10-Q
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Table of Contents

 

 

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, 2023

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.)

622 Third Avenue, New York, New York

10017

(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 8, 2023, the registrant had 163,659,536 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


Table of Contents

Table of Contents

 

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022

3

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2023 and 2022

4

Condensed Consolidated Statements of Stockholder’s Equity (Deficit) (unaudited) for the three months ended March 31, 2023 and 2022

5

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2023 and 2022

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Disclosures

24

Item 5.

Other Information

24

Item 6.

Exhibits

25

Signatures

26

 

 

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

TALKSPACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2023

 

 

December 31, 2022

 

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

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 



 

CURRENT ASSETS:

 



 

 



 

Cash and cash equivalents

 

$

125,083

 

 

$

138,545

 

Accounts receivable, net

 

 

12,460

 

 

 

9,640

 

Other current assets

 

 

3,813

 

 

 

4,372

 

Total current assets

 

 

141,356

 

 

 

152,557

 

Property and equipment, net

 

 

563

 

 

 

677

 

Intangible assets, net

 

 

2,343

 

 

 

2,529

 

Other long-term assets

 

 

518

 

 

 

491

 

Total assets

 

$

144,780

 

 

$

156,254

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 



 

 



 

CURRENT LIABILITIES:

 



 

 



 

Accounts payable

 

$

7,674

 

 

$

6,461

 

Deferred revenues

 

 

4,123

 

 

 

4,355

 

Accrued expenses and other current liabilities

 

 

9,800

 

 

 

16,502

 

Total current liabilities

 

 

21,597

 

 

 

27,318

 

Warrant liabilities

 

 

1,128

 

 

 

939

 

Other long-term liabilities

 

 

418

 

 

 

461

 

Total liabilities

 

 

23,143

 

 

 

28,718

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 



 

 



 

Common stock of $0.0001 par value — Authorized: 1,000,000,000 shares at March 31, 2023 and December 31, 2022; Issued and outstanding: 163,119,345 and 161,155,030 shares at March 31, 2023 and December 31, 2022, respectively

 

 

16

 

 

 

16

 

Additional paid-in capital

 

 

381,581

 

 

 

378,722

 

Accumulated deficit

 

 

(259,960

)

 

 

(251,202

)

Total stockholders’ equity

 

 

121,637

 

 

 

127,536

 

Total liabilities and stockholders’ equity

 

$

144,780

 

 

$

156,254

 

 

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

 

3


Table of Contents

 

TALKSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended

 

 

 

March 31,

 

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

 

2023

 

 

2022

 

Revenues

 

$

33,336

 

 

$

30,150

 

Cost of revenues

 

 

16,588

 

 

 

15,129

 

Gross profit

 

 

16,748

 

 

 

15,021

 

Operating expenses:

 

 

 

 

 

 

Research and development, net

 

 

5,353

 

 

 

5,035

 

Clinical operations, net

 

 

1,601

 

 

 

1,776

 

Sales and marketing

 

 

13,469

 

 

 

21,408

 

General and administrative

 

 

5,364

 

 

 

8,010

 

Total operating expenses

 

 

25,787

 

 

 

36,229

 

Operating loss

 

 

(9,039

)

 

 

(21,208

)

Financial income, net

 

 

(424

)

 

 

(869

)

Loss before taxes on income

 

 

(8,615

)

 

 

(20,339

)

Taxes on income

 

 

143

 

 

 

21

 

Net loss

 

$

(8,758

)

 

$

(20,360

)

Net loss per share:

 

 

 

 

 

 

Basic and Diluted

 

$

(0.05

)

 

$

(0.13

)

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

 

 

 

 

 

 

Basic and Diluted

 

 

161,797,781

 

 

 

154,083,443

 

 

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

4


Table of Contents

 

TALKSPACE, INC.

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2023

 

Number of Shares
Outstanding

 

 

Amount

 

 

Additional paid-in
capital

 

 

Accumulated
deficit

 

 

Total

 

Balance as of December 31, 2022

 

 

161,155,030

 

 

$

16

 

 

$

378,722

 

 

$

(251,202

)

 

$

127,536

 

Exercise of stock options

 

 

1,739,265

 

 

*)

 

 

 

621

 

 

 

 

 

 

621

 

Restricted stock units vested, net of tax

 

 

225,050

 

 

*)

 

 

 

(65

)

 

 

 

 

 

(65

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,303

 

 

 

 

 

 

2,303

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(8,758

)

 

 

(8,758

)

Balance as of March 31, 2023 (unaudited)

 

 

163,119,345

 

 

$

16

 

 

$

381,581

 

 

$

(259,960

)

 

$

121,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2022

 

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 (unaudited)

 

 

155,104,655

 

 

$

15

 

 

$

368,152

 

 

$

(191,890

)

 

$

176,277

 

*) Represents an amount lower than $1

 

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

5


Table of Contents

TALKSPACE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(U.S. dollars in thousands)

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(8,758

)

 

$

(20,360

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

306

 

 

 

429

 

Stock-based compensation

 

 

2,303

 

 

 

2,368

 

Remeasurement of warrant liabilities

 

 

189

 

 

 

(875

)

Increase in accounts receivable

 

 

(2,820

)

 

 

(800

)

Decrease in other current assets

 

 

559

 

 

 

4,923

 

Increase in accounts payable

 

 

1,213

 

 

 

2,061

 

Decrease in deferred revenues

 

 

(232

)

 

 

(1,160

)

Decrease in accrued expenses and other current liabilities

 

 

(6,702

)

 

 

(1,837

)

Other

 

 

(95

)

 

 

105

 

Net cash used in operating activities

 

 

(14,037

)

 

 

(15,146

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9

)

 

 

(88

)

Proceeds from sale of property and equipment

 

 

28

 

 

 

 

Net cash provided by (used in) investing activities

 

 

19

 

 

 

(88

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

621

 

 

 

2,063

 

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

 

 

(65

)

 

 

(558

)

Net cash provided by financing activities

 

 

556

 

 

 

1,505

 

Net decrease in cash and cash equivalents

 

 

(13,462

)

 

 

(13,729

)

Cash and cash equivalents at the beginning of the period

 

 

138,545

 

 

 

198,256

 

Cash and cash equivalents at the end of the period

 

$

125,083

 

 

$

184,527

 

Supplemental cash flow data:

 

 

 

 

 

 

Cash paid during the period for interest

 

$

29

 

 

$

12

 

Cash paid during the period for income taxes

 

$

168

 

 

$

174

 

 

 

 

 

 

 

 

 

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

6


Table of Contents

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. The Company offers convenient and affordable access to a fully credentialed network of highly qualified providers. Since Talkspace’s founding in 2012, the Company has connected millions of patients with licensed behavioral health providers across a wide and growing spectrum of care through virtual counseling, psychotherapy, and psychiatry.

 

The Company's principal executive office is located in New York, NY. The Company has three wholly owned subsidiaries, Talkspace LLC, Talkspace Network LLC and Groop Internet Platform LTD. In addition, the Company holds a variable interest in one professional association and six professional corporations, which have been established pursuant to the requirements of their respective domestic jurisdiction governing the corporate practice of medicine. See Note 11, “Variable Interest Entities,” in the notes to the condensed consolidated financial statements for further details.

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, 2022, have been applied consistently in these unaudited condensed consolidated financial statements, unless otherwise stated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Intercompany transactions and balances have been eliminated in the preparation of the condensed consolidated financial statements.

 

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the condensed consolidated financial statements. The Company’s significant estimates and assumptions used in these financial statements include, but are not limited to, the recognition and disclosure of contingent liabilities, revenue recognition, stock-based compensation awards and the fair value of warrant liabilities. The Company bases its estimates on historical factors, current circumstances and the experience and judgment of management. The Company evaluates its assumptions on an ongoing basis. The Company’s management believes that the estimates, judgments, and assumptions used are reasonable based on information available at the time they are made. Estimates, by their nature, are based on judgment and available information, therefore, actual results could be materially different from these estimates.

 

Reclassification

Certain prior year amounts have been reclassified to conform to current year presentation.

Recently Issued and Adopted Accounting Pronouncements

The Company has reviewed recent accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on the condensed consolidated financial statements as a result of their future adoption.

7


Table of Contents

NOTE 3. REVENUE RECOGNITION

 

The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, when the Company satisfies its performance obligation to perform its defined contractual obligations to provide virtual behavioral healthcare services. Revenue is recognized in an amount that reflects the consideration that the Company will be entitled in exchange for the service rendered. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that is included in the transaction price in accordance using the expected value method, as this method best predicts the amount of consideration to which the Company will be entitled based on the terms of its contracts. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

Through its platform, Talkspace serves its business-to-business (“B2B”) channel, comprised of large health insurance plans and employee assistance programs (“Payors”), and large enterprise clients (“DTE”) who offer their insured members and employees access to the Company's platform at in-network reimbursement rates, or while their employer is under an active contract with Talkspace, where applicable, and its business-to-consumer (“Consumer”) channel, comprised of individual consumers who subscribe directly to the Company's platform.

 

The Company contracts with Payors to provide its therapy and psychiatry services to their eligible covered members. Revenue is recognized at a point in time, as virtual therapy or psychiatry session is rendered. The transaction price is determined based on contracted rates and includes variable consideration in the form of implicit price concessions. The Company determines the total transaction price, including an estimate of variable consideration, at contract inception and reassesses this estimate at each reporting date. The Company estimates the amount of variable consideration that is included in the transaction price using the expected value method primarily based on actual historical collection experience for each insurance payor over a twelve-month period. Revenue from Payors is presented net of implicit price concessions. Contracts with Payors include annual evergreen clauses and generally may be terminated by either party typically upon a minimum 60-day advance notice.

 

The Company contracts with enterprises to provide access to its therapist platform for their employees, primarily based on a per-member-per-month access fee model. Revenues from access fees are recognized ratably over the contractual term. The majority of contracts with enterprise clients typically range in length from one to three years and are generally non-cancelable during the initial contractual term.

 

The Company also generates revenues from the sale of monthly, quarterly, bi-annual and annual membership subscriptions to the Company's therapy platform as well as supplementary a la carte offerings directly to individual consumers through a subscription plan. The Company recognizes consumer revenues ratably over the subscription period, beginning when therapy services commence. The Company recognizes revenues from supplementary a la carte offerings at a point in time, as virtual therapy session is rendered. Members may cancel their subscription at any time and will receive a pro-rata refund for the subscription price. The transaction price from member subscription revenue and supplementary a la carte offerings includes variable consideration in the form of refunds. The Company estimates the refund liability for the variable consideration portion of the transaction price primarily based on historical experience. The refund liability is recorded within the “Accrued expenses and other current liabilities” line item in the condensed consolidated balance sheets. Revenue from individual consumers is presented net of refunds.

 

The following table presents the Company’s revenues from sales to unaffiliated customers disaggregated by revenue source:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2023

 

 

2022

 

Revenues from sales to unaffiliated customers:

 

Unaudited

 

 

Unaudited

 

   Payor revenue

 

$

14,811

 

 

$

8,110

 

   DTE revenue

 

 

8,676

 

 

 

5,661

 

Total B2B revenue

 

 

23,487

 

 

 

13,771

 

Consumer revenue

 

 

9,849

 

 

 

16,379

 

Total revenue

 

$

33,336

 

 

$

30,150

 

 

Accounts Receivable and Allowance for Credit Losses

Accounts receivables are stated net of credit losses allowance. The Company is exposed to credit losses primarily through its contracts with health insurance plans, employee assistance programs and enterprise clients. The Company’s methodology for estimating credit loss is based on historical collection experience, customer creditworthiness, current and future economic

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condition and market condition. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Accounts receivables are written off after all reasonable means to collect the full amount have been exhausted. The allowance for credit losses was immaterial as of March 31, 2023 and December 31, 2022.

 

Deferred Revenue

The Company records deferred revenues when cash payments from customers are received in advance of the Company's performance obligation to provide services. As of March 31, 2023, deferred revenue related mainly to the Company’s consumer channel. The Company expects to satisfy the majority of its performance obligations associated with deferred revenue within one year or less.

NOTE 4. FAIR VALUE MEASUREMENT

The carrying value of the Company’s cash equivalents, accounts receivable, 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 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 were measured at fair value at inception and thereafter on a recurring, quarterly basis, with changes in fair value presented within financial income, 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 following table presents the changes in the fair value of warrant liabilities during the three months ended March 31, 2023 and 2022:

 

 

Level 3 Liabilities

 

 

 

For the Three Months Ended March 31, 2023 (unaudited)

 

(in thousands)

 

Beginning Balance

 

 

Change in Fair Value

 

 

Ending Balance

 

Private Placement Warrants

 

$

939

 

 

$

189

 

 

$

1,128

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 Liabilities

 

 

 

For the three Months Ended March 31, 2022 (unaudited)

 

(in thousands)

 

Beginning Balance

 

 

Change in Fair Value

 

 

Ending Balance

 

Private Placement Warrants

 

$

4,070

 

 

$

(875

)

 

$

3,195

 

 

 

NOTE 5. LEASES

In November 2022, the Company entered into a long-term lease agreement for new office space in New York, NY. This operating lease expires two years from the rent commencement date and has the option to be renewed for an additional year. The Company recognizes ROU lease asset and lease liability based on the present value of the future minimum lease payments at the lease commencement date. The Company did not include the renewal options as part of the ROU lease asset and lease liability at the commencement date as it was not reasonably certain that the renewal option will be exercised. The Company used incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date in determining the present value of future payments. As of March 31, 2023 the weighted-average remaining lease term was 1.83 years and weighted-average discount rate was 7.17%. As of March 31, 2023 and December 31, 2022, the ROU lease asset was of $0.4 million and is included within the "Other assets" line item in the condensed consolidated balance sheet. As of March 31, 2023 and December 31, 2022, the short-term portion of the lease liability was $0.2 million and is included within the "Accrued expenses and other current liabilities" line item in the condensed consolidated balance sheet. As of March 31, 2023 and December 31, 2022, the long-term portion of the lease liability was $0.2 million and $0.3 million, respectively, and is included within the "Other liabilities" line item in the condensed consolidated balance sheet. Operating lease cost recognized for the three months ended March 31, 2023 was $0.1 million.

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In addition, the Company's wholly owned subsidiary, Groop Internet Platform LTD, located in Israel, leases its operating facilities under a month-to-month operating lease agreement. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes rent expense for these leases on a straight-line basis over the lease term.

 

The following table outlines the maturities of the Company’s lease liabilities as of March 31, 2023:

 

 

 

March 31, 2023

 

In thousands

 

unaudited

 

The remainder of 2023

 

$

203

 

2024

 

 

270

 

2025

 

 

22

 

Total undiscounted lease payments

 

$

495

 

Less interest

 

 

(29

)

Present value of operating lease liability

 

$

466

 

 

NOTE 6. COMMITMENTS AND CONTINGENT LIABILITIES

Litigation

In January 2022, the Company and certain of its current and former officers and directors were named as defendants in securities class action complaints filed in the United States District Court for the Southern District of New York 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.), which were subsequently consolidated under the caption In re Talkspace, Inc. Securities Litigation, No. 22-cv-00163 (S.D.N.Y) (the “Securities Action”). The Securities Action asserts violations of sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and SEC Rules 10b-5 and 14a-9 promulgated thereunder. These actions generally relate to public disclosures and statements by the Company in connection with its merger with Hudson Executive Investment Corp. (“HEIC”).

 

In December 2022, the Company’s subsidiary Tailwind Merger Sub II, LLC, certain of the Company’s current and former directors and officers, and others were named as defendants in a putative class action complaint filed in the Delaware Court of Chancery under the case caption Valdez v. Braunstein, et al., C.A. No. 2022-1148 (Del. Ch.) (the “Delaware Action”). The Delaware Action asserts claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty relating to the merger with HEIC, among other things, based on many of the same facts at issue in the Securities Action. The complaint seeks, among other things damages on behalf of putative class members who did not redeem their shares in connection with the Company’s merger with HEIC.

 

In February 2023, the Company resolved the Securities Action and the Delaware Action through mediation. The settlement resolves these litigations with respect to all named defendants. The Company recorded an accrual for its respective share of the settlement agreement as of December 31, 2022. The settlement will have to be approved by the court, which the Company expects will occur in the third quarter of 2023.

 

In June and July 2022, two individuals filed stockholder derivative lawsuits on behalf of Talkspace in the United States District Court for the Southern District of New York under the case captions: (1) Odsvall v. Oren Frank et al., No. 22-cv-05016 (S.D.N.Y.) and (2) Nayman v. Berg, et al., No. 22-cv-06258 (S.D.N.Y.), which were subsequently consolidated under the caption In re Talkspace Stockholder Derivative Litigation, No. 22-cv-05016 (S.D.N.Y.) (the “Derivative Action”). The Derivative Action names certain of the Company’s current and former officers and directors as defendants and the Company as a nominal defendant. The Derivative Action asserts claims for violations of federal securities laws, breach of fiduciary duty, and aiding and abetting breaches of fiduciary duty relating to the merger with HEIC, among other things, based on many of the same facts at issue in the Securities Action.

 

In February 2023 the parties agreed to resolve the Derivative Action with respect to all named defendants in exchange for the Company’s agreement to implement certain changes to its Governance environment. The settlement will have to be approved by the court, which the Company expects will occur in the third quarter of 2023. The Company is responsible for payment of legal fees to the counsel representing the plaintiffs in the Derivative Action. The Company accrued the estimated total legal fees as of December 31, 2022.

 

In addition to the foregoing, the Company may in the future be involved in various legal proceedings, claims and litigation that arise in the normal course of business. The Company accrues for estimated loss contingencies related to legal matters when available information indicates that it is probable a liability had been incurred and the Company can reasonably estimate the

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amount of that loss. In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is often not possible to reasonably estimate the size of the possible loss or range of loss or possible additional losses or range of additional losses.

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 7. CAPITAL STOCK

 

As of March 31, 2023 and December 31, 2022 there were outstanding 12,780,000 Private Placement Warrants and 21,350,000 Public Warrants to purchase the Company’s common stock at an exercise price of $11.50 per share. As of March 31, 2023 and December 31, 2022, no shares of preferred stock were issued or outstanding.

NOTE 8. SHARE-BASED COMPENSATION

In June 2021, the Company adopted the 2021 Incentive Award Plan (the “2021 Plan”) under which the Company may grant cash and equity incentive awards to officers, employees, directors, consultants and service providers in order to attract, motivate and retain the talent.

In June 2021, 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. As of March 31, 2023, no employee stock purchases have been made under the 2021 ESPP.

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).

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,

 

 

 

2023

 

 

2022

 

(in thousands)

 

unaudited

 

 

unaudited

 

Research and development, net

 

$

674

 

 

$

546

 

Clinical operations, net

 

 

120

 

 

 

122

 

Sales and marketing

 

 

391

 

 

 

777

 

General and administrative

 

 

1,118

 

 

 

923

 

Total stock-based compensation expense

 

$

2,303

 

 

$

2,368

 

 

 

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NOTE 9. NET (LOSS) INCOME 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,

 

 

 

2023

 

 

2022

 

(in thousands, except share and per share data)

 

unaudited

 

 

unaudited

 

Net loss

 

$

(8,758

)

 

$

(20,360

)

Weighted-average shares used to compute net loss per share:

 

 

 

 

 

 

Basic and Diluted

 

 

161,797,781

 

 

 

154,083,443

 

Net loss per share:

 

 

 

 

 

 

Basic and Diluted

 

$

(0.05

)

 

$

(0.13

)

For the three months ended March 31, 2023, the following were excluded from the calculation of diluted net loss per share since each would have had an anti-dilutive effect given the Company's net loss: 14,746,915 stock options, 11,549,261 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, 2022, the following were excluded from the calculation of diluted income per share since each would have had an anti-dilutive effect given the Company's 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.

NOTE 10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

 

 

March 31, 2023

 

 

December 31, 2022

 

(in thousands)

 

unaudited

 

 

 

 

User acquisition

 

$

2,111

 

 

$

2,256

 

Employee compensation

 

 

2,087

 

 

 

5,290

 

Litigation costs

 

 

1,221

 

 

 

5,500

 

Professional fees

 

 

978

 

 

 

543

 

Other

 

 

3,403

 

 

 

2,913

 

Accrued expenses and other current liabilities

 

$

9,800

 

 

$

16,502

 

 

 

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NOTE 11. VARIABLE INTEREST ENTITIES ("VIEs")

 

The Company holds a variable interest in Talkspace Provider Network, PA (“TPN”) and certain affiliated professional entities (“PC entities”). TPN and the PC entities are VIEs. Under the provisions of ASC 810, “Consolidation”, an entity consolidates a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

The Company determined that it is able to direct the activities of TPN and the PC entities that most significantly impact their economic performance and it funds and absorbs all losses of these VIEs resulting in the Company being the primary beneficiary of these entities. Accordingly, the Company consolidates these VIEs.

 

The following table details the assets and liabilities of the Company's consolidated VIEs as of March 31, 2023 and December 31, 2022:

 

(in thousands)

 

March 31, 2023

 

 

December 31, 2022

 

ASSETS

 

unaudited

 

 

 

 

Cash and cash equivalents

 

$

1,240

 

 

$

883

 

Accounts receivable

 

 

6,962

 

 

 

1,716

 

Other assets

 

 

1,241

 

 

 

4,813

 

Total Assets

 

$

9,443

 

 

$

7,412

 

LIABILITIES

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

 

4,839

 

 

 

3,758

 

Total Liabilities

 

$

4,839

 

 

$

3,758

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context otherwise requires, all references in this section as to “Talkspace,” the “Company,” “we,” “us” or “our” refer to the business of Talkspace, Inc. and its consolidated subsidiaries.

The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes contained in this Quarterly Report and the financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve risks and uncertainties. As a result of many factors, such as those 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, 2022 and “Forward-Looking Statements” sections and elsewhere in this Quarterly Report, our actual results may differ materially from those anticipated in these forward-looking statements.

 

The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations for the three months ended March 31, 2023 and 2022. For a discussion of our results of operations, liquidity and capital resources for the three months ended March 31, 2021, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of our Quarterly Report on Form 10-Q for the three months ended March 31, 2022.

Overview

Talkspace is a healthcare company offering its members convenient and affordable access to a fully-credentialed network of highly qualified providers. We are a leading virtual behavioral health company and, since Talkspace’s founding in 2012, we have connected millions of patients with licensed mental health providers across a wide and growing spectrum of care through virtual counseling, psychotherapy and psychiatry. We created a purpose-built platform to address the vast, unmet and growing demand for mental health services of our members, serving our business-to-business (“B2B”) channel, comprised of large health plans and employee assistance programs (“Payors”) such as Aetna, Cigna, Premera and Optum and large enterprise clients (“DTE”) such as Google and Expedia (collectively, our “clients”), who offer their insured members and employees access to our platform at in-network reimbursement rates, or while their employer is under an active contract with Talkspace, where applicable, and our business-to-consumer (“Consumer”) channel, comprised of individual consumers who subscribe directly to our platform.

As of March 31, 2023, we had approximately 98 million B2B eligible lives and over 15,100 consumer active members. For the three months ended March 31, 2023, our clinicians completed 171,700 B2B sessions related to members covered under our health plan clients, as compared to 90,600 completed B2B sessions for the three months ended March 31, 2022. Please refer to the “Key Business Metrics” section below for a description of active members and B2B eligible lives.

Operating Segments

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

Key Business Metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business:

 

Unaudited

 

Three Months Ended
March 31,

 

(in thousands except number of health plan and enterprise clients or otherwise indicated)

 

2023

 

 

2022

 

Number of B2B eligible lives at period end (in millions)

 

 

98

 

 

 

77

 

Number of completed B2B sessions

 

 

171.7

 

 

 

90.6

 

Number of health plan clients at period end

 

 

20

 

 

 

16

 

Number of enterprise clients at period end

 

 

227

 

 

 

189

 

Number of Consumer active members at period end

 

 

15.1

 

 

 

22.2

 

 

 

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B2B Eligible Lives: We consider B2B lives “eligible” if such persons are eligible to receive treatment on the Talkspace platform, in the case of our enterprise clients, while their employer is under an active contract with Talkspace, or, in the case of health plan clients, at an agreed upon reimbursement rate through insurance under an employee assistance program or other network behavioral health paid benefit program. There may be instances where a person may be covered through multiple solutions, typically through behavioral health plans and employee assistance programs. In these instances, the person is counted each time they are covered in the B2B eligible lives calculation, which may cause this amount to reflect a higher number of B2B eligible lives than we actually serve.

 

Active Members: We consider members “active” (i) in the case of our B2B members, if such members have engaged on our platform during the preceding 25 days, such as sending a text, video or audio message to, or participating in a video call with, a provider, completing a satisfaction or progress report survey or signing up for our platform, and (ii) in the case of our consumer members, commencing on the date such member initiates contact with a provider on our platform until the term of their monthly, quarterly or bi-annual subscription plan expires, unless terminated early. While a growth in active members typically highlights strong engagement with our members, not all active members are associated with revenue in that particular period.

 

Components of Results of Operations

Revenues

We contract with health insurance plans, employee assistance organizations and enterprises to provide services to individuals who are qualified to receive access to the Company’s services through the Company’s commercial arrangements. We generate revenues from payments from insured members and claims paid by their respective insurance companies and from contracted platform access fees paid to us by our enterprise clients for the delivery of therapy services to their members or employees. We recognize revenues from services provided to insured members at a point in time, as virtual therapy or psychiatry session is rendered. We recognize revenue from our enterprise clients ratably over the contractual term based primarily on a per-member-per month access fee model.

We also generate revenues from the sale of monthly, quarterly, bi-annual and annual membership subscriptions to the Company's therapy platform as well as supplementary a la carte offerings directly to individual consumers through a subscription plan. We recognize member subscription revenues ratably over the subscription period, beginning when therapy services commence. We recognize revenues from supplementary a la carte offerings at a point in time, as virtual therapy session is rendered. Members may cancel their subscription at any time and will receive a pro-rata refund for the subscription price.

Revenue growth is generated from increasing our eligible covered lives through contracting with health plans, increasing utilization within eligible covered lives, expanding enterprise clients, and increasing membership subscriptions.

Cost of Revenues

Cost of revenues is comprised primarily of therapist payments. Cost of revenues is largely driven by the size of our provider network that is required to service the growth of our health plan and enterprise clients, in addition to the growth of our customer base.

We designed our business model and our provider network to be scalable and to leverage a hybrid model of both employee providers and independently contracted providers to support multiple growth scenarios. The compensation paid to our independently contracted providers is variable, and the amount paid to a provider is generally based on the amount of time committed by such provider to our members. In addition, our network supervisors have authority to approve the payment of incentive bonuses to providers with certain licenses during periods of higher demand for providers with such licenses. For our employee providers, they receive a fixed-salary and discretionary bonuses, where applicable, all of which is included in cost of revenues.

While we expect to make increased investments to support accelerated growth and the required investment to scale our provider network, we also expect increased efficiencies and economies of scale. Our cost of revenues as a percentage of revenues is expected to fluctuate from period to period depending on the interplay of these factors as well as pricing fluctuations.

 

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Operating Expenses

Operating expenses consist of research and development, clinical operations, sales and marketing, and general and administrative expenses.

Research and Development Expenses

Research and development expenses include personnel and related expenses for software development and engineering, information technology infrastructure, security, privacy compliance and product development (inclusive of stock-based compensation for our research and development employees), third-party services and contractors related to research and development, information technology and software-related costs.

Clinical Operations Expenses

Clinical operations expenses are associated with the management of our provider network of therapists. Such costs are comprised of costs related to recruiting, onboarding, credentialing, training and ongoing quality assurance activities (inclusive of stock-based compensation for our clinical operations employees), costs of third-party services and contractors related to recruiting and training and software-related costs.

Sales and Marketing Expenses

Sales expenses consist primarily of employee-related expenses, including salaries, benefits, commissions, travel and stock-based compensation costs for our employees engaged in sales and account management. We expect our sales expenses to increase as we continue to invest in the expansion of our health plan and enterprise business.

Marketing expenses consist primarily of advertising and marketing expenses for member acquisition and engagement, as well as personnel costs, including salaries, benefits, bonuses, stock-based compensation expense for marketing employees, third-party services and contractors. Marketing expenses also include third-party software subscription services, third-party independent research, participation in trade shows, brand messaging and costs of communications materials that are produced for our clients to generate greater awareness and utilization of our platform among our health plan and enterprise clients.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, including salaries, benefits, bonuses and stock-based compensation expense for certain executives, finance, accounting, legal and human resources functions, as well as professional fees, occupancy costs, and other general overhead costs. We expect to incur additional general and administrative expenses in compliance, legal, investor relations, director’s and officer’s insurance, and professional services related to our compliance and reporting obligations as a public company, however we expect further incremental increases to be minimal.

Financial income, net

Financial income, net includes the impact from (i) non-cash changes in the fair value of our warrant liabilities, (ii) interest earned on cash equivalents deposited in our money market accounts and (iii) other financial expenses in connection with bank charges.

Taxes on income

Our taxes on income consists primarily of foreign income taxes related to income generated by our subsidiary organized under the laws of Israel.

We have a full valuation allowance for our U.S. deferred tax assets, including federal and state NOLs. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized through expected future taxable income in the United States.

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Results of Operations

The following table presents our results of operations for the three months ended March 31, 2023 and 2022 and the dollar and percentage change between the respective periods:

 

 

 

Three Months Ended
March 31,

 

 

Variance

 

Unaudited

 

2023