LifeStance Health Group, Inc. 10-Q

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, 2023. 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, 2023, 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 supported practices. References to "our employees" and "our clinicians" refer collectively to employees and clinicians, respectively, of our subsidiaries and supported practices. References to "our patients" refer to the patients treated by such clinicians. Our Business We are reimagining mental health through a tech-enabled care delivery model built to expand access, address affordability, improve outcomes and lower overall healthcare 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 supported practices and our geographic scale, employing 7,269 licensed mental health clinicians as of September 30, 2024. 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 healthcare 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 healthcare. • Patients - We are the front-door to comprehensive outpatient mental healthcare. 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 supported 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 healthcare 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. 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. 18 Our Clinicians As of September 30, 2024, we employed 7,269 psychiatrists, advanced practice nurses, psychologists and therapists through our subsidiaries and supported practices. We generate revenue on a per visit basis (total revenue per visit ("TRPV")) 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. We measure productivity by the number of visits that are performed by a clinician, which is driven by the time clinicians make available to see patients and our ability to fill clinician's schedules by attracting new patients, scheduling patients, and converting scheduled appointments to completed visits. Clinician productivity impacts our ability to generate revenue and also impacts clinician compensation, as clinician compensation is primarily driven by the number of visits provided by each clinician. 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 7,269 clinicians employed through our subsidiaries and supported practices, as of September 30, 2024. 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 our 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 targeted 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. Our clinicians treated patients through 2.0 million and 5.9 million visits in the three and nine months ended September 30, 2024, respectively. We believe our ability to deliver more accessible, flexible, affordable and effective mental healthcare is a key driver of our patient growth. We believe we provide a superior and differentiated mental healthcare 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 affordable 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 focuses on 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 referral 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 improved outcomes for our shared patients, and enabling more integrated care and lower total healthcare 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 healthcare services with those of our medical provider partners. By co-locating and driving toward integration with primary care and specialty providers, we can enhance our clinicians' 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 healthcare providers, increasing our value to them and driving new opportunities to partner to grow our patient base and revenue opportunities. 19 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 has historically 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 evaluate new payor relationships and national contracts where we believe the payor's policies and approach to mental healthcare align with our mission, while also seeking to drive regional rate improvement, including terminating certain of our lower-volume payor contracts 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. As part of our ongoing business operations, we renegotiate our existing payor contracts and enter into new payor contracts. Our results of operations can fluctuate based on the reimbursement rates resulting from these payor contract negotiations and renegotiations. To the extent that payors, particularly payors comprising a significant portion of our revenue, negotiate lower reimbursement rates or elect not to cover some or all of our services, our business and results of operations could be adversely impacted. Expand and Optimize our Center Base Within Existing and New Markets We believe we have built a powerful market growth engine that allows us to rapidly grow our presence within our markets and unlock potential latent demand through our differentiated scale, access and affordability. De Novo Centers 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. 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 selectively pursue acquisitions 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 has been deployed both to enter new markets and in our existing markets. In new markets, acquisitions have allowed 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 have allowed us to grow our geographic reach and clinician base to expand patient access. Real Estate Optimization In connection with our expansion through de novo builds and acquisitions, in 2023, we announced a strategic re-focus, to prioritize resources and close certain centers as a direct result of changes to our business model driven by a shift to more virtual visits initiated by the COVID-19 pandemic. As a result, we completed a significant reduction in physical space and exited several underoccupied offices by both negotiating terminations of and abandoning certain real estate leases during 2023. We plan to continue to optimize our real estate footprint on a go-forward basis as part of our recurring operations. 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 income (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. 20 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Total revenue $ 312,722 $ 262,895 $ 925,490 $ 775,062 Revenue growth 19 % 21 % 19 % 23 % Income (loss) from operations 47 (74,357 ) (32,672 ) (156,863 ) Center Margin 100,431 76,209 292,963 218,782 Net loss (5,957 ) (61,583 ) (50,331 ) (141,303 ) Adjusted EBITDA 30,713 14,582 86,969 38,751 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, income (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 income (loss) from operations excluding depreciation and amortization and general and administrative expenses. Therefore, Center Margin is computed by removing from income (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 income (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 income (loss) from operations, the most closely comparable GAAP financial measure, to Center Margin: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Income (loss) from operations $ 47 $ (74,357 ) $ (32,672 ) $ (156,863 ) Adjusted for: Depreciation and amortization 15,115 19,621 56,279 58,220 General and administrative expenses (1) 85,269 130,945 269,356 317,425 Center Margin $ 100,431 $ 76,209 $ 292,963 $ 218,782 (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. 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. 21 We define Adjusted EBITDA as net loss excluding interest expense, depreciation and amortization, income tax provision (benefit), gain on remeasurement of contingent consideration, stock-based compensation, loss on disposal of assets, transaction costs, executive transition costs, litigation costs, strategic initiatives, real estate optimization and restructuring charges, amortization of cloud-based software implementation costs, 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 and nine months ended September 30, 2024 and 2023. 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Net loss $ (5,957 ) $ (61,583 ) $ (50,331 ) $ (141,303 ) Adjusted for: Interest expense, net 5,413 5,477 17,139 15,688 Depreciation and amortization 15,115 19,621 56,279 58,220 Income tax provision (benefit) 575 (16,385 ) 1,594 (26,964 ) Gain on remeasurement of contingent consideration (15 ) (1,867 ) (1,975 ) (4,443 ) Stock-based compensation expense 14,895 21,525 60,026 78,469 Loss on disposal of assets 2 1 80 70 Transaction costs (1) 29 — 821 89 Executive transition costs — 114 591 636 Litigation costs (2) 224 45,418 1,053 49,267 Strategic initiatives (3) 134 790 1,292 3,242 Real estate optimization and restructuring charges (4) — 1,257 (250 ) 4,977 Amortization of cloud-based software implementation costs (5) 298 — 478 — Other expenses (6) — 214 172 803 Adjusted EBITDA $ 30,713 $ 14,582 $ 86,969 $ 38,751 (1) Primarily includes capital markets advisory, consulting, accounting and legal expenses related to our acquisitions and to the secondary offering completed in the second quarter of 2024. (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 (e.g., complex class action litigation), (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. During the three and nine months ended September 30, 2024 and 2023, litigation costs included cash expenses related to three distinct litigation matters, including (x) a securities class action litigation, (y) a privacy class action litigation and (z) a compensation model class action litigation. For a discussion of certain legal proceedings in which we are involved, please read Note 12, Commitments and Contingencies, to our unaudited consolidated financial statements in this report. (3) Strategic initiatives consist of expenses directly related to a multi-phase system upgrade in connection with our recent and significant expansion. During each of the three and nine months ended September 30, 2024 and 2023, we continued a process of evaluating and adopting critical enterprise-wide systems for (i) human resources management, (ii) clinician credentialing and onboarding process, and for the three and nine months ended September 30, 2023, (iii) a scalable electronic health resources system. Strategic initiatives represents costs, such as third-party consulting costs and one-time 22 costs, that are not part of our ongoing operations related to these enterprise-wide systems. We considered the frequency and scale of this multi-part enterprise upgrade when determining that the expenses were not normal, recurring operating expenses. (4) Real estate optimization and restructuring charges consist of cash expenses and non-cash charges related to our real estate optimization initiative, which include certain asset impairment and disposal costs, certain gains and losses related to early lease terminations, and exit and disposal costs related to our real estate optimization initiative to consolidate our physical footprint during the three and nine months ended September 30, 2023. As the decision to close these centers was part of a significant strategic project driven by a historic shift in behavior, the magnitude of center closures has been and is expected to be greater than what would be expected as part of ordinary business operations and do not constitute normal recurring operating activities. During the nine months ended September 30, 2024, real estate optimization and restructuring charges consisted of certain gains and losses related to early lease terminations of previously abandoned real estate leases in 2023. (5) Represents amortization of capitalized implementation costs related to cloud-based software arrangements that are included within general and administrative expenses included in our unaudited consolidated statements of operations and comprehensive loss. (6) Primarily includes costs incurred to consummate or integrate acquired centers, certain of which are wholly-owned and certain of which are supported 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 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 Nine Months Ended September 30, September 30, 2023 2024 2023 (in thousands) Acquired center integration (1) $ 156 $ 95 $ 475 Former owner fees (2) 58 — 142 Other (3) — 77 186 Total $ 214 $ 172 $ 803 (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. 23 Results of Operations The following table sets forth a summary of our financial results for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) 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 ) Total Revenue Total revenue increased $49.8 million, or 19%, to $312.7 million for the three months ended September 30, 2024 from $262.9 million for the three months ended September 30, 2023. This was primarily due to an increase of $48.6 million of patient service revenue and an increase of $1.2 million of nonpatient revenue. The increase in patient service revenue was mainly due to a net increase of 851 in total clinicians from organic hiring, resulting in an increase in patient visits of 0.3 million, or 15%. Additionally, TRPV increased year-over-year primarily driven by modest payor rate increases. Total revenue increased $150.4 million, or 19%, to $925.5 million for the nine months ended September 30, 2024 from $775.1 million for the nine months ended September 30, 2023. This was primarily due to an increase of $149.2 million of patient service revenue and an increase of $1.2 million of nonpatient revenue. The increase in patient service revenue was mainly due to a net increase of 851 in total clinicians from organic hiring, resulting in an increase in patient visits of 0.8 million, or 15%. Additionally, TRPV increased year-over-year primarily driven by modest payor rate increases. We anticipate revenue growth to continue to be driven by our in-house clinician recruiting and de novo strategies as well as our ability to increase patient visits at existing centers through our ability to accommodate virtual sessions in addition to our in-person visits. Operating Expenses Center costs, excluding depreciation and amortization Center costs, excluding depreciation and amortization increased $25.6 million, or 14%, to $212.3 million for the three months ended September 30, 2024 from $186.7 million for the three months ended September 30, 2023. This was primarily due to a $24.0 million increase in center-based compensation due to the increase in patient visits of 0.3 million from the increase in the total number of clinicians from organic hiring. In addition, occupancy costs consisting of center rent and utilities and other center operating expenses consisting of office supplies and insurance contributed to the increase of $1.6 million. Center costs, excluding depreciation and amortization increased $76.2 million, or 14%, to $632.5 million for the nine months ended September 30, 2024 from $556.3 million for the nine months ended September 30, 2023. This was primarily due to a $73.2 million increase in center-based compensation due to the increase in patient visits of 0.8 million from the increase in the total number of clinicians from organic hiring. In addition, occupancy costs consisting of center rent and utilities and other center operating expenses consisting of office supplies and insurance contributed to the increase of $3.0 million. We expect our center costs, excluding depreciation and amortization to continue to increase in the short- to medium-term as we strategically invest to expand our business through our in-house clinician recruiting and de novo strategies and to potentially capture more of our market opportunity. 24 General and administrative expenses General and administrative expenses decreased $45.6 million, or 35%, to $85.3 million for the three months ended September 30, 2024 from $130.9 million for the three months ended September 30, 2023. This was primarily due to a decrease of $41.6 million in other operating expenses as a result of professional fees and legal expenses preceding the settlement of our shareholder class action lawsuit during the third quarter of 2023 with no similar expense in the third quarter of 2024. In addition, there was a decrease of $6.6 million in stock-based compensation, which was slightly offset by an increase in salaries, wages and employee benefits of $3.8 million. Further, the decrease is also partially attributable to a decrease of $0.7 million in third-party consulting costs and one-time costs associated with our strategic initiatives related to the multi-phase system upgrade in connection with our recent and significant expansion and a decrease of $0.5 million in occupancy costs. General and administrative expenses decreased $48.0 million, or 15%, to $269.4 million for the nine months ended September 30, 2024 from $317.4 million for the nine months ended September 30, 2023. This was primarily due to a decrease of $43.1 million as a result of professional fees and legal expenses preceding the settlement of our shareholder class action lawsuit during the third quarter of 2023 with no similar expense in the third quarter of 2024. In addition, there was a decrease of $18.4 million in stock-based compensation expense primarily relating to the RSUs granted at the time of our IPO without a similar expense in 2024, which was offset by an increase in salaries, wages and employee benefits of $18.8 million. Further, there was a decrease in third-party consulting costs and one-time costs associated with our strategic initiatives of $2.0 million related to the multi-phase system upgrade in connection with our recent and significant expansion and a decrease of $3.3 million in occupancy costs. We expect our general and administrative expenses to increase in the foreseeable future due to our planned investments to support company growth. Depreciation and amortization Depreciation and amortization expense decreased $4.5 million to $15.1 million for the three months ended September 30, 2024 from $19.6 million for the three months ended September 30, 2023. This was primarily due to the amortization of intangibles and depreciation during the periods. Depreciation and amortization expense decreased $1.9 million to $56.3 million for the nine months ended September 30, 2024 from $58.2 million for the nine months ended September 30, 2023. This was primarily due to the amortization of intangibles and depreciation during the periods. Other Expense Interest Expense, net Interest expense, net decreased $0.1 million to $5.4 million for the three months ended September 30, 2024 from $5.5 million for the three months ended September 30, 2023. This decrease was primarily due to lower interest rates on borrowings outstanding during the period. Interest expense, net increased $1.4 million to $17.1 million for the nine months ended September 30, 2024 from $15.7 million for the nine months ended September 30, 2023. This increase was primarily due to higher borrowings outstanding during the period. Income Tax (Provision) Benefit Income tax (provision) benefit decreased $17.0 million to a provision of $0.6 million for the three months ended September 30, 2024 from a benefit of $16.4 million for the three months ended September 30, 2023 primarily due to taxable loss and non-deductible equity awards for the three months ended September 30, 2024. Income tax (provision) benefit decreased $28.6 million to a provision of $1.6 million for the nine months ended September 30, 2024 from a benefit of $27.0 million for the nine months ended September 30, 2023 primarily due to taxable loss and non-deductible equity awards for the nine months ended September 30, 2024. 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, as amended, 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 $102.6 million and $78.8 million as of September 30, 2024 and December 31, 2023, respectively. 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 September 30, 2024 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 25 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 September 30, 2024 and December 31, 2023, there was an aggregate principal amount of $287.3 million and $289.5 million outstanding under the 2022 Credit Agreement, respectively. As of September 30, 2024, our non-cancellable future minimum operating lease payments totaled $243.8 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 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 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 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 September 30, 2024, 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: Nine Months Ended September 30, 2024 2023 (in thousands) Net cash provided by (used in) operating activities $ 44,944 $ (33,679 ) Net cash used in investing activities (15,265 ) (48,926 ) 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 Cash Flows Provided By (Used In) Operating Activities During the nine months ended September 30, 2024, operating activities provided $44.9 million of cash, primarily impacted by our $50.3 million net loss and $146.0 million in non-cash charges. This was partially offset by changes in our operating assets and liabilities of $50.8 million. During the nine months ended September 30, 2023, operating activities used $33.7 million of cash, primarily impacted by our $141.3 million net loss and $169.2 million in non-cash charges. This was partially offset by changes in our operating assets and liabilities of $61.6 million. Cash Flows Used In Investing Activities During the nine months ended September 30, 2024, investing activities used $15.3 million of cash resulting from our purchases of property and equipment. During the nine months ended September 30, 2023, investing activities used $48.9 million of cash, primarily resulting from our business acquisitions of $19.8 million and purchases of property and equipment of $29.1 million. 26 Cash Flows (Used In) Provided By Financing Activities During the nine months ended September 30, 2024, financing activities used $5.9 million of cash, resulting primarily from payments of loan obligations of $2.2 million and payments of contingent consideration of $3.7 million. During the nine months ended September 30, 2023, financing activities provided $16.6 million of cash, resulting primarily from borrowings of $25.0 million under the 2022 Credit Agreement, partially offset by payments of loan obligations of $1.8 million, payments of debt issue costs of $0.2 million and payments of contingent consideration of $6.4 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 September 30, 2024. 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 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, 2023. 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.