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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-256202

Prospectus

40,000,000 shares

 

 

LOGO

LifeStance Health Group, Inc.

 

Common stock   $18.00 per share

 

LOGO

This is the initial public offering of our common stock. We are offering 32,800,000 shares of our common stock and the selling stockholders are offering an additional 7,200,000 shares of our common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

The selling stockholders have granted the underwriters an option to purchase up to 6,000,000 additional shares of our common stock within 30 days of the date of this prospectus.

After the completion of this offering, certain of our existing stockholders that are affiliates of TPG Global, LLC, Summit Partners and Silversmith Capital Partners will own a majority of the voting power of our outstanding shares of common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of The Nasdaq Stock Market LLC (“Nasdaq”). See “Principal and Selling Stockholders.”

Prior to this offering, there has been no public market for shares of our common stock. Our common stock has been approved for listing on Nasdaq under the symbol “LFST.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

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     Per share        Total  

Initial public offering price

   $ 18.00        $ 720,000,000  

Underwriting discounts and commissions(1)

   $ 0.99        $ 39,600,000  

Proceeds to us before expenses

   $ 17.01        $ 557,928,000  

Proceeds to the selling stockholders

   $ 17.01        $ 122,472,000  

(1) We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriters (Conflicts of Interest)” for additional information regarding underwriting compensation.

 

LOGO

Investing in our common stock involves risk. See “Risk Factors” beginning on page 19.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to investors on or about June 14, 2021.

 

LOGO

 

 

Morgan Stanley    Goldman Sachs & Co. LLC    J.P. Morgan    Jefferies
TPG Capital BD, LLC    UBS Investment Bank    William Blair
Capital One Securities   AmeriVet Securities   Drexel Hamilton   R. Seelaus & Co., LLC     Siebert Williams Shank  

Prospectus dated June 9, 2021

 


 


Table of Contents

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Table of Contents

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Table of Contents

Table of Contents

 

     Page  

Prospectus Summary

     1  

The Offering

     13  

Summary Consolidated Financial Data

     15  

Risk Factors

     19  

Cautionary Note Regarding Forward-Looking Statements

     51  

Organizational Structure

     53  

Use of Proceeds

     56  

Dividend Policy

     57  

Capitalization

     58  

Dilution

     60  

Unaudited Pro Forma Financial Information

     62  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     72  

Business

     104  

Management

     127  

Executive and Director Compensation

     136  

Certain Relationships and Related Party Transactions

     149  

Principal and Selling Stockholders

     152  

Description of Indebtedness

     155  

Description of Capital Stock

     158  

Shares Eligible For Future Sale

     162  

Material U.S. Federal Income Tax Considerations For Non-U.S. Holders

     164  

Underwriters (Conflicts of Interest)

     168  

Legal Matters

     183  

Experts

     183  

Changes in Independent Public Accounting Firm

     183  

Where You Can Find More Information

     184  

Index to Consolidated Financial Statements

     F-1  

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with different information, and neither we, the selling stockholders nor the underwriters take responsibility for any other information others may give you. We, the selling stockholders and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

For investors outside of the United States, neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

 

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Industry and Market Data

Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent industry analysts and publications, as well as our own estimates, research and surveys. This information involves a number of assumptions and limitations. While we believe the information presented in this prospectus is generally reliable, forecasts, assumptions, expectations, beliefs, estimates and projections involve risk and uncertainties and are subject to change based on various factors, including those described under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”

Throughout this prospectus, all references to a “Net Promoter Score” refer to a measure of patient satisfaction widely used in the mental healthcare industry. We calculate our Net Promoter Score based on responses to patient surveys, administered following a patient’s appointment at one of our centers, that ask the patient to rank, on a scale of one to 10, how likely the patient would be to recommend our services to a friend. We assign the designation of “Promoter” to respondents who provide a score of 9 or 10, the designation of “Passive” to respondents who provide a score of 7 or 8, and the designation of “Detractor” to respondents who provide a score of 0 to 6. We then subtract the percentage of Detractors from Promoters to determine our overall Net Promoter Score. We believe that this method of calculation aligns with industry standards and that this metric is meaningful for investors because of the correlation between Net Promoter Score and patient satisfaction. The Net Promoter Score for our Company that we discuss in this prospectus was calculated based on the survey results of approximately 3,900 patients across our centers from January 14, 2021 through March 31, 2021.

References in this prospectus to a Metropolitan Statistical Area (“MSA”) refer to an area, as defined by the Office of Management and Budget, that has at least one urbanized area of 50,000 or more inhabitants, plus adjacent territory that has a high degree of social and economic integration with the core area, as measured by commuting ties.

Calculation of our estimated addressable market for outpatient mental healthcare in the United States of approximately $116 billion reflects our estimate based on data derived from third-party industry reports as well as claims data analysis. Our estimate is calculated based on (i) the estimated spend on outpatient mental healthcare in the United States for 2020, plus (ii) the estimated spend on mental health patients in the United States who are unserved and underserved, plus (iii) the estimated spend on patients in the United States who are unaware that they need treatment but have unmet mental health needs that are otherwise commercially addressable.

Trademarks and Service Marks

This prospectus includes our trademarks and service marks such as LIFESTANCE® and the LifeStance logo, which are protected under applicable intellectual property laws and are our property or the property of our subsidiaries. This prospectus may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are listed without the ®, SM and TM symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

 

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Basis of Presentation

Organizational Structure

As further described herein, on May 14, 2020, affiliates of TPG Global, LLC (collectively, “TPG”) acquired a majority equity interest in LifeStance Health Holdings, Inc., a subsidiary of LifeStance Health, LLC, in a series of transactions referred to in this prospectus as the “TPG Acquisition.” Prior to the TPG Acquisition, our business was conducted by LifeStance Health, LLC and its consolidated subsidiaries and affiliated practices. From the TPG Acquisition until the organizational transactions described herein, our business has been conducted by LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices.

LifeStance Health Group, Inc., the issuer in this offering, was incorporated in connection with this offering to serve as a holding company that will wholly own LifeStance TopCo, L.P. and its subsidiaries. LifeStance Health Group, Inc. has not engaged in any business or other activities other than those incidental to its formation, the organizational transactions described herein and the preparation of this prospectus and the registration statement of which this prospectus forms a part. Following this offering, LifeStance Health Group, Inc. will remain a holding company, it will wholly own the equity interests of LifeStance TopCo, L.P., and it will operate and control all of the business and affairs and consolidate the financial results of LifeStance TopCo, L.P. and its subsidiaries and affiliated practices. Unless stated otherwise or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions described herein, which we refer to collectively as the “Organizational Transactions.” See “Organizational Structure” for a description of the Organizational Transactions and a diagram depicting our corporate structure after giving effect to the Organizational Transactions and this offering. Following the completion of this offering, we intend to include the financial statements of LifeStance Health Group, Inc. and its consolidated subsidiaries and affiliated practices in our periodic reports and other filings required by applicable law and the rules and regulations of the Securities and Exchange Commission (the “SEC”).

Presentation of our Financial Results

For the year ended December 31, 2019, the three months ended March 31, 2020, and the period from April 1, 2020 to May 14, 2020 (such period from January 1, 2020 to May 14, 2020, the “Predecessor 2020 Period”), we present the financial statements of LifeStance Health, LLC and its consolidated subsidiaries and affiliated practices in this prospectus. Affiliates of TPG formed LifeStance TopCo, L.P. on April 13, 2020 for the purpose of facilitating the TPG Acquisition. For the period from April 13, 2020 (the date of formation of LifeStance TopCo, L.P.) to December 31, 2020 (the “Successor 2020 Period”) and for the three months ended March 31, 2021, we present the financial statements of LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices in this prospectus. For the period from April 13, 2020 through May 13, 2020, the operations of LifeStance TopCo, L.P. were limited to those incident to its formation and the TPG Acquisition, which were not significant. Because it resulted in a change of control, the TPG Acquisition was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets and liabilities be recognized on the consolidated balance sheet at their fair value as of the acquisition date. Accordingly, the financial information provided in this prospectus is presented as “Predecessor” or “Successor” to indicate whether it relates to the period preceding the TPG Acquisition or the period succeeding the TPG Acquisition, respectively. Due to the change in the basis of accounting resulting from the TPG Acquisition, the consolidated financial statements for the Predecessor and Successor periods, included elsewhere in this prospectus, are not necessarily comparable.

We have supplemented the discussion of historical results for these periods with pro forma information for key financial metrics and results of operations for the full year ended December 31, 2020, as we believe it is useful to investors to compare a pro forma twelve-month 2020 period to the annual 2019 historical period presented. The pro forma financial information presented in this prospectus is derived from the “Unaudited Pro Forma Financial Information” and gives pro forma effect to the TPG Acquisition, the Organizational Transactions and this offering in presenting results of operations for the twelve months ended December 31, 2020. The pro forma financial

 

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information is presented for informational purposes only and may not be indicative of results that would have been achieved if the TPG Acquisition, the Organizational Transactions or this offering had taken place on January 1, 2020.

Presentation of our Business

We operate our business through clinical practices (which we refer to as “centers”) that are either (i) wholly owned by our subsidiaries or (ii) in certain states where applicable law requires ownership of the centers by physicians (as opposed to non-physicians), contractually affiliated with us—meaning we own substantially all of the assets of the center and enter into a long-term management services contract with the center pursuant to which we provide all the services to the center that it needs to operate, with the exception of medical or clinical services. We refer to such physician-owned centers as our “affiliated practices,” which is common terminology in our industry. As of December 31, 2020, 250 of our 370 centers were operated as affiliated practices. We manage our wholly-owned centers and affiliated practices consistently and generally do not distinguish between our wholly-owned centers and affiliated practices in operating our business, subject to compliance with applicable law.

Our subsidiaries directly employ the clinicians who practice at our wholly-owned centers, whereas our affiliated practices directly employ the clinicians at those centers. However, pursuant to our management services contracts with our affiliated practices, we run the day-to-day operations of each center and control all activities, in accordance with applicable law, other than medical and clinical services. For example, we provide accounting and financial management, information systems, marketing, budgeting, administrative personnel, risk management and other types of administrative support. We are also the party to the payor contracts pursuant to which the affiliated practices are credentialed to provide mental health services, which we enter into for and on behalf of the affiliated practices, as well as our wholly-owned centers. The revenue generated from affiliated practices is paid out to us pursuant to the management services contracts after all expenses of the practice have been paid to third parties, including clinician/employee compensation.

Based on the contractual arrangements with our affiliated practices and the substantial reliance and dependence of our affiliated practices on LifeStance for operational support and capital needs, we consider ourselves the primary beneficiary of our affiliated practices, and therefore consolidate the results of our affiliated practices in our financial statements as described in more detail in this prospectus. See “Business—Organization” for additional information on our arrangements with our affiliated practices.

 

 

Unless stated otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “our business,” “LifeStance” and “our Company” and similar references refer: (1) prior to the TPG Acquisition, to LifeStance Health, LLC and its consolidated subsidiaries and affiliated practices, (2) prior to the consummation of the Organizational Transactions but following the TPG Acquisition, to LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices and (3) at or following the consummation of the Organizational Transactions, to LifeStance Health Group, Inc. and its consolidated subsidiaries and affiliated practices.

References to “our employees” and “our clinicians” refer collectively to employees and clinicians, respectively, of our subsidiaries and affiliated practices. References to “our patients” refer to the patients treated by such clinicians.

 

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Prospectus Summary

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” and our financial statements and the related notes, before deciding to buy shares of our common stock.

Overview

Our vision is a truly healthy society where mental and physical healthcare are unified to make lives better. Our mission is to help people lead healthier, more fulfilling lives by improving access to trusted, affordable and personalized mental health care. To fulfill this mission, we have built one of the nation’s largest outpatient mental health platforms based on number of clinicians and geographic scale.

We are dedicated to improving the lives of our patients by reimagining mental health through a disruptive, tech-enabled in-person and virtual care delivery model built to expand access and affordability, improve outcomes and lower overall health care costs. We combine a personalized, digitally-powered patient experience with differentiated clinical capabilities and in-network insurance relationships to fundamentally transform patient access to mental health treatment. By revolutionizing the way mental health care is delivered, we believe we have an opportunity to improve the lives and health of millions of individuals.

We employed over 3,300 licensed mental health clinicians through our subsidiaries and affiliated practices across 73 MSAs in 27 states as of March 31, 2021. Our clinicians offer patients a comprehensive suite of mental health services, spanning psychiatric evaluations and treatment, psychological and neuropsychological testing, and individual, family and group therapy. We treat a broad range of mental health conditions, including anxiety, depression, bipolar disorder, eating disorders, psychotic disorders and post-traumatic stress disorder. Patients can receive care virtually through our online delivery platform or in-person at one of our conveniently located centers. Through our more than 200 payor relationships, including national agreements with multiple payors, patients can utilize their in-network benefits when they receive care from one of our clinicians, enhancing access and affordability.

Mental illness is a large and growing crisis that creates a significant burden on the healthcare ecosystem. In 2019, over 51 million people in the United States, including nearly one in five adults, lived with a mental illness. This prevalence makes mental health a greater disease burden than cancer or heart disease. This disease burden has a broader impact across all of healthcareindividuals with mental health conditions, including depression and anxiety, have been shown to increase overall health care costs by 50% to 100%. However, there are significant barriers to addressing this crisis, including a lack of patient access and affordability, as well as insufficient clinical scale, organization and resources. According to the Kaiser Family Foundation, only 27% of total mental health needs are met at a national level in the United States.

We founded LifeStance to solve these challenges. More broadly, we recognized that addressing this unmet need would require a transformation of how mental health care is built and delivered. We developed powerful incentives for each of our stakeholders—patients, clinicians, payors and primary care and specialist physicians—to align with our mission, adopt our platform and drive our growth.

We Provide Patients Access to Convenient, Affordable, High-Quality Care

We are the front-door to comprehensive outpatient mental healthcare. We believe our ability to deliver a superior patient experience is evidenced by our Net Promoter Score (“NPS”) of 80 based on survey data we



 

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gathered from patients. Our clinicians offer patients comprehensive services to treat mental health conditions across the clinical spectrum. 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. Our clinical approach also delivers validated outcomes—we see that after two visits to treat such conditions, 81% of our patients report a decrease in their suicidal ideation, 53% of patients report improvement with their symptoms of depression and 54% of patients report an improvement in their symptoms of anxiety.

We Empower Clinicians to Improve the Lives of Their Patients

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—with clinicians employed by our subsidiaries and affiliated practices—and we improve patient access through in-network payor contracts and primary care and specialist physician referrals. Our integrated platform and national infrastructure reduce administrative burdens for clinicians while increasing engagement and satisfaction. Our clinicians are dedicated to our mission—in surveys we conducted in January 2021, 85% of our clinicians surveyed said they feel inspired to do their best and 97% believe they are positively assisting their patients to live a healthier life through their work at LifeStance.

We Improve Outcomes and Reduce Costs for Payors and Their Members

We partner with payors to deliver access to high-quality outpatient mental health care to their members at scale. Long-term analyses demonstrate that $1 spent on collaborative mental health care saves $6.50 in total medical costs, representing a compelling opportunity for us to drive improved health outcomes and significant cost savings. Through our validated patient outcomes and extensive scale, we offer payors a pathway to achieving these savings in the broader healthcare system.

We Enable Primary Care Physicians to Deliver Superior Care

We collaborate with primary care 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 for over 50% of patients with a mental illness. We partner with over 2,100 primary care physicians and specialist physician groups across the country to provide a mental healthcare network for referrals and, in certain instances, through co-location to improve the diagnosis and treatment of their patients. Our measurable patient outcomes also provide primary care and specialist physicians with a valuable, validated treatment path to improve the overall health of our mutual patients.

We Have an Opportunity to Transform Healthcare as a Whole

To truly transform healthcare, the integration of mental and physical care is increasingly recognized as a critical priority. It is estimated that over one-third of all patients with chronic physical diseases have a co-occurring mental health disorder. Our scale, breadth of capabilities and value proposition to our key stakeholders position us to enable this transformation, which we are already undertaking. As of December 31, 2020, we co-located our clinicians in nearly 50 primary care and specialist offices, across nine MSAs in seven states, to facilitate seamless mental health care treatment and enable collaborative care consultation with other care providers. We have several Medicare Advantage and employer pilots underway as we lead efforts that seek to demonstrate the ability of fully-integrated mental health models to improve holistic health outcomes. We envision a future where the coordination



 

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and delivery of mental and physical care is accomplished collaboratively between primary care and mental health providers to improve overall patient health, and we are actively working to lead the mental health industry in this direction.

We Have Experienced Significant Growth

We have a demonstrated track record of growth.

 

   

Our total patient visits increased from 931,934 in 2018 to 1,353,285 in 2019, and to 2,290,728 in 2020.

 

   

Our number of total centers increased from 125 as of December 31, 2018 to 170 as of December 31, 2019, and to 370 as of December 31, 2020.

 

   

Our number of employed clinicians increased from 794 as of December 31, 2018 to 1,404 as of December 31, 2019, and to 3,097 as of December 31, 2020.

We generate revenue on a per-visit basis when a patient receives care from one of our clinicians. Depending on the state, our clinicians are either employed directly through our subsidiaries or through our affiliated practices, for which we manage day-to-day operations pursuant to long-term management services contracts. See “Basis of Presentation” and “Business—Organization.” Our revenue is generally derived from in-network insurance coverage pursuant to which our subsidiaries or affiliated practices are reimbursed for patient services. For the twelve months ended December 31, 2020, 89% of our revenue was derived from commercial in-network payors, 5% of our revenue was derived from government payors, 4% of our revenue was derived from patients on a self-pay basis and 2% of our revenue was derived from non-patient services. Our contracts with payors are typically structured as fee-for-service arrangements, with negotiated reimbursement rates for our clinical services. With respect to our affiliated practices, our revenue is derived from management fees negotiated under our management services contracts. We believe we are well-positioned to grow our revenue by catering to each of our stakeholders and remaining focused on our patient-centered mission.

Total revenue increased from $100.3 million in 2018 to $212.5 million in 2019, was $111.7 million in the Predecessor 2020 Period, was $265.6 million in the Successor 2020 Period, and increased to $377.2 million in 2020 on a pro forma basis. Total revenue increased from $73.1 million for the three months ended March 31, 2020 to $143.1 million for the three months ended March 31, 2021. Our net income (loss) was $(1.1) million in 2018, $5.7 million in 2019, $(24.9) million in the Predecessor 2020 Period, $(13.1) million in the Successor 2020 Period, and $(299.0) million in 2020 on a pro forma basis. For the three months ended March 31, 2020 and March 31, 2021, our net income (loss) was $2.7 million and $(8.7) million, respectively. Adjusted EBITDA increased from $6.5 million in 2018 to $24.4 million in 2019, was $12.7 million in the Predecessor 2020 Period, was $37.5 million in the Successor 2020 Period, and was $50.1 million in 2020 on a pro forma basis. Adjusted EBITDA increased from $8.2 million for the three months ended March 31, 2020 to $12.6 million for the three months ended March 31, 2021. As of March 31, 2021, our total indebtedness was $399.2 million. See “—Summary Consolidated Financial Data—Non-GAAP Financial Measures” for more information about how we define and calculate Adjusted EBITDA and for a reconciliation of net income (loss), the most comparable measure under U.S. generally accepted accounting principles (“GAAP”), to Adjusted EBITDA. See “Basis of Presentation” and “Unaudited Pro Forma Financial Information” for additional information regarding the presentation of our 2020 pro forma financial information.

We see exciting growth opportunities for our business. We have a significant opportunity to scale within our existing footprint. We estimate there are approximately 650,000 mental health clinicians in the United States, which provides us with a meaningful runway to grow from our base of more than 3,300 employed clinicians as of March 31, 2021. We have identified an additional 28 MSAs for near-term expansion, which could grow our reach to approximately 57% of the U.S. population. As we scale, we believe our digital investments and virtual care



 

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capabilities would allow us to leverage our platform to rapidly extend our reach, unlocking potential latent demand for mental health care across our markets. Since our inception in March 2017 through December 31, 2020, we have successfully opened 120 de novo centers, hired 1,746 clinicians through our subsidiaries and affiliated practices, and completed 53 acquisitions of existing practices.

Mental Health Needs to be Reimagined

Mental healthcare in the United States today is broken. A number of factors are contributing to this large and growing crisis.

Mental Health is a Large Disease Burden

Mental health disorders are among the most prevalent of all diseases in the United States. One in five U.S. adults and one in six youths will experience mental illness each year and over 45% of adults will experience mental health issues during their lifetime. This incidence has been worsening in recent decades.

Lack of Access and Affordability

Despite this large burden, access to mental health treatment is plagued by significant challenges. Even if patients are able to access a mental health professional, studies show they often face significant wait times of up to one to two months. Affordability issues amplify these challenges. For example, due to poor reimbursement dynamics, only 55% of psychiatrists accept private insurance compared to 89% for other physician specialties. As a result, individuals are forced to pay cash out-of-pocket for treatment, leading to one in five people forgoing needed mental health treatment altogether for reasons including affordability.

Highly Fragmented Industry Lacking Resources

These access and affordability issues are compounded by a highly fragmented industry. We estimate that over 95% of mental health clinicians practice as independent providers compared to 31% for primary care physicians and even fewer in other specialties. We believe that independent clinicians are burdened with significant non-clinical business demands, impeding their ability to focus on their patients’ care.

Lack of Care Coordination Results in Poor Outcomes and High Costs

Fragmentation among providers and lack of resources impedes the integration of mental health care with the broader healthcare system. Many primary care physicians and specialists are not well-equipped to identify and treat patients with mental health conditions. Limited treatment results in higher total medical costs. There have been an average of 63 million emergency room visits annually related to mental illness over the past three years, resulting in higher overall costs to patients and payors.

We Have a Significant Opportunity

We estimate that the outpatient mental healthcare market in the United States was approximately $116 billion as of 2020. We expect that the market will nearly double from 2020 to 2025 at a compound annual growth rate of 14%, to approximately $215 billion, driven by significant, long-term tailwinds, including increased incidence of mental health-related disease, increased awareness and acceptance driving treatment demand, increased access and pursuit of integration with physical care, and increased support from federal and state level regulations.

We Deliver Value for All Key Stakeholders in the Healthcare Ecosystem

Our model is built to empower each of the healthcare ecosystem’s key stakeholders and align around our shared goal of delivering a healthier life for patients by creating access to high-quality mental health care.



 

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Our Patients Gain Access to High-Quality Care When and Where They Need It

Our clinicians treated more than 357,000 patients through 2.3 million visits in 2020. We aim to deliver value to our patients in multiple ways:

 

   

Superior patient experience: We have a relentless focus on delivering a superior experience to our patients. We enable our patients to conveniently see their clinician through their preferred choice of virtual or in-person visits. We optimize patient engagement through our convenient digital tools, including online scheduling, adherence reminders, online prescription refills and online payments. We believe our superior patient experience drives increased patient engagement — in 2020, 78% of our patients have had two or more visits with our clinicians. We believe our ability to deliver a superior patient experience is evidenced by our NPS of 80 based on survey data we gathered from patients.

 

   

Front door to comprehensive mental health care: We offer comprehensive access to a suite of services to meet our patients’ needs through their mental health care journey. We believe our breadth of clinical capabilities enables superior coordination among disciplines to deliver our patients the best possible care.

 

   

Increased access and affordability through in-network coverage: We have over 200 payor relationships nationally, which improves access and affordability for our patients.

 

   

Outcomes-driven, patient-centric care: Through our technology and our outcomes data, we enable patients and their clinicians to track improvements in their well-being, increasing their engagement with care.

Our Clinicians Are Empowered to Focus on Improving the Lives of Their Patients

As of March 31, 2021, we employed over 3,300 psychiatrists, advanced practice nurses (“APNs”), psychologists and therapists through our subsidiaries and affiliated practices to deliver care through our platform. We deliver value to our clinicians in several ways:

 

   

Empowered to put patients first: Our platform enables our clinicians to focus on delivering the best possible care to their patients. We augment their ability to serve their patients through technology tools and data, while freeing them from the many non-clinical burdens they face in independent practice.

 

   

Collaborative clinical environment: We promote a clinical culture of collaboration and ongoing learning for our team of mental health professionals. Our clinicians are highly engaged—over 85% say they feel inspired to do their best through their work at LifeStance.

 

   

Unique employed model: Our clinicians are employed as W-2 employees by our subsidiaries and affiliated practices rather than as independent contractors, the latter of which we believe is more common in the mental healthcare industry in the United States. Additionally, we offer a flexible visit-based economic model, which allows our clinicians to build their patient panels while flexibly managing caseloads in line with clinicians’ personal preferences.

 

   

Improved patient access: Referrals from our payor and primary care and specialist physician partners connect clinicians with new patients. Our patient-clinician matching technology efficiently matches patients with appropriate clinicians to improve engagement.

 

   

Flexible care delivery to meet their patients’ needs: Our conveniently located centers and virtual care delivery platform provide our clinicians with greater flexibility and convenience to serve their patients in whatever environment is most suitable.

 

   

Increased efficiency: We have built a centralized operating platform that enables significant efficiencies for our clinicians, alleviating administrative burden, expanding availability for patient care and improving overall clinician satisfaction.



 

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Our Payor Partners Expand Access, Improve Outcomes and Lower Costs

We have over 200 in-network payor relationships offering access to our clinician team. We deliver value to our payor partners in several ways:

 

   

Access to a national clinician employee base: We are one of the nation’s largest outpatient mental health platforms, with over 3,300 licensed clinicians employed by our subsidiaries and affiliated practices across 73 MSAs in 27 states as of March 31, 2021.

 

   

Lower total medical costs: Long-term analyses demonstrate that incremental spend on mental health care for patients results in significantly higher savings in total health care costs.

 

   

Measurable outcomes: We track major measures of clinical outcomes, quality and utilization. These measures allow us to track the improvement of patients, measure their progress and provide our payor and employer partners with the data to quantify the impact of our care.

 

   

Stronger member and client value proposition: We believe our clinicians provide best-in-class mental health treatment services and experience, which enables payors to provide to their members a superior product. Because mental health conditions can lead to employee absenteeism and lower productivity, we believe our payor partners are also well-positioned to deliver value to their employer clients.

Our Primary Care and Specialist Physician Partners Can More Effectively Improve the Lives of their Patients

We partner with over 2,100 primary care physicians and specialist physician groups to deliver improved health outcomes for our shared patients:

 

   

More efficient referral base: We offer our primary care partners an extensive mental health clinician base for their patients, enabling their patients to receive the best total care across their mental and physical health needs.

 

   

Improved outcomes: Through the integration of mental and physical health care, we believe physicians can achieve better outcomes and lower total health care costs to their patients with co-morbidities.

 

   

Enable more integrated care and lower costs: We believe mental and physical health care integration will help lower costs to our primary care and specialist physician partners under reimbursement models where reimbursement rates are tied to quality and value-based outcomes. Our collaborative care model aims to improve early diagnosis of mental health conditions to drive identification and better treatment, which may lead to improved quality outcomes and lower costs.

How We Strengthen the Healthcare Ecosystem

We are a market leader with significant scale in terms of both multi-disciplinary clinician base and geographic reach. We believe our value proposition drives a powerful network effect that further reinforces our competitive strengths.

Extensive Scale, Breadth and Access

We are reimagining access to mental health care in the United States. We are one of the nation’s largest providers of outpatient mental health care in the country based on the number of clinicians we employ through our subsidiaries and our affiliated practices and our geographic scale. In 2020, our clinicians treated more than 357,000 patients through 2.3 million visits. During the twelve months ended December 31, 2020, 93% of our patients were commercially insured as of their latest visit, which allowed them to access care through their insurance coverage, increasing access and affordability. We believe the scale, breadth and depth of our offering is unmatched in our industry.



 

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Differentiated Platform Delivering Seamless Patient Experience

We believe we deliver a superior patient experience through a pioneering, modern care model. We believe that, while advanced digital capabilities are an essential part of the future of mental health care delivery, it is difficult to replicate and replace the in-person, human aspect of care. As a result, we have built a holistic, people-driven, digitally enabled care experience. We believe the model we built is critical to delivering best-in-class mental health care outcomes and differentiates our platform.

Comprehensive Clinical Capabilities with Improved Outcomes

Our comprehensive suite of mental health care services is built to meet the breadth of our patients’ needs and deliver improved outcomes. Our patients have access to our team of licensed mental health clinicians, including psychiatrists, APNs, psychologists and therapists. We treat a broad range of mental health conditions, including anxiety, depression, bipolar disorder, eating disorders, psychotic disorders and post-traumatic stress disorder.

Employer of Choice for Licensed Mental Health Clinicians

We believe we are an employer of choice in mental health, allowing us to employ highly qualified clinicians. Our success is demonstrated by our track record—in addition to the clinicians we have gained through our acquisitions, since our inception in March 2017 through December 31, 2020, we have hired 1,746 clinicians through our subsidiaries and affiliated practices, with a clinician retention rate of over 87% compared to the industry average of 77%.

Valuable Partner to All of Healthcare’s Key Stakeholders

We believe our model creates powerful incentives for the healthcare ecosystem’s key stakeholders to partner with us. As we grow, we continuously invest in our platform to further improve access, enhance our operations and technology, and refine our clinical model to continue to deliver leading outcomes. In turn, this makes us more valuable to our key stakeholders, further reinforcing our industry leadership.

Highly Scalable Platform with Proven Growth Playbook

We believe we have developed a highly replicable playbook that allows us to enter new markets and pursue growth through multiple vectors. To enter new markets, we seek to acquire high-quality practices with a track record of clinical excellence and in-network payor relationships. Once we enter a market, our powerful organic growth engine drives our growth through de novo openings, center expansions, clinician recruiting and tuck-in acquisitions.

Highly Experienced Executive Team

Our executive team has a proven track record, having successfully founded and led several patient-centric healthcare businesses. Our leadership team has an average of 21 years of experience across operational, technology and clinical roles in healthcare and technology businesses. We believe our executive team’s extensive experience will continue to drive our success.

Our Strategies for Growth

We believe we are well positioned to sustain our strong track record of growth and accomplish our mission to reimagine mental health care in the United States. To achieve this, we are anchored on our vision to deliver the



 

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highest-quality care for our patients and our value proposition to our key stakeholders. Our significant growth opportunities include:

Expand Presence in Our Existing 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. We have a significant opportunity to scale within our existing footprint.

Enter into New Markets

We believe our model is highly replicable nationally and we have identified an additional 28 MSAs for potential near-term expansion that could expand our overall population coverage by 29 million individuals. The highly fragmented nature of our industry provides us with significant opportunity to build and expand our presence across the United States.

Expand Our Patient Populations and Services

We see significant scope to further extend our offering to serve other large insured patient populations, including Medicare, Medicaid and self-insured employers, as well as extend our offering directly to consumers. We also see an opportunity to grow our service offering to address a broader spectrum of our patients’ mental health needs including, for example, in mental wellness programs.

Grow Our Partnerships with Key Stakeholders

We enjoy preferred national relationships with payors based on our scale, comprehensive service offering and ability to integrate mental health care. As we continue to grow, we see an opportunity to augment the scope of our relationships with each of our stakeholders, including by entering into risk-sharing partnerships. We believe our deepening relationships with each of these key health care stakeholders will further drive our success as we benefit from continued growth in our patient referral networks.

Advance Integrated Care Models

We are currently pioneering collaborative care models with our payor partners in several of our markets, embedding mental health clinicians into primary care centers to evaluate and treat patients in a single setting. Over time, our goal is to continue to evolve our offering toward a fully-integrated care model in which primary care and specialist physicians and mental health clinicians work together to develop and provide personalized treatment plans for shared patients.

Competition

The market for mental health services is competitive. We compete in a highly fragmented market with direct and indirect competitors that offer varying levels of impact to key stakeholders such as patients, clinicians, payor partners and physician partners. Our competitors primarily include other mental health providers that deliver services virtually or in-person. Our indirect competitors also include episodic consumer-driven point solutions, such as in-person and virtual life coaching, digital therapy and support tools and other technologies related to mental health care. See “Business—Competition” for additional information on our competitive landscape.



 

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Summary of Risks Related to Our Business

An investment in our common stock involves a high degree of risk. Among these important risks are the following:

 

   

we may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, including if we are unable to successfully execute on our growth initiatives and business strategies;

 

   

if we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to execute on our business strategy;

 

   

if reimbursement rates paid by third-party payors are reduced or if third-party payors otherwise restrain our ability to obtain or deliver care to patients, our business could be harmed;

 

   

we conduct business in a heavily regulated industry and if we fail to comply with these laws and government regulations, we could incur penalties or be required to make significant changes to our operations or experience adverse publicity, which could have a material adverse effect on our business, results of operations and financial condition;

 

   

we are dependent on our relationships with affiliated practices, which we do not own, to provide health care services, and our business would be harmed if those relationships were disrupted or if our arrangements with these entities became subject to legal challenges;

 

   

we operate in a competitive industry, and if we are not able to compete effectively, our business, results of operations and financial condition would be harmed;

 

   

the impact of healthcare reform legislation and other changes in the healthcare industry and in health care spending on us is currently unknown, but may harm our business;

 

   

if our or our vendors’ security measures fail or are breached and unauthorized access to our employees’, patients’ or partners’ data is obtained, our systems may be perceived as insecure, we may incur significant liabilities, including through private litigation or regulatory action, our reputation may be harmed, and we could lose patients and partners;

 

   

our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;

 

   

our existing indebtedness could adversely affect our business and growth prospects;

 

   

our Principal Stockholders control us, and their interests may conflict with ours or yours; and

 

   

the other factors set forth under “Risk Factors.”

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of exemptions from some of the reporting requirements that are otherwise applicable to public companies that are not emerging growth companies. These exemptions include:

 

   

being permitted to present only two years of audited consolidated financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;



 

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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), in the assessment of our internal control over financial reporting;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements;

 

   

an exemption from compliance with the requirement of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on the financial statements; and

 

   

an exemption from the requirements of holding a nonbinding advisory vote on executive compensation and obtaining stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including, but not limited to, if the market value of our common stock held by non-affiliates (assessed as of the most recently completed second fiscal quarter) is equal to or exceeds $700 million, or if our annual gross revenue is equal to or exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part. We may elect to take advantage of some or all of the reduced disclosure requirements in future filings with the SEC. As a result, the information that we provide to investors may be different than you might receive from other public reporting companies in which you are invested.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period.

TPG Acquisition

On May 14, 2020, affiliates of TPG acquired a majority of the equity interests of LifeStance Health Holdings, Inc., a subsidiary of LifeStance Health, LLC, in the TPG Acquisition. Immediately prior to the TPG Acquisition, in order to facilitate the acquisition and the rollover by certain equityholders, LifeStance Health, LLC completed a reorganization pursuant to which the equity holders of LifeStance Health, LLC, including affiliates of Summit Partners (together with its affiliates, “Summit”) and affiliates of Silversmith Capital (together with its affiliates, “Silversmith,” and, together with TPG and Summit, our “Principal Stockholders”), received a distribution of 100% of the equity interests of LifeStance Health Holdings, Inc. in complete redemption of their Class A common units, Class C common units, Preferred A units, and Preferred A-1 units of LifeStance Health, LLC. Pursuant to the TPG Acquisition, (i) the historic equity holders of LifeStance Health, LLC contributed a portion of their shares of LifeStance Health Holdings, Inc. to LifeStance TopCo, L.P. in exchange for equity interests of LifeStance TopCo, L.P. and (ii) an indirect subsidiary of LifeStance TopCo, L.P. merged with and into LifeStance Health Holdings, Inc., with shareholders of LifeStance Health Holdings, Inc. receiving cash consideration in connection with cancellation of the remainder of their shares, for aggregate equity and cash consideration of approximately $1.05 billion. In connection with the TPG Acquisition, on May 14, 2020, LifeStance Health Holdings, Inc. entered into the Existing Credit Agreement (as defined in “Description of Indebtedness”), under which LifeStance Health Holdings, Inc. borrowed $210.0 million in term loans and $50.0 million in delayed draw loans, payable in quarterly principal and interest payments, with a maturity date of May 14, 2026. At the same time, LifeStance Health Holdings, Inc. also obtained access to a revolving credit facility with a total borrowing commitment of $20.0 million with interest-only payments until the maturity date of May 14, 2025. See “Description of Indebtedness,” “Unaudited Pro Forma Financial Information” and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus.



 

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Following the TPG Acquisition, we have conducted our business through LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices. Affiliates of TPG formed LifeStance TopCo, L.P. on April 13, 2020 for the purpose of facilitating the TPG Acquisition. Because it resulted in a change of control, the TPG Acquisition was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets and liabilities be recognized on the consolidated balance sheet at their fair value as of the acquisition date. LifeStance Health, LLC was determined by the Company to be LifeStance TopCo, L.P.’s predecessor. For the period from April 13, 2020 through May 13, 2020, the operations of LifeStance TopCo, L.P. were limited to those incident to its formation and the TPG Acquisition, which were not significant. Accordingly, the financial information provided in this prospectus is presented as “Predecessor” or “Successor” to indicate whether they relate to the period preceding the TPG Acquisition or the period succeeding the acquisition, respectively. Due to the change in the basis of accounting resulting from the TPG Acquisition, the consolidated financial statements for the Predecessor and Successor periods, included elsewhere in this prospectus, are not necessarily comparable. See “Basis of Presentation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—TPG Acquisition and Comparability of Results.”

Our Principal Stockholders; Controlled Company

TPG. TPG is a leading global alternative asset firm founded in 1992 with more than $91 billion of assets under management as of December 31, 2020 and offices in Austin, Beijing, Fort Worth, Hong Kong, London, Luxembourg, Melbourne, Moscow, Mumbai, New York, San Francisco, Seoul, Singapore and Washington, DC. TPG’s investment platforms are across a wide range of asset classes, including private equity, growth equity, real estate, and public equity. TPG aims to build dynamic products and options for its investors while also instituting discipline and operational excellence across the investment strategy and performance of its portfolio.

Summit. Founded in 1984, Summit Partners is a global alternative investment firm that is currently managing more than $20 billion in capital dedicated to growth equity, fixed income and public equity opportunities. Summit invests across growth sectors of the economy and has invested in more than 500 companies in healthcare, technology and other growth industries. Summit maintains offices in North America and Europe and invests in companies around the world.

Silversmith. Founded in 2015, Silversmith Capital Partners is a Boston-based growth equity firm with $2.0 billion of capital under management. Silversmith’s mission is to partner with and support the best entrepreneurs in growing, profitable technology and healthcare companies. The partners have over 75 years of collective investing experience and have served on the boards of numerous successful growth companies.

Following the completion of this offering, the Principal Stockholders will own approximately 66.0% of our common stock in the aggregate, or 64.4% if the underwriters’ option to purchase additional shares of our common stock from the selling stockholders is exercised in full. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Risk Factors—Risks Related to Our Common Stock and This Offering.”

Corporate Information and Structure

LifeStance Health Group, Inc. was formed as a Delaware corporation on January 28, 2021 in anticipation of this offering and has not, to date, conducted any activities other than those incidental to its formation, the Organizational Transactions and the preparation of the prospectus and the registration statement of which this prospectus forms a part. Our principal executive offices are located at 4800 N. Scottsdale Road, Suite 6000, Scottsdale, AZ 85251, and our telephone number at that location is (425) 279-8500. Our website address is www.lifestance.com. Our website and the information contained on our website do not constitute a part of this prospectus. We are a holding company and all of our business operations are conducted through our subsidiaries and affiliated practices. See “Organizational Structure.”



 

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Channels for Disclosure of Information

Investors, the media and others should note that, following the completion of this offering, we intend to announce material information to the public through filings with the SEC, the investor relations page on our website (www.lifestance.com), press releases, public conference calls and public webcasts.

The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media and others to follow the channels listed above and to review the information disclosed through such channels.

Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.



 

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The Offering

 

Common stock offered by us

32,800,000 shares.

 

Common stock offered by the selling stockholders

7,200,000 shares.

 

Common stock to be outstanding after this offering

373,648,648 shares.

 

Option to purchase additional shares

The selling stockholders have granted the underwriters an option to purchase up to 6,000,000 additional shares of our common stock within 30 days of the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $550.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
 

 

We intend to use approximately $302.7 million of the net proceeds to us from this offering to repay amounts outstanding under the Existing Credit Agreement, inclusive of prepayment fees, and we intend to use the remaining net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. See “Use of Proceeds.”

 

  We will not receive any proceeds from the sale of the shares of common stock offered by the selling stockholders in this offering. For more information on our selling stockholders, see “Principal and Selling Stockholders.”

 

Dividend policy

We do not currently pay dividends and do not currently anticipate paying dividends on our common stock in the future. However, we expect to reevaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in our credit facilities and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our Board of Directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our Board of Directors may deem relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” included elsewhere in this prospectus, for restrictions on our ability to pay dividends.


 

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Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Nasdaq symbol

“LFST.”

 

Conflicts of Interest

An affiliate of TPG Capital BD, LLC will beneficially own in excess of 10% of our issued and outstanding common stock. As a result of the foregoing relationship, TPG Capital BD, LLC, an affiliate of TPG and an underwriter in this offering, is deemed to have a “conflict of interest” under Rule 5121 (“Rule 5121”) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly, this offering is being made in compliance with the applicable provisions of Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the member primarily responsible for managing this public offering does not have a conflict of interest, is not an affiliate of any member that has a conflict of interest and meets the requirements of paragraph (f)(12)(E) of Rule 5121. See “Underwriters (Conflicts of Interest).”

The number of shares of common stock to be outstanding after this offering is based on 340,848,648 shares of common stock outstanding as of March 31, 2021, after giving effect to the exchange of all outstanding Class A Units and Class B Units of LifeStance TopCo, L.P. for shares of common stock (including shares of common stock issued as restricted stock subject to vesting) of LifeStance Health Group, Inc. pursuant to the Organizational Transactions, and excludes:

 

   

6,127,529 shares of common stock underlying restricted stock units to be granted prior to closing of this offering, as described under “Executive and Director Compensation—IPO Equity Grants”;

 

   

40,909,584 shares of common stock reserved for future issuance under our 2021 Omnibus Equity Incentive Plan (the “2021 Plan”);

 

   

6,816,973 shares of common stock reserved for future issuance pursuant to our 2021 Employee Stock Purchase Plan (the “ESPP”); and

 

   

500,000 shares of common stock to be issued to LifeStance Health Foundation, a newly formed non-profit organization, concurrently with the closing of this offering, as described under “Business—Employees and Human Capital Resources.”

Unless otherwise indicated, information presented in this prospectus gives effect to the following:

 

   

the Organizational Transactions, as described under “Organizational Structure”;

 

   

the effectiveness of our amended and restated certificate of incorporation and our amended and restated bylaws; and

 

   

no exercise by the underwriters of their option to purchase up to 6,000,000 additional shares of our common stock from the selling stockholders in this offering.



 

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Summary Consolidated Financial Data

The following table sets forth summary consolidated financial data for the periods and as of the dates indicated below. The summary consolidated balance sheet data as of December 31, 2020 are derived from the audited consolidated financial statements of LifeStance TopCo, L.P. and its consolidated subsidiaries (the “Successor”) included elsewhere in this prospectus. The summary consolidated balance sheet data as of March 31, 2021 are derived from the unaudited consolidated financial statements of the Successor included elsewhere in this prospectus.

The summary consolidated statement of operations data presented below for the year ended December 31, 2019 and the period from January 1 to May 14, 2020 relate to LifeStance Health, LLC and its consolidated subsidiaries (the “Predecessor”) and are derived from the audited consolidated financial statements of the Predecessor that are included elsewhere in this prospectus. The summary consolidated statement of operations data for the period from April 13 to December 31, 2020 relate to the Successor and are derived from the audited consolidated financial statements of the Successor that are included elsewhere in this prospectus. For the period from April 13, 2020 through May 13, 2020, the operations of LifeStance TopCo, L.P. were limited to those incident to its formation and the TPG Acquisition, which were not significant. The summary consolidated statement of operations data for the three months ended March 31, 2021 are derived from the unaudited consolidated financial statements of the Successor included elsewhere in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2020 are derived from the unaudited consolidated financial statements of the Predecessor included elsewhere in this prospectus.

We have prepared the unaudited interim consolidated financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future and our interim results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the full year ending December 31, 2021, or any other period.

LifeStance Health Group, Inc. was formed as a Delaware corporation on January 28, 2021 in anticipation of this offering and has not, to date, conducted any activities other than those incidental to its formation, the Organizational Transactions and the preparation of this prospectus and the registration statement of which this prospectus forms a part. As such, summary consolidated financial data for LifeStance Health Group, Inc. has not been provided.



 

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The following information should be read in conjunction with the sections entitled “Basis of Presentation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and our consolidated financial statements and the notes thereto contained elsewhere in this prospectus.

 

Consolidated Statement of
Operations Data
  Successor     Predecessor     Pro Forma
Consolidated
    Successor     Predecessor  
    Three months
ended
March 31,
2021
    Three months
ended
March 31,
2020
    Year ended
December 31,
2020
    April 13 to
December 31,
2020
    January 1
to May 14,
2020
    Year ended
December 31,
2019
 
(in thousands)                                    

Total revenue

  $ 143,132     $ 73,106     $ 377,217     $ 265,556     $ 111,661     $ 212,518  

Operating expenses

                 

Center costs, excluding depreciation and amortization shown separately below

    99,134       51,634       258,041       179,264       78,777       150,122  

General and administrative expenses

    32,651       13,662       430,474       51,841       20,854       41,060  

Depreciation and amortization

    12,228       2,175       42,949       27,710       3,335       6,095  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 144,013     $ 67,471     $ 731,464     $ 258,815     $ 102,966     $ 197,277  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (881     5,635       (354,247     6,741       8,695       15,241  

Other income (expense)

                 

Gain (loss) on remeasurement of contingent consideration

    (307     354       (254     (576     322       229  

Transaction costs

    (1,534     (953     (37,184     (3,937     (33,247     (2,186

Interest income (expense)

    (8,632     (1,680     (12,538     (19,112     (3,020     (5,409

Other expense

    (89     —         (1,490     (263     (14     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (10,562     (2,279     (51,466     (23,888     (35,959     (7,366
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

    (11,443     3,356       (405,713     (17,147     (27,264     7,875  

Income tax benefit (provision)

    2,761       (703     106,675       4,022       2,319       (2,206
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) and comprehensive income (loss)

  $ (8,682   $ 2,653     $ (299,038   $ (13,125   $ (24,945   $ 5,669  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Consolidated Balance Sheet Data    As of March 31, 2021  
     LifeStance
Health Group,
Inc. Pro Forma
Consolidated (1)
     LifeStance
TopCo., L.P.

Actual
 

(in thousands)

     

Cash and cash equivalents

   $ 283,731      $ 39,494  

Total assets

     1,848,326        1,606,283  

Long term debt, net

     99,408        387,298  

Total liabilities

     289,659        580,524  

Redeemable units

     —          71,750  

Total stockholders’/members’ equity

     1,558,667        954,009  

 

(1)

Reflects the effect of (i) the Organizational Transactions; (ii) the effectiveness of our amended and restated certificate of incorporation; (iii) the issuance of 32,800,000 shares of common stock by us in this offering; (iv) the use of approximately $550.0 million in net proceeds to us from the sale of such shares, after



 

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  deducting underwriting discounts and commissions and estimated offering expenses payable by us, including approximately $302.7 million for the repayment of certain indebtedness under our Existing Credit Agreement; and (v) payment of the approximately $1.2 million termination fee under our management services agreement in connection with the closing of this offering.

Non-GAAP Financial Measures

We present Adjusted EBITDA, a non-GAAP performance measure, to supplement our results of operations presented in accordance with GAAP. We believe Adjusted EBITDA is useful in evaluating our operating performance and 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 (loss). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics and Non-GAAP Financial Measures” for a description of Adjusted EBITDA, how we calculate this measure, more information on our use and the limitations of Adjusted EBITDA as a measure of our financial performance and a reconciliation of Adjusted EBITDA to net income (loss) for the year ended December 31, 2018. See “Unaudited Pro Forma Financial Information” for additional information regarding the presentation of our 2020 pro forma financial information.

The table below presents Adjusted EBITDA reconciled to our net income (loss), the closest GAAP measure, for the periods indicated:

 

Non-GAAP Financial Measures      Successor              Predecessor     Pro Forma
Consolidated
    Successor     Predecessor  
    Three
months
ended
March 31,
2021
          Three
months
ended
March 31,
2020
    Year ended
December 31,

2020
    April 13 to
December 31,
2020
    January 1 to
May 14,
2020
    Year ended
December 30,
2019
 

(in thousands)

                   

Net income (loss)

  $ (8,682       $ 2,653     $ (299,038   $ (13,125   $ (24,945   $ 5,669  

Adjusted for:

                   

Interest expense

    8,632           1,680       12,538       19,112       3,020       5,409  

Depreciation and amortization

    12,228           2,175       42,949       27,710       3,335       6,095  

Income tax (benefit) provision

    (2,761         703       (106,675     (4,022     (2,319     2,206  

Loss (gain) on remeasurement of contingent consideration

    307           (354     254       576       (322     (229

Unit based compensation

    605           —         357,006       1,452       —         54  

Management fees(1)

    89           —         1,369       142       14       —    

Loss on disposal of assets

    —             —         121       121       —         —    

Transaction costs(2)

    1,534           953       39,409       3,937       33,247       2,186  

Other expenses(3)

    632           407       2,202       1,567       635       3,010  
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 12,584         $ 8,217     $ 50,135     $ 37,470     $ 12,665     $ 24,400  
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents management fees paid to certain of our executive officers and affiliates of our Principal Stockholders pursuant to the management services agreement entered into in connection with the TPG Acquisition. The management services agreement will terminate in connection with this offering and we will be required to pay a one-time fee of approximately $1.2 million to such parties. See “Certain Relationships and Related Party Transactions—TPG Acquisition and Related Agreements—Management Services Agreement.”



 

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(2)

Primarily includes capital markets advisory, consulting, accounting and legal expenses related to our acquisitions and costs related to the TPG Acquisition. Of the transaction costs incurred in 2019, approximately $1.4 million relate to the TPG Acquisition. Of the transaction costs incurred in 2020 on a pro forma basis, $32.9 million relate to the TPG Acquisition.

(3)

Primarily includes costs incurred to consummate or integrate acquired centers, certain of which are wholly-owned and certain of which are affiliated practices, in addition to the compensation paid to former owners of acquired centers and related expenses that are not reflective of the ongoing operating expenses of our centers. Acquired center integration, former owner fees, and other are components of general and administrative expenses included in our consolidated statement of income (loss). Impairment on loans is a component of center costs, excluding depreciation and amortization included in our consolidated statement of income (loss). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics and Non-GAAP Financial Measures—Adjusted EBITDA” for a description of these costs.



 

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Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding to invest in our common stock. If any of the following risks should occur, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we do not currently deem material may also become important factors that adversely affect our business.

Risks Related to Our Business and Our Industry

We may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, including if we are unable to successfully execute on our growth initiatives and business strategies.

We have experienced significant growth since our inception in 2017. We continually execute a number of growth initiatives, strategies and operating plans designed to enhance our business. For example, our strategy includes growing our business by opening de novo centers, acquiring high-quality existing centers, recruiting new clinicians, building our relationships with payors and developing strategic relationships with other primary care and specialist physicians to offer an integrated care model. The anticipated benefits from these efforts are based on several assumptions that may prove to be inaccurate. Moreover, we may not be able to successfully complete these growth initiatives, strategies and operating plans and realize all of the benefits, including growth targets, that we expect to achieve, or it may be more costly to do so than we anticipate.

Future revenue may not grow at historic rates or may decline. Our future growth will depend, in part, on our ability to continue to successfully identify and execute on expansion opportunities, our ability to demonstrate the value of our platform, and our ability to attract and retain a sufficient number of qualified clinicians and support personnel. A variety of risks could cause us not to realize some or all of these growth plans and benefits. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies and operating plans, increased difficulty and cost in implementing these efforts, including difficulties in complying with evolving regulatory requirements, and the incurrence of other unexpected costs associated with operating the business. Moreover, our continued implementation of these programs may disrupt our operations and performance. As a result, we cannot assure you that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies and operating plans negatively impacts our operations or costs more or takes longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, results of operations and financial condition may be harmed.

If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to execute on our business strategy.

Our significant growth in recent periods may put strain on our business, operations and employees. For example, we added an additional 200 centers through our subsidiaries and affiliated practices in 2020 and grew from 1,404 employed active clinicians as of December 31, 2019 to 3,097 clinicians as of December 31, 2020, and to 3,301 clinicians as of March 31, 2021. We have also significantly increased the number of patient visits conducted over this period. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our financial and accounting systems and our IT infrastructure. In addition, in order for our clinicians to effectively provide virtual services to patients, we need to provide them with adequate IT and technology support.

 

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Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in or exacerbate weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our growth is expected to require significant capital expenditures. As we expand and make related upfront capital expenditures, including leasing new centers, developing our platform, and hiring clinicians within those centers, our margins may be reduced during those periods as we will not recognize patient service revenue until those centers open and begin patient visits. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our revenue may not increase or may grow more slowly than expected and we may be unable to implement our business strategy, which would adversely affect our business, results of operations and financial condition.

Our growth depends on our ability to open de novo centers. To the extent we are unable to successfully identify suitable locations or secure space or if our lessors are unable to obtain permits and complete construction in a timely manner, our growth may be negatively impacted.

We may be unable to keep existing centers in current locations or open new centers in desirable locations in the future. We compete with other businesses for suitable locations for our centers. Local land use, local zoning issues, environmental regulations and other regulations may affect our ability to find suitable locations and also influence the cost of leasing or building our centers. We also may have difficulty negotiating real estate leases on acceptable terms or at all.

Opening de novo centers requires us to hire clinicians and establish a patient base in order to produce a return on investment. When we open centers in new markets, we may encounter difficulties in attracting new clinicians due to competition and area demographics and may encounter difficulties in attracting new patients due to a lack of patient familiarity with our brand, our lack of familiarity with local patient preferences, and preexisting relationships between patients and clinicians who are not affiliated with our Company. We cannot be certain that new centers will produce the anticipated revenues or return on investment or that existing centers will not be materially adversely affected by new or expanded competition in their market areas.

We plan to acquire existing high-quality centers as part of our business strategy and may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations, and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom.

Historically, a part of our business strategy has been the acquisition of existing high-quality centers with in-network payor relationships. We plan to continue to evaluate and make acquisitions pursuant to our strategy and may also seek to acquire or invest in businesses or technologies that we believe could complement or expand our business and our platform, enhance our capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

We also may not achieve the anticipated benefits from acquired centers due to a number of factors, including, but not limited to:

 

   

unanticipated costs or liabilities associated with acquisitions;

 

   

difficulty integrating or migrating accounting systems, operations and personnel of acquired businesses;

 

   

diversion of management’s attention from other business matters;

 

   

use of resources that are needed in other parts of our business; and

 

   

use of substantial portions of our available cash to consummate acquisitions.

 

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Our inability to successfully integrate or realize the anticipated benefits from acquisitions could adversely affect our business, results of operations and financial condition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. If our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could adversely affect our results of operations.

We may decide to incur additional debt in connection with an acquisition or issue our common stock or other securities to the equity holders of the acquired business, which would potentially dilute the ownership of our existing stockholders. We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might have on our operating results.

We operate in a competitive industry, and if we are not able to compete effectively, our business, results of operations and financial condition would be harmed.

The market for mental health care is competitive. We compete in a highly fragmented market with direct and indirect competitors that offer varying levels of impact to key stakeholders such as patients, clinicians, payor partners, and primary care and other specialist physician partners. Our competitive success is contingent on our ability to address the needs of key stakeholders efficiently and with superior outcomes at scale compared with competitors. We compete across various segments within the mental health care market, including with respect to traditional health care providers and medical practices, technology platforms, care management and coordination, digital health, telehealth and health information exchange. Competition in our market involves changing technologies, evolving regulatory requirements and industry expectations, and changes in clinician and patient needs. If we are unable to keep pace with the evolving needs of our patients and clinicians and the evolving competitive landscape in a timely and efficient manner, demand for our services may be reduced and our business, financial condition and results of operations would be harmed.

Each of the individual geographic areas in which we operate has a different competitive landscape. In each of our markets, we compete with other outpatient mental health providers for patients and in contracting with commercial payors. In addition, we face intense competition from other clinical practices, hospitals, health systems and other outpatient mental health providers in recruiting psychiatrists, advanced practice nurses (“APNs”), psychologists, therapists, and other health care professionals. The inability to attract new clinicians would negatively affect our financial results.

Our competitors primarily include other outpatient mental health providers that deliver care in-person or through virtual visits. Our indirect competitors also include episodic consumer-driven point solutions, such as in-person and virtual life coaching, digital therapy and support tools and other technologies related to mental health care services. In addition to established mental health providers, we may face additional competition from new market entrants, including major retailers that have recently begun to offer in-person and virtual mental health care in certain markets. Generally, practices, certain hospitals, and other outpatient mental health providers in the local communities we serve provide services similar to those we offer, and, in some cases, our competitors may offer a broader array of services, more flexible hours or more desirable locations to patients and outpatient mental health providers than ours, and may have larger or more specialized medical staffs to serve patients. Furthermore, health care consumers are now able to access patient satisfaction data, as well as standard charges for services, to compare competing outpatient mental health providers; if any of our centers or our affiliated practices achieve poor results (or results that are lower than our competitors’) on patient satisfaction surveys, or if our standard charges are or are perceived to be higher than our competitors, we may attract fewer patients. Additional quality measures and trends toward clinical or billing transparency, including recently enacted price transparency rules that would require third-party payors to make their pricing information publicly available, may have a negative impact on our competitive position and patient volumes, as patients may prefer to use lower-cost health care providers if they deliver services that are perceived to be similar in quality to ours. Competition from specialized providers, medical practices, retailers, digital health companies and other parties could negatively impact our revenue and market share.

 

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We may encounter competitors that have greater name recognition, longer operating histories or more resources than us. Further, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or patient or clinician requirements and may have the ability to initiate or withstand substantial price competition. In light of these factors, even if our model is more effective than those of our competitors, current or potential patients or clinicians may choose to turn to our competitors. If we are unable to successfully compete in the mental healthcare market, our business and prospects would be materially harmed.

The estimates of market opportunity and revenue growth and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, the size and growth of the overall U.S. mental healthcare market is subject to significant variables, including a changing regulatory environment and population demographics, which can be difficult to measure, estimate or quantify. Estimating and forecasting growth opportunities in any given market are difficult and affected by multiple variables such as population growth, concentration of prospective patients and population density, among other things. Further, there can be no assurance that we will be able to sufficiently penetrate certain market segments included in our estimates and forecasts, including due to limited deployable capital, ineffective marketing efforts or the inability to develop sufficient presence in a given market to attract patients or contract with payors or primary care and other specialist physician partners in that market. In addition, increased unemployment may lead to a loss of insurance benefits for patients, negatively impacting their ability to access our services and, in turn, our financial performance. For these reasons, the estimates and forecasts in this prospectus relating to the size and expected growth of our target markets may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.

If reimbursement rates paid by third-party payors are reduced or if third-party payors otherwise restrain our ability to obtain or deliver care to patients, our business could be harmed.

Private third-party payors pay for the services that we provide to many of our patients. During the twelve months ended December 31, 2020, 93% of our patients were commercially insured as of their latest visit. If any commercial third-party payors reduce their reimbursement rates or elect not to cover some or all of our services, our business, results of operations and financial condition may be harmed. Third-party payors may also elect to create narrow networks, which may exclude our clinicians. Three payors individually exceeded 10% of our total revenue for the twelve months ended December 31, 2020, comprising 23%, 19% and 11% of our total revenue for such period. UnitedHeathcare and Anthem comprised 20% and 17% of our total revenue, respectively, for the three months ended March 31, 2021. Our payor relationships generally operate across multiple independent regional contracts. Changes in reimbursement rates from these or other large commercial payors could adversely impact our business and results of operations.

Our commercial payor contracts are typically structured as fee-for-service arrangements, pursuant to which we, or our affiliated practices, collect the fees for patient services. Under these arrangements, we assume financial risks related to changes in the mix of insured and uninsured patients and patients covered by government-sponsored health care programs, third-party reimbursement rates and patient volume.

A portion of our revenue comes from government health care programs. Payments from federal and state government programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review and federal and state funding restrictions, each of which could increase or decrease program payments, as well as affect the cost of providing services to patients and the timing of payments. We are unable to predict the effect of recent and future policy changes on our operations. In addition, the uncertainty and fiscal pressures placed upon federal and state governments as a result of, among

 

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other things, deterioration in general economic conditions and the funding requirements from federal healthcare reform legislation, may affect the availability of taxpayer funds for Medicare and Medicaid programs. Changes in government health care programs may reduce the reimbursement we receive from them or private payors and could adversely impact our business and results of operations.

A substantial decrease in patient volume, an increase in the number of uninsured or underinsured patients or an increase in the number of patients covered by government health care programs, as opposed to commercial plans that have higher reimbursement levels, could reduce our profitability and adversely impact future growth. In addition, we may be unable to enter new payor contracts on favorable terms, or at all. In some cases, our revenue decreases if our volume or reimbursement decreases, but our expenses, including clinician compensation, may not decrease proportionately.

There has also been a recent trend in the healthcare sector of payors shifting to new models and value-based care arrangements. Changing legislation and other regulatory and executive developments have led to the creation of new models of care and other initiatives in both the government and private sector. Value-based care incentivizes health care providers to improve both the health and well-being of their patients while concurrently managing the medical expenses or “spend” of a particular population. Value-based care reimbursement models implemented by government health care programs or private third-party payors could materially change the manner in which mental health providers are reimbursed. Any failure on our part to adequately implement strategic initiatives to adjust to these marketplace developments could have a material adverse impact on our business.

A nominal number of our current contracts provide for incremental payments tied to the attainment of quality or performance metrics. If we fail to obtain these metrics in future periods, our revenue may decrease relative to past periods. In addition, we may enter into contracts in the future that may include parallel or full risk sharing for identified populations. These agreements would expose us to significant financial downside in the event that we are not able to improve outcomes and reduce total cost of care for the populations. These contracts may include components of medical spending, increasing the size of potential downside risk relative to traditional fee-for-service mental health spending.

The federal government and several states have enacted laws restricting the amount out-of-network providers of services can charge and recover for such services.

In December 2020, in connection with the Consolidated Appropriations Act of 2021, the No Surprises Act introduced national limitations on physician billing for certain services furnished by providers who are not in-network with the patient’s self-insured health plan, individual or group health plan (including fully-insured plans) that will go into effect on January 1, 2022. In addition, several states where we conduct business have enacted or are considering similar laws that would apply to patients having state-regulated insurance. For example, Florida, Ohio and Texas have adopted their own balance billing laws that, in certain cases, prohibit out-of-network providers from billing patients in excess of in-network rates. These measures could limit the amount we can charge and recover for services we furnish where we have not contracted with the patient’s insurer, and therefore could have a material adverse effect on our business, financial condition, results of operations and cash flows. Moreover, these measures could affect our ability to contract with certain payors and under historically similar terms and may cause, and the prospect of these changes may cause, payors to terminate their contracts with us and our affiliated practices, further affecting our business, financial condition, results of operations and cash flows. There is also risk that additional legislation at the federal and state level will give rise to major third-party payors leveraging this legislation or related changes as an opportunity to terminate and renegotiate existing reimbursement rates.

Financial pressures on patients, as well as economic conditions, may adversely affect our patient volume.

We may be adversely affected by patients’ unwillingness to pay for treatment by our clinicians. Higher numbers of unemployed individuals generally translate into more individuals without health care insurance to

 

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help pay for services, thereby increasing the potential for persons to elect not to seek treatment if they cannot afford to self-pay. Growth of patient receivables or deterioration in the ability to collect on these accounts, due to changes in economic conditions or otherwise, could have an adverse effect on our business, results of operations and financial condition. In addition, patients with high deductible insurance plans may be less likely to seek treatment as a result of higher expected out-of-pocket costs.

We may receive reimbursement for virtual services that is less than for comparable in-person services, which would negatively impact revenue and results of operations.

From time to time, we may operate in states that have not adopted laws related to parity between reimbursement rates for virtual services and in-person care. If we are not able to enter into regional payor contracts that provide for reimbursement parity between in-person and virtual services, private payors may not reimburse for virtual services at the same rates as in-person care for all patients within that market. Currently, our reimbursement rates for virtual services and in-person care are substantially similar. This is driven by contractual arrangements with our payor partners or payor policies. If we are not able to enter into or renew payor contracts on these terms or if payor policies change, we may receive reimbursement for virtual services that is less than comparable to in-person services in such states, which would negatively impact our revenue with respect to such markets, and as a result, our business, financial condition and results of operations.

Failure to timely or accurately bill for our services could have a negative impact on our patient service revenue, bad debt expense and cash flow.

Billing for our services is complex. The practice of providing mental health services in advance of payment or prior to assessing a patient’s ability to pay for such services may have a significant negative impact on our patient service revenue, bad debt expense and cash flow. We bill numerous and varied payors, including self-pay patients and various forms of commercial insurance providers. Different payors typically have differing forms of billing requirements that must be met prior to receiving payment for services rendered. Self-pay patients and third-party payors may fail to pay for services even if they have been properly billed. Reimbursement to us is typically conditioned, among other things, on our providing the proper procedure and diagnosis codes. Incorrect or incomplete documentation and billing information could result in non-payment for services rendered or reduction in reimbursement. Additional factors that could complicate our billing include variation in coverage for similar services among various payors and the difficulty of adherence to specific compliance requirements, coding and various other procedures mandated by responsible parties. To the extent the complexity associated with billing for our services causes delays in our cash collections, we assume the financial risk of increased carrying costs associated with the aging of our accounts receivable as well as the increased potential for bad debt expense.

We face inspections, reviews, audits and investigations under our commercial payor contracts and pursuant to federal and state programs. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.

We are subject to various inspections, reviews, audits and investigations to verify our compliance with applicable laws and regulations and any payor-specific requirements. Commercial payors and government programs reserve the right to conduct audits. We also periodically conduct internal audits and reviews of our regulatory compliance. An adverse inspection, review, audit or investigation could result in:

 

   

refunding amounts we have been paid from payors;

 

   

state or federal agencies imposing fines, penalties and other sanctions on us;

 

   

temporary suspension of payment for new patients to the practice;

 

   

decertification or exclusion from participation in one or more payor networks;

 

   

self-disclosure of violations to applicable regulatory authorities;

 

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damage to our reputation;

 

   

the revocation of a clinician’s or a practice’s license; and

 

   

loss of certain rights under, or termination of, our contracts with commercial payors.

We have in the past and may in the future be required to refund amounts we have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business, financial condition and results of operations. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant.

We are dependent on credentialing our clinicians under our insurance contracts at the time of hire.

We are responsible for credentialing our existing and new clinicians, and all of our clinicians need to be credentialed, either by us or by a contracted third party. The amount of time required to complete credentialing varies substantially between payor and region and is largely out of our control. Any delay in completing credentialing will result in a delay in clinicians seeing patients and a concomitant delay in generating revenue, which may materially affect our business. We may not be able to delegate credentialing for new centers that we may acquire in the future, which could result in delays in entry to new markets. Any failure of our clinicians to maintain credentials and licenses could result in delays in our ability to deliver care to patients, and therefore adversely affect our reputation and our business.

Our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems.

Our business is dependent on maintaining effective information systems as well as the integrity and timeliness of the data we use to serve our patients, support our clinicians and payor partners and operate our business. Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our partners regard as significant. If our data were found to be inaccurate or unreliable due to fraud or other error, or if we, or any of the third-party vendors we engage, were to fail to maintain information systems and data integrity effectively, we could experience operational disruptions that may impact our patients and clinicians and hinder our ability to provide care to patients, retain and attract patients, establish reserves, report financial results timely and accurately and maintain regulatory compliance, among other things.

Our information technology strategy and execution are critical to our continued success. We must continue to invest in long-term solutions that will enable us to anticipate patient needs and expectations, enhance the patient experience, act as a differentiator in the market, protect against rapidly changing cybersecurity risks and threats, and keep pace with evolving privacy and security laws, requirements and regulations, including changes in payment regimes such as the Payment Card Industry Data Security Standard (“PCI DSS”). Our success is dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver and enhance technology systems that support our business processes in a cost-efficient and resource-efficient manner. We have identified certain weaknesses with respect to our IT function. See “—Risks Related to Our Common Stock and This Offering—We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or fail to maintain an effective system of internal control over financial reporting. If our remediation of the material weaknesses is not effective, or we fail to develop and maintain effective internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired, which could harm our business and negatively impact the value of our common stock.”

 

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Increasing regulatory and legislative changes will place additional demands on our information technology infrastructure that could have a direct impact on resources available for other projects tied to our strategic initiatives for our technology platform. In addition, recent trends toward greater patient engagement in health care require new and enhanced technologies, including more sophisticated applications for mobile devices. Connectivity among technologies is becoming increasingly important. We and our third-party vendors must also develop new systems to meet current market standards and keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and patient needs. Failure to do so may present compliance challenges and impede our ability to deliver care to patients in a competitive manner. Further, because system development projects are long-term in nature, they may be more costly than expected to complete and may not deliver the expected benefits upon completion. Even if successful, there can be no assurance that additional development projects will not be needed or arise in the future or that we have the necessary resources to complete such development projects. Further, the technological advances of our competitors or future competitors may result in our technologies or future technologies become uncompetitive or obsolete. Our failure to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems could adversely affect our results of operations, financial position and cash flow. Similarly, if our third party vendors fail to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of their own information technology systems, interruptions in their systems or network may result in disruptions of our own systems and business operations.

If we cannot license rights to use technologies on reasonable terms, our ability to provide digital services, including virtual visits, and develop our technology platform would be inhibited.

We license certain rights to use technologies related to our digital services, including virtual visits, patient visit scheduling, patient-clinician matching, and other services, and, in the future, we may identify additional third-party intellectual property that we may need to license in order to engage in our business. However, such licenses may not be available on acceptable terms or at all. The licensing or acquisition of third-party intellectual property rights is a competitive area, and several more established companies may pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, capital resources and greater development or commercialization capabilities. In addition, such licenses may be non-exclusive, which could give our competitors access to the same intellectual property licensed to us. If we are unable to enter into the necessary licenses on acceptable terms or at all, if any necessary licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our licensors fail to prevent infringement by third parties, or if the licensed intellectual property rights are found to be invalid or unenforceable, our business could be adversely affected. Moreover, we could encounter delays and other obstacles in our attempt to develop alternatives.

We lease all of our centers and may experience risks relating to lease termination, lease expense escalators, lease extensions and special charges.

We currently lease all of our centers. Our leases are typically on terms ranging from one to seven years. Each of our leases provides that the lessor may terminate the lease, subject to applicable cure provisions, for a number of reasons, including failure to pay rent as specified or default of terms of the lease that are not cured within a specified notice period including, but not limited to, abandonment of the space, use of the space of a purpose not permitted under the lease, failure to maintain the premises in good condition, or creation and maintenance of a nuisance. If a lease agreement is terminated, there can be no assurance that we will be able to enter into a new lease agreement on similar or better terms or at all.

Our lease obligations often include annual fixed rent escalators ranging between 2% and 3% or variable rent escalators based on a consumer price index. These escalators could impact our ability to satisfy certain obligations and financial covenants and place an additional burden on our results of operations, liquidity and financial position, particularly if such escalator rates outpace growth in our operating results.

 

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As we continue to expand and have leases with different start dates, it is likely that some number of our leases will expire each year. Our lease or license agreements often provide for renewal or extension options. There can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension. If we are not able to renew or extend our leases at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operations could be adversely affected.

Leasing centers pursuant to binding lease agreements may limit our ability to exit markets. For instance, if a center subject to a lease becomes unprofitable, we may be required to continue operating such center or, if allowed by the landlord, to close such center, we may remain obligated for the lease payments on such center. We could incur special charges relating to the closing of such center, including lease termination costs or impairment charges, which would reduce our profits and adversely affect our business, financial condition or results of operations.

Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies could adversely affect our business, financial position, results of operations and liquidity.

We depend on our executive team, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees could harm our business.

Our success depends largely upon the continued service of our key executive officers. These executive officers are at-will employees and therefore they may terminate employment with us at any time with no advance notice. We also do not maintain any key person life insurance policies. From time to time, there may be changes in our executive team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives. Our business would be harmed if we fail to adequately plan for succession of our executives or if we fail to effectively recruit, integrate, retain and develop key talent and/or align our talent with our business needs.

Litigation arising in the ordinary course of business, including in connection with commercial disputes or employment claims, against us could be costly and time-consuming to defend.

We are subject, and in the future may become subject from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our partners in connection with commercial disputes, consumer class action claims, employment claims made by our current or former employees or other claims or proceedings. Litigation may result in substantial costs, settlement and judgments and may divert management’s attention and resources, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our common stock.

Natural or man-made disasters and other similar events, including the COVID-19 pandemic, may significantly disrupt our business and negatively impact our business, financial condition and results of operations.

Our centers may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, fires, floods, nuclear disasters and acts of terrorism or other criminal activities, which make it

 

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difficult or impossible for us to operate our business for some period of time. Although we deliver care in both in-person and digital settings, such disruptions in our operations could negatively impact our business and results of operations and harm our reputation. Although we maintain an insurance policy covering damage to property we lease, such insurance may not be sufficient to compensate for losses that may occur. Any such losses or damages could harm our business, financial condition and results of operations. In addition, our physician partners’ facilities may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or other negative effects on our business and operations, with respect to our integrated care model.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours, although we have been able to mitigate the disruption by enabling clinicians to deliver care in a digital setting.

This pandemic, as well as intensified measures undertaken to contain the spread of COVID-19, could cause disruptions and severely impact our business, including, but not limited to:

 

   

financial pressures on our patients;

 

   

negatively impacting collections of accounts receivable;

 

   

negatively impacting our ability to provide services to patients due to unpredictable demand;

 

   

negatively impacting our ability to forecast our business’s financial outlook;

 

   

potential adverse impacts to capital markets, which could impede our liquidity;

 

   

creating regulatory uncertainty if certain regulations are adopted that are adverse to the business;

 

   

harming our business, results of operations and financial condition; and

 

   

loss of insurance coverage.

We cannot predict with any certainty whether and to what degree the disruption caused by the COVID-19 pandemic and reactions thereto will continue, and expect to face difficulty accurately predicting our internal financial forecasts. The pandemic also presents challenges as our workforce, including both clinicians and support personnel, is largely working remotely.

It is not possible for us to accurately predict the duration or magnitude of the adverse results of the pandemic and its effects on our business, results of operations or financial condition at this time, but such effects may be material. Additionally, it is not possible for us to accurately determine the extent to which COVID-19 impacted our patient visits and related revenues, and if these impacts, if any, will continue. It is also not possible to predict whether any vaccine will mitigate any adverse results of the pandemic or accelerate a restoration of normal operations. The COVID-19 pandemic may also have the effect of heightening many of the other risks identified elsewhere in this prospectus.

We, our clinicians and affiliated practices may become subject to medical liability claims, which could cause us to incur significant expenses and may require us to pay significant damages if not covered by insurance.

Our business entails the risk of medical liability claims against us, our clinicians and our affiliated practices. Although we, our clinicians and our affiliated practices carry insurance covering medical malpractice claims in amounts that we believe are appropriate in light of the risks attendant to our business, successful medical liability claims could result in substantial damage awards that exceed the limits of our and our clinicians’ insurance

 

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coverage. Our affiliated practices and clinicians carry professional liability insurance, and we separately carry a professional liability insurance policy, which covers medical malpractice claims. In addition, professional liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services. As a result, adequate professional liability insurance may not be available to our clinicians, our affiliated practices or to us in the future at acceptable costs or at all.

Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our affiliated medical group from our operations, which could have a material adverse effect on our business, financial condition and results of operations. In addition, any claims may adversely affect our business or reputation.

If we fail to cost-effectively develop widespread brand awareness and maintain our reputation, or if we fail to achieve and maintain market acceptance for our mental health services, our business could suffer.

We believe that developing and maintaining widespread awareness of our brand and maintaining our reputation for delivering high-quality care to patients is important to attract new patients and clinicians and maintain existing patients and clinicians. In addition, we have a growing number of strategic relationships with primary care and other specialist physician partners to develop our integrated care model and referral networks. Market acceptance of our services and patient acquisition depends on educating people, as well as payors and partners, as to the distinct features, ease-of-use, positive lifestyle impact, efficacy, quality and other perceived benefits of our platform as compared to alternatives. In particular, market acceptance is dependent on our ability to sufficiently saturate a particular geographic area to deliver care to local patients. The level of saturation required depends on the needs of the local market and the preferences of the patients in that market. Further, we rely on referrals and placed advertisements to spread brand awareness. Referrals are dependent on patients relaying positive experiences with our services and clinicians. If we are not successful in demonstrating to existing and potential patients, clinicians and payors the benefits of our platform, if we are not able to sufficiently saturate a market in convenient locations for patients, or if we are not able to achieve the support of payors and physician partners for our model and services, we could experience lower than expected patient retention. Further, the loss or dissatisfaction of patients or clinicians may substantially harm our brand and reputation, inhibit widespread adoption of our services, reduce our revenue, and impair our ability to attract or retain patients and clinicians.

Our brand promotion activities may not generate awareness or increase revenue and, even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, we may fail to attract or retain patients, clinicians, payors and physician partners necessary to realize a sufficient return on our brand-building efforts or to achieve the widespread brand awareness we seek.

If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed.

The registered or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential patients and clinicians. In addition, third parties have filed, and may in the future file, for registration of trademarks similar or identical to our trademarks, thereby impeding our ability to build brand identity and possibly leading to market confusion. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to develop brand recognition of our technology platform or other services. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we are unable to establish or protect our trademarks and trade names, or if we are unable to build name

 

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recognition based on our trademarks and trade names, we may not be able to compete effectively, which could harm our competitive position, business, financial condition, results of operations and prospects.

Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock.

Our quarterly results of operations have varied and may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, including, without limitation, the following:

 

   

the addition or loss of contracts with, or modification of contract terms with, payors, including the reduction of reimbursement rates for our services or the termination of our network contracts with payors;

 

   

fluctuations in unemployment rates and economic conditions, which could result in reductions in patient visits;

 

   

the timing of recognition of revenue;

 

   

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure, including upfront capital expenditures and other costs related to expanding in existing markets or entering new markets, as well as providing administrative and operations support services to our affiliated practices under our management contracts;

 

   

our ability to effectively manage the size and composition of our clinician base relative to the level of demand for services from our patients;

 

   

the timing and success of introductions of new applications and services by us or our competitors;

 

   

changes in the competitive dynamics of our industry, including consolidation among competitors;

 

   

the timing of expenses related to acquisition or other expansion opportunities and potential future charges for impairment of goodwill from acquired practices; and

 

   

the number of business days in the quarter.

Our failure to raise additional capital or generate cash flows necessary to execute our growth strategy in the future could reduce our ability to compete successfully and harm our results of operations.

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms or at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests. If we engage in additional debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. In addition, the covenants in the Credit Agreement among LifeStance Health Holdings, Inc., Lynnwood Intermediate Holdings, Inc., Capital One, National Association, and each lender party thereto, dated May 14, 2020 (the “Existing Credit Agreement”), may limit our ability to obtain additional debt, and any failure to adhere to these covenants could result in penalties or defaults that could further restrict our liquidity or limit our ability to obtain financing. If we need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to, among other things:

 

   

continue to expand our organization;

 

   

hire, train and retain clinicians and other employees;

 

   

respond to competitive pressures or unanticipated working capital requirements; or

 

   

pursue acquisition opportunities.

 

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As a result, failure to raise additional capital or generate cash flows necessary to execute our growth strategy in the future could reduce our ability to compete successfully and harm our results of operations.

Risks Related to Healthcare and Data Privacy Regulation

We conduct business in a heavily regulated industry and if we fail to comply with these laws and government regulations, we could incur penalties or be required to make significant changes to our operations or experience adverse publicity, which could have a material adverse effect on our business, results of operations and financial condition.

The U.S. healthcare industry is heavily regulated and closely scrutinized by federal and state governments. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payors, our contractual relationships with affiliated clinicians, vendors and patients, our marketing activities and other aspects of our operations. Of particular importance are:

 

   

the federal Ethics in Patient Referrals Act, commonly referred to as the Stark Law, that, unless one of the statutory or regulatory exceptions apply, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with the entity, and prohibit the entity from billing Medicare or Medicaid for such designated health services. Sanctions for violating the Stark Law include denial of payment, civil monetary penalties of up to $25,820 per claim submitted and exclusion from the federal health care programs. Failure to refund amounts received as a result of a prohibited referral on a timely basis may constitute a false or fraudulent claim and may result in civil penalties and additional penalties under the False Claims Act. The statute also provides for a penalty of up to $172,137 for a circumvention scheme;

 

   

the federal Anti-Kickback Statute that prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration for referring an individual, in return for ordering, leasing, purchasing or recommending or arranging for or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by any federal health care program, such as Medicare and Medicaid. Remuneration has been interpreted broadly to be anything of value, and could include compensation, discounts or free marketing services. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $104,330 for each violation, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act. Violations can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to 10 years. Similarly, violations can result in exclusion from participation in government health care programs, including Medicare and Medicaid;

 

   

the criminal health care fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their implementing regulations, which we collectively refer to as HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any health care benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

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HIPAA, and its implementing regulations, which also imposes certain regulatory and contractual requirements regarding the privacy, security and transmission of protected health information (“PHI”);

 

   

the federal False Claims Act that imposes civil and criminal liability on individuals or entities that knowingly submit false or fraudulent claims for payment to the government or knowingly making, or causing to be made, a false statement in order to have a false claim paid, including qui tam or whistleblower suits;

 

   

the federal Civil Monetary Penalties Law prohibits, among other things, the offering or transfer of remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an exception applies;

 

   

reassignment of payment rules that prohibit certain types of billing and collection practices in connection with claims payable by the Medicare or Medicaid programs;

 

   

similar state law provisions pertaining to Anti-Kickback, self-referral and false claims issues, some of which may apply to items or services reimbursed by any third party payor, including commercial insurers or services paid out-of-pocket by patients;

 

   

state laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians’ medical decisions or engaging in some practices such as splitting fees with physicians and psychologists;

 

   

the Federal Trade Commission Act and federal and state consumer protection, advertisement and unfair competition laws, which broadly regulate marketplace activities and activities that could potentially harm consumers;

 

   

laws that regulate debt collection practices as applied to our debt collection practices;

 

   

a provision of the Social Security Act that imposes criminal penalties on health care providers who fail to disclose or refund known overpayments;

 

   

federal and state laws that prohibit providers from billing and receiving payment from Medicare and Medicaid for services unless the services are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered;

 

   

risks related to employing or contracting with individuals or entities that are sanctioned or excluded from participation in government health care programs;

 

   

the Federal Substance Abuse Confidentiality Regulations known as 42 C.F.R. Part 2;

 

   

federal and state laws and policies that require health care providers to maintain licensure, certification or accreditation to provide physician and other professional services, to enroll and participate in the Medicare and Medicaid programs, to report certain changes in their operations to the agencies that administer these programs, as well as state insurance laws; and

 

   

state and federal statutes and regulations that govern workplace health and safety.

Because of the breadth of these laws and the need to fit certain activities within one of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws may prove costly. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, overpayment recoupment, loss of enrollment status and exclusion from the Medicare and Medicaid programs. The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Our failure to accurately anticipate the application of these laws

 

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and regulations to our business or any other failure to comply with regulatory requirements could create liability for us and negatively affect our business. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and result in adverse publicity.

To enforce compliance with the federal laws, the U.S. Department of Justice and the U.S. Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) have continued their scrutiny of health care providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and mandatory minimum penalties of $11,665 to $23,331 per false claim or statement, health care providers often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating health care providers’ compliance with the health care reimbursement rules and fraud and abuse laws.

We are, and may in the future be, a party to various lawsuits, demands, claims, qui tam suits, governmental investigations and audits (including investigations or other actions resulting from our obligation to self-report suspected violations of law) and other legal matters, any of which could result in, among other things, substantial financial penalties or awards against us, mandated refunds, substantial payments made by us, required changes to our business practices, exclusion from future participation in Medicare, Medicaid and other health care programs and possible criminal penalties, any of which could have a material adverse effect on our business, results of operations, financial condition and cash flows and materially harm our reputation. In March 2020, we received a Civil Investigative Demand from the U.S. Attorney’s Office of the Northern District of Georgia involving an investigation of a laboratory arrangement. We do not believe that we are a target of the investigation or that there is any material exposure based on our internal review. We do not know how the investigation will be resolved, to what extent it may be expanded, or whether we or our employees will be subject to further investigation, enforcement action or related penalties that could have a material adverse effect on our business, results of operations and financial condition.

The laws, regulations and standards governing the provision of health care services may change significantly in the future. We cannot assure you that any new or changed health care laws, regulations or standards will not materially adversely affect our business. We cannot assure you that a review of our business by judicial, law enforcement, regulatory or accreditation authorities will not result in a determination that could adversely affect our operations.

Regulations related to health care are evolving. To the extent regulations revert to their pre-COVID-19 state, particularly with respect to state licensure laws, our ability to provide virtual service across regions will be hampered.

In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion or reinterpretation of various laws and regulations. Compliance with these future laws and regulations may require us to change our practices at an undeterminable and possibly significant initial monetary and recurring expense. These additional monetary expenditures may increase future overhead, which could have a material adverse effect on our results of operations and our ability to provide virtual services in certain jurisdictions. Areas of government regulation that, if changed, could be costly to us include: rules governing the practice of medicine by physicians; laws relating to licensure requirements for psychiatrists and other licensed mental health professionals; laws limiting the corporate practice of medicine and professional fee-splitting; laws

 

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governing the issuance of prescriptions in an online setting; cybersecurity and privacy laws; and laws and rules relating to the distinction between independent contractors and employees.

In addition, a few states have imposed different, and, in some cases, additional, standards regarding the provision of services virtually. The unpredictability of this regulatory landscape means that sudden changes in policy regarding standards of care and reimbursement are possible. If a successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations. If we are required to adapt our business model, we may be limited to only in-person services, which may have a material adverse effect on our business, financial condition and results of operations.

We are dependent on our relationships with affiliated practices, which we do not own, to provide health care services, and our business would be harmed if those relationships were disrupted or if our arrangements with these entities became subject to legal challenges.

The corporate practice of medicine prohibition exists in some form, by statute, regulation, board of medicine or attorney general guidance, or case law, in certain of the states in which we operate. These laws generally prohibit the practice of medicine or practice of psychology by lay-persons or entities and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing providers’ professional judgment. Due to the prevalence of the corporate practice of medicine doctrine, including in certain of the states where we conduct our business, we enter into management services contracts with our affiliated practices to provide a wide range of administrative and operations support services to these practices. Under the management contracts between LifeStance and each affiliated practice, we provide various administrative and management services in exchange for management fees set forth in our management services contracts. To the extent our ability to receive cash fees from the affiliated practices is limited, our ability to use that cash for growth, debt service or other uses may be impaired and, as a result, our results of operations and financial condition may be adversely affected. In addition, the affiliated practices are owned by our Chief Medical Officer and other licensed clinical leadership employees. In the event of any such employee’s death or disability or upon certain other triggering events, we maintain the right to direct the transfer of the ownership of the affiliated practices to another licensed physician.

Our ability to perform medical and virtual services in a particular U.S. state is directly dependent upon the applicable laws governing the practice of medicine, health care delivery and fee splitting in such locations, which are subject to changing political, regulatory and other influences. The extent to which a U.S. state considers particular actions or relationships to constitute the practice of medicine is subject to change and to evolving interpretations by professional boards and state attorneys general, among others, each of which has broad discretion. There is a risk that U.S. state authorities in some jurisdictions may find that our contractual relationships with outpatient mental health practices, which govern the provision of medical and virtual services and the payment of administrative and operations support fees, violate laws prohibiting the corporate practice of medicine and fee-splitting. The extent to which each state may consider particular actions or contractual relationships to constitute improper influence of professional judgment varies across the states and is subject to change and to evolving interpretations by state boards of medicine and state attorneys general, among others. Accordingly, we must monitor our compliance with laws in every jurisdiction in which we operate on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including the provision of virtual services, and fee splitting in one or more jurisdictions may change in a manner adverse to our business. While the management contracts prohibit us from controlling, influencing or otherwise interfering with the practice of medicine by the affiliated clinicians, and provide that clinicians retain exclusive control and responsibility for all aspects of the practice of medicine and the delivery of medical services, there can be no assurance that our contractual arrangements and activities with affiliated practices will be free from scrutiny from U.S. state authorities, and we cannot guarantee that subsequent interpretation of the corporate practice of medicine and fee-splitting laws will not circumscribe our business operations. State corporate practice

 

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of medicine doctrines also often impose penalties on health care clinicians themselves for aiding the corporate practice of medicine, which could discourage clinicians from participating in our network. If a successful legal challenge or an adverse change in relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in affected jurisdictions would be disrupted, which could harm our business.

While we expect that our relationships with our affiliated practices will continue, a material change in our relationship with these entities, or among the affiliated practices, whether resulting from a dispute among the entities, a challenge from a governmental regulator, a change in government regulation, or the loss of these relationships or contracts with outpatient mental health practices, could impair our ability to provide services to our patients and could harm our business.

The impact of healthcare reform legislation and other changes in the healthcare industry and in health care spending on us is currently unknown, but may harm our business.

Our revenue is dependent on the healthcare industry and could be affected by changes in health care spending, reimbursement and policy. The healthcare industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “Affordable Care Act” or the “ACA”) in 2010 made major changes in how health care is delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured population of the United States.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA as well as efforts to repeal or replace certain aspects of the ACA. For example, the Tax Cuts and Jobs Act of 2017 included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Since the enactment of the Tax Cuts and Jobs Act of 2017, there have been additional amendments to certain provisions of the ACA, and it is possible that the current Biden administration and Congress will likely continue to seek to modify or build on certain provisions of the ACA. In December 2019, a federal appeals court held that the individual mandate portion of the ACA was unconstitutional and left open the question whether the remaining provisions of the ACA would be valid without the individual mandate. On November 10, 2020, the Supreme Court heard oral arguments, but it is unknown when the Supreme Court will issue a decision. We continue to evaluate the effect that the ACA and its possible modification or repeal and replacement has on our business. It is uncertain the extent to which any such changes may impact our business or financial condition. In addition to these legal challenges, the Biden administration may advance new healthcare policy goals and objectives through statute, regulation and executive order. For example, the Biden administration could propose a public health insurance option, which, if enacted, could significantly change the competitive landscape among commercial insurance carriers. It is uncertain the extent to which any such changes may impact our business or financial condition.

Other legislative changes to provider reimbursement have been proposed and adopted since the ACA was enacted. These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year pursuant to the Budget Control Act of 2011 (known as Medicare sequestration) and subsequent extensions, which began in 2013 and will remain in effect through 2029 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. New laws may result in additional reductions in Medicare and other health care funding, which may materially adversely affect customer demand and affordability for our products and, accordingly, the results of our financial operations. Additional changes that may affect our business include the expansion of new programs such as Medicare payment for performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), which will not be fully implemented until 2022. At this time, it is unclear how the introduction of the MACRA program will impact overall physician reimbursement.

 

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The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and subsequent legislation including the Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021, provides temporary reimbursement relief for health care providers that, when terminated, could have a material impact on our business. Among other things, Medicare sequestration cuts were temporarily suspended through March 31, 2021, although Congress could act to extend the moratorium further; there is also a one-time overall 3.75% increase in payments across all services and specialties listed in the final 2021 Medicare Physician Fee Schedule; however actual increases or decreases vary across specialties. When these enhanced reimbursement provisions sunset, it is uncertain what impact that will have on our business.

Such changes in the regulatory environment may also result in changes to our payor mix that may affect our operations and revenue. In addition, certain provisions of the ACA authorize voluntary demonstration projects, which include the development of bundling payments for acute, inpatient hospital services, physician services and post-acute services for episodes of hospital care. Further, the ACA may adversely affect payors by increasing medical costs generally, which could have an effect on the industry and potentially impact our business and revenue as payors seek to offset these increases by reducing costs in other areas. Certain of these provisions are still being implemented and the full impact of these changes on us cannot be determined at this time.

Uncertainty regarding future amendments to the ACA as well as new legislative proposals to reform health care and government insurance programs, along with the trend toward managed health care in the United States, could result in reduced demand and prices for our services. We expect that additional state and federal health care reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments and other third party payors will pay for health care products and services, which could adversely affect our business, financial condition and results of operations.

If our or our vendors’ security measures fail or are breached and unauthorized access to our employees’, patients’ or partners’ data is obtained, our systems may be perceived as insecure, we may incur significant liabilities, including through private litigation or regulatory action, our reputation may be harmed, and we could lose patients and partners.

Our business involves the storage and transmission of proprietary information and sensitive or confidential data, including personal information of employees and others, as well as the PHI of our patients. Several laws and regulations require us to keep this information secure. Because of the extreme sensitivity of the information we store and transmit, the security features of our and our third-party vendors’ computer, network and communications systems infrastructure are critical to the success of our business. We cannot be sure that our security features and processes or that our vetting and oversight of third parties will be sufficient. We also exercise limited control over third-party vendors, which increases our vulnerability to problems with the technology and information services they provide. Determined threat actors would likely be able to penetrate our security or the security of our vendors with enough skills, resources, and time. A breach or failure of our or our third-party vendors’ network, hosted service providers or vendor systems could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, cyber-attacks by computer hackers such as denial-of-service and phishing attacks, nation-state attacks, political protests, failures during the process of upgrading or replacing software and databases, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. We are also dependent on a technology supply chain that involves many third parties, some of whom may not be known to us, and each of these companies may also be a source of potential risk to our patients, operations and reputation. Hackers and data thieves are increasingly sophisticated and operating large-scale and complex automated attacks, including on companies within the healthcare industry. As cyber threats continue to evolve, we and our third-party vendors may be unable to anticipate all potential threats. We may be required to expend additional resources to further enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. If our or our third-party vendors’ security measures fail or are breached, it could result in unauthorized persons

 

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accessing sensitive patient data (including PHI), a loss of or damage to our data, or an inability to access data sources, process data or provide our services to our patients. A security incident may even remain undetected for an extended period, and we or our third-party vendors may be unable to anticipate such threats and attacks or implement adequate preventive measures. Such failures or breaches of our or our third-party vendors’ security measures, or our or our third-party vendors’ inability to effectively resolve such failures or breaches in a timely manner, could severely damage our reputation, adversely affect patient, provider or investor confidence in us, and reduce the demand for our services from existing and potential patients. In addition, we could face litigation, damages for contract breach, monetary penalties or regulatory actions for violation of applicable laws or regulations, and incur significant costs to comply with applicable data breach notification laws and to implement remedial measures to prevent future occurrences and mitigate past violations. Although we maintain insurance covering certain security and privacy damages and related expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

Our Board of Directors is briefed periodically on cybersecurity and risk management issues and we have implemented a number of processes to avoid cyber threats and to protect privacy. However, the processes we have implemented in connection with such initiatives may be insufficient to prevent or detect improper access to confidential, proprietary or sensitive data, including personal data. In addition, the competition for talent in the data privacy and cybersecurity space is intense, and we may be unable to hire, develop or retain suitable talent capable of adequately detecting, mitigating or remediating these risks. Our failure to adhere to, or successfully implement processes in response to, evolving cybersecurity threats and changing legal or regulatory requirements in this area could result in legal liability or damage to our reputation in the marketplace.

Should an attacker gain access to our network or the network of our third-party vendor, including by way of example, using compromised credentials of an authorized user, we are at risk that the attacker might successfully leverage that access to compromise additional systems and data. Certain measures that could increase the security of our systems, such as data encryption (including data at rest encryption), heightened monitoring and logging, scanning for source code errors or deployment of multi-factor authentication, take significant time and resources to deploy broadly, and such measures may not be deployed in a timely manner or be effective against an attack. As cybersecurity threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. The inability to implement, maintain and upgrade adequate safeguards could have a material adverse effect on our business.

Our information systems must be continually updated, patched and upgraded to protect against known vulnerabilities. The volume of new vulnerabilities has increased markedly, as has the criticality of patches and other remedial measures. In addition to remediating newly identified vulnerabilities, previously identified vulnerabilities must also be continuously addressed. Accordingly, we are at risk that cyber-attackers exploit these known vulnerabilities before they have been addressed. Due to the systems and platforms that we operate, the increased frequency at which vendors are issuing security patches to their products, the need to test patches and, in some cases, coordinate with clients and vendors, before they can be deployed, we continuously face the substantial risk that we cannot deploy patches in a timely manner. These risks can be heightened as we acquire and work to integrate additional centers. We are also dependent on third-party vendors to keep their systems patched and secure in order to protect our information systems and data. Any failure related to these activities and any breach of our information systems could result in significant liability and have a material adverse effect on our business, reputation and financial condition.

 

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Our use and disclosure of PII, including PHI, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure such information we hold could result in significant liability or reputational harm and, in turn, substantial harm to our affiliated practices, affiliated clinicians, patient base and revenue.

The privacy and security of personally identifiable information (“PII”) stored, maintained, received or transmitted electronically is a major issue in the United States. While we strive to comply with all applicable privacy and security laws and regulations, as well as our own posted privacy policies, legal standards for privacy, including but not limited to “unfairness” and “deception,” as enforced by the Federal Trade Commission and state attorneys general, continue to evolve and any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose customers, which could have a material adverse effect on our business. Recently, there has been an increase in public awareness of privacy issues in the wake of revelations about the activities of various government agencies and in the number of private privacy-related lawsuits filed against companies. Any allegations about us, our affiliated practices or our affiliated clinicians with regard to the collection, processing, use, disclosure, or security of PII or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.

We also publish statements to our patients and stakeholders that describe how we handle and protect personal information. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue or misleading, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders.

Numerous foreign, federal and state laws and regulations govern collection, dissemination, use and confidentiality of personally identifiable health information, including state privacy and confidentiality laws (including state laws requiring disclosure of breaches) and HIPAA.

HIPAA establishes a set of basic national privacy and security standards for the protection of PHI, by health plans, health care clearinghouses and certain health care providers, referred to as covered entities, and the business associates with whom such covered entities contract for services, which includes us. Certain of our entities and affiliated practices are covered entities, while our management service entities are business associates.

HIPAA requires covered entities and business associates to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic health care transactions, including activities associated with the billing and collection of health care claims.

HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations include civil monetary penalties of up to $59,522 per violation, not to exceed approximately $1.8 million for violations of the same standard in a single calendar year (as of 2020, and subject to periodic adjustments for inflation). However, a single breach incident can result in violations of multiple standards, which could result in significant fines. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year of imprisonment. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer, or use identifiable health information for commercial advantage, personal gain, or malicious harm. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. Any such penalties or lawsuits could harm our business, financial condition, results of operations and prospects.

 

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In addition, HIPAA mandates that the Secretary of Health and Human Services (“HHS”) conduct periodic compliance audits of HIPAA covered entities or business associates for compliance with the HIPAA Privacy and Security Standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the Civil Monetary Penalty fine paid by the violator.

HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public website. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually. We have experienced minor breaches of PHI in the ordinary course of business, but none have involved more than 500 individuals. Further, the HHS Office for Civil Rights (“OCR”) published a proposed rule in January of 2021, which, among other things calls for greater care coordination and an individual’s rights to access patient records. The proposed rule specifically encourages the disclosure of PHI when needed to help individuals experiencing substance use disorder, serious mental illness and in emergency circumstances. The proposed rule is subject to a regulatory suspension announced by the Biden administration and we do not know when (or if) the final rule will be published or whether there may be additional changes to the regulations, but when it is, we will need to evaluate and potentially update our HIPAA regulatory programs and documentation to ensure compliance with such requirements.

Additionally, we may be required to comply with the Federal Substance Abuse Confidentiality Regulations known as 42 C.F.R. Part 2. In July 2020, new regulations overhauled these laws to better align with HIPAA and make other updates to facilitate better coordination of care in response to the opioid epidemic. The federal government could initiate criminal charges for violations of Part 2, which include $500 for the first offense; and $5,000 for all subsequent offenses and seek fines up to $5,000 per violation for individuals and $10,000 per violation for organizations. Under the CARES Act, Congress also gave HHS the authority to issue civil money penalties for violations of Part 2, ranging from $100 to $50,000 per violation depending on the level of culpability.

Further, the U.S. federal government and various states and governmental agencies have adopted or are considering adopting various laws, regulations and standards regarding the collection, use, retention, security, disclosure, transfer and other processing of sensitive and personal information. For example, California implemented the California Confidentiality of Medical Information Act, that imposes restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. These laws and regulations are not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. Where state laws are more protective, we have to comply with the stricter provisions. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. California has also implemented the California Consumer Privacy Act, or CCPA, which came into effect on January 1, 2020 and, which increases privacy rights for California residents and imposes obligations on companies that process their personal information. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The CCPA has been amended from time to time, and it is possible that further amendments will be enacted, but even in its current format remains unclear how various provisions of the CCPA will be interpreted and enforced. Additionally, the recently passed California Privacy Rights Act (“CPRA”), which will become operational in 2023, will significantly

 

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modify the CCPA, including expanding consumers’ rights with respect to certain sensitive personal information, and creating a new state agency that will be vested with authority to implement and enforce the CCPA and CPRA. We will need to evaluate and potentially update our privacy regulatory programs to ensure compliance with such requirements, and our review and update may not be able to achieve full compliance within the allowed period of time.

The Virginia Consumer Data Protection Act (“CDPA”) was signed into law on March 2, 2021 and will go into effect on January 1, 2023. The CDPA provides consumers with new rights to access, correct, delete and obtain a copy of the personal information a covered business holds about them, and to opt out of certain data processing activities. Significantly, covered business will also be required to obtain opt-in consent before collecting or processing “sensitive data” and to conduct “Data Protection Assessments” in specified circumstances. The state attorney general can assess penalties up to $7,500 per violation. We are assessing the effects that CDPA will have on our business.

There are many other state-based data privacy and security laws and regulations that may impact our business. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time, may require us to modify our data processing practices and policies, divert resources from other initiatives and projects and could restrict the way services involving data are offered, all of which may adversely affect our results of operations. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we may be subject.

The interplay of federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our clients and potentially exposing us to additional expense, adverse publicity and liability. Further, as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business could intensify. Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as PHI or PII, along with increased customer demands for enhanced data security infrastructure, could greatly increase our cost of providing our services, decrease demand for our services, reduce our revenue and/or subject us to additional liabilities.

In addition to the applicable federal and state laws, we are also subject to PCI DSS, a self-regulatory standard that requires companies that process payment card data to implement certain data security measures. If we or our payment processor fail to comply with the PCI DSS, we may incur significant fines or liability and lose access to major payment card systems. Our systems are subject to annual review under the PCI DSS requirements, and we have historically had, may now have, and may have in the future have items that require improvement. Industry groups may in the future adopt additional self-regulatory standards by which we are legally or contractually bound.

Because of the breadth of these laws and the narrowness of their exceptions and safe harbors, it is possible that our business activities can be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of health care reform. Federal, state and foreign enforcement bodies have recently increased their scrutiny of interactions between health care companies and health care providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Any such investigations, prosecutions, convictions or settlements could result in significant financial penalties, damage to our brand and reputation, and a loss of customers, any of which could have an adverse effect on our business.

 

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Laws regulating scope of clinician practices and supervision requirements may constrain our ability to grow and meet patient needs.

Each state regulates the scope of practice under our clinicians’ licenses. There is substantial variation across states in scope of practice for many clinician types, including nurse practitioners. In a number of states in which we operate, nurse practitioners are required to have physician supervisors, in particular in connection with the prescription of Schedule II drugs. The need to provide supervisors may constrain our ability to add new clinicians to the practice, meet patient need or serve specific geographic regions. Further, supervision and scope of license laws are subject to frequent change by state legislative bodies. Changes decreasing the scope of license or increasing the onerousness of supervision requirements could adversely affect our ability to meet patient need and ultimately negatively impact our business and results of operations.

Regulations related to telehealth are still evolving. To the extent regulations revert to their pre-COVID state, our ability to provide or be reimbursed for certain telehealth services could be impaired.

Given the uncertain regulatory climate, government regulations regarding the provision of telehealth services have been unpredictable, and sudden changes could be costly to us or have a material effect on our business. Further, some states impose strict standards on using telehealth to prescribe certain classes of controlled substances that can be commonly used to treat mental health disorders. The unpredictability of this regulatory landscape means that sudden changes in policy regarding standards of care and reimbursement are possible. If a successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations. If we are required to adapt our business model, we may be limited to only in person services, which may have a material adverse effect on our business, financial condition and results of operations.

Recent growth in our telehealth services has been facilitated by significant reduction of regulatory and reimbursement barriers for telehealth services in response to the COVID-19 pandemic, including expansion of reimbursement for telehealth services, and easing of state licensure policies for clinicians, enabling more clinicians to serve patients in more states. During the public health emergency, the Drug Enforcement Agency is permitting providers to prescribe certain control substances through telehealth without requiring those providers to have conducted an in-person medical evaluation. To the extent these regulations revert to their pre-COVID state, our ability to provide certain telehealth services may be impaired, which may have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Indebtedness

Our existing indebtedness could adversely affect our business and growth prospects.

As of March 31, 2021, we had $399.2 million in principal amount outstanding under our Existing Credit Agreement. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.

Our indebtedness and the cash flow needed to satisfy our debt have important consequences, including:

 

   

limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

 

   

making us more vulnerable to rising interest rates; and

 

   

making us more vulnerable in the event of a downturn in our business.

 

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Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, developments in tax policy, such as the disallowance of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial conditions and results of operations.

In addition, we may need to refinance all or a portion of our indebtedness before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in penalties or defaults, which would also harm our ability to incur additional indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our indebtedness.

The terms of the Existing Credit Agreement restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The Existing Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:

 

   

incur additional indebtedness or other contingent obligations;

 

   

create liens;

 

   

make investments, acquisitions, loans and advances;

 

   

consolidate, merge, liquidate or dissolve;

 

   

sell, transfer or otherwise dispose of our assets;

 

   

pay dividends on our equity interests or make other payments in respect of capital stock; and

 

   

materially alter the business we conduct.

You should read the discussion under the heading “Description of Indebtedness” for further information about these covenants.

 

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The restrictive covenants in the Existing Credit Agreement require us to satisfy certain financial condition tests. Our ability to satisfy those tests can be affected by events beyond our control. In addition, the Existing Credit Agreement contains a financial maintenance covenant requiring compliance with a maximum leverage ratio as of the last day of each fiscal quarter.

A breach of the covenants or restrictions under the Existing Credit Agreement could result in an event of default. Such a default may allow the creditors to accelerate the related debt, which may result in the acceleration of any other debt we may incur to which a cross-acceleration or cross-default provision applies. In the event the holders of our indebtedness accelerate the repayment, we may not have sufficient assets to repay that indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to grow in accordance with our growth strategy.

The transition away from LIBOR may adversely affect our cost to obtain financing.

On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit London Interbank Offered Rate (“LIBOR”) rates after 2021. On March 5, 2021, the U.K. Financial Conduct Authority and the ICE Benchmark Administration (the “IBA”) announced that the IBA will cease publication in their current form for (i) 1-week and 2-month U.S. Dollar LIBOR rates immediately following the publication on December 31, 2021 and (ii) overnight, 1-month, 3-month, 6-month and 12-month LIBOR rates immediately following the publication on June 30, 2023. While there is still no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants, selected and the Federal Reserve Bank of New York started in May 2018 to publish the Secured Overnight Finance Rate (“SOFR”), as an alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash in the overnight U.S. treasury repo market. At this time, it is impossible to predict whether the SOFR or another reference rate will become an accepted alternative to LIBOR. The manner and impact of this transition may materially adversely affect the trading market for LIBOR-based securities, which may result in an increase in borrowing costs under our Existing Credit Agreement. Any replacement for LIBOR may result in an effective increase in the applicable interest rate on our current or future debt obligations, including our Existing Credit Agreement.

Risks Related to Our Common Stock and This Offering

Our Principal Stockholders control us, and their interests may conflict with ours or yours.

Immediately following this offering, investment entities affiliated with our Principal Stockholders will, collectively, beneficially own approximately 66.0% of our common stock, or 64.4% if the underwriters exercise in full their option to purchase additional shares from the selling stockholders, which means that, based on their combined percentage voting power held after this offering, the Principal Stockholders together will control the vote of all matters submitted to a vote of our stockholders, which will enable them to control the election of the members of the Board of Directors and other corporate decisions. Even when the Principal Stockholders cease to own shares of our stock representing a majority of the total voting power, for so long as the Principal Stockholders continue to own a significant percentage of our stock, the Principal Stockholders will still be able to significantly influence the composition of our Board of Directors and the approval of actions requiring stockholder approval. Accordingly, for

 

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such period of time, the Principal Stockholders will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock. In particular, for so long as the Principal Stockholders continue to own a significant percentage of our stock, the Principal Stockholders will be able to cause or prevent a change of control of us or a change in the composition of our Board of Directors and could preclude any unsolicited acquisition of us. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of us and ultimately might affect the market price of our common stock.

In addition, in connection with this offering, we will enter into a Stockholders Agreement that will provide each Principal Stockholder the right to designate nominees for election to our Board of Directors. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

The Principal Stockholders and their affiliates engage in a broad spectrum of activities, including investments in the healthcare industry generally. In the ordinary course of their business activities, the Principal Stockholders and their affiliates may engage in activities where their interests conflict with our interests or those of our other stockholders, such as investing in or advising businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Our amended and restated certificate of incorporation to be effective in connection with the closing of this offering will provide that none of the Principal Stockholders, any of their affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or its affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. The Principal Stockholders also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, each of the Principal Stockholders may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

Upon listing of our shares on Nasdaq, we will be a “controlled company” within the meaning of the rules of Nasdaq and, as a result, we will qualify for exemptions from certain corporate governance requirements. You will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.

After completion of this offering, the Principal Stockholders together will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of our Board of Directors consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we may elect to utilize one or more of these exemptions. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

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We are an emerging growth company and our compliance with the reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Acts of 2012 (the “JOBS Act”), and may remain an emerging growth company for up to five years. For as long as we are an emerging growth company, we will not be required to comply with certain requirements that are applicable to other public companies that are not emerging growth companies, including the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and may also take advantage of the reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and obtaining stockholder approval of any golden parachute payments not previously approved. As a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company and we have provided only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting, and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance, and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company, and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. Our management and other personnel will also need to devote a substantial amount of time towards compliance with the additional reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance. We are currently evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

 

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We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or fail to maintain an effective system of internal control over financial reporting. If our remediation of the material weaknesses is not effective, or we fail to develop and maintain effective internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired, which could harm our business and negatively impact the value of our common stock.

In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2019, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

We did not design and maintain an effective control environment commensurate with our financial reporting requirements due to an insufficient complement of resources in the accounting/finance and IT functions, with an appropriate level of knowledge, experience and training. This material weakness contributed to the following additional material weaknesses:

 

   

We did not maintain formal accounting policies and procedures, and did not design and maintain controls related to significant accounts and disclosures to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over account reconciliations, segregation of duties and the preparation and review of journal entries.

These material weaknesses resulted in material misstatements related to the identification and valuation of intangible assets acquired in business combinations that impacted the classification of intangible assets and goodwill, related impacts to amortization and income tax expense, and the restatement of our previously issued annual consolidated financial statements as of and for the years ended December 31, 2019 and 2018 with respect to such intangibles assets acquired in business combinations. The consolidated financial statements and the related notes included elsewhere in this prospectus give effect to such restatement. Additionally, these material weaknesses could result in a misstatement of substantially all of the financial statement accounts and disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected.

 

   

We did not design and maintain effective controls over IT general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain: (i) program change management controls for financial systems to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored; and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.

These IT deficiencies did not result in a material misstatement to our consolidated financial statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, we have determined these deficiencies in the aggregate constitute a material weakness.

 

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We have begun implementation of a plan to remediate these material weaknesses. These remediation measures are ongoing as of the date of this prospectus and include: hiring additional personnel, such as finance and accounting, compliance, IT, human resources and other professionals with appropriate levels of knowledge and experience, and establishing an internal audit function; implementing additional procedures and controls consistent with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to address the risk of material misstatement; and enhancing IT governance processes.

We intend to evaluate current and projected resource needs on a regular basis and hire additional qualified resources as needed. Our ability to maintain qualified and adequate resources to support the Company and our projected growth will be a critical component of our internal control environment.

We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be negatively impacted, we may be unable to maintain compliance with securities law requirements in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result.

We have not performed a formal evaluation of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged an independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our consolidated financial statements. Presently, we are not an accelerated filer, as such term is defined by Rule 12b-2 of the Exchange Act, and therefore, our management is not presently required to perform an annual assessment of the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm will first be required to audit the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company” and may identify additional material weakness. We will also be required to disclose changes made in our internal controls over financial reporting on a quarterly basis. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business, results of operations and financial condition and could cause a decline in the trading price of our common stock.

Provisions of our corporate governance documents could make an acquisition of our Company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

In addition to beneficial ownership by our Principal Stockholders of a controlling percentage of our common stock, our certificate of incorporation and bylaws, and the Delaware General Corporate Law (the “DGCL”), contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified Board of Directors and the ability of our Board of Directors to issue preferred stock without stockholder approval that could be used to dilute a potential acquirer. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See “Description of Capital Stock.”

 

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Our amended and restated certificate of incorporation after this offering will designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the “Securities Act”), each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, stockholders, or employees.

Our amended and restated certificate of incorporation will provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

   

any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws;

 

   

any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; and

 

   

any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”).

Our certificate of incorporation will also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising under the Securities Act. However, Section 22 of the Securities Act provides that federal and state courts have concurrent jurisdiction over lawsuits brought the Securities Act or the rules and regulations thereunder. To the extent the exclusive forum provision restricts the courts in which claims arising under the Securities Act may be brought, there is uncertainty as to whether a court would enforce such a provision. We note that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. This provision does not apply to claims brought under the Exchange Act.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Our amended and restated certificate of incorporation after this offering will contain a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely impact our business.

Each of our Principal Stockholders and the members of our Board of Directors who are affiliated with them, by the terms of our certificate of incorporation, will not be required to offer us any corporate opportunity of which they become aware and can take any such corporate opportunity for themselves or offer it to other companies in which they have an investment. We, by the terms of our certificate of incorporation, will expressly renounce any interest or expectancy in any such corporate opportunity to the extent permitted under applicable law, even if the opportunity is one that we or our subsidiaries might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so. Our certificate of incorporation will not be able to be amended to eliminate our renunciation of any such corporate opportunity arising prior to the date of any such amendment.

 

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Our Principal Stockholders are in the business of making investments in companies and any of our Principal Stockholders may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if our Principal Stockholders allocate attractive corporate opportunities to themselves or their affiliates instead of to us.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

The initial public offering price of our common stock is substantially higher than the as adjusted net tangible book deficit per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our as further adjusted net tangible book deficit per share after this offering. You will experience immediate dilution of $17.64 per share, representing the difference between our as further adjusted net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately 51.4% of the aggregate price paid by all purchasers of our stock but will own only approximately 10.7% of our common stock outstanding after this offering assuming no exercise of the underwriters’ option to purchase additional shares from the selling stockholders. See “Dilution.”

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although our common stock has been approved for listing on Nasdaq under the symbol “LFST,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price has been determined by negotiations among us, the selling stockholders and the representatives of the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies related to our platform by using our shares as consideration.

Our stock price may be volatile, and the value of our common stock may decline.

The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. We, the selling stockholders and the underwriters have negotiated the initial public offering price. You may not be able to resell your shares at or above the initial public offering price or at all. Our results of operations and the trading price of our shares may fluctuate in response to various factors, including:

 

   

actual or anticipated changes or fluctuations in our results of operations and whether our results of operations meet the expectations of securities analysts or investors;

 

   

actual or anticipated changes in securities analysts’ estimates and expectations of our financial performance;

 

   

announcements of new technology platform capabilities, commercial or payor relationships, acquisitions, or other events by us or our competitors;

 

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general market conditions, including volatility in the market price and trading volume of technology companies in general and of companies in the mental healthcare industry and the general healthcare in particular;

 

   

investors’ perceptions of our prospects and the prospects of the businesses in which we participate;

 

   

sales of large blocks of our common stock, including sales by our executive officers, directors, and significant stockholders;

 

   

announced departures of any of our key personnel;

 

   

lawsuits threatened or filed against us or involving our industry, or both;

 

   

changing legal or regulatory developments in the United States and other countries;

 

   

any default or anticipated default under agreements governing our indebtedness;

 

   

effects of public health crises, such as the COVID-19 pandemic; and

 

   

general economic conditions and trends.

These and other factors, many of which are beyond our control, may cause our results of operations and the market price and demand for our shares to fluctuate substantially. While we believe that results of operations for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly results of operations could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

We do not expect to pay any dividends for the foreseeable future. Investors in this offering may never obtain a return on their investment.

We do not currently pay dividends and do not currently anticipate paying dividends on our common stock in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our Board of Directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy.”

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline.

The trading market for our shares will be influenced, in part, by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. Securities and industry analysts do not currently, and may never, publish research on our Company. If no securities or industry analysts commence coverage of our Company, the trading price of our shares would likely be negatively impacted. In the event securities or industry analysts initiated coverage, and one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

 

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Cautionary Note Regarding Forward-Looking Statements

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. For example, all statements we make relating to growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors and assumptions described in “Risk Factors” and elsewhere in this prospectus, including, among other things:

 

   

we may not grow at the rates we historically have achieved or at all, even if our key metrics may imply future growth, including if we are unable to successfully execute on our growth initiatives and business strategies;

 

   

if we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase proportionally or at all, and we may be unable to execute on our business strategy;

 

   

if reimbursement rates paid by third-party payors are reduced or if third-party payors otherwise restrain our ability to obtain or deliver care to patients, our business could be harmed;

 

   

we conduct business in a heavily regulated industry and if we fail to comply with these laws and government regulations, we could incur penalties or be required to make significant changes to our operations or experience adverse publicity, which could have a material adverse effect on our business, results of operations and financial condition;

 

   

we are dependent on our relationships with affiliated practices, which we do not own, to provide health care services, and our business would be harmed if those relationships were disrupted or if our arrangements with these entities became subject to legal challenges;

 

   

we operate in a competitive industry, and if we are not able to compete effectively, our business, results of operations and financial condition would be harmed;

 

   

the impact of health care reform legislation and other changes in the healthcare industry and in health care spending on us is currently unknown, but may harm our business;

 

   

if our or our vendors’ security measures fail or are breached and unauthorized access to our employees’, patients’ or partners’ data is obtained, our systems may be perceived as insecure, we may incur significant liabilities, including through private litigation or regulatory action, our reputation may be harmed, and we could lose patients and partners;

 

   

our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;

 

   

our existing indebtedness could adversely affect our business and growth prospects;

 

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our Principal Stockholders control us, and their interests may conflict with ours or yours; and

 

   

the other factors set forth under “Risk Factors.”

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.

 

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Organizational Structure

Prior to this offering, our business has been conducted by LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices. LifeStance TopCo, L.P. is a Delaware limited partnership whose equityholders prior to the organizational transactions described below consisted of entities affiliated with our Principal Stockholders, members of our management, our Board of Directors and certain other investors. LifeStance Health Group, Inc., the issuer in this offering, is a Delaware corporation that was incorporated to serve as a holding company that, following the organizational transactions described below, owns all of the equity interests of LifeStance TopCo, L.P.

Prior to this offering, each of the holders of partnership interests in LifeStance TopCo, L.P. contributed its partnership interests to LifeStance Health Group, Inc. in exchange for shares of common stock (including shares of common stock issued as restricted stock subject to vesting as described below) of LifeStance Health Group, Inc. Following the contribution of partnership interests, LifeStance TopCo, L.P. became wholly owned by LifeStance Health Group, Inc. The number of shares of common stock that each such holder of partnership interests in LifeStance TopCo, L.P. received was determined based on the value that such holder would have received under the distribution provisions of the limited partnership agreement of LifeStance TopCo, L.P., with our shares of common stock valued by reference to the initial public offering price of our shares in this offering. We refer to these transactions collectively as the “Organizational Transactions.”

A total of 340,848,648 shares of common stock of LifeStance Health Group, Inc. were issued to holders of partnership interests in LifeStance TopCo, L.P. as described above. The shares of common stock issued to holders of partnership interests that are “profits interests” subject to certain vesting conditions specified in individual award agreements (Class B Units) were issued as restricted shares that will vest on the same terms applicable to the profits interests exchanged. Certain of the vesting terms of such awards are expected to be modified, as described in “Executive and Director Compensation—Award Terms Expected to be Amended.” Each such award agreement includes a time-based vesting component and a performance-based vesting component. Of those shares, 30,770,787 will be subject to continued vesting conditions. If the vesting terms of the restricted shares are not satisfied, such restricted shares will be forfeited and canceled. For information regarding the beneficial ownership of our common stock before and after this offering, and after giving effect to the Organizational Transactions, see “Principal and Selling Stockholders.”

LifeStance Health Group, Inc. has not engaged in any business or other activities other than those incidental to its formation, the Organizational Transactions and the preparation of this prospectus and the registration statement of which this prospectus forms a part. Following this offering, LifeStance Health Group, Inc. will remain a holding company, its sole material asset will be the equity of LifeStance TopCo, L.P., and it will operate and control all of the business and affairs and consolidate the financial results of LifeStance TopCo, L.P. LifeStance TopCo, L.P. is the sole shareholder of LifeStance Ultimate Holdings, Inc., a Delaware corporation, which is the sole shareholder of Lynnwood Intermediate Holdings, Inc., a Delaware corporation, which is the sole shareholder of LifeStance Health Holdings, Inc., a Delaware corporation, which is the sole shareholder of LifeStance Health, Inc., a Delaware corporation. We conduct all of our operations through LifeStance Health, Inc. and its subsidiaries and affiliated practices.

 

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The following chart shows our simplified organizational structure immediately following the consummation of the Organizational Transactions and this offering, after giving effect to the issuance and sale of 32,800,000 shares of our common stock by the Company and the sale of 7,200,000 shares of our common stock by the selling stockholders in this offering, assuming no exercise of the underwriters’ option to purchase additional shares from the selling stockholders:

 

LOGO

 

 

(1)

In connection with the Organizational Transactions, the general partner of LifeStance TopCo, L.P. became a wholly-owned subsidiary of LifeStance Health Group, Inc.

(2)

In certain states, we operate our centers as affiliated practices pursuant to management services contracts to comply with applicable law. We manage our wholly-owned centers and affiliated practices consistently and generally do not distinguish between our wholly-owned centers and affiliated practices in operating our

 

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  business, subject to compliance with applicable law. See “Business—Organization” for additional information regarding our relationships with affiliated practices.
(3)

Consistent with applicable law, our affiliated practices are owned by our Chief Medical Officer or other licensed clinical leadership employees.

(4)

For most of our affiliated practices, Behavioral Health Practice Services, LLC (one of our wholly-owned subsidiaries) is party to a management services contract between us and the affiliated practice. For certain of our affiliated practices, other wholly owned subsidiaries of LifeStance Health, Inc. are party to the management services contract.

 

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Use of Proceeds

We estimate that the net proceeds to us from our issuance and sale of 32,800,000 shares of common stock in this offering will be approximately $550.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately $302.7 million of the net proceeds to us from this offering to repay amounts outstanding under each of the Credit Facilities pursuant to our Existing Credit Agreement, to be repaid ratably among each outstanding loan, and prepayment fees. The outstanding loans bear a weighted average interest rate of adjusted LIBOR plus 6.5%, for loans that bear interest based on adjusted LIBOR, or the alternate base rate plus 5.25%, for loans that bear interest based on the alternate base rate (with adjusted LIBOR and the alternate base rate being calculated as set forth in the Existing Credit Agreement). The Credit Facilities mature (a) with respect to the Closing Date Term Loans and the First Amendment Term Loans that have not been extended, May 14, 2026, and (b) with respect to the Closing Date Revolving Facility (as defined in the Existing Credit Agreement), to the extent not extended, May 14, 2025. See “Description of Indebtedness.”

We intend to use the remainder of the net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may use a portion of such net proceeds for acquisitions or strategic investments, although we do not currently have any plans or commitments for any such acquisitions or investments outside the ordinary course of business.

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with complete certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the actual amounts that we will spend on the uses set forth above.

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. We will, however, bear the costs, other than the underwriting discounts and commissions, associated with the sale of shares of our common stock by the selling stockholders in this offering.

 

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Dividend Policy

We do not currently pay dividends and do not currently anticipate paying dividends on our common stock in the future. However, we expect to reevaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in our credit facilities and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our Board of Directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our Board of Directors may deem relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Indebtedness” included elsewhere in this prospectus for restrictions on our ability to pay dividends.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2021:

 

   

on an actual basis; and

 

   

on a pro forma basis to reflect: (i) the Organizational Transactions; (ii) the effectiveness of our amended and restated certificate of incorporation; (iii) the issuance of 32,800,000 shares of common stock by us in this offering; (iv) the use of approximately $550.0 million in net proceeds to us from the sale of such shares, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, including approximately $302.7 million for the repayment of certain indebtedness under our Existing Credit Agreement; and (v) payment of the approximately $1.2 million termination fee under our management services agreement in connection with the closing of this offering.

The pro forma information set forth in the table below is illustrative only. You should read this table in conjunction with the information contained in “Use of Proceeds,” “Unaudited Pro Forma Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of March 31, 2021  
(in thousands)    LifeStance
TopCo, L.P.
Actual
    LifeStance
Health
Group, Inc.
Pro Forma
Consolidated
 

Cash and cash equivalents

   $ 39,494     $ 283,731  
  

 

 

   

 

 

 

Long-term debt, including current portions:

    

Credit facilities

    

Term loan facility

     283,238       74,764  

Delayed draw loans

     100,497       26,528  

Revolving loan

     15,500       4,091  
  

 

 

   

 

 

 

Total long-term debt

     399,235       105,383  
  

 

 

   

 

 

 

Redeemable units:

    

Redeemable Class A units — 35,000 units authorized; 35,000 units issued and outstanding as of March 31, 2021

     71,750       —    

Members’/stockholders’ equity:

    

Common units A-1 — 959,563 units authorized; 959,563 units issued and outstanding as of March 31, 2021

     959,563       —    

Common units A-2 — 50,908 units authorized; 50,908 units issued and outstanding as of March 31, 2021

     50,946       —    

Common units B — 179,190 units authorized; 0 units issued and outstanding as of March 31, 2021

     —         —    

Preferred stock — par value $0.01 per share; 0 shares authorized, 0 shares issued and outstanding, actual; 25,000 shares authorized, 0 shares issued and outstanding, pro forma consolidated

  

 

—  

 

    —    

Common stock — par value $0.01 per share; 1 shares authorized, 0 shares issued and outstanding, actual; 800,000 shares authorized, 373,649 shares issued and outstanding, pro forma consolidated

     —         3,736  

Additional paid-in capital

     2,057       1,631,478  

Accumulated deficit

     (58,557     (76,547
  

 

 

   

 

 

 

Total members’/stockholders’ equity

     954,009       1,558,667  
  

 

 

   

 

 

 

Total capitalization

   $ 1,424,994     $ 1,664,050  
  

 

 

   

 

 

 

 

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The number of shares of common stock to be outstanding after this offering (including shares of common stock issued as restricted stock subject to vesting) is based on 340,848,648 shares of common stock outstanding as of March 31, 2021, after giving effect to the exchange of all outstanding Class A Units and Class B Units of LifeStance TopCo, L.P. for shares of common stock of LifeStance Health Group, Inc. pursuant to the Organizational Transactions, and excludes: 6,127,529 shares of common stock underlying restricted stock units to be granted prior to closing of this offering, as described under “Executive and Director Compensation—IPO Equity Grants”; 40,909,584 shares of common stock reserved for future issuance under the 2021 Plan; 6,816,973 shares of common stock reserved for future issuance pursuant to the ESPP; and 500,000 shares of common stock to be issued to LifeStance Health Foundation, a newly formed non-profit organization, concurrently with the closing of this offering, as described under “Business—Employees and Human Capital Resources.”

 

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Dilution

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the as further adjusted net tangible book deficit per share of our common stock after this offering. Dilution results from the fact that the initial public offering price of our common stock is expected to be substantially higher than the as adjusted net tangible book deficit per share of our common stock. Our net tangible book deficit per share represents the amount of our total tangible assets (total assets less (i) goodwill and intangible assets, net and (ii) deferred offering-related costs) less total liabilities, divided by the number of outstanding shares of our common stock.

As of March 31, 2021, we had historical net tangible book deficit of $399.4 million, which represents total assets of $1,606.3 million less (i) goodwill and intangible assets, net of $1,423.0 million, (ii) deferred offering-related costs of $2.2 million and (iii) total liabilities of $580.5 million. We have not presented the historical net tangible book deficit per unit of LifeStance TopCo, L.P. as of March 31, 2021 because we believe net tangible book deficit as adjusted to reflect the exchange of Class A Units and Class B Units of LifeStance TopCo, L.P. for shares of common stock of LifeStance Health Group, Inc. pursuant to the Organizational Transactions (which we refer to as “as adjusted net tangible book deficit per share”) is a more meaningful measure given the Organizational Transactions occurred prior to this offering.

As of March 31, 2021, we had as adjusted net tangible book deficit per share of common stock of $(1.17), which is based on 340,848,648 shares of our common stock outstanding as of March 31, 2021, after giving effect to the exchange of all outstanding Class A Units and Class B Units of LifeStance TopCo, L.P. for shares of common stock (including shares of common stock issued as restricted stock subject to vesting) of LifeStance Health Group, Inc. pursuant to the Organizational Transactions.

After giving further effect to the issuance and sale of 32,800,000 shares of our common stock in this offering, less the underwriting discounts and commissions and estimated offering expenses payable by us, the use of approximately $550.0 million in net proceeds to us from the sale of such shares, including approximately $302.7 million for the repayment of certain indebtedness under our Existing Credit Agreement, and payment of the termination fee under our management services agreement in connection with the closing of this offering, our as further adjusted net tangible book value as of March 31, 2021 would have been approximately $135.7 million, or $0.36 per share of common stock. This amount represents an immediate increase in net tangible book deficit of $1.53 per share of our common stock to the existing stockholders and immediate dilution of $17.64 per share of our common stock to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share

      $ 18.00  

As adjusted net tangible book deficit per share as of March 31, 2021

   $ (1.17   

Increase in net tangible book deficit per share attributable to investors purchasing shares in this offering

     1.53     
  

 

 

    

As further adjusted net tangible book value per share, after giving effect to this offering

        0.36  
     

 

 

 

Dilution in as further adjusted net tangible book value per share to investors in this offering

      $ 17.64  
     

 

 

 

 

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The following table summarizes, as of March 31, 2021, on the as further adjusted basis described above, the total number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share of our common stock paid by purchasers of such shares and by new investors purchasing shares of our common stock in this offering. The following table does not reflect any sales by the selling stockholders in this offering.

 

     Shares purchased     Total consideration     Average price
per share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     340,848,648        91.2 %   $ 695,619,608        54.1 %   $ 2.04  

New investors

     32,800,000        8.8       590,400,000        45.9     $ 18.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     373,648,648        100 %   $ 1,286,019,608                    100 %   $ 3.44  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 333,648,648, or approximately 89.3% of the total shares of common stock outstanding after this offering (or 87.7% of the total shares of common stock outstanding after this offering if the underwriters exercise their option to purchase additional shares of common stock from the selling stockholders in full), which will increase the number of shares held by new investors to 40,000,000, or approximately 10.7% of the total shares of common stock outstanding after this offering (or 46,000,000 shares, or 12.3% of the total shares of common stock outstanding after this offering if the underwriters exercise their option to purchase additional shares of common stock from the selling stockholders in full).

The number of shares of common stock to be outstanding after this offering (including shares of common stock issued as restricted stock subject to vesting) is based on 340,848,648 shares of common stock outstanding as of March 31, 2021, after giving effect to the exchange of all outstanding Class A Units and Class B Units of LifeStance TopCo, L.P. for shares of common stock of LifeStance Health Group, Inc. pursuant to the Organizational Transactions, and excludes: 6,127,529 shares of common stock underlying restricted stock units to be granted prior to closing of this offering, as described under “Executive and Director Compensation—IPO Equity Grants”; 40,909,584 shares of common stock reserved for future issuance under the 2021 Plan; 6,816,973 shares of common stock reserved for future issuance pursuant to the ESPP; and 500,000 shares of common stock to be issued to LifeStance Health Foundation, a newly formed non-profit organization, concurrently with the closing of this offering, as described under “Business—Employees and Human Capital Resources.”

 

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Unaudited Pro Forma Financial Information

The following unaudited pro forma condensed consolidated financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release 33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (the “Final Rule”). The Final Rule became effective on January 1, 2021 and the unaudited pro forma condensed consolidated financial information herein is presented in accordance therewith. The unaudited pro forma condensed consolidated financial information has been adjusted to include transaction accounting adjustments, which reflect the application of the accounting required by generally accepted accounting principles in the United States (“GAAP”), linking the effects of the events listed below to our historical consolidated financial statements.

The unaudited condensed consolidated financial information presented below is derived from, and should be read in conjunction with, the historical consolidated financial statements included elsewhere in this prospectus.

TPG Acquisition

On May 14, 2020, affiliates of TPG acquired a majority equity interest in LifeStance Health Holdings, Inc., a subsidiary of LifeStance Health, LLC, in a series of transactions referred to in this prospectus as the “TPG Acquisition.” Prior to the TPG Acquisition, our business was conducted by LifeStance Health, LLC and its consolidated subsidiaries and affiliated practices. From the TPG Acquisition until the Organizational Transactions described herein, our business has been conducted by LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices.

Organizational Transactions and Offering

LifeStance Health Group, Inc., the issuer in this offering, was incorporated in connection with this offering to serve as a holding company that will wholly own LifeStance TopCo, L.P. and its subsidiaries. Prior to this offering, the holders of partnership interests in LifeStance TopCo, L.P. contributed their partnership interests to LifeStance Health Group, Inc. in exchange for shares of common stock of LifeStance Health Group, Inc.

The unaudited pro forma condensed consolidated balance sheet as of March 31, 2021 presents LifeStance Health Group, Inc.’s consolidated financial position after giving pro forma effect to the Organizational Transactions, the effectiveness of our amended and restated certificate of incorporation, this offering and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on March 31, 2021.

The unaudited pro forma condensed consolidated statements of operations data for the three months ended March 31, 2021 and for the fiscal year ended December 31, 2020 presents LifeStance TopCo, L.P.’s consolidated results of operations after giving pro forma effect to the TPG Acquisition, the Organizational Transactions, the effectiveness of our amended and restated certificate of incorporation, this offering and the use of the estimated net proceeds from this offering as described under “Use of Proceeds” (collectively, the “Transactions”), as if such transactions occurred on January 1, 2020.

At the closing of this offering, we will terminate the management services agreement with certain of our executive officers and affiliates of our Principal Stockholders (collectively, the “Managers”), and in connection with the termination, we will pay a termination fee of approximately $1.2 million in cash to the Managers in accordance with the terms of the agreement.

For purposes of the unaudited pro forma condensed consolidated financial information presented in this prospectus, we have reflected that 32,800,000 shares of common stock will be issued by LifeStance Health Group, Inc. in this offering at a price per share equal to $18.00.

 

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The historical financial information of the Company was derived from the unaudited consolidated financial statements of the Company as of and for the three months ended March 31, 2021, and derived from the audited consolidated financial statements for the period from January 1, 2020 to May 14, 2020 (Predecessor) and the period from April 13, 2020 to December 31, 2020 (Successor), which are included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the sections of this prospectus captioned “Basis of Presentation,” “Organizational Structure,” “Use of Proceeds,” “Capitalization,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited consolidated financial statements and the unaudited consolidated financial statements, in each case including the related notes, included elsewhere in this prospectus. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statement of operations.

The unaudited pro forma condensed consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of LifeStance Health Group, Inc. that would have occurred had the Transactions occurred on the dates assumed. The unaudited pro forma consolidated financial information does not purport to be indicative of our results of operations or financial position had the Transactions occurred on the dates assumed. The unaudited pro forma condensed consolidated financial information also does not project our results of operations or financial position for any future period or date.

 

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LifeStance Health Group, Inc.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

As of March 31, 2021

(in thousands)

 

                      Pro Forma
Consolidated
 
    As of March 31,
2021
    Transaction Accounting
Adjustments —Offering
          As of March 31,
2021
 

ASSETS

       
Current assets:                        

Cash and cash equivalents

  $ 39,494     $ 557,928       (A)     $ 283,731  
      (9,811     (B)    
      (1,213     (C)    
      (302,667     (E)    

Patient accounts receivable

    47,768       —           47,768  

Prepaid expenses and other current assets

    22,316       (2,194     (B)       20,122  
 

 

 

   

 

 

     

 

 

 

Total current assets

    109,578       242,043         351,621  

Non-current assets:

       

Property and equipment, net

    70,802       —           70,802  

Intangible assets, net

    323,302       —           323,302  

Goodwill

    1,099,675       —           1,099,675  

Deposits

    2,926       —           2,926  
 

 

 

   

 

 

     

 

 

 

Total non-current assets

    1,496,705       —           1,496,705  
 

 

 

   

 

 

     

 

 

 

TOTAL ASSETS

  $ 1,606,283     $ 242,043       $ 1,848,326  
 

 

 

   

 

 

     

 

 

 
LIABILITIES, REDEEMABLE UNITS AND
STOCKHOLDERS’/MEMBERS’ EQUITY
                       
Current liabilities:                        

Accounts payable

    5,913       —           5,913  

Accrued payroll expenses

    45,357       —           45,357  

Other accrued expenses

    25,667       (2,975     (B)       22,692  

Current portion of contingent consideration

    14,890       —           14,890  

Other current liabilities

    4,930       —           4,930  
 

 

 

   

 

 

     

 

 

 

Total current liabilities

    96,757       (2,975       93,782  

Non-current liabilities:

       

Long-term debt, net

    387,298       (287,890     (E)       99,408  

Other non-current liabilities

    14,150       —           14,150  

Contingent consideration, net of current portion

    1,093       —           1,093  

Deferred tax liability, net

    81,226       —           81,226  
 

 

 

   

 

 

     

 

 

 

Total non-current liabilities

    483,767       (287,890       195,877  
 

 

 

   

 

 

     

 

 

 

TOTAL LIABILITIES

    580,524       (290,865       289,659  
 

 

 

   

 

 

     

 

 

 
REDEEMABLE UNITS                        

Redeemable Class A units — 35,000 units authorized, issued and outstanding as of March 31, 2021

    71,750       (71,750     (D)       —    

STOCKHOLDERS’/MEMBERS’ EQUITY

       

Preferred stock — par value $0.01 per share 25,000 shares authorized, 0 shares issued and outstanding, pro forma consolidated

    —         —           —    

Common stock — par value $0.01 per share 800,000 shares authorized, 373,649 shares issued and outstanding, pro forma consolidated

    —         328       (A)       3,736  
      3,408       (D)    

Common units A-1 — 959,563 units authorized, issued and outstanding as of March 31, 2021

    959,563       (959,563     (D)       —    

Common units A-2 — 50,908 units authorized, issued and outstanding as of March 31, 2021

    50,946       (50,946     (D)       —    

Common units B — 179,190 units authorized and 0 issued and outstanding as of March 31, 2021

    —         —         (D)       —    

Additional paid-in capital

    2,057       557,600       (A)       1,631,478  
      (7,910     (B)    
      1,078,851       (D)    
      880       (F)    

Accumulated deficit

    (58,557     (1,120     (B)       (76,547
      (1,213     (C)    
      (14,777     (E)    
      (880     (F)    
 

 

 

   

 

 

     

 

 

 

TOTAL STOCKHOLDERS’/MEMBERS’ EQUITY

    954,009       604,658         1,558,667  
 

 

 

   

 

 

     

 

 

 

TOTAL LIABILITIES, REDEEMABLE UNITS AND STOCKHOLDERS’/MEMBERS’ EQUITY

  $ 1,606,283     $ 242,043       $ 1,848,326  
 

 

 

   

 

 

     

 

 

 

See accompanying notes to unaudited pro forma condensed consolidated financial information.

 

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LifeStance Health Group, Inc.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the three months ended March 31, 2021

(in thousands, except per share data)

 

                       Pro Forma
Consolidated
 
     Three Months Ended
March 31, 2021
    Transaction Accounting
Adjustments — Offering
          Three Months Ended
March 31, 2021
 

Revenues

        

Total revenue

   $ 143,132     $ —         $ 143,132  

Operating Expenses

        

Center costs, excluding depreciation and amortization shown separately below

     99,134       —           99,134  

General and administrative expenses

     32,651       (1,105     (GG)       62,296  
       30,750       (II)    

Depreciation and amortization

     12,228       —           12,228  
  

 

 

   

 

 

     

 

 

 

Total operating costs and expenses

     144,013       29,645         173,658  
  

 

 

   

 

 

     

 

 

 

Loss from operations

   $ (881   $ (29,645     $ (30,526

Other income (expense)

        

Loss on remeasurement of contingent consideration

     (307     —           (307

Transaction costs

     (1,534     —           (1,534

Interest expense

     (8,632     6,666       (HH)       (1,966

Other expense

     (89     —           (89
  

 

 

   

 

 

     

 

 

 

Total other income (expense)

     (10,562     6,666         (3,896
  

 

 

   

 

 

     

 

 

 

Loss before income taxes

     (11,443     (22,979       (34,422

Income tax benefit (provision)

     2,761       5,970       (JJ)       8,731  
  

 

 

   

 

 

     

 

 

 

Net (loss) income and comprehensive (loss) income

     (8,682     (17,009       (25,691

Accretion of Redeemable Class A units

     (36,750     36,750       (FF)       —    
  

 

 

   

 

 

     

 

 

 

Net (loss) income available to common members

   $ (45,432   $ 19,741       $ (25,691
  

 

 

   

 

 

     

 

 

 

Net (loss) income per share attributable to LifeStance TopCo, L.P. members - basic and diluted

   $ (0.04      

Weighted average common units outstanding - basic and diluted

     1,044,969        

Net loss per share attributable to LifeStance Health Group, Inc. stockholders - basic and diluted

           (0.07

Pro forma common shares outstanding - basic and diluted

           342,878  

See accompanying notes to unaudited pro forma condensed consolidated financial information.

 

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LifeStance Health Group, Inc.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the year ended December 31, 2020

(in thousands, except per share data)

 

    Successor           Predecessor               As Adjusted
Before
Organizational
Transactions
and Offering
Adjustments

Year Ended
December 31,
2020
              Pro Forma
Consolidated

Year Ended
December 31,
2020
 
    April 13
to
December 31,
2020
          January 1
to
May 14,
2020
    Transaction
Accounting
Adjustments
- TPG
Acquisition
        Organizational
Transactions
and Offering
Adjustments
     

Revenues

                 

Total revenues

  $ 265,556       $ 111,661     $ —         $ 377,217     $ —         $ 377,217  

Operating Expenses

                 

Center costs, excluding depreciation and amortization shown separately below

    179,264         78,777           258,041       —           258,041  

General and administrative expenses

    51,841         20,854       832     (AA)     73,527       2,225     (GG)     430,474  
                354,722     (II)  

Depreciation and amortization

    27,710         3,335       11,904     (BB)     42,949       —      

—  

    42,949  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total operating costs and expenses

    258,815         102,966       12,736         374,517       356,947         731,464  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income from operations

  $ 6,741       $ 8,695     $ (12,736     $ 2,700     $ (356,947     $ (354,247

Other income (expense)

                 

Gain (loss) on remeasurement of contingent consideration

    (576       322       —           (254     —           (254

Transaction costs

    (3,937       (33,247     —           (37,184     —           (37,184

Interest expense

    (19,112       (3,020     (4,674   (CC)     (26,806     14,268     (HH)     (12,538

Other expense

    (263       (14     —           (277     (1,213   (EE)     (1,490
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total other income (expense)

    (23,888       (35,959     (4,674       (64,521     13,055         (51,466
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Loss before income taxes

    (17,147       (27,264     (17,410       (61,821     (343,892       (405,713

Income tax benefit

    4,022         2,319       4,835     (JJ)     11,176       95,499     (JJ)     106,675  
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net loss and comprehensive loss

  $ (13,125     $ (24,945   $ (12,575     $ (50,645   $ (248,393     $ (299,038
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Accretion of Series A-1 redeemable convertible preferred units

    —           (272,582     272,582     (DD)     —         —           —    

Cumulative dividend on Series A redeemable convertible preferred units

    —           (662     662     (DD)     —         —           —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

     

 

 

 

Net loss available to common members

  $ (13,125     $ (298,189   $ (260,669     $ (50,645   $ (248,393     $ (299,038
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income (loss) per share to LifeStance TopCo, L.P. members - basic and diluted

  $ (0.01                

Weighted average common units outstanding - basic and diluted

    1,034,016                  

Net Income (loss) per share attributable to LifeStance Health Group, Inc. stockholders - basic and diluted

                  $ (0.87

Pro forma common shares
outstanding - basic and diluted

                    342,878  

See accompanying notes to unaudited pro forma condensed consolidated financial information.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

1.

Basis of Presentation and Description of the Transactions

The unaudited pro forma condensed consolidated balance sheet as of March 31, 2021 assumes that the Transactions occurred on March 31, 2021 (other than the TPG Acquisition, which occurred on May 14, 2020 and accordingly is reflected in the historical consolidated balance sheet). The unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 2021 and for the year ended December 31, 2020 presents the pro forma effect of the Transactions as if they had occurred on January 1, 2020.

In addition, the unaudited pro forma condensed consolidated financial information does not reflect any cost savings, operating synergies or revenue enhancements that LifeStance Health Group, Inc. may achieve as a result of the Transactions.

TPG Acquisition

On May 14, 2020, affiliates of TPG acquired a majority equity interest in LifeStance Health Holdings, Inc., a subsidiary of LifeStance Health, LLC, in a series of transactions referred to in this prospectus as the “TPG Acquisition.” Prior to the TPG Acquisition, our Predecessor’s business was conducted by LifeStance Health, LLC and its consolidated subsidiaries and affiliated practices. From the TPG Acquisition until the Organizational Transactions described herein, our business has been conducted by LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices.

For the year ended December 31, 2019 and for the period from January 1, 2020 to May 14, 2020, we present the financial statements of LifeStance Health, LLC and its consolidated subsidiaries and affiliated practices in this prospectus. Affiliates of TPG formed LifeStance TopCo, L.P. on April 13, 2020 for the purpose of facilitating the TPG Acquisition. For the period from April 13, 2020 (the date of formation of LifeStance TopCo, L.P.) to December 31, 2020 and for the three months ended March 31, 2021, we present the financial statements of LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices. For the period from April 13, 2020 through May 13, 2020, the operations of LifeStance TopCo, L.P. were limited to those incident to its formation and the TPG Acquisition, which were not significant. Because it resulted in a change of control, the TPG Acquisition was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that our assets and liabilities be recognized on the consolidated balance sheet at their fair value as of the acquisition date. Accordingly, the financial information provided in this prospectus is presented as “Predecessor” or “Successor” to indicate whether it relates to the period preceding the TPG Acquisition or the period succeeding the TPG Acquisition, respectively. Due to the change in the basis of accounting resulting from the TPG Acquisition, the consolidated financial statements for the Predecessor and Successor periods, included above, are not necessarily comparable.

Organizational Transactions and Offering

LifeStance Health Group, Inc., the issuer in this offering, was incorporated in connection with this offering to serve as a holding company that will wholly own LifeStance TopCo, L.P. and its subsidiaries. LifeStance Health Group, Inc. has not engaged in any business or other activities other than those incidental to its formation, the Organizational Transactions described herein and the preparation of this prospectus and the registration statement of which this prospectus forms a part.

Prior to this offering, the holders of partnership interests in LifeStance TopCo, L.P. contributed their partnership interests to LifeStance Health Group, Inc. in exchange for shares of common stock of LifeStance Health Group, Inc. The number of shares of common stock that each such holder of partnership interests in LifeStance TopCo, L.P. received was determined based on the value that such holder would have received under the distribution provisions of the limited partnership agreement of LifeStance TopCo, L.P., with shares of

 

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common stock of LifeStance Health Group, Inc. valued by reference to the initial public offering price of shares of LifeStance Health Group, Inc. in this offering.

The unaudited pro forma condensed consolidated financial information presented reflects the issuance by us of 32,800,000 shares of our common stock to the purchasers in this offering in exchange for net proceeds of approximately $550.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Following this offering, LifeStance Health Group, Inc. will remain a holding company, its sole material asset will be the equity of LifeStance TopCo, L.P., and it will operate and control all of the business and affairs and consolidate the financial results of LifeStance TopCo, L.P.

See “Organizational Structure” for a description of the Organizational Transactions and a diagram depicting our structure after giving effect to the Organizational Transactions and this offering.

Our unaudited pro forma condensed consolidated financial information does not give effect to our endowment of the LifeStance Health Foundation, a newly formed non-profit organization, as described under “Business—Employees and Human Capital Resources.”

 

2.

Adjustments to Unaudited Pro Forma Condensed Consolidated Financial Information

Adjustments included in the unaudited pro forma condensed consolidated balance sheet as of March 31, 2021 are as follows:

Adjustments related to the Organizational Transactions and this offering

 

(A)

Represents the net proceeds of approximately $557.9 million, after deducting underwriting discounts and commissions and before deducting estimated offering expenses payable by us (which are reflected in adjustment (B)).

 

(B)

Reflects the payment of one-time incremental costs associated with this offering. The sum of these costs, which are primarily legal, accounting and other direct costs related to this offering, is approximately $7.9 million. Approximately $3.0 million was accrued as a liability as of March 31, 2021. A portion of these costs are recorded in “prepaid expenses and other current assets” on our unaudited pro forma condensed consolidated balance sheet. Upon completion of this offering, these capitalized costs will be offset against the net proceeds from this offering as a reduction of additional paid-in capital. Any non-recurring incremental professional services costs that are paid with proceeds from the offering and not capitalized will be expensed.

 

(C)

Represents the termination fee of approximately $1.2 million paid to the Managers in connection with the termination of the management services agreement at the closing of this offering.

 

(D)

Represents the exchange of our Class A-1, Class A-2, and Class B common units into 340,848,648 shares of LifeStance Health Group, Inc. common stock (including shares of common stock issued as restricted stock subject to vesting) pursuant to the Organizational Transactions.

 

(E)

Represents the use of approximately $302.7 million of the proceeds from this offering to repay outstanding indebtedness under our Existing Credit Agreement, which amounts to $293.9 million principal amount and a prepayment fee of approximately $8.8 million. The adjustment to long-term debt represents the payment of $293.9 million, less the write-off of previously capitalized debt issue costs of approximately $6.0 million.

 

(F)

Represents an acceleration of vesting for certain performance-based awards as a result of the modification of vesting terms associated with the restricted shares issued to holders of partnership interest units as described in “Organizational Structure.”

 

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Adjustments included in the unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 2021 and the year ended December 31, 2020 are as follows:

Adjustments related to the TPG Acquisition

 

(AA)

Represents the incremental unit-based compensation expense of approximately $832 thousand related to the Class B units granted as part of the TPG Acquisition as if the grant occurred on January 1, 2020.

 

(BB)

Represents the incremental amortization expense related to certain definite-lived intangible assets, reflected in the purchase price allocation at the date of the TPG Acquisition, as if those certain definite-lived intangible assets were recognized on January 1, 2020. The following table represents the pro forma adjustment to estimated amortization expense for the year ended December 31, 2020:

 

Intangible Asset    Fair Value
as of May
14, 2020
     Estimated
Life
(Years)
     Period from
January 1, 2020
through

May 14, 2020
 

Trademarks/names - LifeStance/Corporate

   $ 235,500        22.5      $ 3,867  

Trademarks/names - Regional

     22,900        5.0        1,692  

Non-competition Agreements - Executives

     77,500        4.0        7,158  

Non-competition Agreements - Providers

     8,400        5.0        622  
  

 

 

       

 

 

 

Subtotal

   $ 344,300         $ 13,339  

Less: Historical amortization expense (January 1, 2020 through May 14, 2020)

           (1,435
        

 

 

 

Incremental amortization expense

         $ 11,904  
        

 

 

 

 

(CC)

Represents the incremental interest expense, accretion of debt discount, and amortization of debt issuance costs of approximately $4.7 million associated with our Existing Credit Agreement that was incurred as part of the TPG Acquisition as if the Existing Credit Agreement was entered into on January 1, 2020.

 

(DD)

Represents the elimination of accretion of Series A-1 redeemable convertible preferred units and the cumulative dividend on Series A redeemable convertible preferred units as these units were exchanged as part of the TPG Acquisition.

 

(JJ)

Reflects an adjustment for the estimated income tax effect of the pro forma adjustments. The tax effect on the pro forma adjustments was calculated using the historical statutory rate in effect for the period presented.

Adjustments related to the Organizational Transactions and this offering

 

(EE)

Represents a one-time termination fee of approximately $1.2 million to be paid to the Managers in connection with the termination of the management services agreement at the closing of this offering.

 

(FF)

Represents the elimination of accretion of Class A redeemable units to be exchanged as part of the Organizational Transactions.

 

(GG)

Represents non-recurring transaction-related costs of $1.1 million in connection with this offering that were reflected in the historical consolidated statement of operations for the three months ended March 31, 2021. These non-recurring transaction-related costs, totaling approximately $2.2 million, of which $1.1 million was not reflected in the consolidated statement of operations for the three months ended March 31, 2021, are reflected as if incurred on January 1, 2020, the date this offering is deemed to have occurred for purposes of the unaudited pro forma condensed consolidated statement of operations.

 

(HH)

Reflects the reduction in interest expense of $6.7 million and $14.3 million for the three months ended March 31, 2021 and for the year ended December 31, 2020, respectively, as a result of the repayment of a portion of the outstanding indebtedness under our Existing Credit Agreement, as described in “Use of Proceeds”, as if such repayment occurred on January 1, 2020, which is offset by a write off of deferred issuance costs of approximately $6.0 million in the twelve months ended December 31, 2020.

 

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(II)

Reflects a preliminary estimate of the stock-based compensation charge of $30.8 million and $354.7 million for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively, related to the modification of certain award terms, as well as incremental grants of restricted stock units (“RSUs”) that will be issued at the closing of this offering.

 

    

Certain award terms are expected to be amended for our outstanding Class B Units, including those held by our named executive officers in connection with this offering. The adjustment amount includes a preliminary estimate of incremental stock-based compensation expense of $21.6 million and $317.9 million for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively, as a result of the expected modifications of vesting terms associated with the restricted shares issued to holders of partnership interest units as described in “Executive and Director Compensation—Award Terms Expected to be Amended.” As part of the Organizational Transactions, holders of Class B Units will receive approximately 30.8 million shares of common stock issued as restricted stock that will be subject to continued vesting conditions. Of that total amount, holders of Class B Units that were previously subject to market and performance-based vesting conditions, achievement of which was previously deemed to be improbable, are expected to receive approximately 20.4 million shares of common stock issued as restricted stock that are subject to market and service-based vesting conditions which are considered probable of being met. Holders of Class B Units that were previously subject only to service-based vesting conditions are expected to receive approximately 10.4 million shares of common stock issued as restricted stock, which will continue to be subject to service-based vesting conditions.

 

    

The estimate of the incremental stock-based compensation expense was determined based on our preliminary analysis of the change in fair value of the awards with performance-based vesting conditions at the initial public offering price of $18.00. The market-based vesting conditions will provide for the holder to vest 1/3rd of their awards within six months of the completion of this offering, 1/3rd of their awards on the first anniversary of the completion of this offering, 1/6th of their awards 18 months from the completion of this offering and the remaining 1/6th of their awards two years from the completion of this offering. The pro forma estimate of the incremental stock-based compensation expense related to these awards assumes 100.0% of vesting of the first two tranches, 66.7% of the third tranche and 50.0% of the fourth tranche, or approximately 86.1% of the total incremental amount, recognized in the twelve months ended December 31, 2020, and 16.7% of the third tranche and 12.5% of the fourth tranche, or approximately 4.9% of the total incremental amount, recognized in the three months ended March 31, 2021. The remaining amount of the compensation expense adjustment relates to the vesting of the service-based awards over the remaining service period after the modification. The incremental stock-based compensation expense is preliminary and based on our current understanding of the award terms expected to be modified in connection with this offering. The accounting for the modification of these awards will be finalized based on final terms.

 

    

Additionally, we will issue 6,127,529 RSUs to certain employees at the closing of this offering, which will be subject to a three-year service-based vesting condition as described in “Executive and Director Compensation —IPO Equity Grants.” As a result, the adjustment also includes the incremental share-based compensation expense of $9.2 million and $36.8 million for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively.

 

    

The estimated incremental stock-based compensation expense is reflected as if the modification of the Class B Units and grant of new RSUs occurred on January 1, 2020, the date this offering is deemed to have occurred for purposes of the unaudited pro forma condensed consolidated statement of operations.

 

(JJ)

Reflects an adjustment for the estimated income tax effect of the pro forma adjustments. The tax effect of the pro forma adjustments was calculated using the historical statutory rate in effect for the period presented.

 

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3.

Loss per Share

The basic and diluted pro forma net loss per share of common stock represents net loss attributable to LifeStance Health Group, Inc. divided by the combination of the shares owned by existing stockholders and the shares issued in this offering, the proceeds of which are expected to equal $550.0 million (after deducting underwriting discounts and commissions and estimated offering expenses payable by us) as if such shares were outstanding for the entire periods presented. See “Use of Proceeds.” The table below presents the computation of pro forma basic and diluted loss per share for LifeStance Health Group, Inc. for the three months ended March 31, 2021 and for the year ended December 31, 2020 (in thousands, except per share amounts):

 

     Three months ended
March 31, 2021
     Year ended
December 31, 2020
 

Numerator:

     

Net loss

   $ (25,691    $ (299,038

Denominator:

     

Common shares outstanding (basic)(1)

     342,878        342,878  

Incremental common shares attributable to dilutive instruments(2)

     —          —    

Common shares outstanding (diluted)

     342,878        342,878  

Basic and diluted loss per share

     (0.07      (0.87

 

 

(1)

The common shares outstanding is inclusive of the Class A-1, Class A-2, and vested Class B units of LifeStance TopCo, L.P. exchanged for shares of common stock of LifeStance Health Group, Inc. as a result of the Organizational Transactions but excludes shares of common stock issued as restricted stock and subject to vesting, as holders of restricted stock subject to vesting do not participate in losses.

(2)

For the three months ended March 31, 2021 and the year ended December 31, 2020, the dilutive effects of the Company’s restricted stock and RSUs were not included in the computation of diluted loss per share because the effect would have been anti-dilutive.

 

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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 that appear elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risk and uncertainties described under “Risk Factors” and elsewhere in this prospectus. Our actual results may differ materially from those contained in or implied by any forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this prospectus.

TPG Acquisition and Comparability of Results

On May 14, 2020, affiliates of TPG acquired a majority of the equity interests of LifeStance Health Holdings, Inc., a subsidiary of LifeStance Health, LLC, in a series of transactions that we refer to in this prospectus as the “TPG Acquisition.” Immediately prior to the TPG Acquisition, LifeStance Health, LLC completed a reorganization pursuant to which the equity holders of LifeStance Health, LLC, including affiliates of Summit and affiliates of Silversmith received a distribution of 100% of the equity interests of LifeStance Health Holdings, Inc., a direct subsidiary of LifeStance Health, LLC, in complete redemption of their Class A common units, Class C common units, Preferred A units, and Preferred A-1 units of LifeStance Health, LLC. Pursuant to the TPG Acquisition, (i) the historic equity holders of LifeStance Health, LLC contributed a portion of their shares of LifeStance Health Holdings, Inc. to LifeStance TopCo, L.P. in exchange for Class A-1 and A-2 common units of LifeStance TopCo, L.P. and (ii) an indirect subsidiary of LifeStance TopCo, L.P. merged with and into LifeStance Health Holdings, Inc., with shareholders of LifeStance Health Holdings, Inc. receiving cash consideration in connection with cancellation of the remainder of their shares, for aggregate equity and cash consideration of approximately $1.05 billion. In connection with the TPG Acquisition, on May 14, 2020, LifeStance Health Holdings, Inc. entered into a new credit agreement, under which LifeStance Health Holdings, Inc. borrowed $210.0 million in term loans and $50.0 million in delayed draw loans, payable in quarterly principal and interest payments, with a maturity date of May 14, 2026. At the same time, LifeStance Health Holdings, Inc. also obtained access to a revolving credit facility with a total borrowing commitment of $20.0 million in interest-only payments until the maturity date of May 14, 2025. See “Description of Indebtedness,” “Unaudited Pro Forma Financial Information” and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus.

For the year ended December 31, 2019 and for the period from January 1, 2020 to May 14, 2020, we present the financial statements of LifeStance Health, LLC and its consolidated subsidiaries and affiliated practices in this prospectus. Affiliates of TPG formed LifeStance TopCo, L.P on April 13, 2020 for the purpose of facilitating the TPG Acquisition. For the period from April 13, 2020 (the date of formation of LifeStance TopCo, L.P.) to December 31, 2020 and for the three months ended March 31, 2021, we present the financial statements of LifeStance TopCo, L.P. and its consolidated subsidiaries and affiliated practices. For the period from April 13, 2020 through May 13, 2020, the operations of LifeStance TopCo, L.P. were limited to those incident to its formation and the TPG Acquisition, which were not significant. Because it resulted in a change of control, the TPG Acquisition was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that our assets and liabilities be recognized on the consolidated balance sheet at their fair value as of the acquisition date. LifeStance Health, LLC was determined by the Company to be LifeStance TopCo, L.P.’s predecessor. As a result of the TPG Acquisition, the key financial metrics and historical consolidated financial data below are presented on a Successor and Predecessor basis, resulting in the 2020 historical results being presented separately for the period from January 1, 2020 through May 14, 2020 (the “Predecessor 2020 Period”) and for the period from April 13, 2020 through December 31, 2020 (the “Successor 2020 Period”). Due to the change in the basis of accounting resulting from the TPG Acquisition, the consolidated financial statements for the Predecessor and Successor periods, included elsewhere in this prospectus, are not necessarily comparable.

 

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We have supplemented the discussion of historical results for these periods with pro forma information for key financial metrics and results of operations for the full year ended December 31, 2020, as we believe it is useful to investors to compare a pro forma twelve-month 2020 period to the annual 2019 historical period presented. The pro forma financial data presented below is derived from the “Unaudited Pro Forma Financial Information” giving pro forma effect to the TPG Acquisition, the Organizational Transactions, the effectiveness of our amended and restated certificate of incorporation and the offering in presenting results of operations for the twelve months ended December 31, 2020. See “Unaudited Pro Forma Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included herein.

Our Business

We are reimagining mental health through a disruptive, tech-enabled care delivery model built to expand access, address affordability, improve outcomes and lower overall health care costs. We are one of the nation’s largest outpatient mental health platforms based on the number of clinicians we employ through our subsidiaries and our affiliated practices and our geographic scale, employing over 3,300 licensed mental health clinicians across 73 MSAs in 27 states as of March 31, 2021. In 2020, our clinicians treated 357,000 patients through 2.3 million patient visits. Our patient-focused platform combines a personalized, digitally-powered patient experience with differentiated clinical capabilities and in-network insurance relationships to fundamentally transform patient access and treatment. By revolutionizing the way mental health care is delivered, we believe we have an opportunity to improve the lives and health of millions of individuals.

Our model is built to empower each of the healthcare ecosystem’s key stakeholders—patients, clinicians, payors and primary care and specialist physicians—by aligning around our shared goal of delivering better outcomes for patients and providing high-quality mental health care.

 

   

Patients - We are the front-door to comprehensive outpatient mental health care. We believe our ability to deliver a superior patient experience is evidenced by our NPS of 80 based on survey data we gathered from patients. Our clinicians offer patients comprehensive services to treat mental health conditions across the clinical spectrum. 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. Our clinical approach also delivers validated outcomes—in a survey we conducted of over 20,000 patients between May 2020 and December 2020, we observed that after two visits to treat such conditions, 53% of patients report improvement with their symptoms of depression as measured by a change in PHQ9 score, a clinical assessment of depression, 54% of patients report an improvement in their symptoms of anxiety as measured by a change in GAD7 score, a clinical assessment of anxiety, and 81% of our patients report a decrease in their suicidal ideation as measured by a change in both PHQ9 and GAD7 scores.

 

   

Clinicians - We empower clinicians to focus on patient care and relationships by providing what we believe is a superior workplace environment, as well as clinical and technology capabilities to deliver high-quality care. We offer a unique employment model for clinicians in a collaborative clinical environment, employing our clinicians through our subsidiaries and affiliated practices. Our integrated platform and national infrastructure reduce administrative burdens for clinicians while increasing engagement and satisfaction. Our clinicians are dedicated to our mission—in surveys we conducted in January 2021, 85% of our clinicians surveyed said they feel inspired to do their best and 97% believe they are positively assisting their patients to live a healthier life through their work at LifeStance.

 

   

Payors - We partner with payors to deliver access to high-quality outpatient mental health care to their members at scale. Long-term analyses demonstrate that $1 spent on collaborative mental health care saves $6.50 in total medical costs, representing a compelling opportunity for us to drive improved

 

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health outcomes and significant cost savings. Through our validated patient outcomes and extensive scale, we offer payors a pathway to achieving these savings in the broader healthcare system.

 

   

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 for over 50% of patients with a mental illness. We partner with over 2,100 primary care physicians and specialist physician groups across the country to provide a mental healthcare network for referrals and, in certain instances, through co-location to improve the diagnosis and treatment of their patients. Our measurable patient outcomes also provide primary care and specialist physicians with a valuable, validated treatment path to improve the overall health of our mutual patients.

We have a demonstrated track record of growth. From our inception in March 2017 through December 31, 2020, we have successfully opened 120 de novo centers, hired 1,746 clinicians through our subsidiaries and affiliated practices, and completed 53 acquisitions. Our total patient visits increased from 931,934 in 2018 to 1,353,285 in 2019, and to 2,290,728 in 2020. We increased our total number of centers from 125 as of December 31, 2018 to 170 as of December 31, 2019, and to 370 as of December 31, 2020. The breadth of our operating footprint and our growth over time is illustrated below:

LOGO

 

(1)

As of March 31, 2021.

(2)

Based on our identification of 28 MSAs for potential near-term expansion.

Total revenue increased from $100.3 million in 2018 to $212.5 million in 2019, was $111.7 million in the Predecessor 2020 Period, was $265.6 million in the Successor 2020 Period, and increased to $377.2 million in 2020 on a pro forma basis. Total revenue increased from $73.1 million for the three months ended March 31, 2020 to $143.1 million for the three months ended March 31, 2021. Our net income (loss) was $(1.1) million in 2018, $5.7 million in 2019, $(24.9) million in the Predecessor 2020 Period, $(13.1) million in the Successor 2020 Period, and $(299.0) million in 2020 on a pro forma basis. For the three months ended March 31, 2020 and

 

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March 31, 2021, our net income (loss) was $2.7 million and $(8.7) million, respectively. Adjusted EBITDA increased from $6.5 million in 2018 to $24.4 million in 2019, was $12.7 million in the Predecessor 2020 Period, was $37.5 million in the Successor 2020 Period, and was $50.1 million in 2020 on a pro forma basis. Adjusted EBITDA increased from $8.2 million for the three months ended March 31, 2020 to $12.6 million for the three months ended March 31, 2021. See “—Key Metrics and Non-GAAP Financial Measures” for more information about how we define and calculate Adjusted EBITDA and for a reconciliation of net income (loss), the most comparable GAAP measure, to Adjusted EBITDA. See “Unaudited Pro Forma Financial Information” for additional information regarding the presentation of our December 31, 2020 pro forma financial information.

 

LOGO

Key Factors Affecting Our Results

Expanding Center Capacity and Visits Within Existing Centers

We have built a powerful organic growth engine which enables us to drive growth within our existing footprint.

Our Clinicians

As of March 31, 2021, we employed over 3,300 psychiatrists, APNs, psychologists and therapists through our subsidiaries and affiliated practices. We generate revenue on a per visit basis as clinical services are rendered by our clinicians. As our existing centers mature, we grow capacity through investments in office expansion to increase our average clinicians per center and enhance overall utilization. Recruiting new clinicians and retaining existing clinicians in our existing centers enables us to see more patients per center 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. Our success is demonstrated by our track record – in addition to the clinicians we have gained through our acquisitions, we have hired 1,746 clinicians through our subsidiaries and affiliated practices since our inception in March 2017 through December 31, 2020, with a clinician retention rate of over 87% compared to the industry average of 77%.

We believe we have significant opportunity to grow our employed clinician base—we estimate there are approximately 650,000 mental health clinicians in the United States, providing us with a meaningful runway to grow from our current base of more than 3,300 clinicians employed through our subsidiaries and affiliated practices, as of March 31, 2021. To capitalize on this opportunity, 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 fulfill capacity in a timely manner. As we grow our clinician base, we can grow our business,

 

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expand access to 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 roll-out of de novo centers and acquire additional clinicians through our acquisition strategy. 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.

The following chart illustrates growth in employed clinicians since our inception in 2017, measured as of year end.

LOGO

Our Patients

We believe our ability to attract and retain patients to drive growth in our visits and meet the availability of our clinician base will enable us to grow our revenue. We believe we have a significant opportunity to increase the number of patients we serve in our existing markets. In 2020, our clinicians treated more than 357,000 patients through 2.3 million visits. We believe our ability to deliver more accessible, flexible, affordable and effective mental health care is a key driver of our patient growth. We believe we provide a superior and differentiated mental health care experience that integrates virtual and in-person care to deliver care in a convenient way for our patients, meeting our patients where they are. Our in-network payor relationships allow our patients to access care without significant out-of-pocket cost or delays in receiving treatment. We treat mental health conditions across the clinical spectrum through a clinical approach that delivers improved patient outcomes. We support our patients throughout their care continuum with purpose-built technological capabilities, including online assessments, digital provider communication, and seamless internal referral and follow-up capabilities. Approximately 80% of our patients have used our digital tools. Our ability to deliver a superior patient experience is evidenced by our NPS of 80 based on survey data we gathered from patients.

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 over 200 national, regional and local payors that enables their members to be referred to us as patients. Payors refer patients to our platform to drive improvement in health outcomes for their members, reduction in total medical costs and increased member satisfaction and retention. Within our markets, we partner with primary care practice groups, specialists, health systems and academic institutions to refer patients to our centers and clinicians. Our local marketing teams build and maintain relationships with our referring partner networks to create awareness of our platform and services, including the opening of new centers and the introduction of newly hired clinicians with appointment availability. We also use online marketing to develop our national brand to increase brand awareness and promote additional channels of patient recruitment.

 

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The following table illustrates growth in overall patient visits since our inception in 2017.

LOGO

 

 

  (1)

For 2017, reflects total patient visits following our inception in March 2017.

Our Primary Care and Specialist Physician Referral Relationships

We have built a powerful patient referral network through partnerships with over 2,100 primary care physicians and specialist physician groups across the country. We deliver value to our provider partners by offering a more efficient referral base, delivering improved outcomes for our mutual patients, and enabling more integrated care and lower total health care costs. As we continue to scale nationally, we plan to partner with additional hospital systems, large primary care groups and other specialist groups to help streamline their mental health network needs and drive continued patient growth across our platform. Our vision over time is to further integrate our mental health care services with those of our medical provider partners. As of December 31, 2020, we co-located our clinicians in nearly 50 primary care offices across nine MSAs to enable collaborative care with other care providers. By co-locating and driving towards integration with primary care providers, we can enhance our clinician’s access to patients. We anticipate that we will continue to grow these relationships while evolving our offering toward a fully-integrated care model in which primary care and our mental health clinicians work together to develop and provide personalized treatment plans for shared patients. We believe these efforts will help to further align our model with that of other health care providers increasing our value to them and driving new opportunities to partner to grow our patient base.

Our Payors

We have over 200 payor relationships, including national contracts with multiple payors that 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, measurable outcomes, and stronger member and client value proposition through the offering of in-network mental health services. As a result, we have consistently expanded our payor relationships from 80 as of December 31, 2018 to 111 as of December 31, 2019, and to 206 as of December 31, 2020. A majority of our revenue is derived from commercial in-network insurance coverage – for the twelve months ended December 31, 2020, our payor mix by revenue was 89% commercial in-network payors, 5% government payors, 4% self-pay and 2% non-patient services revenue. The strength of our payor relationships and our value proposition allowed us to secure rate parity between in-person and virtual visits, either by contract or payor policy, prior to the COVID-19 pandemic. To expand this network and grow access to covered patients, we continue to establish new payor relationships and national contracts while also seeking to drive regional rate improvement for our patients and clinicians. 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.

 

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Expand our Center Base Within Existing and New Markets

We believe we have developed a highly replicable playbook that allows us to enter new markets and pursue growth through multiple vectors. We typically identify new markets based on the core characteristics of patient population demographics, substantial clinician recruiting opportunities, untreated patient communities and a diverse group of payors. To enter new markets, we seek to open de novo centers or acquire high-quality practices with a track record of clinical excellence and in-network payor relationships. Once we enter a new market, our powerful organic growth engine drives our growth through de novo openings, center expansions, clinician recruiting and tuck-in acquisitions. We anticipate focusing on continued expansion, both in our existing markets and in new geographies, where mental health care remains a large unmet need.

De Novo Builds

Our de novo center strategy is a central component of our organic growth engine to build our capacity and increase density in our existing MSAs. From our inception in 2017 through December 31, 2020, we have successfully opened 120 de novo centers, including 78 de novo centers in 2020 and 27 de novo centers in 2019. We believe there is a significant opportunity to use de novo center openings to unlock 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 in line with, or above, historical performance.

Our systematic de novo process is built to enable us to generate a return on investment. We estimate that, on average, our de novo centers break even within the first two to four months, pay back invested capital within 13 months, and realize a two-times return on invested capital within 18 months, on a Center Margin basis. On average, de novo centers with at least two years of operating history as of December 31, 2020 had $1.7 million in total revenue and $0.6 million, or 35%, in Center Margin for the twelve months ended December 31, 2020. The foregoing 2020 amounts are pro forma combined Predecessor and Successor amounts. See “—Key Metrics and Non-GAAP Financial Measures”—Center Margin” for our definition of Center Margin. See “Unaudited Pro Forma Financial Information” for additional information regarding the presentation of our 2020 pro forma financial information.

The following chart illustrates total revenue from our de novo centers opened in 2018, 2019 and 2020.

LOGO

Acquisitions

We have built a proprietary pipeline of acquisition targets, providing us with significant opportunities to scale through potential acquisitions. We believe the highly fragmented nature of the mental health market

 

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provides us with a meaningful opportunity to execute on our acquisition playbook. We seek to acquire select practices that meet our standards of high-quality clinical care and align with our mission. We believe our guiding principle of creating a national platform built with a patient and clinician focus makes us a partner of choice for smaller, independent practices. Our acquisition strategy is deployed both to enter new markets and in our existing markets. In new markets, acquisitions allow us to establish a presence with high-quality practices with a track record of clinical excellence and in-network payor relationships that can be integrated into our national platform. In existing markets, acquisitions allow us to grow our geographic reach and clinician base to expand patient access. For newly acquired centers, we typically fully integrate them into our operational and technology infrastructure within four to six months following an acquisition. As of December 31, 2020, we had completed over 53 acquisitions of existing practices, since our inception.

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. 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.

To illustrate how we expect our de novo centers to become profitable, the data below detail how the Center Margin of these centers opened in 2018, 2019 and 2020 has grown. We believe the centers that opened in 2018 are a good representation of our typical profitability ramp given the relative maturity of the 2018 cohort compared to centers from 2019 and 2020. Our centers typically operate at a loss for two to four months before they become profitable as we grow our clinician and patient population at each center.

 

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The following chart illustrates Center Margin over time for our 2018, 2019 and 2020 center cohorts, measured after each center is opened.

De Novo Center Margin by Cohort (1)(2)

 

LOGO

 

  (1)

Excludes pre-revenue periods.

 

  (2)

2019 Cohort includes one new market entry at which clinicians are paid a fixed salary.

COVID-19 Impact

On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. The rapid spread of COVID-19 around the world and throughout the United States has altered the behavior of businesses and people, with significant negative effects on federal, state and local economies, the duration of which is unknown at this time. Various policies were implemented by federal, state and local governments in response to the COVID-19 pandemic that caused many people to remain at home and forced the closure of or limitations on certain businesses, as well as suspended elective procedures by health care facilities.

With the COVID-19 pandemic placing an unprecedented strain on daily life, existing trends in mental health care have worsened dramatically since the beginning of the pandemic—41% of adults reported at least one adverse mental health condition, including symptoms of mental illness or substance abuse related to the pandemic. Quarantining and lockdown measures have resulted in furloughs and layoffs, dramatically increasing stressors and leading to poorer overall mental and physical health.

In response to the COVID-19 pandemic, we took the following actions in 2020 to ensure the safety of our employees and their families and to address the physical, mental and social health of our patients:

 

   

Implemented safety protocols including all Center of Disease Control directives in addition to state and local directives. This included distributing COVID-19 guidelines to all clinicians and employees as well as regular global communication from our Chief Medical Officer.

 

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Provided support to clinicians and administrative employees in the event they were unable to work due to a quarantine.

 

   

Trained all of our clinicians to meet patients virtually.

 

   

Upgraded acquired center websites to allow patients to readily access digital services.

 

   

Proactively communicated with patients about the availability of clinicians and treatment and appointment reminders.

We believe the COVID-19 pandemic did not have a material impact on our results of operations, cash flows and financial position as of or for the three months ended March 31, 2021. While the impact of the COVID-19 pandemic has increased stressors associated with mental health, we believe that a combination of factors contribute to our total patient visits and related revenue, including, among others, long-term trends in reduced stigmatization of mental health. Even before the pandemic, we saw the need to have a platform supported by leading technology to give us the ability to treat patients virtually or in-person. Our prior investment in our technology platform, most notably in our digital capabilities, became an essential component for continuing to deliver care to our patients during the pandemic. We observed an impact on appointments in mid-March 2020 as patients moved to shelter-at-home and increased cancellations. By the end of March 2020, appointments and visits had returned to normal levels. Our clinician recruitment opportunities have also increased as a result of the pandemic, driven by an increase in clinician supply from those seeking more stable employment models. With independent clinicians facing higher technology costs, shifting consumer behavior and challenges from the uncertain economic environment, our pipeline of acquisition targets grew and assisted in our 2020 footprint expansion.

Even prior to the COVID-19 pandemic, our payor contracts or payor policies typically provided for rate parity for our care services regardless of whether visits are conducted in-person or virtually. As a result, even if temporary rate parity provisions that were enacted in response to the COVID-19 pandemic are not permanently extended, we do not expect such actions to have a meaningful impact on our business.

We believe COVID-19 will represent a paradigm shift in the importance of and focus on mental health care. We have seen significant increase in patient demand as well as payor and employer adoption of mental health coverage options during the pandemic and it is now integrated into health care offerings more than ever before. We feel the spotlight the pandemic has put on the need for mental health care will have a positive impact on our industry and business for years to come.

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:

 

     Successor    

 

     Predecessor     Pro Forma     Successor     

 

     Predecessor  
     Three months
ended March
31, 2021
   

 

     Three months
ended March
31, 2020
    Year ended
December 31,
2020
    April 13 to
December
31, 2020
   

 

     January 1 to
May 14,
2020
    Year ended
December
31, 2019
 

(in thousands)

                      

Total revenue

   $ 143,132          $ 73,106     $ 377,217     $ 265,556          $ 111,661     $ 212,518  

Revenue growth

     96          81     77     *            *       112

Organic revenue growth

              41     *            *       35

Income (loss) from operations

   $ (881        $ 5,635     $ (354,247   $ 6,741          $ 8,695     $ 15,241  

Center Margin

   $ 43,998          $ 21,472     $ 119,176     $ 86,292          $ 32,884     $ 62,396  

Net income (loss)

   $ (8,682        $ 2,653     $ (299,038   $ (13,125        $ (24,945   $ 5,669  

Adjusted EBITDA

   $ 12,584          $ 8,217     $ 50,135     $ 37,470          $ 12,665     $ 24,400  

 

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*

Denotes not meaningful due to lack of comparability between annual and partial periods. In addition, organic revenue growth is measured on a twelve-month basis and is therefore not reported for interim periods.

Organic revenue growth, Center Margin and Adjusted EBITDA are not measures of financial performance under GAAP and are not intended to be substitutes for any GAAP financial measures, including revenue, income from operations or net income (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.

Organic Revenue Growth

We define organic revenue growth as the change in total revenue, excluding revenue from acquisitions for the first twelve months following the date of acquisition of new centers. Therefore, organic revenue is computed by removing from total revenue the amount of revenue from centers acquired within twelve months from the end of the period presented. We use organic revenue growth as one of the measures to assess our results of operations. We believe that organic revenue growth is an appropriate measure of operating performance as it allows investors to measure, analyze and compare our growth in a meaningful and consistent manner without the impact of what may be non-comparable acquisition activity from period to period. Organic revenue growth metrics vary across the healthcare industry. As a result, our organic revenue growth calculation is not necessarily comparable to similarly titled metrics reported by other companies.

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, exclusive of 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 will be 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.

 

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The following table provides a reconciliation of income (loss) from operations, the most closely comparable GAAP financial measure, to Center Margin:

 

    Pro Forma     Successor           Predecessor     Successor           Predecessor  
    Year ended
December 31,
2020
    April 13 to
December 31,
2020
          January 1 to
May 14,
2020
    Year ended
December 31,
2019
    Year ended
December 31,
2018
    Three months
ended
March 31,
2021
          Three months
ended
March 31,
2020
 

(in thousands)

                     

Income (loss) from operations

  $ (354,247   $ 6,741         $ 8,695     $ 15,241     $ 2,787     $ (881       $ 5,635  

Adjusted for:

                     

Depreciation and amortization

    42,949       27,710           3,335       6,095       2,733       12,228           2,175  

General and administrative expenses(1)

    430,474       51,841           20,854       41,060       24,468       32,651           13,662  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Center Margin

  $ 119,176     $ 86,292         $ 32,884     $ 62,396     $ 29,988     $ 43,998         $ 21,472  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

(1)

Represents salaries, wages and employee benefits for our executive leadership, finance, human resources, marketing, billing and credentialing support and technology infrastructure.

Adjusted EBITDA

We present Adjusted EBITDA, a non-GAAP performance measure, to supplement our results of operations presented in accordance with generally accepted accounting principles, or GAAP. We believe Adjusted EBITDA is useful in evaluating our operating performance, and may be helpful to securities analysts, institutional investors and other interested parties in understanding our operating performance and prospects. Adjusted EBITDA is not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to companies in other industries or within the same industry with similarly titled measures of performance. Therefore, our Adjusted EBITDA should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net income or loss.

We define Adjusted EBITDA as net income (loss) excluding interest expense, depreciation and amortization, provision (benefit) for income taxes, gain (loss) on remeasurement of contingent consideration, unit-based compensation, management fees, loss on disposal of assets, transaction costs and other expenses. We include Adjusted EBITDA in this prospectus 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.

 

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A reconciliation of Adjusted EBITDA to net income (loss) is presented below for the periods indicated. 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 income (loss).

 

    Successor           Predecessor     Pro Forma     Successor           Predecessor  
    Three
months
ended
March
31, 2021
          Three
months
ended
March 31,
2020
    Year ended
December 31,
2020
    April 13 to
December 31,
2020
          January 1 to
May 14,
2020
    Year ended
December 31,
2019
    Year ended
December 31,
2018
 

(in thousands)

                     

Net income (loss)

  $ (8,682       $ 2,653     $ (299,038   $ (13,125       $ (24,945   $ 5,669     $ (1,097

    Adjusted for:

                     

Interest expense

    8,632           1,680       12,538       19,112           3,020       5,409       453  

Depreciation and amortization

    12,228           2,175       42,949       27,710           3,335       6,095       2,733  

Income tax (benefit) provision

    (2,761         703       (106,675     (4,022         (2,319     2,206       5,385  

Loss (gain) on remeasurement of contingent consideration

    307           (354     254       576           (322     (229     (2,488

Unit-based compensation

    605           —         357,006       1,452           —         54       249  

Management fees (1)

    89           —         1,369       142           14       —         —    

Loss on disposal of assets

    —             —         121       121           —         —         —    

Transaction costs (2)

    1,534           953       39,409       3,937           33,247       2,186       533  

Other expenses (3)

    632           407       2,202       1,567           635       3,010       695  
 

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 12,584         $ 8,217     $ 50,135     $ 37,470         $ 12,665     $ 24,400     $ 6,463  
 

 

 

       

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

 

(1)

Represents management fees paid to certain of our executive officers and affiliates of our Principal Stockholders pursuant to the management services agreement entered into in connection with the TPG Acquisition. The management services agreement will terminate in connection with this offering and we will be required to pay a one-time fee of approximately $1.2 million to such parties. See “Certain Relationships and Related Party Transactions—TPG Acquisition and Related Agreements—Management Services Agreement.”

(2)

Primarily includes capital markets advisory, consulting, accounting and legal expenses related to our acquisitions and costs related to the TPG Acquisition. Of the transaction costs incurred in 2019, $1.4 million relate to the TPG Acquisition. Of the transaction costs incurred in 2020 on a pro forma basis, $32.9 million relate to the TPG Acquisition.

 

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(3)

Primarily includes costs incurred to consummate or integrate acquired centers, certain of which are wholly-owned and certain of which are affiliated practices, in addition to the compensation paid to former owners of acquired centers and related expenses that are not reflective of the ongoing operating expenses of our centers. Acquired center integration, former owner fees, and other are components of general and administrative expenses included in our consolidated statement of income (loss). Impairment on loans is a component of center costs, excluding depreciation and amortization included in our consolidated statement of income (loss). These costs are summarized for each period in the table below:

 

    Successor           Predecessor     Pro Forma     Successor           Predecessor  
    Three
months
ended
March
31, 2021
          Three
months
ended
March 31,
2020
    Year ended
December 31,
2020
    April 13 to
December 31,
2020
          January 1 to
May 14,
2020
    Year ended
December 31,
2019
    Year ended
December 31,
2018
 

(in thousands)

                     

Acquired center integration(1)

  $ 501         $ 250     $ 1,614     $ 1,201         $ 413     $ 1,101     $ 240  

Former owner fees(2)

    84           157       501       284           217       860       451  

Impairment of loans(3)

    —             —         —         —             —         581       —    

Other(4)

    47           —         87       82           5       468       4  
 

 

 

     

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total

  $ 632         $ 407     $ 2,202     $ 1,567         $ 635     $ 3,010     $ 695  
 

 

 

     

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

 

(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)

Represents write-off of advances provided to clinicians of acquired entities.

(4)

Primarily includes severance expense unrelated to integration services.

Components of Revenue and Expenses

Total Revenue

Total revenue consists primarily of consideration we expect to be entitled to in exchange for all patient activities. We bill each patient or third-party payor on a fee-for-service basis as medical services are rendered. Revenue is recognized as performance obligations are satisfied. Performance obligations are determined based on the nature of the services provided, and generally each individual counselling session is a performance obligation.

We have relationships with over 200 third-party payors. We determine the transaction price under these contracts based on standard charges for services provided net of price concessions related to contractual adjustments provided to third-party payors, discounts provided to uninsured patients in accordance with our policy and/or implicit price concessions provided to patients. The differences between the price at which we expects to receive from patients and the standard billing rates are accounted for as contractual adjustments or discounts, which are deducted from gross revenue to arrive at net revenues. Contractual adjustments and discounts are based on contractual agreements, discount policies and historical experience. We use historical patient visit rates, our historical mix of services performed and current reimbursement rates to help us analyze and explain historical patient service revenue. To achieve efficiencies and provide consistent access to care for patients across the country, we may negotiate regional or national contracts with certain payors in lieu of location specific agreements. Some of our third-party payor contracts are inherited through acquisitions of practices with existing contracts where we did not have an existing relationship with that payor in the market. During each of the year ended December 31, 2019 and during the Predecessor 2020 Period, Successor 2020 Period and the three months ended March 31, 2020, three

 

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payors individually exceeded 10% of the Company’ revenue, and during the three months ended March 31, 2021, two payors individually exceeded 10% of the Company’s revenue. Our payor relationships generally operate across multiple independent regional contracts. We have patients covered by third-party payors, which include commercial health insurers and governmental payors under programs such as Medicare, and uninsured patients. Governmental payors and uninsured patients account for a small portion of our total revenue.

Operating Expenses

Center costs, excluding depreciation and amortization

Center costs, excluding depreciation and amortization includes the costs we incur to operate our centers, consisting primarily of salaries, wages and employee benefits for clinicians and patient support, occupancy costs such as rent and utilities, medical supplies, insurance and other operating expenses. Center costs do not include an allocation of general and administrative expenses noted below, as they are not directly related to the act of seeing patients or providing care at our centers. Clinicians include psychiatrists, APNs, psychologists and therapists. Patient support employees include welcome coordinators and clinical technicians. 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 and to potentially capture more of our market opportunity.

General and administrative

General and administrative expenses consist primarily of salaries, wages and employee benefits for our executive leadership, finance, human resources, marketing, billing and credentialing support and technology infrastructure. In addition, general and administrative expenses include insurance and corporate occupancy costs.

Depreciation and amortization

Depreciation and amortization expense consists primarily of depreciation on leasehold improvements and other fixed assets as well as amortization on trade name and non-competition agreement intangibles.

Other Income (Expense)

Other income (expense) consists primarily of gains and losses on remeasurement of a contingent consideration liability where the performance condition was not met or likelihood of payment increases, gain (loss) on sale of fixed assets, transaction costs related to legal, consulting and other expenses related to our acquisitions of various centers and in the TPG Acquisition, related party management fees, interest expense on our credit facilities and amortization of debt issue costs. We expect our interest expense and transaction costs to increase in the short- to medium-term as we strategically invest to expand our business.

Income Tax Provision

We account for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized.

In determining whether a valuation allowance for deferred tax assets is necessary, we analyze both positive and negative evidence related to the realization of deferred tax assets and inherent in that, assess the likelihood of sufficient future taxable income. We also consider the expected reversal of deferred tax liabilities and analyze the period in which these would be expected to reverse to determine whether the taxable temporary difference amounts serve as an adequate source of future taxable income to support the realizability of the

 

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deferred tax assets. No valuation allowance was recognized as of December 31, 2019, December 31, 2020, March 31, 2020 or March 31, 2021. In addition, we consider whether it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position.

Results of Operations

Comparison of the Three Months Ended March 31, 2021 (Successor) and March 31, 2020 (Predecessor)

The following table sets forth a summary of our financial results for the periods indicated:

 

     Successor            Predecessor  
     Three months ended
March 31, 2021
           Three months ended
March 31, 2020
 
(in thousands)                    

Total revenue

   $ 143,132          $ 73,106  

Operating expenses

         

Center costs, excluding depreciation and amortization shown separately below

     99,134            51,634  

General and administrative expenses

     32,651            13,662  

Depreciation and amortization

     12,228            2,175  
  

 

 

        

 

 

 

Total operating expenses

     144,013            67,471  
  

 

 

        

 

 

 

(Loss) income from operations

   $ (881        $ 5,635  

Other income (expense)

         

(Loss) gain on remeasurement of contingent consideration

     (307          354  

Transaction costs

     (1,534          (953

Interest expense

     (8,632          (1,680

Other expense

     (89          —    
  

 

 

        

 

 

 

Total other (expense)

     (10,562          (2,279
  

 

 

        

 

 

 

(Loss) Income before taxes

   $ (11,443        $ 3,356  

Income tax benefit (provision)

     2,761            (703
  

 

 

        

 

 

 

Net (loss) income and comprehensive (loss) income

   $ (8,682        $ 2,653  
  

 

 

        

 

 

 

Total Revenue

Total revenue increased $70.0 million, or 96%, to $143.1 million for the three months ended March 31, 2021 (Successor) from $73.1 million for the three months ended March 31, 2020 (Predecessor). The increase in total revenue was attributable to a $16.9 million, $34.6 million and $18.5 million increase due to de novo center openings, acquisitions and an increase in patient visits and growth in revenue per visit at our existing centers, respectively.

Operating Expenses

Center costs, excluding depreciation and amortization

Center costs, excluding depreciation and amortization increased $47.5 million, or 92%, to $99.1 million for the three months ended March 31, 2021 (Successor) from $51.6 million for the three months ended March 31, 2020 (Predecessor). This was primarily due to an increase in clinician compensation of $38.5 million and patient support compensation of $3.0 million. Occupancy costs increased $4.6 million and included an increase in center rent of $3.8 million and an increase in utilities and maintenance expenses of $0.8 million. Other operating expenses increased $1.4 million and included an increase of $0.6 million in insurance and an increase of $0.8 million in center supply expenses.

 

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General and administrative

General and administrative expenses increased $19.0 million, or 139%, to $32.7 million for the three months ended March 31, 2021 (Successor) from $13.7 million for the three months ended March 31, 2020 (Predecessor). This was primarily due to increases of $11.1 million in salaries, wages and employee benefits, $1.8 million in occupancy costs and $6.1 million in other expenses. Occupancy costs included an increase of $1.2 million for IT infrastructure and software as well as an increase of $0.5 million in office equipment, utilities and maintenance expenses. Other expenses included increases of $3.5 million in professional fees and $2.3 million in marketing expenses. These increases reflect expenses incurred to support the growth of our business.

Depreciation and amortization

Depreciation and amortization expense increased $10.0 million to $12.2 million for the three months ended March 31, 2021 (Successor) from $2.2 million for the three months ended March 31, 2020 (Predecessor). This was primarily due to increases in amortization of $3.3 million for trade names and $5.4 million in non-competition agreements related to the recognition of intangible assets associated with the TPG Acquisition. In addition, depreciation increased $1.3 million and consisted of increases in leasehold improvements and computer, software and furniture expenses of $0.7 million and $0.6 million, respectively, due to the increased number of de novo builds and center acquisitions in the period.

Other Income (Expense)

Gain (loss) on remeasurement of contingent consideration

Gain (loss) on remeasurement of contingent consideration decreased $0.7 million to a $0.3 million loss for the three months ended March 31, 2021 (Successor) from a $0.4 million gain for the three months ended March 31, 2020 (Predecessor). This was primarily due to changes in the weighted probability of achieving the performance and operational targets.

Transaction costs

Transaction costs increased $0.6 million to $1.5 million for the three months ended March 31, 2021 (Successor) from $0.9 million for the three months ended March 31, 2020 (Predecessor). Transaction costs increased primarily due to incremental fees related to increased corporate transactions.

Interest Expense

Interest expense increased $6.9 million to $8.6 million for the three months ended March 31, 2021 (Successor) from $1.7 million for the three months ended March 31, 2020 (Predecessor). This was primarily due to our entry into the Existing Credit Agreement on May 14, 2020, which added an additional $210.0 million in outstanding principal in term loans and $50.0 million in delayed draw loans.

Other Income (Expense)

Other income (expense) increased to $89 thousand for the three months ended March 31, 2021 (Successor) from $0 for the three months ended March 31, 2020 (Predecessor) primarily due to management fees.

Income Tax Benefit (Provision)

Income tax provision increased $3.5 million to a $2.8 million benefit for the three months ended March 31, 2021 (Successor) from a $0.7 million provision for the three months ended March 31, 2020 (Predecessor) primarily due to lower taxable income for the three months ended March 31, 2021.

 

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Comparison of the Year Ended December 31, 2020 (on a Pro Forma Basis), the 2020 Successor Period, the 2020 Predecessor Period, and the Year Ended December 31, 2019 (Predecessor)

The following table sets forth a summary of our financial results for the periods indicated:

 

     Pro Forma     Successor            Predecessor  
     Year ended
December 31,
2020
    April 13 to
December 31,
2020
           January 1 to
May 14,
2020
    Year ended
December 31,
2019
 

(in thousands)

             

Total revenue

   $ 377,217     $ 265,556          $ 111,661     $ 212,518  

Operating expenses

             

Center costs, excluding depreciation and amortization shown separately below

     258,041       179,264            78,777       150,122  

General and administrative expenses

     430,474       51,841            20,854       41,060  

Depreciation and amortization

     42,949       27,710            3,335       6,095  
  

 

 

   

 

 

        

 

 

   

 

 

 

Total operating expenses

     731,464       258,815            102,966       197,277  
  

 

 

   

 

 

        

 

 

   

 

 

 

Income from operations

   $ (354,247   $ 6,741          $ 8,695     $ 15,241  

Other income (expense)

             

(Loss) gain on remeasurement of contingent consideration

     (254     (576          322       229  

Transaction costs

     (37,184     (3,937          (33,247     (2,186

Interest expense

     (12,538     (19,112          (3,020     (5,409

Other expense

     (1,490     (263          (14     —    
  

 

 

   

 

 

        

 

 

   

 

 

 

Total other expense

     (51,466     (23,888          (35,959     (7,366
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income before taxes

   $ (405,713   $ (17,147        $ (27,264   $ 7,875  
  

 

 

   

 

 

        

 

 

   

 

 

 

Income tax benefit (provision)

     106,675       4,022            2,319       (2,206
  

 

 

   

 

 

        

 

 

   

 

 

 

Net (loss) income

   $ (299,038   $ (13,125        $ (24,945   $ 5,669  
  

 

 

   

 

 

        

 

 

   

 

 

 

The financial information presented below for the year ended December 31, 2020 on a pro forma basis has been derived from the financial information set forth in “Unaudited Pro Forma Financial Information.” See “Unaudited Pro Forma Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included herein.

Total Revenue

For the year ended December 31, 2019 (Predecessor), total revenue was $212.5 million. For the Predecessor 2020 Period and the Successor 2020 Period, total revenue was $111.7 million and $265.6 million, respectively.

Total revenue increased to $377.2 million for the year ended December 31, 2020 on a pro forma basis from $212.5 million for the year ended December 31, 2019 (Predecessor). The increase in total revenue was attributable to $26.0 million of total revenue related to de novo center openings, $49.6 million of total revenue attributable to acquisitions consummated during the year, and $89.1 million of total revenue resulting from an increase in patient visits and growth in revenue per visit at our existing center base. We anticipate revenue growth to continue to be driven by our de novo and acquisition strategy 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.

 

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Operating Expenses

Center costs, excluding depreciation and amortization

For the year ended December 31, 2019 (Predecessor), center costs, excluding depreciation and amortization was $150.1 million, primarily consisting of $120.2 million of clinician compensation and $13.4 million of patient support compensation. In addition, occupancy costs totaled $11.7 million, consisting of center rent and utilities and maintenance expenses. Other operating expenses consisting of office supplies and insurance totaled $4.8 million. For the Predecessor 2020 Period, center costs, excluding depreciation and amortization was $78.8 million, primarily consisting of $63.3 million of clinician compensation and $7.1 million of patient support compensation. In addition, occupancy costs totaled $6.4 million, consisting of center rent and utilities and maintenance expenses. Other operating expenses consisting of office supplies and insurance totaled $2.0 million. For the Successor 2020 Period, center costs, excluding depreciation and amortization was $179.3 million, primarily consisting of $144.7 million of clinician compensation and $15.0 million of patient support compensation. In addition, occupancy costs totaled $15.8 million, consisting of center rent and utilities and maintenance expenses. Other operating expenses consisting of office supplies and insurance totaled $3.8 million for the Successor 2020 Period.

Center costs, excluding depreciation and amortization increased $107.9 million to $258.0 million for the year ended December 31, 2020 on a pro forma basis from $150.1 million for the year ended December 31, 2019 (Predecessor). This was primarily due to a significant increase in our clinicians from 1,404 as of the end of 2019 to 3,097 as of the end of 2020. Occupancy costs increased $10.5 million, which included an increase in center rent of $8.8 million and an increase in utilities and maintenance expenses of $1.7 million. Other operating expenses increased $1.0 million, which included an increase of $0.7 million in insurance and an increase of $0.2 million in center supplies. Increases in occupancy costs and other operating expenses were primarily driven by our 78 de novo center openings and 29 center acquisitions in 2020.

General and administrative

For the year ended December 31, 2019 (Predecessor), general and administrative expenses were $41.1 million, consisting primarily of $28.8 million in salaries, wages and employee benefits as well as $5.4 million in occupancy costs and $6.8 million in other operating expenses, including professional services and insurance. For the Predecessor 2020 Period, general and administrative expenses were $20.9 million, consisting primarily of $14.5 million in salaries, wages and employee benefits as well as $2.5 million in occupancy costs and $3.8 million in other operating expenses, including professional services and corporate insurance. For the Successor 2020 Period, general and administrative expenses were $51.8 million, consisting primarily of $35.6 million in salaries, wages and employee benefits, as well as $6.3 million in occupancy costs and $9.9 million in other operating expenses, including professional services and insurance.

General and administrative expenses increased $389.4 million to $430.5 million for the year ended December 31, 2020 on a pro forma basis from $41.1 million for the year ended December 31, 2019 (Predecessor). This was primarily due to increases of $21.3 million in salaries, wages and employee benefits, $3.5 million in occupancy costs, $9.8 million in other expenses and incremental stock-based compensation expense of $354.7 million for the year ended December 31, 2020, as a result of the expected modifications of vesting terms associated with the restricted shares issued to holders of partnership interest units as described within “Executive and Director Compensation—Award Terms Expected to be Amended” and the grants of RSUs in connection with this offering. Occupancy costs included an increase of $2.1 million for computer and software costs as well as an increase of $1.3 million in office equipment, utilities and maintenance expenses. Other expenses included increases of $4.4 million in professional fees and $2.0 million in marketing. These increases were incurred to support the growth of our business.

 

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Depreciation and amortization

For the year ended December 31, 2019 (Predecessor), depreciation expense was $3.0 million, primarily consisting of $1.6 million of leasehold improvements and $1.4 million of computer, software and furniture costs. For the year ended December 31, 2019 (Predecessor), amortization expense was $3.1 million, primarily consisting of amortization of trade names of $2.7 million. For the Predecessor 2020 Period, depreciation expense was $1.9 million, primarily consisting of $1.0 million of leasehold improvements and $0.9 million of computer, software and furniture costs. For the Predecessor 2020 Period, amortization expense was $1.4 million, primarily consisting of $1.2 million of amortization of trade names and $0.2 million of amortization of non-competition agreement intangible assets. For the Successor 2020 Period, depreciation expense was $4.4 million, primarily consisting of $2.5 million of leasehold improvements and $1.9 million of computer, software and furniture costs. For the Successor 2020 Period ended December 31, 2020, amortization expense was $23.3 million, primarily consisting of amortization of $13.5 million of noncompete assets and $9.8 million of assets related to trade names.

Depreciation and amortization expense increased to $42.9 million for the year ended December 31, 2020, on a pro forma basis, from $6.1 million for the year ended December 31, 2019 (Predecessor). This was partially due to the TPG Acquisition and recognition of intangible assets in the amount of $344.3 million, which was applied for the full year ended December 31, 2020 on a pro forma basis. Leasehold improvement and computer depreciation increased $1.8 million and $0.8 million, respectively, due to the increased number of de novo builds and center acquisitions.

Other Income (Expense)

Gain (loss) on remeasurement of contingent consideration

For the year ended December 31, 2019 (Predecessor), gain on remeasurement of contingent consideration was $0.2 million. For the Predecessor 2020 Period, gain on remeasurement of contingent consideration was $0.3 million. For the Successor 2020 Period, loss on remeasurement of contingent consideration was $0.6 million.

Gain (loss) on remeasurement of contingent consideration decreased $0.5 million to a $0.3 million loss for the year ended December 31, 2020 on a pro forma basis from a $0.2 million gain for the year ended December 31, 2019 (Predecessor). This was primarily due to changes in the weighted probability of achieving the performance and operational targets.

Transaction costs

For the year ended December 31, 2019 (Predecessor), transaction costs were $2.2 million, primarily consisting of legal, consulting and other expenses in connection with acquisitions made in the period. For the Predecessor 2020 Period and the Successor 2020 Period, transaction costs were $33.2 million and $3.9 million, respectively, primarily consisting of $32.9 million of costs related to the TPG Acquisition and legal, consulting and other expenses in connection with other acquisitions that closed in the respective period.

Transaction costs increased $35.0 million to $37.2 million for the year ended December 31, 2020, on a pro forma basis, from $2.2 million for the year ended December 31, 2019 (Predecessor). This increase was primarily due to $32.9 million of legal, consulting and other fees associated with the TPG Acquisition.

Interest expense

For the year ended December 31, 2019 (Predecessor), interest expense was $5.4 million, primarily consisting of interest on our term loans under our Prior Credit Agreement (as defined below). For the Predecessor 2020 Period and Successor 2020 Period, interest expense was $3.0 million and $19.1 million, respectively.

 

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Interest expense in the Predecessor 2020 Period primarily consisted of interest on our term loans under our Prior Credit Agreement. Interest in the Successor 2020 Period consisted of interest expense under our Existing Credit Agreement.

Interest expense increased $7.1 million to $12.5 million for the year ended December 31, 2020 on a pro forma basis from $5.4 million for the year ended December 31, 2019 (Predecessor). This was primarily due to our entry into the Existing Credit Agreement on May 14, 2020, which added an additional $210.0 million in principal amount in term loans and $50.0 million in delayed draw loans, partially offset by the assumed repayment of certain indebtedness under the Existing Credit Agreement from the estimated net proceeds of this offering described in “Use of Proceeds.” This increase in principal balance and the repayment of the debt facilities is included for the year ended December 31, 2020 on a pro forma basis due to the pro forma adjustments assuming the TPG Acquisition and this offering had occurred on January 1, 2020. Further, on November 4, 2020, we amended the Existing Credit Agreement and added an aggregate of $115.0 million in loan commitments.

Other income (expense)

For the Predecessor 2020 Period, other expense was $14 thousand and consisted of related party management fees. For the Successor 2020 Period, other expense was $0.3 million and consisted of fixed asset disposal of $0.1 million and related party management fees of $0.2 million.

Other income (expense) increased $1.5 million for the year ended December 31, 2020, on a pro forma basis, from $0 for the year ended December 31, 2019 (Predecessor). This increase was primarily due the management services agreement that will terminate in connection with this offering and we will be required to pay a one-time fee of approximately $1.2 million to certain of our executive officers and affiliates of our Principal Stockholders.

Income Tax Provision

For the year ended December 31, 2019 (Predecessor), income tax provision was $2.2 million. For the Predecessor 2020 Period and the Successor 2020 Period, the income tax benefit was $2.3 million and $4.0 million, respectively.

Income tax benefit increased $108.9 million to a $106.7 million benefit for the year ended December 31, 2020, on a pro forma basis, from a $2.2 million provision for the year ended December 31, 2019 (Predecessor) primarily due to tax effects of the pro forma adjustments pursuant to Regulation S-X, Article 11 rules to apply the statutory tax rate to the pro forma adjustments.

Quarterly Results of Operations and Other Data

The following table sets forth our unaudited condensed consolidated statement of operations data for each of the last nine quarters in the period ended March 31, 2021. The unaudited condensed consolidated quarterly statements of operations data set forth below have been prepared on a basis consistent with our audited consolidated financial statements included elsewhere in this prospectus and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the results of operations for the periods presented. Our historical quarterly results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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    Successor     Predecessor  
    Three Months
Ended
March 31,
2021
    Three Months
Ended
December 31,
2020
    Three Months
Ended
September 30,
2020
    April 13 to
June 30,
2020*
    April 1 to
May 14,
2020
    Three Months
Ended
March 31,
2020
    Three Months
Ended
December 31,
2019
    Three Months
Ended
September 30,
2019
    Three Months
Ended
June 30,
2019
    Three Months
Ended
March 31,
2019
 

Revenues

                     

Total revenues

  $ 143,132     $ 118,121     $ 101,982     $ 45,453     $ 38,555     $ 73,106     $ 62,593     $ 58,461     $ 51,040     $ 40,424  

Operating Expenses

                     

Center costs, excluding depreciation and amortization shown separately below

    99,134       79,142       68,847       31,275       27,143       51,634       44,145       41,198       35,830       28,949  

General and administrative expenses

    32,651       23,665       19,534       8,642       7,192       13,662       11,770       10,988       9,845       8,457  

Depreciation and amortization

    12,228       11,368       10,910       5,432       1,160       2,175       2,231       1,383       1,321       1,160  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    144,013       114,175       99,291       45,349       35,495       67,471       58,146       53,569       46,996       38,566  
 

(Loss) income from operations

  $ (881   $ 3,946     $ 2,691     $ 104     $ 3,060     $ 5,635     $ 4,447     $ 4,892     $ 4,044     $ 1,858  
 

Other income (expense)

                     

Gain (loss) on remeasurement of contingent consideration

    (307     (614     89       (51     (32     354       232       —         (3     —    

Transaction costs

    (1,534     (3,073     (683     (181     (32,294     (953     (1,550     (112     (377     (147

Interest expense

    (8,632     (7,129     (6,421     (5,562     (1,340     (1,680     (1,524     (1,551     (1,363     (971

Other income (expense)

    (89     (197     (44     (22     (14     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (10,562     (11,013     (7,059     (5,816     (33,680     (2,279     (2,842     (1,663     (1,743     (1,118
 

Income (loss) before taxes

    (11,443     (7,067     (4,368     (5,712     (30,620     3,356       1,605       3,229       2,301       740  

Income tax benefit (provision)

    2,761       1,578       1,074       1,370       3,022       (703     (631     (810     (579     (186
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

    (8,682     (5,489     (3,294     (4,342     (27,598     2,653       974       2,419       1,722       554  

Accretion of Series A-1 redeemable convertible preferred units

    —         —         —         —         (272,582     —         (62,975     —         —         —    

Cumulative dividend on Series A redeemable convertible preferred units

    —         —         —         —         (217     (445     (400     (400     (399     (399

Accretion of Redeemable Class A units

    (36,750     —         —         —         —         —         —         —         —         —    

Net (loss) income available to common members

  $ (45,432   $ (5,489   $ (3,294   $ (4,342   $ (300,397   $ 2,208     $ (62,401   $ 2,019     $ 1,323     $ 155  

 

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*

For the period from April 13, 2020 through May 14, 2020, the operations of LifeStance TopCo, L.P. (Successor) were limited to those incident to its formation and the TPG Acquisition, which were not significant. Earnings from April 13 to May 14 were reflected in the Predecessor 2020 Period.

 

    Successor     Predecessor  
(% of revenues)   Three Months
Ended
March 31,
2021
    Three Months
Ended
December 31,
2020
    Three Months
Ended
September 30,
2020
    April 13 to
June 30,
2020*
    April 1 to
May 14,
2020
    Three Months
Ended
March 31,
2020
    Three Months
Ended
December 31,
2019
    Three Months
Ended
September 30,
2019
    Three Months
Ended
June 30,
2019
    Three Months
Ended
March 31,
2019
 

Revenues

                                                                                                                                                                         

Total revenues

    100     100     100     100     100     100     100     100     100     100

Operating Expenses

                     

Center costs, excluding depreciation and amortization shown separately below

    69       67       68       69       70       71       71       70       70       72  

General and administrative expenses

    23       20       19       19       19       19       19       19       19       21  

Depreciation and amortization

    9       10       11       12       3       3       4       2       3       3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    101       97       98       100       92       93       94       91       92       96  
 

Income (loss) from operations

    (1     3       2       0       8       7