LifeStance Health Group, Inc. 10-Q

Item 1 . Financial Statements (Unaudited). LIFESTANCE HEALTH GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS For the quarterly period ended September 30, 2024 1 LIFESTANCE HEALTH GROUP, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (In thousands, except for par value) September 30, 2024 December 31, 2023 CURRENT ASSETS Cash and cash equivalents $ 102,615 $ 78,824 Patient accounts receivable, net 158,161 125,405 Prepaid expenses and other current assets 26,244 21,502 Total current assets 287,020 225,731 NONCURRENT ASSETS Property and equipment, net 169,974 188,222 Right-of-use assets 154,835 170,703 Intangible assets, net 195,352 221,072 Goodwill 1,293,346 1,293,346 Other noncurrent assets 7,414 10,895 Total noncurrent assets 1,820,921 1,884,238 Total assets $ 2,107,941 $ 2,109,969 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 7,282 $ 7,051 Accrued payroll expenses 111,858 102,478 Other accrued expenses 43,291 35,012 Contingent consideration 2,500 8,169 Operating lease liabilities, current 48,959 46,475 Other current liabilities 3,624 3,688 Total current liabilities 217,514 202,873 NONCURRENT LIABILITIES Long-term debt, net 279,055 280,285 Operating lease liabilities, noncurrent 158,679 181,357 Deferred tax liability, net 15,219 15,572 Other noncurrent liabilities 381 952 Total noncurrent liabilities 453,334 478,166 Total liabilities $ 670,848 $ 681,039 COMMITMENTS AND CONTINGENCIES (see Note 12) STOCKHOLDERS’ EQUITY Preferred stock – par value $ 0.01 per share; 25,000 shares authorized as of September 30, 2024 and December 31, 2023; 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023 — — Common stock – par value $ 0.01 per share; 800,000 shares authorized as of September 30, 2024 and December 31, 2023; 382,640 and 378,725 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively 3,826 3,789 Additional paid-in capital 2,243,673 2,183,684 Accumulated other comprehensive income 771 2,303 Accumulated deficit ( 811,177 ) ( 760,846 ) Total stockholders' equity 1,437,093 1,428,930 Total liabilities and stockholders’ equity $ 2,107,941 $ 2,109,969 The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements. 2 LIFESTANCE HEALTH GROUP, INC. consolidated statements of operations and comprehensive loss (unaudited) (In thousands, except for Net Loss per Share) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 TOTAL REVENUE $ 312,722 $ 262,895 $ 925,490 $ 775,062 OPERATING EXPENSES Center costs, excluding depreciation and amortization shown separately below 212,291 186,686 632,527 556,280 General and administrative expenses 85,269 130,945 269,356 317,425 Depreciation and amortization 15,115 19,621 56,279 58,220 Total operating expenses $ 312,675 $ 337,252 $ 958,162 $ 931,925 INCOME (LOSS) FROM OPERATIONS $ 47 $ ( 74,357 ) $ ( 32,672 ) $ ( 156,863 ) OTHER EXPENSE Gain on remeasurement of contingent consideration 15 1,867 1,975 4,443 Transaction costs ( 29 ) — ( 821 ) ( 89 ) Interest expense, net ( 5,413 ) ( 5,477 ) ( 17,139 ) ( 15,688 ) Other expense ( 2 ) ( 1 ) ( 80 ) ( 70 ) Total other expense $ ( 5,429 ) $ ( 3,611 ) $ ( 16,065 ) $ ( 11,404 ) LOSS BEFORE INCOME TAXES ( 5,382 ) ( 77,968 ) ( 48,737 ) ( 168,267 ) INCOME TAX (PROVISION) BENEFIT ( 575 ) 16,385 ( 1,594 ) 26,964 NET LOSS $ ( 5,957 ) $ ( 61,583 ) $ ( 50,331 ) $ ( 141,303 ) NET LOSS PER SHARE, BASIC AND DILUTED ( 0.02 ) ( 0.17 ) ( 0.13 ) ( 0.39 ) Weighted-average shares used to compute basic and diluted net loss per share 380,359 372,476 378,713 365,556 NET LOSS $ ( 5,957 ) $ ( 61,583 ) $ ( 50,331 ) $ ( 141,303 ) OTHER COMPREHENSIVE (LOSS) INCOME Unrealized (losses) gains on cash flow hedge, net of tax ( 1,872 ) 230 ( 1,532 ) 1,107 COMPREHENSIVE LOSS $ ( 7,829 ) $ ( 61,353 ) $ ( 51,863 ) $ ( 140,196 ) The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements. 3 LIFESTANCE HEALTH GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) (In thousands) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Capital Income Deficit Equity Balances at June 30, 2024 383,314 $ 3,833 $ 2,228,771 $ 2,643 $ ( 805,220 ) $ 1,430,027 Net loss — — — — ( 5,957 ) ( 5,957 ) Issuance of common stock upon vesting of restricted stock units 63 — — — — — Forfeitures ( 737 ) ( 7 ) 7 — — — Other comprehensive loss — — — ( 1,872 ) — ( 1,872 ) Stock-based compensation expense — — 14,895 — — 14,895 Balances at September 30, 2024 382,640 $ 3,826 $ 2,243,673 $ 771 $ ( 811,177 ) $ 1,437,093 Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Capital Income Deficit Equity Balances at June 30, 2023 378,005 $ 3,782 $ 2,141,247 $ 4,151 $ ( 654,304 ) $ 1,494,876 Net loss — — — — ( 61,583 ) ( 61,583 ) Issuance of common stock upon vesting of restricted stock units 707 7 ( 7 ) — — — Forfeitures ( 105 ) ( 1 ) 1 — — — Other comprehensive income — — — 230 — 230 Stock-based compensation expense — — 21,525 — — 21,525 Balances at September 30, 2023 378,607 $ 3,788 $ 2,162,766 $ 4,381 $ ( 715,887 ) $ 1,455,048 The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements. 4 LIFESTANCE HEALTH GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) (In thousands) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Capital Income Deficit Equity Balances at December 31, 2023 378,725 $ 3,789 $ 2,183,684 $ 2,303 $ ( 760,846 ) $ 1,428,930 Net loss — — — — ( 50,331 ) ( 50,331 ) Issuance of common stock upon vesting of restricted stock units 7,126 70 ( 70 ) — — — Forfeitures ( 3,211 ) ( 33 ) 33 — — — Other comprehensive loss — — — ( 1,532 ) — ( 1,532 ) Stock-based compensation expense — — 60,026 — — 60,026 Balances at September 30, 2024 382,640 $ 3,826 $ 2,243,673 $ 771 $ ( 811,177 ) $ 1,437,093 Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Capital Income Deficit Equity Balances at December 31, 2022 375,964 $ 3,761 $ 2,084,324 $ 3,274 $ ( 572,636 ) $ 1,518,723 Net loss — — — — ( 141,303 ) ( 141,303 ) Adoption of ASU 2016-13 — — — — ( 1,948 ) ( 1,948 ) Issuance of common stock upon vesting of restricted stock units 4,713 47 ( 47 ) — — — Forfeitures ( 2,070 ) ( 20 ) ( 3,379 ) — — ( 3,399 ) Other comprehensive income — — — 1,107 — 1,107 Stock-based compensation expense — — 81,868 — — 81,868 Balances at September 30, 2023 378,607 $ 3,788 $ 2,162,766 $ 4,381 $ ( 715,887 ) $ 1,455,048 The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements. 5 LIFESTANCE HEALTH GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 50,331 ) $ ( 141,303 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 56,279 58,220 Non-cash operating lease costs 29,431 30,225 Stock-based compensation 60,026 78,469 Amortization of discount and debt issue costs 1,264 1,592 Gain on remeasurement of contingent consideration ( 1,975 ) ( 4,443 ) Other, net 998 5,105 Change in operating assets and liabilities, net of businesses acquired: Patient accounts receivable, net ( 32,757 ) ( 48,484 ) Prepaid expenses and other current assets ( 3,924 ) ( 52,293 ) Accounts payable 620 ( 3,848 ) Accrued payroll expenses 9,381 7,622 Operating lease liabilities ( 34,300 ) ( 30,109 ) Other accrued expenses 10,232 65,568 Net cash provided by (used in) operating activities $ 44,944 $ ( 33,679 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 15,265 ) ( 29,106 ) Acquisitions of businesses, net of cash acquired — ( 19,820 ) Net cash used in investing activities $ ( 15,265 ) $ ( 48,926 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt — 25,000 Payments of debt issue costs — ( 188 ) Payments of long-term debt ( 2,194 ) ( 1,821 ) Payments of contingent consideration ( 3,694 ) ( 6,402 ) Net cash (used in) provided by financing activities $ ( 5,888 ) $ 16,589 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,791 ( 66,016 ) Cash and Cash Equivalents - Beginning of period 78,824 108,621 CASH AND CASH EQUIVALENTS – END OF PERIOD $ 102,615 $ 42,605 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net $ 19,023 $ 15,424 Cash paid for taxes, net of refunds $ 59 $ 416 SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES Contingent consideration incurred in acquisitions of businesses $ — $ 1,985 Acquisition of property and equipment included in liabilities $ 1,203 $ 5,303 The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements. 6 LIFESTANCE HEALTH GROUP, INC. NOTES TO CONSOLI DATED FINANCIAL STATEMENTS (unaudited) (In thousands, except per share amounts) NOTE 1 NATURE OF THE BUSINESS Description of Business LifeStance Health Group, Inc. ("LifeStance" or the "Company") operates as a provider of outpatient mental health services, spanning psychiatric evaluations and treatment, psychological and neuropsychological testing, and individual, family and group therapy. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's significant accounting policies are discussed in Note 2 "Summary of Significant Accounting Policies" in Item 15 of its Annual Report on Form 10-K for the year ended December 31, 2023. During the nine months ended September 30, 2024, there have been no significant changes to these policies. Basis of Presentation and Principles of Consolidation The Company has prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the SEC regarding interim financial reporting, which include the accounts of LifeStance, its wholly-owned subsidiaries and variable interest entities ("VIEs") in which LifeStance has an interest and is the primary beneficiary. Pursuant to these rules and regulations, the Company has omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly state its consolidated financial condition, results of operations and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s audited financial statements for the year ended December 31, 2023 in the Company's Annual Report on Form 10-K. Use of Accounting Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Variable Interest Entities The Company evaluates its ownership, contractual and other interests in entities to determine if it has any variable interest in a VIE. These evaluations are complex, involve judgment, and the use of estimates and assumptions based on available information. If the Company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. The Company acquires and operates certain care centers which are deemed to be Friendly-Physician Entities (“FPEs”). As part of an FPE acquisition, the Company acquires 100 % of the non-medical assets, however due to legal requirements the physician-owners must retain 100% of the equity interest. The Company’s agreements with FPEs generally consist of both a Management Service Agreement, which provides for various administrative and management services to be provided by the Company to the FPE, and Stock Transfer Restriction (“STR”) agreements with the physician-owners of the FPEs, which provide for the transition of ownership interests of the FPEs under certain conditions. The outstanding voting equity instruments of the FPEs are owned by the nominee shareholders appointed by the Company under the terms of the STR agreements. The Company has the right to receive income as an ongoing management fee, which effectively absorbs all of the residual interests and has also provided financial support through loans to the FPEs. The Company has exclusive responsibility for the provision of all nonmedical services including facilities, technology and intellectual property required for the day-to-day operation and management of each of the FPEs, and makes recommendations to the FPEs in establishing the guidelines for the employment and compensation of the physicians and other employees of the FPEs. In addition, the STR agreements provide that the Company has the right to designate an appropriately licensed person(s) to purchase the equity interest of the FPE for a nominal amount in the event of a succession event at the Company’s discretion. Based on the 7 provisions of these agreements, the Company determined that the FPEs are VIEs due to the equity holder having insufficient capital at risk, and the Company has a variable interest in the FPEs. The contractual arrangements described above allow the Company to direct the activities that most significantly affect the economic performance of the FPEs. Accordingly, the Company is the primary beneficiary of the FPEs and consolidates the FPEs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support the Company provides to the FPEs (e.g., loans) and the provisions of the contractual arrangements and nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual profits or losses generated by the FPEs. Therefore, all income and expenses recognized by the FPEs are allocated to the Company. The Company does not hold interests in any VIEs for which the Company is not deemed to be the primary beneficiary. As noted previously, the Company acquires 100% of the non-medical assets of the VIEs. The aggregate carrying values of the VIEs total assets and total liabilities not purchased by the Company but included on the consolidated balance sheets were not material at September 30, 2024 and December 31, 2023 . Recent Accounting Pronouncements Not Yet Adopted In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis. ASU 2023-07 is effective for public companies for annual periods beginning on or after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. ASU 2023-07 will apply retrospectively to all prior periods presented in the financial statements. The Company is in process of evaluating the impact of adoption of ASU 2023-07 on the Company's consolidated financial statements and disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted. ASU 2023-09 will apply on a prospective basis and retrospective application is permitted. The Company is in process of evaluating the impact of adoption of ASU 2023-09 on the Company's consolidated financial statements and disclosures. NOTE 3 TOTAL REVENUE The Company’s total revenue is dependent on a series of contracts with third-party payors, which is typical for providers in the healthcare industry. The Company has determined that the nature, amount, timing and uncertainty of revenue and cash flows are affected by the payor mix with third-party payors, which have different reimbursement rates. The payor mix of fee-for-service revenue from patients and third-party payors consists of the following: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Amount % of Total Revenue Amount % of Total Revenue Amount % of Total Revenue Amount % of Total Revenue Commercial $ 283,264 91 % $ 239,902 91 % $ 840,943 91 % $ 704,717 91 % Government 14,850 5 % 10,993 4 % 43,016 5 % 32,943 4 % Self-pay 11,619 3 % 10,229 4 % 33,231 3 % 30,360 4 % Total patient service revenue 309,733 99 % 261,124 99 % 917,190 99 % 768,020 99 % Nonpatient service revenue 2,989 1 % 1,771 1 % 8,300 1 % 7,042 1 % Total $ 312,722 100 % $ 262,895 100 % $ 925,490 100 % $ 775,062 100 % Among the commercial payors, the table below represents insurance companies that individually represented 10 % or more of revenue: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Payor A 16 % 19 % 17 % 19 % Payor B 16 % 13 % 15 % 13 % 8 NOTE 4 PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of the following: September 30, 2024 December 31, 2023 Leasehold improvements $ 172,889 $ 170,212 Computers and peripherals 23,471 27,302 Internal-use software 8,381 7,197 Furniture, fixtures and equipment 43,082 42,316 Medical equipment 842 842 Construction in process 6,921 9,037 Total $ 255,586 $ 256,906 Less: Accumulated depreciation ( 85,612 ) ( 68,684 ) Total property and equipment, net $ 169,974 $ 188,222 Depreciation expense consists of the following: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Depreciation expense $ 10,409 $ 9,448 $ 30,559 $ 27,698 NOTE 5 LEASES The Company leases its office facilities and office equipment which are accounted for as operating leases. Some leases contain clauses for renewal at the Company's option with renewal terms that generally extend the lease term fro m one to seven years . The components of lease expense for the Company's operating leases in its unaudited consolidated statements of operations and comprehensive loss were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Operating lease costs $ 13,817 $ 14,270 $ 41,231 $ 42,842 Variable lease costs and short-term lease costs were no t material. The weighted-average remaining lease term and discount rate for operating lease liabilities included in the consolidated balance sheets are as follows: September 30, 2024 December 31, 2023 Weighted-average remaining lease term (in years) 4.2 4.6 Weighted-average discount rate 7.44 % 7.11 % Supplemental cash flow information related to operating leases was as follows: Nine Months Ended September 30, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 48,502 $ 47,356 Noncash lease activity Right-of-use lease assets obtained in exchange for new operating lease liabilities $ 13,752 $ 13,844 The future minimum lease payments under noncancellable operating leases as of September 30, 2024 are as follows: Year Ended December 31, Amount Remainder of 2024 $ 12,999 2025 65,642 2026 58,771 2027 45,104 2028 32,196 Thereafter 29,043 Total lease payments $ 243,755 Less: imputed interest ( 36,117 ) Total lease liabilities $ 207,638 Related party lease transactions were not material as of September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 and 2023. 9 Real Estate Optimization and Restructuring Charges In 2023, the Company announced a strategic re-focus, to prioritize resources and close certain centers as a direct result of changes to the Company's business model driven by a shift to more virtual visits initiated by the COVID-19 pandemic. The Company substantially completed a significant reduction in physical space and exited several underoccupied offices by both negotiating terminations of and abandoning certain real estate leases during the year ended December 31, 2023. The Company accounts for real estate optimization restructuring charges in accordance with ASC 420, Exit or Disposal Cost Obligations and ASC 360-10, Property, Plant, and Equipment . The costs are included in general and administrative expenses in the unaudited consolidated statements of operations and comprehensive loss. During the three months ended September 30, 2023, the Company recorded $ 1,257 of office space reductions, including primarily $ 2,364 of property and equipment disposals and $ 1,602 of gains related to early lease terminations. During the nine months ended September 30, 2023, the Company recorded $ 4,977 of office space reductions, including primarily $ 2,339 of right-of-use asset impairment, $ 2,664 of property and equipment disposal and impairment costs, and $ 1,610 of gains related to early lease terminations. The portion of these amounts to be settled by cash disbursements was accounted for as an exit cost liability within other current liabilities and other noncurrent liabilities within the unaudited consolidated balance sheets and are not material as of September 30, 2024 . NOTE 6 GOODWILL AND INTANGIBLE ASSETS Goodwill Goodwill was $ 1,293,346 as of September 30, 2024 and December 31, 2023. There have been no changes to the goodwill carrying value during the period. Intangible Assets Intangible assets consist of the following: September 30, 2024 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Useful Life (Years) Regional trade names $ 36,694 $ ( 34,187 ) $ 2,507 4.0 LifeStance trade names 235,500 ( 45,873 ) 189,627 22.5 Non-competition agreements 94,535 ( 91,317 ) 3,218 4.2 Total intangible assets $ 366,729 $ ( 171,377 ) $ 195,352 December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Useful Life (Years) Regional trade names $ 36,694 $ ( 26,399 ) $ 10,295 5.0 LifeStance trade names 235,500 ( 38,024 ) 197,476 22.5 Non-competition agreements 94,535 ( 81,234 ) 13,301 4.2 Total intangible assets $ 366,729 $ ( 145,657 ) $ 221,072 Gross carrying amount is based on the fair value of the intangible assets determined at the acquisition date. Total intangible asset amortization expense consists of the following: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Amortization expense $ 4,706 $ 10,173 $ 25,720 $ 30,522 NOTE 7 BUSINESS COMBINATIONS During the nine months ended September 30, 2023, the Company completed the acquisitions of 3 outpatient mental health practices. There were no completed acquisitions during the three and nine months ended September 30, 2024. The Company accounted for the acquisitions as business combinations using the acquisition method of accounting. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the respective acquisition dates. 10 Total consideration transferred for these acquisitions consisted of the following: Nine Months Ended September 30, 2023 Cash consideration $ 20,000 Contingent consideration, at initial fair value 1,985 Total consideration transferred $ 21,985 The results of the acquired businesses have been included in the Company’s consolidated financial statements beginning as of their acquisition dates. It is impracticable to provide historical supplemental pro forma financial information along with revenue and earnings subsequent to the acquisition dates for acquisitions during the period due to a variety of factors, including access to historical information and the operations of acquirees being integrated within the Company shortly after closing and not operating as discrete entities within the Company’s organizational structure. Fair Values of Assets Acquired and Liabilities Assumed The following table summarizes the fair values of assets acquired and liabilities assumed as of the dates of acquisition: Nine Months Ended Allocation of Purchase Price September 30, 2023 Cash $ 181 Patient accounts receivable 372 Prepaid expenses and other current assets 138 Property and equipment 221 Right-of-use assets 368 Other noncurrent assets 22 Intangible assets 843 Goodwill 20,733 Total assets acquired 22,878 Total liabilities assumed 893 Fair value of net assets $ 21,985 The majority of the tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. The Company developed estimates for the expected future cash flows and discount rates used in the present value calculations. The following table summarizes the fair values of acquired intangible assets as of the dates of acquisition: Nine Months Ended September 30, 2023 Regional trade names (1) $ 435 Non-competition agreements (2) 408 Total $ 843 (1) Useful lives for regional trade names are 5 years . (2) Useful lives for non-competition agreements are 5 years . Contingent Consideration Under the provisions of the acquisition agreements, the Company may pay additional cash consideration in the form of earnouts, contingent upon the acquirees achieving certain performance and operational targets (see Note 8). The following table summarizes the maximum contingent consideration based on the acquisition agreements: Nine Months Ended Contingent consideration September 30, 2023 Maximum contingent consideration based on acquisition agreements $ 2,650 Goodwill Goodwill is primarily attributable to the assembled workforce, customer and payor relationships and anticipated synergies and economies of scale expected from the integration of the businesses. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the acquisition. All goodwill is deductible for tax purposes. 11 NOTE 8 FAIR VALUE MEASUREMENTS Contingent Consideration The Company measures its contingent consideration liability at fair value on a recurring basis using Level 3 inputs. The Company estimates the fair value of the contingent consideration liability based on the likelihood and timing of the contingent earn-out payments. The following is the summary of the significant assumptions used for the fair value measurement of the contingent consideration liability as of September 30, 2024 and December 31, 2023. Valuation Technique Range of Significant Assumptions September 30, 2024 December 31, 2023 Probability-weighted analysis Probability 0 % - 100 % 0 % - 100 % based earn-outs Discount rate 8.4 % 9.7 % As of September 30, 2024 and December 31, 2023, the Company adjusted the fair value of the contingent consideration liability due to remeasurement at the reporting date. Hedging Activities The Company uses derivative financial instruments, including an interest rate swap, for hedging and non-trading purposes to manage its exposure to changes in interest rates. The Company entered into a hedge transaction (interest rate swap) using a derivative financial instrument for the purpose of hedging the Company’s exposure to interest rate risks, which the contractual terms of the hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. The objective of entering into the interest rate swap is to eliminate the variability of cash flows in the Secured Overnight Financing Rate ("SOFR") interest payments associated with the variable-rate loan over the life of the loan. In August 2022, the Company entered into an interest rate swap agreement to pay a fixed rate of 3.24 % on a total notional value of $ 189,000 of debt. As a result of the interest rate swap, 94.5 % of the term loan previously exposed to interest rate risk from changes in SOFR is now hedged against the interest rate swap at a fixed rate. The interest rate swap matures on September 30, 2025. As of September 30, 2024, the notional value was $ 185,220 . As changes in interest rates impact the future cash flow of interest payments, the hedge provides a synthetic offset to interest rate movements. The Company used the income approach to value the derivative for the interest rate swap using observable market data for all significant inputs and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. This derivative instrument (interest rate swap) is designated and qualifies as a cash flow hedge, with the entire gain or loss on the derivative reported as a component of other comprehensive income. Amounts recorded in accumulated other comprehensive income are released to earnings in the same period that the hedged transaction impacts consolidated earnings within interest expense, net. The cash flows from the derivative treated as a cash flow hedge is classified in the Company’s consolidated statements of cash flows in the same category as the item being hedged. For the three and nine months ended September 30, 2024 and 2023, the Company included immaterial gains on the hedged instrument (variable-rate borrowings) in the same line item (interest expense, net) as the offsetting gain on the related interest rate swap in the unaudited consolidated statements of operations and comprehensive loss. The following table summarizes the location of the interest rate swap in the unaudited consolidated balance sheets: Consolidated balance sheets location September 30, 2024 December 31, 2023 Interest rate swap Prepaid expenses and other current assets $ 1,046 $ — Interest rate swap Other noncurrent assets $ — $ 2,931 The amount of estimated cash flow hedge unrealized gains and losses that are expected to be reclassified to earnings in the next twelve months is not material. 12 Fair Value Measured on a Recurring Basis The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis: September 30, 2024 December 31, 2023 Assets Measured at Fair Value Money market funds $ 85,836 $ 64,766 Level 1 $ 85,836 $ 64,766 Interest rate swap asset $ 1,046 $ 2,931 Level 2 $ 1,046 $ 2,931 Total assets measured at fair value $ 86,882 $ 67,697 Liabilities Measured at Fair Value Contingent consideration liability: Beginning balance $ 8,169 $ 17,824 Additions related to acquisitions — 1,985 Payments of contingent consideration ( 3,694 ) ( 7,668 ) Gain on remeasurement ( 1,975 ) ( 3,972 ) Ending balance 2,500 8,169 Level 3 $ 2,500 $ 8,169 Total liabilities measured at fair value $ 2,500 $ 8,169 NOTE 9 LONG-TERM DEBT On May 4, 2022, the Company entered into a credit agreement, as amended (the “2022 Credit Agreement”) among LifeStance Health Holdings, Inc., Lynnwood Intermediate Holdings, Inc., Capital One, National Association, and each lender party thereto. The 2022 Credit Agreement established commitments in respect of a term loan facility of $ 200,000 , a revolving loan facility of up to $ 50,000 and a delayed draw term loan facility of up to $ 100,000 . The commitments under the term loan facility and the revolving facility were available to be drawn on May 16, 2022. The Company borrowed $ 200,000 in term loans on that date, with a maturity date of May 16, 2028 . The remaining commitments under the delayed draw term loan facility terminated on August 14, 2024 . Once drawn upon, the delayed draw term loan facility has a maturity date of May 16, 2028. 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 3.75 % 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 2.75 %. The term loans are collateralized by substantially all of the assets of the Company. The revolving loan has interest only payments until the maturity date of May 16, 2027 . The 2022 Credit Agreement requires the Company to maintain compliance with certain restrictive financial covenants related to earnings, leverage ratios, and other financial metrics. The Company was in compliance with all debt covenants at September 30, 2024 and December 31, 2023. Long-term debt consists of the following: September 30, 2024 December 31, 2023 Term loans $ 196,000 $ 197,500 Delayed Draw term loans 91,300 91,994 Total long-term debt 287,300 289,494 Less: Current portion of long-term debt ( 2,925 ) ( 2,925 ) Less: Unamortized discount and debt issue costs (1) ( 5,320 ) ( 6,284 ) Total Long-Term Debt, Net of Current Portion and Unamortized Discount and Debt Issue Costs $ 279,055 $ 280,285 (1) The unamortized debt issue costs related to long-term debt are presented as a reduction of the carrying amount of the corresponding liabilities on the unaudited consolidated balance sheets. Unamortized debt issue costs related to delayed draw term loan commitments and revolving loans are presented within other noncurrent assets on the unaudited consolidated balance sheets. The current portion of long-term debt is included within other current liabilities on the unaudited consolidated balance sheets. 13 Interest expense, net consists of the following: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Interest expense, net $ 5,413 $ 5,477 $ 17,139 $ 15,688 Future principal payments on long-term debt as of September 30, 2024 are as follows: Year Ended December 31, Amount Remainder of 2024 $ 731 2025 2,925 2026 2,925 2027 2,925 2028 277,794 Total $ 287,300 The fair value of long-term debt is based on the present value of future payments discounted by the market interest rates or the fixed rates based on current rates offered to the Company for debt with similar terms and maturities, which is a Level 2 fair value measurement. Long-term debt is presented at carrying value on the unaudited consolidated balance sheets. The fair value of long-term debt at September 30, 2024 and December 31, 2023 was $ 306,099 and $ 304,955 , respectively. Revolving Loan Under the 2022 Credit Agreement, the Company has a revolving loan commitment from Capital One in the amount of $ 50,000 . Any borrowing on the revolving loan under the 2022 Credit Agreement is due in full on May 16, 2027 . The revolving loan bears 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 unused revolving loan incurs a commitment fee of 0.50 % per annum. There are no amounts outstanding on the revolving loan as of September 30, 2024 and December 31, 2023 . NOTE 10 STOCK-BASED COMPENSATION 2021 Equity Incentive Plan Effective June 9, 2021, the Company’s Board of Directors (the "Board") and its stockholders as of that date adopted and approved the LifeStance Health Group, Inc. 2021 Equity Incentive Plan (the “2021 Equity Incentive Plan”). The 2021 Equity Incentive Plan permits the grant of awards or restricted or unrestricted common stock, stock options, stock appreciation rights, restricted stock units, performance awards, and other stock-based awards to employees and directors of, and consultants and advisors to, the Company and its affiliates. On January 1, 2024, the number of shares of common stock reserved and available for issuance under the 2021 Equity Incentive Plan increased by 18,936 shares. Restricted Stock Awards ("RSA") The following is a summary of RSA transactions as of and for the nine months ended September 30, 2024: Unvested Shares Weighted-Average Grant Date Fair Value Unvested, December 31, 2023 5,479 $ 11.98 Vested ( 13 ) 11.98 Forfeited ( 3,211 ) 11.98 Unvested, September 30, 2024 2,255 $ 11.98 Restricted Stock Units ("RSU") The following is a summary of RSU transactions as of and for the nine months ended September 30, 2024: Unvested Shares Weighted-Average Grant Date Fair Value Outstanding, December 31, 2023 23,378 $ 7.24 Granted 13,671 6.92 Vested ( 7,126 ) 8.40 Canceled and forfeited ( 5,132 ) 7.18 Outstanding, September 30, 2024 24,791 $ 6.74 14 Stock Options The following is a summary of stock option activity as of and for the nine months ended September 30, 2024: Number of Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding, December 31, 2023 13,476 $ 7.42 8.70 $ 5,565 Granted — — Exercised — — — Canceled and forfeited — — Outstanding, September 30, 2024 13,476 $ 7.42 6.68 $ 1,838 Exercisable at September 30, 2024 2,142 $ 7.51 6.64 $ 153 Vested or expected to vest at September 30, 2024 13,476 $ 7.42 6.68 $ 1,838 Stock-Based Compensation Expense The Company recognized stock-based compensation expense related to RSAs, RSUs, and stock options within general and administrative expenses in the unaudited consolidated statements of operations and comprehensive loss as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Stock-based compensation expense $ 14,895 $ 21,525 $ 60,026 $ 78,469 As of September 30, 2024, the Company had $ 134,383 in unrecognized compensation expense related to all non-vested RSUs and stock options that will be recognized over the weighted-average remaining service period of 1.6 years. 2021 Employee Stock Purchase Plan Effective June 9, 2021, the Board and its stockholders as of that date adopted and approved the LifeStance Health Group, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”). The ESPP is more fully described in Note 11 in the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. As of September 30, 2024 , no shares of common stock have been purchased under the Company’s ESPP. NOTE 11 INCOME TAXES The provision (benefit) for income taxes is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Provision (benefit) for income taxes $ 575 $ ( 16,385 ) $ 1,594 $ ( 26,964 ) The effective tax rates are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Effective tax rate ( 10.7 )% 21.0 % ( 3.3 )% 16.0 % The difference between the Company’s effective tax rate and the U.S. statutory tax rate of 21 % was prima rily the result of non-deductible equity awards. The Company regularly evaluates the realizability of its deferred tax assets and establishes a valuation allowance if it is more likely than not that some or all the deferred tax assets will not be realized. NOTE 12 COMMITMENTS AND CONTINGENCIES Professional Liability Insurance The Company's medical malpractice insurance coverage is subject to a $ 3,000 per claim limit and an annual aggregate shared limit of $ 8,000 . Should the claims-made policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term, but reported subsequently, would be uninsured. The Company is not aware of any unasserted claims, unreported incidents, or claims outstanding that are expected to exceed malpractice insurance coverage limits as of September 30, 2024 and December 31, 2023. 15 Health Care Industry The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, and government healthcare program participation requirements, reimbursement for patient services, and Medicare fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violation of these laws and regulations could result in expulsion from government healthcare programs together with imposition of significant fines and penalties, as well as significant repayments for patient services billed. Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. As a result of investigations by governmental agencies, various healthcare companies have received requests for information and notices regarding alleged noncompliance with those laws and regulations, which, in some instances, have resulted in companies entering into significant settlement agreements. Compliance with such laws and regulations may also be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. There can be no assurance that regulatory authorities will not challenge the Company’s compliance with these laws and regulations, and it is not possible to determine the impact (if any) such claims or penalties would have upon the Company. In addition, the contracts the Company has with commercial payors also provide for retroactive audit and review of claims. Management believes that the Company is in substantial compliance with fraud and abuse as well as other applicable government laws and regulations. While no regulatory inquiries have been made, compliance with such laws and regulations is subject to government review and interpretation, as well as regulatory actions unknown or unasserted at this time. General Contingencies The Company is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions, injuries to employees, and natural disasters. These risks are covered by commercial insurance purchased from independent third parties. There has been no significant reduction in insurance coverage from the previous year in any of the Company’s policies. Litigation The Company may be involved from time-to-time in legal actions relating to the ownership and operations of its business. Liabilities related to loss contingencies are recognized when the Company believes it is probable a liability has occurred and the amount can be reasonably estimated by management. In the first half of 2023, two related hybrid collective/class action lawsuits, captioned Armand et al. v. LifeStance Health Group, Inc. and Jessica McAfee et al. v. LifeStance Health Group, Inc. , were filed against the Company, in the United States District Court for the Middle District of Florida on January 1, 2023 and the United States District Court for the District of Arizona on June 22, 2023, respectively, by a putative collective or class representing employees of the Company related to advance on compensation and alleged underpayments for time worked. The lawsuit seeks unspecified monetary damages. The process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolution cannot be predicted. The Company has not recorded any material accruals for loss contingencies and in management's opinion no material range of loss is estimable for this matter as of September 30, 2024. On April 26, 2023, a class action litigation captioned Strong v. LifeStance Health Group, Inc. was filed in the United States District Court for the District of Arizona against the Company by a putative class representing users of the Company's website who allege various privacy-related claims premised on the Company's use of pixel technologies on its website. The lawsuit seeks unspecified monetary damages. The Company has moved to dismiss all claims. The process of resolving these matters is inherently uncertain and may develop over an extended period of time; therefore, at this time, the ultimate resolution cannot be predicted. The Company has not recorded any material accruals for loss contingencies and in management's opinion no material range of loss is estimable for this matter as of September 30, 2024 . NOTE 13 NET LOSS PER SHARE The following table presents the calculation of basic and diluted net loss per share (“EPS”) for the Company’s common shares: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net loss available to common stockholders' $ ( 5,957 ) $ ( 61,583 ) $ ( 50,331 ) $ ( 141,303 ) Weighted-average shares used to compute basic and diluted net loss per share 380,359 372,476 378,713 365,556 Net loss per share, basic and diluted $ ( 0.02 ) $ ( 0.17 ) $ ( 0.13 ) $ ( 0.39 ) The Company has issued potentially dilutive instruments in the form of RSAs, RSUs and stock options. The Company did not include any of these instruments in its calculation of diluted loss per share for the three and nine months ended September 30, 2024 and 2023 because to include them would be anti-dilutive due to the Company’s net loss during the period. See Note 10 for the issued, vested and 16 unvested RSAs, RSUs and stock options. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share: As of September 30, 2024 2023 RSAs 2,255 5,615 RSUs 24,791 24,109 Stock options 13,476 13,476 40,522 43,200 17