase was primarily due to higher borrowings outstanding during the period.
Income Tax Benefit
Income tax benefit decreased $2.7 million to $4.0 million for the three months ended March 31, 2023 from a $6.7 million benefit for the three months ended March 31, 2022 primarily due to the decrease in taxable loss and non-deductible equity awards for the three months ended March 31, 2023.
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 that certain credit agreement entered into on May 4, 2022 by the Company, LifeStance Health Holdings, Inc., Lynnwood Intermediate Holdings, Inc., Capital One, National Association, and each lender party thereto (the "2022 Credit Agreement"). We had cash and cash equivalents of $68.3 million and $108.6 million as of March 31, 2023 and December 31, 2022.
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 from the issuance date of our March 31, 2023 unaudited financial statements, without any additional financing. 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, 2022 and March 31, 2023, there was an aggregate principal amount of $234.0 million and $233.4 million outstanding under the 2022 Credit Agreement, respectively. As of March 31, 2023, our non-cancellable future minimum operating lease payments totaled $296.9 million.
Debt
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
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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 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 March 31, 2023, 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:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
(in thousands) |
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
(7,890 |
) |
|
$ |
3,308 |
|
Net cash used in investing activities |
|
|
(27,549 |
) |
|
|
(50,855 |
) |
Net cash (used in) provided by financing activities |
|
|
(4,888 |
) |
|
|
13,508 |
|
Net decrease in cash and cash equivalents |
|
$ |
(40,327 |
) |
|
$ |
(34,039 |
) |
Cash and cash equivalents, beginning of period |
|
|
108,621 |
|
|
|
148,029 |
|
Cash and cash equivalents, end of period |
|
$ |
68,294 |
|
|
$ |
113,990 |
|
Cash Flows (Used In) Provided By Operating Activities
During the three months ended March 31, 2023, operating activities used $7.9 million of cash, primarily impacted by our $34.2 million net loss and $52.6 million in non-cash charges. This was partially offset by changes in our operating assets and liabilities of $26.3 million. During the three months ended March 31, 2022, operating activities provided $3.3 million of cash, primarily impacted by our $62.3 million net loss and $76.2 million in non-cash charges. This was partially offset by changes in our operating assets and liabilities of $10.6 million.
Cash Flows Used In Investing Activities
During the three months ended March 31, 2023, investing activities used $27.5 million of cash, primarily resulting from our business acquisitions totaling $19.8 million and purchases of property and equipment of $7.7 million. During the three months ended March 31, 2022, investing activities used $50.9 million of cash, primarily resulting from our business acquisitions of $23.0 million and purchases of property and equipment of $27.9 million.
Cash Flows (Used In) Provided By Financing Activities
During the three months ended March 31, 2023, financing activities used $4.9 million of cash, resulting from payments of loan obligations of $0.6 million and payments of contingent consideration of $4.3 million. During the three months ended March 31, 2022, financing activities provided $13.5 million of cash, resulting primarily from borrowings of $20.0 million under the May 2020 Credit Agreement, partially offset by payments of loan obligations of $0.3 million and payments of contingent consideration of $5.7 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 LifeStance Health Group, Inc., its wholly-owned subsidiaries and VIEs consolidated by LifeStance Health Group, Inc. in which LifeStance Health Group, Inc. has an interest and is the primary beneficiary for the period ended March 31, 2023. 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
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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, 2022. 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.
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 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 March 31, 2023 due to the material weaknesses described below.
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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, 2022, 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 March 31, 2023. 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:
•We did not maintain formal accounting policies and procedures, and did not design and maintain controls related to significant accounts and disclosures to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over account reconciliations, segregation of duties and the preparation and review of journal entries.
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.
•We did not design and maintain effective controls over IT general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain: (i) program change management controls for financial systems to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored; and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.
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 March 31, 2023, our remediation measures are ongoing and include the following:
•hired additional accounting and IT personnel to enhance our technical reporting, transactional accounting, and IT capabilities. We designed and implemented controls to support training, development, and technical research capabilities for those personnel, along with development and implementation of policies and procedures to support the external financial reporting functions. We continue to evaluate our staffing needs and plan to hire additional personnel as necessary to support our operations;
•performed detailed risk assessments for significant financial processes to identify, design, and implement control activities related to internal control over financial reporting;
•developed and implemented controls related to the formalization of our accounting policies and procedures and financial reporting;
•development and implementation of controls related to significant accounts and disclosures to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over account reconciliations, segregation of duties and the preparation and review of journal entries;
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•developed and implemented IT security and governance controls to address program change of internally and externally developed systems and computer operations associated with information systems impacting the preparation of our consolidated financial statements;
•developed and implemented controls related to the periodic monitoring and review of user access rights, the identification and risk ranking of segregation of duties conflicts, and, where it is determined there is a need for an individual to having conflicting access, a periodic review of the underlying activities is performed by an independent person who does not have such conflicting access;
•developed and implemented controls related to computer operations surrounding critical batch jobs and data backups; and
•development and implementation of program change management controls, including new or material modifications, related to testing, authorization and implementation of program and data changes affecting financial IT applications and accounting records.
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 March 31, 2023 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.
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