10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39314

 

TALKSPACE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-4636604

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

Not applicable

Not applicable

(Address of principal executive offices)

(Zip Code)

(212) 284-7206

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.0001 per share

 

TALK

 

Nasdaq Stock Market

Warrants to purchase common stock

 

TALKW

 

Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

As of May 2, 2022, the registrant had 155,116,870 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

6

 

Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021

6

 

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2022 and 2021

7

 

Condensed Consolidated Statements of Stockholder’s Equity (Deficit) (unaudited) for the three months ended March 31, 2022 and 2021

8

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2022 and 2021

9

 

Notes to Unaudited Condensed Consolidated Financial Statements

10

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

27

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

Signatures

33

 

 

 

2


 

basis of presentation

As used in this Quarterly Report, unless the context otherwise requires, references to:

2021 Plan” are to the Talkspace, Inc. 2021 Incentive Award Plan;
Business Combination” are to, together, (i) the First Merger and (ii) the Second Merger;
2021 ESPP” are to the Talkspace, Inc. 2021 Employee Stock Purchase Plan;
Exchange Act” are to the Securities Exchange Act of 1934, as amended;
First Merger” are to the merger of First Merger Sub with and into Old Talkspace;
First Merger Sub” are to Tailwind Merger Sub I, Inc.;
HEC” are to Hudson Executive Investment Corp., a Delaware corporation;
HEC Forward Purchase Agreement” are to the forward purchase agreement, entered into as of June 8, 2020, by and between HEC and HEC Fund, as amended by that certain First Amendment to Forward Purchase Agreement, dated January 12, 2021;
HEC Fund” are to HEC Master Fund LP, a Delaware limited partnership;
HEC IPO” are to the initial public offering by HEC which closed on June 11, 2020;
Merger Agreement” are to that certain Agreement and Plan of Merger, dated as of January 12, 2021, by and among HEC, Old Talkspace, First Merger Sub and Second Merger Sub;
Old Talkspace” are to Groop Internet Platform, Inc. (d/b/a “Talkspace”), a Delaware corporation;
private placement warrants” are to the warrants issued by HEC to the Sponsor in a private placement simultaneously with the closing of the HEC IPO and the warrants originally sold as part of the units in the HEC Forward Purchase;
public warrants” are to the warrants originally sold as part of the units in the HEC IPO (whether they were purchased in the HEC IPO or thereafter in the open market);
SEC” are to the United States Securities and Exchange Commission;
Second Merger Sub” are to Tailwind Merger Sub II, LLC;
Sponsor” are to HEC Sponsor LLC, a Delaware limited liability company;
Warrant Agreement” are to that certain Warrant Agreement, dated as of June 8, 2020, by and between HEC and Continental Stock Transfer & Trust Company; and
warrants” are to the public warrants and the private placement warrants.

3


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements regarding our future results of operations and financial position, industry and business trends, stock-based compensation, revenue recognition, business strategy, plans and market growth.

 

The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: we have a history of losses, which we expect to continue, and we may never achieve or sustain profitability; our business and the markets we operate in are new and rapidly evolving which makes it difficult to evaluate our future prospects and the risks and challenges we may encounter; we may not grow at the rates we historically have achieved or at all; the virtual behavioral health market is immature and volatile, and if it does not develop, if it develops more slowly than we expect, if it encounters negative publicity or if our services are not competitive, the growth of our business will be harmed; the outbreak of the novel coronavirus (COVID-19) and its impact on business and economic conditions could adversely affect our business, results of operations and financial condition, and the extent and duration of those effects will be uncertain; we operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition and results of operations will be harmed; if growth in the number of clients and members or providers on our platform decreases, or the number of products or services that we are able to sell to our clients and members decreases, due to legal, economic or business developments, our business, financial condition and results of operations will be harmed; we may be unsuccessful in achieving broad market education and changing consumer purchasing habits; our growth depends in part on the success of our strategic relationships with third parties that we provide services to; our virtual behavioral healthcare strategies depend on our ability to maintain and expand our network of therapists, psychiatrists and other providers; developments affecting spending by the healthcare industry could adversely affect our business; our business could be adversely affected by legal challenges to our business model or by actions restricting our ability to provide the full range of our services in certain jurisdictions; we are dependent on our relationships with affiliated professional entities, which we do not own, to provide physician and other professional services, and our business, financial condition and our ability to operate in certain jurisdictions would be adversely affected if those relationships were disrupted or if our arrangements with our providers or clients are found to violate state laws prohibiting the corporate practice of medicine or fee splitting; the impact on us of recent healthcare legislation and other changes in the healthcare industry and in healthcare spending is currently unknown, but may adversely affect our business, financial condition and results of operations; changes in consumer sentiment or laws, rules or regulations regarding the use of cookies and other tracking technologies and other privacy matters could have a material adverse effect on our ability to generate net revenues and could adversely affect our ability to collect proprietary data on consumer behavior; our use and disclosure of personal information, including PHI, personal data, and other health information, is subject to state, federal or other privacy and security regulations; any failure to protect, enforce or defend our intellectual property rights could impair our ability to protect our technology and our brand; legal proceedings could cause us to incur unforeseen expenses and could occupy a significant amount of our management’s time and attention; and the other important factors discussed in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and described from time to time in our future reports filed with the SEC. The forward-looking statements in this Quarterly Report are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

 

4


 

You should read this Quarterly Report and the risk factors discussed in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of any new information, future events or otherwise.

5


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

TALKSPACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2022

 

 

December 31, 2021

 

(U.S. dollars in thousands, except share and per share data)

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 



 

CURRENT ASSETS:

 



 

 



 

Cash and cash equivalents

 

$

184,127

 

 

$

198,256

 

Accounts receivable, net of reserves of $4,706 and $4,918 as of March 31, 2022 and December 31, 2021, respectively

 

 

6,312

 

 

 

5,512

 

Other current assets

 

 

5,039

 

 

 

9,562

 

Total current assets

 

 

195,478

 

 

 

213,330

 

Property and equipment, net

 

 

633

 

 

 

624

 

Intangible assets, net

 

 

3,086

 

 

 

3,436

 

Goodwill

 

 

6,134

 

 

 

6,134

 

Other long-term assets

 

 

82

 

 

 

82

 

Total assets

 

$

205,413

 

 

$

223,606

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 



 

 



 

CURRENT LIABILITIES:

 



 

 



 

Accounts payable

 

$

9,490

 

 

$

7,429

 

Deferred revenues

 

 

6,026

 

 

 

7,186

 

Accrued expenses and other current liabilities

 

 

10,234

 

 

 

12,562

 

Total current liabilities

 

 

25,750

 

 

 

27,177

 

Warrant liabilities

 

 

3,195

 

 

 

4,070

 

Other long-term liabilities

 

 

191

 

 

 

86

 

Total liabilities

 

 

29,136

 

 

 

31,333

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 



 

 



 

Common stock of $0.0001 par value — Authorized: 1,000,000,000 shares at March 31, 2022 and December 31, 2021; Issued and outstanding: 155,104,655 and 152,862,447 shares at March 31, 2022 and December 31, 2021, respectively

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

368,152

 

 

 

363,788

 

Accumulated deficit

 

 

(191,890

)

 

 

(171,530

)

Total stockholders’ equity

 

 

176,277

 

 

 

192,273

 

Total liabilities and stockholders’ equity

 

$

205,413

 

 

$

223,606

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

6


 

TALKSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(U.S. dollars in thousands, except share and per share data)

 

2022

 

 

2021

 

Revenues

 

$

30,150

 

 

$

27,157

 

Cost of revenues

 

 

15,129

 

 

 

9,814

 

Gross profit

 

 

15,021

 

 

 

17,343

 

Operating expenses:

 

 

 

 

 

 

Research and development, net

 

 

5,035

 

 

 

2,964

 

Clinical operations

 

 

1,776

 

 

 

2,077

 

Sales and marketing

 

 

21,408

 

 

 

22,251

 

General and administrative

 

 

8,010

 

 

 

2,608

 

Total operating expenses

 

 

36,229

 

 

 

29,900

 

Operating loss

 

 

21,208

 

 

 

12,557

 

Financial (income) expense, net

 

 

(869

)

 

 

173

 

Loss before taxes on income

 

 

20,339

 

 

 

12,730

 

Taxes on income

 

 

21

 

 

 

8

 

Net loss

 

$

20,360

 

 

$

12,738

 

Net loss per share (1):

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

0.13

 

 

$

0.93

 

Weighted average number of common shares (1):

 

 

 

 

 

 

Weighted average number of common shares used in computing basic and diluted net loss per share:

 

 

154,083,443

 

 

 

13,762,205

 

 

(1) Prior period results have been adjusted to reflect the exchange of Old Talkspace’s common stock for Talkspace’s common stock at an exchange ratio of approximately 1.134140 in June 2021 as a result of the Business Combination.

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

7


 

TALKSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(U.S. dollars in thousands, except share and per share data)

 

Convertible Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2022

 

Number of Shares
Outstanding

 

 

Amount

 

 

Number of Shares
Outstanding

 

 

Amount

 

 

Additional paid-in
capital

 

 

Accumulated
deficit

 

 

Total

 

Balance as of December 31, 2021

 

 

 

 

$

 

 

 

152,862,447

 

 

$

15

 

 

$

363,788

 

 

$

(171,530

)

 

$

192,273

 

Exercise of stock options

 

 

 

 

 

 

 

 

2,164,870

 

 

*)

 

 

 

2,063

 

 

 

 

 

 

2,063

 

Restricted stock units vested, net of tax

 

 

 

 

 

 

 

 

77,338

 

 

*)

 

 

 

(67

)

 

 

 

 

 

(67

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,368

 

 

 

 

 

 

2,368

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,360

)

 

 

(20,360

)

Balance as of March 31, 2022

 

 

 

 

$

 

 

 

155,104,655

 

 

$

15

 

 

$

368,152

 

 

$

(191,890

)

 

$

176,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock (1)

 

 

Common Stock (1)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2021

 

Number of Shares
Outstanding

 

 

Amount

 

 

Number of Shares
Outstanding

 

 

Amount

 

 

Additional paid-in
capital
(1)

 

 

Accumulated
deficit

 

 

Total

 

Balance as of December 31, 2020

 

 

94,582,550

 

 

$

111,282

 

 

 

13,413,431

 

 

$

1

 

 

$

9,889

 

 

$

(108,788

)

 

$

(98,898

)

Exercise of stock options

 

 

 

 

 

 

 

 

684,923

 

 

*)

 

 

 

797

 

 

 

 

 

 

797

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,513

 

 

 

 

 

 

1,513

 

Issuance of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125

 

 

 

 

 

 

125

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,738

)

 

 

(12,738

)

Balance as of March 31, 2021

 

 

94,582,550

 

 

$

111,282

 

 

 

14,098,354

 

 

$

1

 

 

$

12,324

 

 

$

(121,526

)

 

$

(109,201

)

 

*) Represents an amount lower than $1

(1) Prior period results have been adjusted to reflect the exchange of Old Talkspace’s common stock for Talkspace’s common stock at an exchange ratio of approximately 1.134140 in June 2021 as a result of the Business Combination.

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

8


 

TALKSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(U.S. dollars in thousands)

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(20,360

)

 

$

(12,738

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

429

 

 

 

462

 

Stock-based compensation

 

 

2,368

 

 

 

1,513

 

Warrant change in fair value

 

 

(875

)

 

 

165

 

Increase in accounts receivable, net

 

 

(800

)

 

 

(1,666

)

Decrease (increase) in other current assets

 

 

4,923

 

 

 

(1,076

)

Increase in accounts payable

 

 

2,061

 

 

 

7,030

 

(Decrease) increase in deferred revenues

 

 

(1,160

)

 

 

2,878

 

Decrease in accrued expenses and other current liabilities

 

 

(1,837

)

 

 

(447

)

Increase in other long-term liabilities

 

 

105

 

 

 

 

Net cash used in operating activities

 

 

(15,146

)

 

 

(3,879

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(88

)

 

 

(319

)

Net cash used in investing activities

 

 

(88

)

 

 

(319

)

Cash flows from financing activities:

 

 

 

 

 

 

Payment of deferred issuance costs

 

 

 

 

 

(75

)

Proceeds from exercise of stock options

 

 

2,063

 

 

 

797

 

Payments for employee taxes withheld related to vested stock-based awards

 

 

(558

)

 

 

 

Net cash provided by financing activities

 

 

1,505

 

 

 

722

 

Net decrease in cash and cash equivalents

 

 

(13,729

)

 

 

(3,476

)

Cash and cash equivalents at the beginning of the period

 

 

198,256

 

 

 

13,248

 

Cash and cash equivalents at the end of the period (1)

 

$

184,527

 

 

$

9,772

 

Supplemental cash flow data:

 

 

 

 

 

 

Cash paid during the period for interest

 

$

12

 

 

$

5

 

Cash paid during the period for income taxes

 

$

174

 

 

$

 

Non-cash financing activity:

 

 

 

 

 

 

Deferred issuance costs

 

$

 

 

$

2,673

 

Issuance of warrant and other costs related to the Credit Agreement

 

$

 

 

$

175

 

(1) As of March 31, 2022, amount includes restricted cash of $0.4 million maintained in a short-term certificate of deposit account and included within other current assets in the condensed consolidated balance sheet.

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

9


 

TALKSPACE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

 

Talkspace, Inc. (together with its consolidated subsidiaries, the “Company” or “Talkspace”) is a leading behavioral healthcare company enabled by a purpose-built technology platform. Talkspace provides individuals and licensed therapists, psychologists and psychiatrists with an online platform for one-on-one therapy delivered via messaging, audio and video. Talkspace was originally incorporated as Hudson Executive Investment Corp. (“HEC”). In connection with the Business Combination completed in June 2021, HEC filed the Certificate of Incorporation and changed its name to “Talkspace, Inc.”.

 

Operating Segments

The Company operates its business as a single segment and as one reporting unit, which is how our chief operating decision maker (who is our interim chief executive officer) reviews financial performance and allocates resources.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. The Company’s interim period results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year.

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2021, have been applied consistently in these unaudited condensed consolidated financial statements, unless otherwise stated. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Use of estimates

The preparation of consolidated financial statements, in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company evaluates its assumptions on an ongoing basis. The Company’s management believes that the estimates, judgment, and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

 


 

 

Recently Issued and Adopted Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires entities to disclose information about certain types of government assistance they receive in the notes to the financial statements. Entities are required to provide the new disclosures prospectively for all transactions with a government entity that are accounted for under either a grant or a contribution accounting model and are reflected in the financial statements at the date of initially applying the new amendments, and to new transactions entered into after that date. Retrospective application of the guidance is permitted. The amendments in this ASU are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted this guidance on January 1, 2022 and the adoption did not have a significant impact on its condensed consolidated financial statements or related disclosures.

 

In May 2021, the FASB issued ASU 2021-04—Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, which clarifies and reduces diversity in accounting for modifications or exchanges of freestanding

10


 

equity-written call options that remain equity classified after modifications or exchanges based on the substance of the transactions. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2022 and the adoption did not have an impact on its condensed consolidated financial statements or related disclosures.

 

In August 2020, the FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer's Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendments in this ASU are effective for public entities excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2022 and the adoption did not have an impact on its condensed consolidated financial statements or related disclosures.

NOTE 3. REVENUE RECOGNITION

The Company is operating a virtual behavioral healthcare business that connects individuals and licensed therapists, psychologists and psychiatrists with an online platform for one-on-one therapy delivered via messaging, audio and video. Individuals access the Company’s services through the Company’s website or mobile app. The Company generates revenues from the sale of monthly, quarterly, bi-annual and annual membership subscriptions to its therapy platform as well as supplementary a la carte offerings, payments from members and their respective insurance companies and annually contracted platform access fees from enterprise clients for the delivery of therapy services to their members or employees.

The Company provides these services directly to individuals through a subscription plan. The Company also contracts with health plans and other enterprises to provide its services to individuals who are qualified to receive access to the Company’s services through the Company’s commercial arrangements.

The following table presents the Company’s revenues disaggregated by revenue source:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2022

 

 

2021

 

Revenues from sales to unaffiliated customers:

 



 



 

 

Consumers

 

$

17,260

 

 

$

18,564

 

Commercial

 

 

12,890

 

 

 

8,593

 

Total

 

$

30,150

 

 

$

27,157

 

 

Accounts Receivable and Revenue Reserves

Revenue reserves are deducted from accounts receivable to present the net amount expected to be collected. As of March 31, 2022, revenue reserves mainly relate to allowances for accounts receivable balances from health insurance and EAP organizations. During the three months ended March 31, 2022, the Company recorded an increase in revenue reserves of $1.0 million. During the three months ended March 31, 2022, the Company also wrote-off $1.2 million of aged receivables that were previously fully reserved. As of March 31, 2022, the balance of receivables related to health insurance and EAP organizations was $6.0 million and the revenue reserves against these receivables was $4.7 million, of this amount $3.4 million relates to aged balances for periods prior to 2022.

 

Deferred Revenue

The Company records deferred revenue when cash payments are received in advance of the Company’s performance obligation to provide services. As of March 31, 2021, deferred revenue related mainly to the Company’s consumer subscription business. Deferred revenue as of March 31, 2022 was $6.0 million ($7.2 million as of December 31, 2021). The Company recognizes deferred revenues as revenues in the statement of operations once performance obligations have been performed and satisfied. The Company expects to satisfy the majority of its performance obligations associated with deferred revenue within one year or less.

11


 

 

Contract Costs

The Company elected to use the practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less.

NOTE 4. FAIR VALUE MEASUREMENT

The carrying value of the Company’s cash equivalents, accounts receivable, other current assets, accounts payable, and accrued liabilities approximate fair value because of the relatively short-term nature of the underlying assets. The Company’s Private Placement Warrants are carried at fair value with changes in fair value recognized in earnings each period.

The Private Placement Warrants acquired in connection with the consummation of the Business Combination and the closing of the Forward Purchase Agreement with the HEC Fund are accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the accompanying condensed consolidated balance sheets. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within financial (income) expense, net in the condensed consolidated statement of operations.

The Private Placement Warrants were valued using the Black-Scholes-Merton Model, which is considered to be a Level 3 fair value measurement. The primary unobservable input utilized in determining the fair value of the Private Placement Warrants is the expected volatility of the Company’s common stock. The expected volatility of the Company’s common stock was estimated to be approximately 68.8% and 67.8% as of March 31, 2022 and December 31, 2021, respectively. For the three months ended March 31, 2022, the Company had gains related to the revaluation of the Private Placement Warrants of $0.9 million.

The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

 

(in thousands)

 

Level

 

March 31, 2022

 

 

December 31, 2021

 

Liabilities:

 

 

 

(unaudited)

 

 

 

 

Warrant liability – Private Placement Warrants

 

3

 

$

3,195

 

 

$

4,070

 

The following table presents the changes in the fair value of warrant liabilities during the three months ended March 31, 2022:

 

(in thousands)

 

Private Placement

 

Balance at December 31, 2021

 

$

4,070

 

Change in value

 

 

(875

)

Balance at March 31, 2022 (unaudited)

 

$

3,195

 

 

In connection with the consummation of the Business Combination, the Company also acquired Public Warrants from HEC and also issued equity warrants to certain consultants. The Company determined these warrants met the criteria to be classified as equity in accordance with ASC 815-40. The Company valued these warrants using the instrument’s publicly listed trading price on the date of acquisition or issuance, where applicable, and included in additional paid-in capital within stockholder’s deficit. This is considered to be a non-recurring Level 1 measurement due to the use of an observable market quote in an active market.

NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES

 

Lease commitments

The Company does not currently have any leases with terms in excess of 12 months. Since terminating our prior office lease in New York City in August 2020, the Company has an immaterial short-term sublease for office space in New York City. The Company currently has no permanent physical office space and the majority of our employees are working remotely.

 

The Company has limited operations outside the United States. The Company has one foreign subsidiary located in Israel which leases its operating facilities under a month-to-month operating lease agreement.

 

12


 

The Company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, the Company does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition, but recognizes lease expenses over the lease term on a straight-line basis. The Company also elected the practical expedient to not separate lease and non-lease components for all of the Company’s leases.

 

Rent expenses under the Company’s short-term operating leases for the three months ended March 31, 2022 was $0.1 million (insignificant for the three months ended March 31, 2021).

 

Litigation

The Company is and may in the future be involved in various legal proceedings arising from the normal course of business activities. Although the results of litigation and claims cannot be predicted with certainty, currently, the Company believes that the likelihood of any material adverse impact on the Company’s consolidated results of operations, cash flows or our financial position for any such litigation or claims is remote. Regardless of the outcome, litigation can have an adverse impact on the Company because of the costs to defend lawsuits, diversion of management resources and other factors.

 

In January 2022, the Company and certain of its current and former officers and directors were named as defendants in a soon to be consolidated securities class action complaint currently listed in the United States District Court for the Southern District of New York (the “Securities Actions”) under the case headings: (1) Baron v. Talkspace et al., No. 22-cv-00163 (S.D.N.Y.) and (2) Valdez v. Talkspace et al., No. 22-cv-00840 (S.D.N.Y.). The Securities Actions asserted violations of sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 promulgated thereunder. The Securities Actions generally relate to public disclosures and statements by the Company in connection with the Business Combination. The complaints seek, among other things, damages on behalf of all members of the proposed class. The Court is currently considering a lead plaintiff(s) for the consolidated case.

 

The Company is not able to predict the outcome of these lawsuits, nor can it predict the amount of time and expense that will be required to resolve the lawsuits. The Company believes that the lawsuits are without merit and intends to vigorously defend against them.

 

In addition to the foregoing, from time-to-time, the Company is party to various legal proceedings, claims and litigation that arise in the normal course of business. In the opinion of management, the ultimate outcome of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Accruals for loss contingencies are recorded when a loss is probable, and the amount of such loss can be reasonably estimated.

Warranties and Indemnification

The Company’s arrangements generally include certain provisions for indemnifying clients against liabilities if there is a breach of a Client’s data or if the Company’s service infringes a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications.

The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as a director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer liability insurance coverage that would generally enable it to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.

NOTE 6. CAPITAL STOCK

 

The Company’s authorized capital stock consists of (a) 1,000,000,000 shares of common stock, par value $0.0001 per share; and (b) 100,000,000 shares of preferred stock, par value $0.0001 per share. As of March 31, 2022, there were 155,104,655 shares of common stock issued and outstanding (152,862,447 as of December 31, 2021). As of March 31, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.

 

13


 

NOTE 7. SHARE-BASED COMPENSATION

The Company adopted the 2014 Stock Incentive Plan (the “2014 Plan”) pursuant to which incentive and nonqualified stock options and stock purchase rights to purchase the Company’s common stock may be granted to officers, employees, directors, consultants and service providers.

In connection with the closing of the Business Combination, the Company adopted the 2021 Incentive Award Plan (the “2021 Plan”) under which the Company may grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent. In connection with the effectiveness of the 2021 Plan, no further awards will be granted under the 2014 Plan. Employees, consultants and directors of the Company, and employees and consultants of its subsidiaries, are eligible to receive awards under the 2021 Plan.

The 2021 Plan is administered by the Company’s board of directors, which may delegate its duties and responsibilities to one or more committees of the Company’s directors and/or officers (referred to collectively as the “plan administrator”), subject to the limitations imposed under the 2021 Plan, Section 16 of the Securities Exchange Act of 1934, as amended, stock exchange rules and other applicable laws. The plan administrator has the authority to take all actions and make all determinations under the 2021 Plan, to interpret the 2021 Plan and award agreements and to adopt, amend and repeal rules for the administration of the 2021 Plan as it deems advisable. The plan administrator also has the authority to determine which eligible service providers receive awards, grant awards and set the terms and conditions of all awards under the 2021 Plan, including any vesting and vesting acceleration provisions, subject to the conditions and limitations in the 2021 Plan.

The maximum number of shares of Talkspace common stock that may be issued pursuant to the exercise of incentive stock options granted under the 2021 Plan is 100,000,000. The aggregate share limit under the 2021 Plan will be subject to an annual increase on the first day of each calendar year beginning January 1, 2022 and ending on and including January 1, 2031 by a number of shares equal to the lesser of (i) a number equal to 5% of the aggregate number of shares of Talkspace common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of Talkspace common stock as is determined by the Talkspace board of directors. An aggregate of 11,995,601 shares of Talkspace common stock are available for issuance under the 2021 Plan as of March 31, 2022.

In connection with the closing of the Business Combination, the Company also adopted the 2021 Employee Stock Purchase Plan (the “2021 ESPP”) under which employees of Talkspace and its participating subsidiaries are provided with the opportunity to purchase Talkspace common stock at a discount through accumulated payroll deductions during successive offering periods.

The 2021 ESPP is administered by the compensation committee of the Company’s board of directors (referred to collectively as the “plan administrator”). The plan administrator has the authority to take all actions and make all determinations under the 2021 ESPP, to interpret the 2021 ESPP and to adopt, amend and repeal rules for the administration of the 2021 ESPP as it deems advisable. In addition, the number of shares of common stock available for issuance under the ESPP will be annually increased on January 1 of each calendar year beginning in 2022 and ending in 2031, by an amount equal to the lesser of (i) 1% of the aggregate number of shares of Talkspace common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of Talkspace common stock as determined by the Talkspace board of directors. The maximum number of shares of Talkspace common stock that may be granted under the 2021 ESPP is 50,000,000. An aggregate of 4,573,602 shares of Talkspace common stock are available for issuance under the 2021 ESPP as of March 31, 2022.

 

All stock-based awards are measured based on the grant date fair value and are generally recognized on a straight-line basis in the Company’s condensed consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally requiring a four-year vesting period).

14


 

 

Stock Options

Stock options issued under the Plans generally vest over a four-year period and are exercisable a maximum period of ten years. A summary of the Company’s stock option activity under the 2014 Plan and the 2021 Plan for the three months ended March 31, 2022 is as follows:

 

 

 

Three Months Ended March 31, 2022

 

 

 

Number of
options

 

 

Weighted
average
exercise
price

 

 

Weighted
average
remaining
contractual
term (in years)

 

 

Aggregate
intrinsic value
(1) (in thousands)

 

Outstanding at the beginning of the period

 

 

19,494,202

 

 

$

1.95

 

 

 

6.88

 

 

$

19,214

 

Granted

 

 

1,552,395

 

 

$

1.61

 

 

 

 

 

 

 

Exercised

 

 

(2,164,870

)

 

$

0.95

 

 

 

 

 

 

 

Forfeited

 

 

(426,122

)

 

$

5.06

 

 

 

 

 

 

 

Outstanding at the end of the period

 

 

18,455,605

 

 

$

1.97

 

 

 

7.15

 

 

$

14,220

 

Exercisable at the end of the period

 

 

13,432,414

 

 

$

0.86

 

 

 

5.92

 

 

$

13,623

 

 

(1) The aggregate intrinsic value of options outstanding and options exercisable at end of the period does not include 4,779,271 and 1,366,014 options that are out of the money, respectively.

 

The weighted average grant-date fair value of stock options granted to employees during the three months ended March 31, 2022 and 2021 was $1.06 and $7.00, respectively.

 

As of March 31, 2022, there was $16.2 million of total unrecognized compensation cost related to non-vested options that are expected to be recognized over a period of up to 4 years.

 

Restricted Stock Units

The Company began issuing restricted stock units (“RSUs”) to certain employees and directors of the Company in the fourth quarter of 2021 under the 2021 plan. These RSUs typically vest over a four-year period.

 

The following table summarizes the activity for RSUs for the three months ended March 31, 2022:

 

 

 

Three months ended March 31, 2022

 

 

 

Number of
restricted stock units

 

 

Weighted
average grant-date
fair value

 

Nonvested at beginning of the period

 

 

2,330,094

 

 

$

3.58

 

Granted

 

 

3,452,961

 

 

$

1.61

 

Vested

 

 

(116,613

)

 

$

3.58

 

Forfeited

 

 

(215,518

)

 

$

3.33

 

Nonvested at end of the period

 

 

5,450,924

 

 

$

2.35

 

 

The fair value as of the respective vesting dates of RSUs that vested during three months ended March 31, 2022 was $0.2 million. As of March 31, 2022, there was $12.4 million of total unrecognized compensation cost related to non-vested RSUs that are expected to be recognized over a period of up to 3.9 years.

The following table sets forth the total stock-based compensation expense related to stock options and restricted stock units included in the respective components of operating expenses in the condensed consolidated statements of operations:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2022

 

 

2021

 

Research and development, net

 

$

546

 

 

$

172

 

Clinical Operations

 

 

122

 

 

 

71

 

Sales and Marketing

 

 

777

 

 

 

877

 

General and administrative

 

 

923

 

 

 

393

 

Total stock-based compensation expense

 

$

2,368

 

 

$

1,513

 

 

15


 

NOTE 8. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the periods presented:

 

 

 

Three Months Ended March 31,

 

(in thousands, except share and per share data)

 

2022

 

 

2021

 

Net loss

 

$

20,360

 

 

$

12,738

 

 

 

 

 

 

 

 

Weighted-average shares used to compute net loss per share,
     basic and diluted
(1)

 

 

154,083,443

 

 

 

13,762,205

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted (1)

 

$

0.13

 

 

$

0.93

 

 

(1) Prior period results have been adjusted to reflect the exchange of Old Talkspace’s common stock for Talkspace’s common stock at an exchange ratio of approximately 1.134140 in June 2021 as a result of the Business Combination.

For the three months ended March 31, 2022, the following were excluded from the calculation of diluted income per share since each would have had an anti-dilutive effect given the Companys net loss: 18,455,605 stock options, 5,450,924 restricted stock units, 12,780,000 private placement warrants and 21,350,000 public warrants to purchase the Company’s common stock.

For the three months ended March 31, 2021, the following were excluded from the calculation of diluted loss per share since each would have had an anti-dilutive effect given the Company’s net loss: 94,582,550 shares of convertible preferred stock, 20,631,735 stock options, 60,000 warrants to the Companys common stock and 50,881 warrants to the Companys series D convertible preferred stock.

NOTE 9. TAXES ON INCOME

As a result of the Company’s history of net operating losses (“NOL”), the Company has provided for a full valuation allowance against its deferred tax assets for assets that are not expected to be realized.

The main reconciling item between the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowance in respect of deferred taxes relating to accumulated net operating losses carried forward due to the uncertainty of the realization of such deferred taxes.

NOTE 10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are comprised of the following:

 

(in thousands)

 

March 31, 2022

 

 

December 31, 2021

 

Employee compensation

 

$

3,135

 

 

$

5,988

 

User acquisition

 

 

2,791

 

 

 

2,680

 

Professional fees

 

 

1,096

 

 

 

1,303

 

Other

 

 

3,212