[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Unaudited Q2 2024 financials show strong revenue growth, reduced net loss, and cash decrease from share repurchases [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to **$133.8 million** as of June 30, 2024, driven by reduced cash, with total liabilities also declining | (U.S. dollars in thousands) | June 30, 2024 (Unaudited) | December 31, 2023 | | :--- | :--- | :--- | | **Total current assets** | $128,769 | $139,800 | | **Total assets** | **$133,790** | **$142,221** | | **Total current liabilities** | $17,779 | $21,648 | | **Total liabilities** | **$19,746** | **$23,575** | | **Total stockholders' equity** | **$114,044** | **$118,646** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q2 2024 revenues increased **29.2%** to **$46.1 million**, significantly narrowing net loss to **$0.5 million** year-over-year | (U.S. dollars in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $46,058 | $35,645 | $91,474 | $68,981 | | **Gross profit** | $20,951 | $17,812 | $42,682 | $34,560 | | **Operating loss** | $(3,486) | $(6,408) | $(5,165) | $(15,447) | | **Net loss** | **$(474)** | **$(4,704)** | **$(1,940)** | **$(13,462)** | | **Net loss per share (Basic & Diluted)** | $(0.00) | $(0.03) | $(0.01) | $(0.08) | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) H1 2024 net cash from operations was **$1.4 million**, a significant improvement, with a **$9.0 million** net decrease in cash due to share repurchases | (U.S. dollars in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,418 | $(13,748) | | Net cash (used in) provided by investing activities | $(2,150) | $18 | | Net cash (used in) provided by financing activities | $(8,263) | $1,289 | | **Net decrease in cash and cash equivalents** | **$(8,995)** | **$(12,441)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail revenue by channel, highlighting strong Payor growth, and significant share repurchase programs approved in 2024 Revenue by Source (in thousands) | Revenue Source | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Payor | $29,945 | $18,539 | +61.5% | | DTE | $9,628 | $8,039 | +19.8% | | Consumer | $6,485 | $9,067 | -28.5% | | **Total revenue** | **$46,058** | **$35,645** | **+29.2%** | - In February 2024, the Board approved a share repurchase program of up to **$15.0 million** During Q2 2024, the company repurchased **2,948,892 shares** for **$8.0 million**[48](index=48&type=chunk)[49](index=49&type=chunk) - Subsequent to the quarter end, on August 1, 2024, the Board approved an additional share repurchase program authorizing up to **$25.0 million** of its common stock and warrants[63](index=63&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Q2 revenue grew **29.2%** driven by Payor segment, achieving positive Adjusted EBITDA of **$1.2 million** with strong liquidity and no debt [Key Business Metrics](index=23&type=section&id=Key%20Business%20Metrics) Key metrics show strong Payor business growth, with eligible lives at **145.3 million** and Payor sessions up **56.6%** year-over-year | Metric | As of/For Six Months Ended June 30, 2024 | As of/For Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Number of eligible lives (in millions) | 145.3 | 109.6 | | Number of completed Payor sessions | 582,800 | 372,200 | | Number of Consumer active members | 10,700 | 13,700 | [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Q2 2024 total revenue increased **29.2%** driven by Payor, gross margin contracted to **45.5%**, and net loss improved to **$0.5 million** - The increase in Q2 revenue was principally due to a **61.5%** increase in Payor revenue and a **19.8%** growth in DTE revenue, partially offset by a **28.5%** decline in Consumer revenue, which was an intentional strategic decision[92](index=92&type=chunk) - Gross margin for Q2 2024 was **45.5%**, down from **50.0%** in Q2 2023 The decline was driven by a shift in revenue mix towards Payor, as consumer sessions tend to provide higher margins[96](index=96&type=chunk) - R&D expenses decreased by **48.1%** in Q2 2024, primarily due to the capitalization of **$1.9 million** in internal-use software development costs[98](index=98&type=chunk) [Non-GAAP Financial Measures](index=29&type=section&id=Non-GAAP%20Financial%20Measures) Adjusted EBITDA, a key non-GAAP measure, improved significantly to positive **$1.2 million** in Q2 2024 from a **$4.0 million** loss in Q2 2023 Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net loss | $ (474) | $ (4,704) | | Depreciation and amortization | 220 | 302 | | Financial (income), net | (3,044) | (1,712) | | Taxes on income | 32 | 8 | | Stock-based compensation | 3,107 | 2,129 | | Non-recurring expenses | 1,338 | — | | **Adjusted EBITDA** | **$ 1,179** | **$ (3,977)** | [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$114.9 million** cash and no debt, with **$32.0 million** authorized for share repurchases - The company's Board of Directors approved an initial **$15.0 million** share repurchase program in February 2024 and an additional **$25.0 million** program in August 2024[114](index=114&type=chunk)[116](index=116&type=chunk) - For the six months ended June 30, 2024, net cash from operating activities was positive at **$1.4 million**, compared to a use of **$13.7 million** in the prior year period, driven by a lower net loss and favorable working capital timing[118](index=118&type=chunk)[119](index=119&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes to market risk disclosures were reported for the six months ended June 30, 2024 - There were no material changes to the market risk information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2023[136](index=136&type=chunk) [Item 4. Controls and Procedures](index=36&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal controls during Q2 2024 - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2024[138](index=138&type=chunk) - No changes occurred during the second quarter of fiscal year 2024 that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[139](index=139&type=chunk) [PART II. OTHER INFORMATION](index=37&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=37&type=section&id=Item%201.%20Legal%20Proceedings) As of June 30, 2024, the company reports no material pending legal proceedings - The Company has no material pending legal proceedings as of June 30, 2024[143](index=143&type=chunk) [Item 1A. Risk Factors](index=37&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported during the six months ended June 30, 2024 - During the six months ended June 30, 2024, there were no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023[144](index=144&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Details Q2 2024 stock repurchase activity, with **2,948,892 shares** repurchased and **$32.0 million** total repurchase authority available Stock Repurchases for Q2 2024 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 1 - 30 | — | $ — | | May 1 - 31 | 1,780,512 | $2.76 | | June 1 - 30 | 1,168,380 | $2.64 | | **Total** | **2,948,892** | | [Item 5. Other Information](index=37&type=section&id=Item%205.%20Other%20Information) No Rule 10b5-1 trading arrangements were adopted, modified, or terminated by directors or officers during Q2 2024 - No "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" was adopted, modified or terminated during the fiscal quarter ended June 30, 2024 by the company's directors and Section 16 officers[149](index=149&type=chunk)

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section covers the unaudited Q1 2024 financial statements, management's discussion and analysis, market risk, and internal controls [Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Talkspace, Inc. as of March 31, 2024, and for the three months then ended. It includes the balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with accompanying notes detailing accounting policies, revenue recognition, fair value measurements, and other financial disclosures [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a slight decrease in total assets to $138.3 million and a reduction in total liabilities to $18.7 million as of March 31, 2024, compared to year-end 2023. Cash and cash equivalents stood at $120.3 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $120,278 | $123,908 | | Total current assets | $135,730 | $139,800 | | **Total assets** | **$138,276** | **$142,221** | | Total current liabilities | $15,686 | $21,648 | | **Total liabilities** | **$18,698** | **$23,575** | | **Total stockholders' equity** | **$119,578** | **$118,646** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the first quarter of 2024, the company reported a significant increase in revenue and a substantial reduction in net loss compared to the same period in 2023. Revenue grew to $45.4 million, while net loss narrowed to $1.5 million, or ($0.01) per share Q1 2024 vs Q1 2023 Statement of Operations (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Revenues | $45,416 | $33,336 | | Gross profit | $21,731 | $16,748 | | Operating loss | $(1,679) | $(9,039) | | **Net loss** | **$(1,466)** | **$(8,758)** | | **Net loss per share (Basic & Diluted)** | **$(0.01)** | **$(0.05)** | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' equity saw a slight increase during the first quarter of 2024, rising to $119.6 million. The increase was primarily driven by stock-based compensation and the exercise of stock options, which offset the net loss for the period - Total stockholders' equity increased from **$118.6 million** at the end of 2023 to **$119.6 million** as of March 31, 2024[14](index=14&type=chunk) - Key activities impacting equity included **$2.3 million** in stock-based compensation and **$0.7 million** from the exercise of stock options, which were partially offset by a net loss of **$1.5 million**[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The company significantly improved its cash flow from operations, using $3.4 million in Q1 2024 compared to $14.0 million in Q1 2023. The quarter ended with a cash and cash equivalents balance of $120.3 million Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(3,391) | $(14,037) | | Net cash used in investing activities | $(385) | $19 | | Net cash provided by financing activities | $146 | $556 | | **Net decrease in cash and cash equivalents** | **$(3,630)** | **$(13,462)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of the company's accounting policies, revenue sources (Payor, DTE, Consumer), fair value measurements of financial instruments like warrant liabilities, commitments, capital stock details including a new share repurchase program, and information on variable interest entities (VIEs) Revenue by Source (in thousands) | Revenue Source | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Payor | $28,508 | $14,811 | | DTE | $9,913 | $8,676 | | Consumer | $6,995 | $9,849 | | **Total revenue** | **$45,416** | **$33,336** | - On February 22, 2024, the Board of Directors approved a share repurchase program authorizing the repurchase of up to **$15 million** of common stock over 24 months. No shares were repurchased under this program as of March 31, 2024[44](index=44&type=chunk) - The company consolidates several Variable Interest Entities (VIEs), including Talkspace Provider Network, PA and eight affiliated professional corporations, as it is determined to be the primary beneficiary[52](index=52&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance for Q1 2024, highlighting a 36.2% revenue increase to $45.4 million, driven by a 92.5% surge in Payor revenue. The net loss narrowed significantly to $1.5 million from $8.8 million YoY, and Adjusted EBITDA turned positive at $0.8 million. The discussion covers key business metrics, operational results, liquidity, and the strategic shift towards the Payor market Key Business Metrics | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Eligible lives at period end (millions) | 131.4 | 98.0 | | Completed Payor sessions (thousands) | 284.2 | 171.7 | | Unique Payor active members (thousands) | 86.3 | 61.9 | | Consumer active members at period end (thousands) | 11.1 | 15.1 | - Total revenue increased by **36.2%** to **$45.4 million** in Q1 2024, primarily due to a **92.5%** increase in Payor revenue. This reflects the company's intentional strategic decision to focus marketing efforts on attracting payor members, which also led to a **29.0%** decline in Consumer revenue[82](index=82&type=chunk) - Adjusted EBITDA, a non-GAAP measure, was **$774 thousand** for Q1 2024, a significant improvement from an Adjusted EBITDA loss of **$(6.4) million** in Q1 2023[96](index=96&type=chunk) - Net cash used in operating activities decreased to **$(3.4) million** from **$(14.0) million** YoY, driven by a lower net loss and favorable timing of payments[100](index=100&type=chunk)[101](index=101&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company states that there were no material changes to its market risk disclosures during the first quarter of 2024, as detailed in its 2023 Annual Report on Form 10-K - There were no material changes to the market risk information previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023[119](index=119&type=chunk) [Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2024. No material changes to internal controls over financial reporting occurred during the quarter - Management concluded that disclosure controls and procedures were effective as of March 31, 2024[120](index=120&type=chunk) - No changes in internal control over financial reporting occurred during Q1 2024 that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[121](index=121&type=chunk) [PART II. OTHER INFORMATION](index=29&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information, including exhibits [Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) The company reports no material pending legal proceedings as of March 31, 2024 - As of March 31, 2024, the Company has no material pending legal proceedings[125](index=125&type=chunk) [Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) The company states there were no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 - During the three months ended March 31, 2024, there were no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023[126](index=126&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=29&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no unregistered sales of equity securities during the period - The company reported 'None' for this item, indicating no unregistered sales of equity securities[127](index=127&type=chunk) [Defaults Upon Senior Securities](index=29&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon senior securities - The company reported 'None' for this item[128](index=128&type=chunk) [Mine Safety Disclosures](index=29&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable to the company's business[129](index=129&type=chunk) [Other Information](index=29&type=section&id=Item%205.%20Other%20Information) The company reports that no directors or Section 16 officers adopted, modified, or terminated any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the fiscal quarter ended March 31, 2024 - No directors or Section 16 officers adopted, modified, or terminated any Rule 10b5-1 trading arrangements during the quarter ended March 31, 2024[130](index=130&type=chunk) [Exhibits](index=30&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibit index lists required filings, including certifications from the Chief Executive Officer and Chief Financial Officer, and Inline XBRL documents[133](index=133&type=chunk)

PART I [Item 1. Business](index=5&type=section&id=Item%201%2E%20Business) Talkspace is a leading behavioral healthcare company providing virtual psychotherapy and psychiatry services to Payor, DTE, and Consumer clients, achieving significant revenue growth and expanding eligible lives to 131 million in 2023. - Talkspace is a leading behavioral healthcare company founded in 2012, connecting millions of patients with licensed mental health providers through messaging, video, and audio via a technology platform[14](index=14&type=chunk) - The company serves Payor clients (health plans, EAPs), Direct-to-Enterprise (DTE) clients (employers, academic organizations), and individual Consumer subscribers[15](index=15&type=chunk) Key Business Metrics (2022 vs. 2023) | Metric | 2023 | 2022 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Revenues (in millions) | $150.0 | $119.6 | 25.5% | | Eligible lives at year end (in millions) | 131 | 92 | 42.4% | | Completed Payor sessions (in thousands) | 850.6 | 426.4 | 99.5% | | Consumer active members at year end (in thousands) | 11.7 | 15.4 | -24.0% | [Our Mission](index=5&type=section&id=Our%20Mission) Talkspace's mission is to help people everywhere heal by providing high-quality behavioral healthcare. - Talkspace's mission is to help people everywhere heal by providing high-quality behavioral healthcare[13](index=13&type=chunk)[18](index=18&type=chunk) [Overview](index=5&type=section&id=Overview) Talkspace is a leading behavioral healthcare company offering convenient and affordable access to licensed mental health providers through a technology platform. - Talkspace, Inc. is a leading behavioral healthcare company offering convenient and affordable access to a network of licensed therapists, psychologists, and psychiatrists through a technology platform[14](index=14&type=chunk) - The company serves Payor clients (health plans, EAPs like Aetna, Cigna, Optum), Direct-to-Enterprise (DTE) clients (enterprises like Google, University of Kentucky), and individual Consumer subscribers[15](index=15&type=chunk) - Talkspace does not prescribe controlled substances in accordance with the DEA Ryan Haight Act[16](index=16&type=chunk) [Our Offerings](index=6&type=section&id=Our%20Offerings) Talkspace provides psychotherapy and psychiatry services, including prescription management for mental health conditions, excluding controlled substances. - Talkspace offers psychotherapy (text, audio, video-based) for mental health conditions like depression, anxiety, and trauma[20](index=20&type=chunk)[21](index=21&type=chunk) - Psychiatry services include initial video consultations and follow-up appointments with board-certified psychiatrists and nurse practitioners for prescription management, excluding controlled substances[22](index=22&type=chunk) [Our Customers](index=6&type=section&id=Our%20Customers) Talkspace serves 131 million eligible lives through Payor and DTE clients, while Consumer active members decreased in 2023. - As of December 31, 2023, Talkspace had approximately **131 million eligible lives** through its Payor and DTE clients, an increase from 92 million in 2022[19](index=19&type=chunk)[24](index=24&type=chunk) - Consumer active members decreased from **15,400 in 2022 to 11,700 in 2023**, serving a diverse customer base across all 50 U.S. states and select international markets[19](index=19&type=chunk)[25](index=25&type=chunk) - Payor clients include health plans (e.g., Aetna, Cigna, Optum) and EAPs, while DTE clients include enterprises (e.g., Google, University of Kentucky, NYC Department of Health) offering services on a PMPM basis[26](index=26&type=chunk) [Technology Platform](index=7&type=section&id=Technology%20Platform) Talkspace leverages a technology platform with machine learning for provider matching and optimizing clinical outcomes using extensive data. - Talkspace leverages a technology platform with machine learning for provider matching, combining structured and unstructured data to predict therapist efficacy and patient success[27](index=27&type=chunk)[30](index=30&type=chunk) - The platform utilizes a robust, closed-loop data ecosystem with over **7.2 billion words** from millions of users and **5 million completed psychological assessments** to optimize clinical outcomes and enhance care[31](index=31&type=chunk)[32](index=32&type=chunk) - Key features include an 'Intro and Expectations' system for best practices, a 'Crisis Risk system' for self-harm detection, and a 'Session Highlights system' for therapist note-taking[34](index=34&type=chunk) [Competition](index=9&type=section&id=Competition) Talkspace competes with existing telehealth platforms and anticipates future competition from large technology and retail companies. - Talkspace competes with telehealth and virtual behavioral health platforms such as American Well Corporation, Teladoc, Lyra Health, and Spring Health[35](index=35&type=chunk) - Potential future competitors include large technology companies (Apple, Amazon, Meta, Google, Verizon, Microsoft) and retailers (Amazon, Walmart) that may develop their own virtual behavioral health solutions[36](index=36&type=chunk) [Therapists, Physicians and Healthcare Professionals](index=9&type=section&id=Therapists%2C%20Physicians%20and%20Healthcare%20Professionals) Talkspace operates through Management Services Agreements with affiliated professional entities to ensure regulatory compliance for its provider network. - Talkspace transitioned its provider structure in Q2 2022, now operating through Management Services Agreements (MSAs) with Talkspace Provider Network, PA (TPN) and affiliated professional entities (PC entities)[37](index=37&type=chunk)[38](index=38&type=chunk) - This structure ensures compliance with regulatory requirements like corporate practice of medicine and fee-splitting laws, with Talkspace LLC providing management services and TPN/PC entities engaging licensed professionals[38](index=38&type=chunk) [Human Capital Overview](index=10&type=section&id=Human%20Capital%20Overview) Talkspace employs 472 staff and 5,235 contracted providers, emphasizing a respectful, secure, and diverse workplace culture. - As of December 31, 2023, Talkspace had **472 employees** (**252 providers**, **220 support staff**) and **5,235 independently contracted providers**[42](index=42&type=chunk) - The company emphasizes a respectful, secure, and supportive workplace culture, with mandatory training on the Code of Business Conduct and Ethics[43](index=43&type=chunk) - Talkspace is committed to diversity and inclusion, providing equal employment opportunities and fostering growth through recruitment, development, and mentoring programs[44](index=44&type=chunk) [U.S. Government Regulation](index=11&type=section&id=U%2E.S%2E%20Government%20Regulation) Talkspace's operations are subject to extensive and evolving federal, state, and local regulations, including licensing, medical practice, and data privacy laws. - Talkspace's operations are subject to extensive federal, state, and local regulations, including licensing, medical practice, and telehealth laws, which are constantly evolving[47](index=47&type=chunk)[49](index=49&type=chunk) - The company's contractual arrangements with affiliated professional entities are designed to comply with state laws prohibiting corporate practice of medicine and fee splitting, which vary by state and are subject to broad interpretation[51](index=51&type=chunk)[52](index=52&type=chunk) - Talkspace is subject to U.S. federal and state health information privacy and security laws, including HIPAA and state-specific regulations like CCPA and CPRA, which impose strict requirements on handling protected health information (PHI) and personal data[60](index=60&type=chunk)[64](index=64&type=chunk)[65](index=65&type=chunk) [Intellectual Property](index=17&type=section&id=Intellectual%20Property) Talkspace protects its intellectual property through patents, copyrights, trademarks, trade secrets, and confidentiality agreements. - Talkspace protects its intellectual property through patents, copyrights, trademarks, trade secrets, and confidentiality agreements[68](index=68&type=chunk) - As of March 13, 2024, the company has **one approved patent** related to 'System and Method in Monitoring Engagement' and several pending applications[69](index=69&type=chunk) [Additional Information](index=17&type=section&id=Additional%20Information) Talkspace's principal place of business is in New York, NY, with SEC filings accessible via its website. - Talkspace's principal place of business is in New York, NY, and its website (talkspace.com) provides access to SEC filings[71](index=71&type=chunk) [Item 1A. Risk Factors](index=18&type=section&id=Item%201A%2E%20Risk%20Factors) Talkspace faces significant risks including sustained profitability challenges, intense competition in a rapidly evolving market, complex regulatory compliance, data security vulnerabilities, and intellectual property protection concerns. - The company has a history of losses and may not achieve or sustain profitability, requiring continued investment in growth and technology[77](index=77&type=chunk)[82](index=82&type=chunk)[84](index=84&type=chunk) - Talkspace operates in a rapidly evolving and competitive virtual behavioral health market, facing challenges from existing players and potential entry of large technology and retail companies[77](index=77&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk)[94](index=94&type=chunk) - Key risks include the ability to retain and attract clients and providers, comply with complex and evolving healthcare regulations (e.g., corporate practice of medicine, fee splitting, HIPAA), and protect intellectual property and data security[77](index=77&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk)[106](index=106&type=chunk)[127](index=127&type=chunk)[159](index=159&type=chunk)[190](index=190&type=chunk) [SUMMARY RISK FACTORS](index=18&type=section&id=SUMMARY%20RISK%20FACTORS) The summary highlights risks related to operating results, early stage of growth, business and industry, legal and regulatory environment, and intellectual property. - The summary highlights risks related to operating results and early stage of growth, business and industry, legal and regulatory environment, and intellectual property[76](index=76&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk) [Risks Related to our Operating Results and Early Stage of Growth](index=20&type=section&id=Risks%20Related%20to%20our%20Operating%20Results%20and%20Early%20Stage%20of%20Growth) Talkspace has incurred significant losses and may not achieve sustained profitability, facing challenges in managing growth in a rapidly evolving market. - Talkspace has incurred significant losses since inception and may not achieve or sustain profitability, requiring substantial investments in client acquisition, technology, and provider network scaling[82](index=82&type=chunk)[84](index=84&type=chunk) - The rapidly evolving market makes it difficult to evaluate future prospects, with success dependent on retaining existing clients, attracting new ones, adopting new offerings, and complying with regulations[85](index=85&type=chunk)[88](index=88&type=chunk) - Revenue growth rates have fluctuated (**5.2% from 2021-2022**, **25.5% from 2022-2023**) and are not indicative of future performance, with challenges in managing growth and expanding operations[87](index=87&type=chunk)[91](index=91&type=chunk) [Risks Related to our Business and Industry](index=23&type=section&id=Risks%20Related%20to%20our%20Business%20and%20Industry) The virtual behavioral health market is rapidly changing and highly competitive, posing risks from technological obsolescence, pricing pressures, customer concentration, and security breaches. - The virtual behavioral health market is characterized by rapid technological change, requiring continuous enhancement of solutions and development of new services to avoid obsolescence[92](index=92&type=chunk) - Competition is intense, with rivals like American Well, Teladoc, Lyra Health, and Spring Health, as well as potential entry from large tech and retail companies, leading to pricing pressures[93](index=93&type=chunk)[94](index=94&type=chunk) - Dependence on a limited number of customers (**two customers represented 10%+ of revenue in 2022 and 2023**) means loss of business from these clients could materially harm financial results[98](index=98&type=chunk) - Reliance on third-party platforms (Apple App Store, Google Play App Store) for distribution poses risks if terms change or access is limited[117](index=117&type=chunk)[118](index=118&type=chunk) - Security breaches or failures in the company's or vendors' systems could lead to significant liabilities, reputational harm, and loss of clients due to the sensitive nature of stored PHI and personal data[127](index=127&type=chunk)[129](index=129&type=chunk) [Risks Related to our Legal and Regulatory Environment](index=37&type=section&id=Risks%20Related%20to%20our%20Legal%20and%20Regulatory%20Environment) Talkspace's business model is vulnerable to evolving regulations governing remote care, medical practice, and data privacy, with non-compliance potentially leading to significant liabilities. - The company's business model is vulnerable to legal challenges and changing regulations governing remote care, medical practice, and prescribing medication online, which could restrict operations[153](index=153&type=chunk)[154](index=154&type=chunk) - Dependence on affiliated professional entities (TPN, PC entities) for physician and professional services carries risks if these relationships are disrupted or found to violate state laws prohibiting corporate practice of medicine or fee splitting[159](index=159&type=chunk)[160](index=160&type=chunk)[161](index=161&type=chunk) - Extensive U.S. federal and state privacy and security regulations (HIPAA, CCPA, CPRA) and international laws (GDPR) govern personal and health information, with non-compliance potentially leading to significant liability and reputational damage[172](index=172&type=chunk)[174](index=174&type=chunk)[178](index=178&type=chunk)[182](index=182&type=chunk)[185](index=185&type=chunk) [Risks Related to our Intellectual Property](index=49&type=section&id=Risks%20Related%20to%20our%20Intellectual%20Property) Failure to protect intellectual property rights could impair the company's technology and brand, leading to increased competition, costly litigation, or reputational damage. - Failure to protect, enforce, or defend intellectual property rights (trademarks, patents, trade secrets) could impair the company's technology and brand, leading to increased competition or costly litigation[190](index=190&type=chunk)[197](index=197&type=chunk) - The company faces risks from third parties challenging the validity of its IP or requiring payments for technology use, potentially incurring substantial costs and diverting management attention[198](index=198&type=chunk)[199](index=199&type=chunk) - Proprietary software development is complex, and defects or errors could damage reputation, lead to claims, or divert resources, adversely affecting business and financial results[204](index=204&type=chunk) [Item 1B. Unresolved Staff Comments](index=63&type=section&id=Item%201B%2E%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report. - No unresolved staff comments were reported[242](index=242&type=chunk) [Item 1C. Cybersecurity](index=64&type=section&id=Item%201C%2E%20Cybersecurity) Talkspace has established comprehensive policies and processes for assessing, identifying, and managing cybersecurity risks, including routine assessments, third-party reviews, and employee training. The Audit Committee oversees cybersecurity governance, receiving regular updates from management, including the CISO and CTO, who manage the program. - Talkspace employs a cybersecurity risk management strategy including periodic risk assessments, simulated drills, data encryption, threat detection, third-party penetration testing, and vendor risk assessments[244](index=244&type=chunk)[246](index=246&type=chunk)[247](index=247&type=chunk) - All employees are required to participate in annual cybersecurity awareness, privacy, and security training[249](index=249&type=chunk) - The Audit Committee is responsible for cybersecurity oversight, receiving quarterly updates on security posture, risk mitigation, and incidents from management, including the CISO and CTO[252](index=252&type=chunk)[253](index=253&type=chunk)[254](index=254&type=chunk) [Risk Management and Strategy](index=64&type=section&id=Risk%20Management%20and%20Strategy) Talkspace assesses and manages cybersecurity threats through policies, processes, third-party reviews, and an incident response plan. - Talkspace assesses and manages cybersecurity threats through policies and processes, including identifying operational risks, fraud, extortion, and legal risks[244](index=244&type=chunk) - The company uses the HITRUST CSF Assurance Program for Cloud assessment and engages third parties for program reviews, vulnerability scanning, and penetration testing[246](index=246&type=chunk)[247](index=247&type=chunk) - An incident response plan coordinates activities for preparing, detecting, containing, eradicating, and recovering from cybersecurity incidents, with material events escalated to the CEO and Board[248](index=248&type=chunk) [Cybersecurity Governance](index=65&type=section&id=Cybersecurity%20Governance) The Audit Committee oversees cybersecurity risks, receiving regular updates from the CISO and CTO who manage the information security program. - The Audit Committee oversees cybersecurity risks, receiving at least quarterly updates on security posture, third-party assessment results, and risk mitigation progress[252](index=252&type=chunk) - The information security program is managed by the Chief Information Security Officer (CISO) and Chief Technology Officer (CTO), supported by experienced personnel in IT and security[254](index=254&type=chunk) [Item 2. Properties](index=66&type=section&id=Item%202%2E%20Properties) Talkspace's headquarters are in New York, NY, with most employees working remotely. The company has limited international operations, and none of its leased facilities are considered material. - Talkspace's headquarters are in New York, NY, with the majority of employees working remotely[256](index=256&type=chunk) - The company has limited international operations, including a foreign subsidiary in Israel that leases its operating facilities under a month-to-month agreement[256](index=256&type=chunk) - None of the company's leased facilities are considered material to its business[256](index=256&type=chunk) [Item 3. Legal Proceedings](index=66&type=section&id=Item%203%2E%20Legal%20Proceedings) Talkspace settled certain class action lawsuits (Securities Action and Delaware Action) in February 2023, with final court approval in Q3 and Q4 2023. The company did not admit liability, settling to avoid litigation costs. A derivative action was also settled in August 2023, involving corporate governance changes. The company accrues for estimated loss contingencies related to legal matters when probable and estimable. - Talkspace resolved securities class action lawsuits (Securities Action and Delaware Action) in February 2023, with final court approval in Q3 and Q4 2023[257](index=257&type=chunk)[428](index=428&type=chunk) - A derivative action was settled in August 2023, leading to corporate governance changes, including enhancements to the Audit Committee and employee compliance training[430](index=430&type=chunk) - The company accrues for estimated loss contingencies when a liability is probable and estimable, acknowledging the inherent difficulty in determining loss amounts[258](index=258&type=chunk)[431](index=431&type=chunk) [Item 4. Mine Safety Disclosures](index=66&type=section&id=Item%204%2E%20Mine%20Safety%20Disclosures) This item is not applicable to Talkspace, Inc. - Mine Safety Disclosures are not applicable to the company[259](index=259&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=67&type=section&id=Item%205%2E%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Talkspace's common stock and warrants began trading on Nasdaq in June 2021. As of December 31, 2023, there were 168.4 million shares outstanding and 78 holders of record. The company does not intend to pay cash dividends in the foreseeable future and has approved a $15 million share repurchase program starting March 2024. - Talkspace's common stock (TALK) and warrants (TALKW) began trading on Nasdaq on June 23, 2021[261](index=261&type=chunk) Common Stock and Warrants Outstanding (as of Dec 31, 2023) | Security Type | Amount | | :-------------------------------- | :------------- | | Common Stock Issued & Outstanding | 168,428,856 shares | | Private Placement Warrants | 12,780,000 | | Public Warrants | 21,350,000 | | Shares underlying outstanding stock options | 10,558,573 | | Shares underlying non-vested restricted stock units | 8,984,827 | - The company does not intend to pay cash dividends for the foreseeable future, prioritizing reinvestment in business development and expansion[225](index=225&type=chunk)[264](index=264&type=chunk) - On February 22, 2024, the Board approved a share repurchase program of up to **$15 million** of common stock over 24 months, starting March 1, 2024[269](index=269&type=chunk) [Market Information](index=67&type=section&id=Market%20Information) Talkspace's common stock and warrants commenced trading on Nasdaq in June 2021. - Talkspace's common stock and warrants commenced trading on Nasdaq under symbols 'TALK' and 'TALKW' on June 23, 2021[261](index=261&type=chunk) [Holders](index=67&type=section&id=Holders) As of March 12, 2024, there were 78 holders of record for common stock and 13 for warrants. - As of March 12, 2024, there were **78 holders of record** for common stock and **13 for warrants**[263](index=263&type=chunk) [Dividends](index=67&type=section&id=Dividends) The company has not paid cash dividends and does not intend to in the foreseeable future. - The company has not paid any cash dividends on its common stock to date and does not intend to in the foreseeable future, with future decisions at the discretion of the board[225](index=225&type=chunk)[264](index=264&type=chunk) [Share-Based Compensation Plans](index=67&type=section&id=Share-Based%20Compensation%20Plans) Talkspace maintains stock-based compensation and employee stock purchase plans to attract, retain, and motivate talent. - Talkspace maintains a stock-based compensation plan (2021 Incentive Award Plan) and an employee stock purchase plan to attract, retain, and motivate talent[265](index=265&type=chunk)[434](index=434&type=chunk) [Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities](index=67&type=section&id=Recent%20Sales%20of%20Unregistered%20Securities%3B%20Use%20of%20Proceeds%20from%20Registered%20Securities) There were no recent sales of unregistered securities or use of proceeds from registered securities to report. - There were no recent sales of unregistered securities or use of proceeds from registered securities to report[266](index=266&type=chunk) [Issuer Repurchases of Equity Securities](index=67&type=section&id=Issuer%20Repurchases%20of%20Equity%20Securities) The company did not repurchase any shares of its common stock during the fourth quarter of 2023. - The company did not repurchase any shares of its common stock during the fourth quarter of 2023[267](index=267&type=chunk) [Equity Compensation Plan Information](index=67&type=section&id=Equity%20Compensation%20Plan%20Information) Information on equity compensation plans is incorporated by reference from the 2024 Annual Meeting Proxy Statement. - Information on equity compensation plans is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[268](index=268&type=chunk) [Share Repurchase Program](index=69&type=section&id=Share%20Repurchase%20Program) The Board approved a $15 million share repurchase program over 24 months, starting March 1, 2024. - On February 22, 2024, the Board approved a share repurchase program authorizing up to **$15 million** of common stock repurchases over 24 months, starting March 1, 2024[269](index=269&type=chunk) - The program allows repurchases through various methods (open market, privately-negotiated) but does not obligate the company to repurchase any specific amount and can be suspended or terminated at any time[269](index=269&type=chunk)[270](index=270&type=chunk) [Item 6. Reserved](index=70&type=section&id=Item%206%2E%20Reserved) This item is reserved and contains no information. [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=70&type=section&id=Item%207%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Talkspace achieved **25.5% revenue growth to $150.0 million** in 2023, driven by Payor and DTE segments, while significantly narrowing its net loss to **$19.2 million** and improving Adjusted EBITDA, maintaining strong liquidity with **$123.9 million cash**. Key Financial Highlights (2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Total Revenue | $150,045 | $119,567 | $30,478 | 25.5% | | Cost of Revenues | $75,665 | $59,229 | $16,436 | 27.7% | | Gross Profit | $74,380 | $60,338 | $14,042 | 23.3% | | Total Operating Expenses | $97,589 | $143,496 | $(45,907) | -32.0% | | Operating Loss | $(23,209) | $(83,158) | $59,949 | 72.1% | | Net Loss | $(19,182) | $(79,672) | $60,490 | 75.9% | | Adjusted EBITDA | $(13,529) | $(58,671) | $45,142 | 76.9% | - Revenue growth was primarily driven by a **123.5% increase in Payor revenue** and **19.0% growth in DTE revenue**, partially offset by a **35.4% decline in Consumer revenue** due to strategic marketing shifts[299](index=299&type=chunk) - Operating expenses decreased significantly by **32.0% in 2023** due to efficiency initiatives, contributing to a substantial reduction in net loss[302](index=302&type=chunk) [Overview](index=70&type=section&id=Overview) Talkspace is a leading virtual behavioral health company connecting millions of patients with licensed mental health providers through virtual counseling. - Talkspace is a leading virtual behavioral health company connecting millions of patients with licensed mental health providers through virtual counseling, psychotherapy, and psychiatry[275](index=275&type=chunk) - As of December 31, 2023, the company had **131 million eligible lives** through Payor and DTE clients (up from 92 million in 2022) and **11,700 Consumer active members** (down from 15,400 in 2022)[276](index=276&type=chunk) - Completed sessions for Payor clients nearly doubled to **850,600 in 2023** from 426,400 in 2022[276](index=276&type=chunk) [Inflation Risk and Economic Conditions](index=70&type=section&id=Inflation%20Risk%20and%20Economic%20Conditions) Demand for Talkspace's solution depends on the general economy, with inflation not materially affecting 2023 results but posing future risks. - The demand for Talkspace's solution is dependent on the general economy, which is affected by geopolitical conditions, credit market stability, inflationary pressures, and interest rates[277](index=277&type=chunk) - Inflation did not materially affect the business in 2023 and 2022, but significant inflationary pressures on costs (e.g., Provider cost) could harm financial results if not offset by price increases or cost savings[278](index=278&type=chunk) [Quarterly Fluctuations](index=71&type=section&id=Quarterly%20Fluctuations) Financial results may fluctuate due to external factors, with revenue recognition over time making rapid increases difficult. - Financial results may fluctuate due to factors outside of the company's control, with revenue from new contracts recognized over time, making rapid increases difficult[279](index=279&type=chunk) - Declines in new or renewed contracts may not be fully reflected in current quarter revenue but will negatively affect future periods[279](index=279&type=chunk) [Operating Segments](index=71&type=section&id=Operating%20Segments) The company operates as a single segment and one reporting unit, as reviewed by the Chief Executive Officer. - The company operates as a single segment and one reporting unit, as reviewed by the Chief Executive Officer[280](index=280&type=chunk) [Key Business Metrics](index=71&type=section&id=Key%20Business%20Metrics) This section presents key business metrics including eligible lives, completed Payor sessions, and active Consumer members. Key Business Metrics (Year Ended December 31) | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Number of eligible lives at year end (in millions) | 131 | 92 | | Number of completed Payor sessions (in thousands) | 850.6 | 426.4 | | Number of health plan clients at year end | 22 | 19 | | Number of enterprise clients at year end | 210 | 226 | | Number of Consumer active members at year end (in thousands) | 11.7 | 15.4 | Key Business Metrics (Three Months Ended December 31) | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Unique Payor active members during the period (in thousands) | 79.2 | 47.5 | [Components of Results of Operations](index=73&type=section&id=Components%20of%20Results%20of%20Operations) This section details the components of Talkspace's financial results, including revenues, cost of revenues, and operating expenses. [Revenues](index=73&type=section&id=Revenues) Revenues are generated from services to individuals through health insurance plans, enterprises, and direct subscriptions. - Revenues are generated from services to individuals through health insurance plans, employee assistance organizations, enterprises, and direct monthly/quarterly/bi-annual/annual membership subscriptions[283](index=283&type=chunk)[284](index=284&type=chunk) - Revenue growth is driven by increasing eligible covered lives, higher utilization within covered lives, expanding enterprise clients, and increasing membership subscriptions[285](index=285&type=chunk) [Cost of Revenues](index=73&type=section&id=Cost%20of%20Revenues) Cost of revenues primarily consists of therapist payments, driven by session volume and provider network size. - Cost of revenues primarily consists of therapist payments, driven by the number of sessions and the size of the provider network[286](index=286&type=chunk) - The company uses a hybrid model of employee and independently contracted providers, with compensation for contracted providers based on time committed and employee providers receiving fixed salaries[287](index=287&type=chunk) [Operating Expenses](index=73&type=section&id=Operating%20Expenses) Operating expenses include research and development, clinical operations, sales and marketing, and general and administrative expenses. - Operating expenses include research and development, clinical operations, sales and marketing, and general and administrative expenses[289](index=289&type=chunk) [Research and Development Expenses](index=73&type=section&id=Research%20and%20Development%20Expenses) R&D expenses cover personnel, software development, IT infrastructure, security compliance, and third-party services. - R&D expenses cover personnel, software development, IT infrastructure, security/privacy compliance, product development, and third-party services[290](index=290&type=chunk) [Clinical Operations Expenses](index=73&type=section&id=Clinical%20Operations%20Expenses) Clinical operations expenses relate to managing the provider network, including recruiting, onboarding, and quality assurance. - Clinical operations expenses are related to managing the provider network, including recruiting, onboarding, credentialing, training, and quality assurance[291](index=291&type=chunk) [Sales and Marketing Expenses](index=73&type=section&id=Sales%20and%20Marketing%20Expenses) Sales and marketing expenses include employee-related costs, commissions, advertising, and member acquisition. - Sales expenses include employee-related costs, commissions, and travel, while marketing expenses cover advertising, member acquisition, personnel, and third-party services[292](index=292&type=chunk)[293](index=293&type=chunk) [General and Administrative Expenses](index=74&type=section&id=General%20and%20Administrative%20Expenses) G&A expenses include personnel costs for executives, finance, legal, HR, professional fees, and occupancy costs. - G&A expenses include personnel costs for executives, finance, legal, compliance, HR, professional fees, and occupancy costs[294](index=294&type=chunk) [Impairment of goodwill](index=74&type=section&id=Impairment%20of%20goodwill) A goodwill impairment charge of $6.1 million was incurred in 2022, with no charges in 2023 or 2021. - A goodwill impairment charge of **$6.1 million** was incurred in 2022; no impairment charges were recorded in 2023 or 2021[295](index=295&type=chunk) [Financial (income), net](index=74&type=section&id=Financial%20%28income%29%2C%20net) Financial (income), net includes non-cash changes in warrant liabilities fair value, interest earned, and other financial expenses. - Financial (income), net includes non-cash changes in warrant liabilities fair value, interest earned on cash equivalents, and other financial expenses[296](index=296&type=chunk) [Taxes on income](index=74&type=section&id=Taxes%20on%20income) Taxes on income primarily consist of foreign income taxes, with a full valuation allowance on U.S. deferred tax assets. - Taxes on income primarily consist of foreign income taxes from the Israeli subsidiary[297](index=297&type=chunk) - The company maintains a full valuation allowance for its U.S. deferred tax assets, including federal and state Net Operating Losses (NOLs), due to uncertainty of realization[297](index=297&type=chunk) [Results of Operations](index=74&type=section&id=Results%20of%20Operations) This section provides a detailed comparison of the company's financial performance for the years ended December 31, 2023, 2022, and 2021. [Year Ended December 31, 2023 compared to December 31, 2022](index=76&type=section&id=Year%20Ended%20December%2031%2C%202023%20compared%20to%20December%2031%2C%202022) This section compares the company's financial results for the years 2023 and 2022, highlighting revenue and expense changes. Revenue Breakdown (2023 vs. 2022) | Revenue Source | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :--------------- | :------------------ | :------------------ | :--------- | :--------- | | Payor revenue | $80,823 | $36,168 | $44,655 | 123.5% | | DTE revenue | $33,614 | $28,241 | $5,373 | 19.0% | | Consumer revenue | $35,608 | $55,158 | $(19,550) | -35.4% | | **Total revenue** | **$150,045** | **$119,567** | **$30,478** | **25.5%** | - Cost of revenues increased by **27.7% to $75.7 million** in 2023, primarily due to increased therapist hours to meet customer engagement[300](index=300&type=chunk) - Gross profit increased by **23.3% to $74.4 million**, but gross margin slightly declined to **49.6%** (from 50.5% in 2022) due to a shift in revenue mix towards Payor[301](index=301&type=chunk) Operating Expenses (2023 vs. 2022) | Expense Category | 2023 (in thousands) | 2022 (in thousands) | Change ($) | Change (%) | | :------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Research and development | $17,571 | $21,659 | $(4,088) | -18.9% | | Clinical operations | $6,159 | $6,591 | $(432) | -6.6% | | Sales and marketing | $52,544 | $72,842 | $(20,298) | -27.9% | | General and administrative | $21,315 | $36,270 | $(14,955) | -41.2% | | Impairment of goodwill | $0 | $6,134 | $(6,134) | -100.0% | | **Total operating expenses** | **$97,589** | **$143,496** | **$(45,907)** | **-32.0%** | - Financial (income), net was **$4.2 million in 2023** (primarily **$5.3 million interest income**, offset by **$0.9 million warrant liability losses**), compared to **$3.7 million in 2022** (primarily **$3.1 million warrant liability gains**)[308](index=308&type=chunk) [Year Ended December 31, 2022 compared to December 31, 2021](index=78&type=section&id=Year%20Ended%20December%2031%2C%202022%20compared%20to%20December%2031%2C%202021) For a detailed discussion of 2022 vs. 2021 results, refer to the prior year's 10-K report. - For a detailed discussion of 2022 vs. 2021 results, refer to the prior year's 10-K report[310](index=310&type=chunk) [Non-GAAP Financial Measures](index=78&type=section&id=Non-GAAP%20Financial%20Measures) Adjusted EBITDA is used as a key performance measure to evaluate operating performance and assess business health. - Adjusted EBITDA is used as a key performance measure to evaluate operating performance, facilitate internal comparisons, and assess business health[311](index=311&type=chunk) - Adjusted EBITDA is calculated by excluding depreciation and amortization, interest and other expenses (income), tax benefit/expense, stock-based compensation, goodwill impairment, and certain non-recurring expenses from net loss[314](index=314&type=chunk) Adjusted EBITDA Reconciliation (2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Net loss | $(19,182) | $(79,672) | | Add: Depreciation and amortization | $1,285 | $1,357 | | (1) Financial (income), net | $(4,245) | $(3,740) | | Taxes on income | $218 | $254 | | Stock-based compensation | $8,395 | $12,116 | | Impairment of goodwill | $0 | $6,134 | | (2) Non-recurring expenses | $0 | $4,880 | | **Adjusted EBITDA** | **$(13,529)** | **$(58,671)** | [Liquidity and Capital Resources](index=80&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2023, Talkspace had $123.9 million in cash and no debt, anticipating sufficient funds for the next twelve months. - As of December 31, 2023, Talkspace had **$123.9 million in cash and cash equivalents** (down from $138.5 million in 2022) and no debt[317](index=317&type=chunk) - The company anticipates funding cash needs for at least the next twelve months using available cash, but may require additional capital for growth, acquisitions, or unforeseen circumstances[319](index=319&type=chunk) [Cash Flows from Operating, Investing and Financing Activities](index=81&type=section&id=Cash%20Flows%20from%20Operating%2C%20Investing%20and%20Financing%20Activities) This section summarizes the company's cash flow activities from operations, investing, and financing for the reported periods. Summary Consolidated Cash Flow Information (2023 vs. 2022) | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Net cash used in operating activities | $(16,393) | $(61,077) | | Net cash used in investing activities | $(141) | $(317) | | Net cash provided by financing activities | $1,897 | $1,683 | | **Net decrease in cash and cash equivalents** | **$(14,637)** | **$(59,711)** | [Operating Activities](index=81&type=section&id=Operating%20Activities) Net cash used in operating activities decreased significantly in 2023 due to a lower net loss. - Net cash used in operating activities decreased significantly in 2023 due to a lower net loss, partially offset by unfavorable timing of accrued expense payments[321](index=321&type=chunk) [Investing Activities](index=81&type=section&id=Investing%20Activities) Net cash used in investing activities decreased primarily due to reduced purchases of computer equipment and software. - Net cash used in investing activities decreased primarily due to a reduction in purchases of computer equipment and software[322](index=322&type=chunk) [Financing Activities](index=81&type=section&id=Financing%20Activities) Net cash provided by financing activities mainly resulted from cash proceeds from the exercise of stock options. - Net cash provided by financing activities mainly resulted from cash proceeds from the exercise of stock options[323](index=323&type=chunk) [Contractual Obligations, Commitments and Contingencies](index=81&type=section&id=Contractual%20Obligations%2C%20Commitments%20and%20Contingencies) Talkspace has no material debt or long-term operating lease obligations, and accrues for estimated loss contingencies related to legal matters. - As of December 31, 2023, Talkspace had no short-term or long-term debt and immaterial long-term operating lease obligations[324](index=324&type=chunk) - The company's commercial contracts include indemnification provisions for data breaches or intellectual property infringement, though no material costs have been incurred to date[326](index=326&type=chunk) - Directors and executive officers are indemnified for costs associated with legal actions, with liability insurance in place[327](index=327&type=chunk) [Off-Balance Sheet Arrangements](index=82&type=section&id=Off-Balance%20Sheet%20Arrangements) Talkspace does not engage in off-balance sheet arrangements that provide liquidity, capital resources, or market/credit risk support. - Talkspace does not engage in off-balance sheet arrangements that provide liquidity, capital resources, or market/credit risk support[328](index=328&type=chunk) [Critical Accounting Policies and Estimates](index=82&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Key accounting policies requiring significant management judgment include contingent liabilities, revenue recognition, and stock-based compensation. - Key accounting policies requiring significant management judgment include contingent liabilities, revenue recognition, stock-based compensation, and fair value of warrant liabilities[329](index=329&type=chunk)[373](index=373&type=chunk) [Revenue Recognition](index=82&type=section&id=Revenue%20Recognition) Revenue is recognized when performance obligations are satisfied, with transaction price estimates including variable consideration. - Revenue is recognized when performance obligations are satisfied, with transaction price estimates including variable consideration based on historical collection experience[330](index=330&type=chunk) [Recent Accounting Pronouncements](index=82&type=section&id=Recent%20Accounting%20Pronouncements) The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes). - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes) which are effective for fiscal years beginning after December 15, 2023, and December 15, 2024, respectively[409](index=409&type=chunk)[410](index=410&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=83&type=section&id=Item%207A%2E%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Talkspace's primary market risks are related to interest rates on its cash and cash equivalents, and foreign currency exchange rates due to limited international operations. The company does not believe a 100 basis point change in interest rates would materially affect its financials, and currently has minimal foreign currency risk. - The company's earnings on cash equivalents are subject to market risk from interest rate changes, but a **100 basis point change** is not expected to have a material effect[337](index=337&type=chunk) - Talkspace has limited operations outside the U.S. and primarily denominates revenue in U.S. dollars, resulting in immaterial exposure to foreign currency exchange risk[338](index=338&type=chunk) [Interest Rate Risk](index=83&type=section&id=Interest%20Rate%20Risk) Talkspace has $123.9 million in cash and no debt, with a 100 basis point interest rate change not expected to materially affect financials. - As of December 31, 2023, cash and cash equivalents totaled **$123.9 million**, with no outstanding debt[336](index=336&type=chunk) - A hypothetical **100 basis point change** in interest rates is not expected to materially affect the company's business, financial condition, or results of operations[337](index=337&type=chunk) [Foreign Currency Exchange Risk](index=83&type=section&id=Foreign%20Currency%20Exchange%20Risk) The majority of revenue is in U.S. dollars, and limited international operations mean foreign currency risk is currently immaterial. - The majority of revenue is in U.S. dollars, and limited international operations mean foreign currency risk is currently immaterial[338](index=338&type=chunk) - Future international expansion could increase exposure to foreign currency exchange risk[338](index=338&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=84&type=section&id=Item%208%2E%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Talkspace's audited consolidated financial statements for 2021-2023, including balance sheets, operations, equity, and cash flows, with an unqualified audit opinion and detailed notes on accounting policies and financial items. - The consolidated financial statements for 2023, 2022, and 2021 are presented in conformity with U.S. GAAP[342](index=342&type=chunk)[372](index=372&type=chunk) - The independent registered public accounting firm, Kost Forer Gabbay & Kasierer, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[342](index=342&type=chunk)[343](index=343&type=chunk)[352](index=352&type=chunk) - A critical audit matter involved the estimation of transaction price and variable consideration for revenue recognition, particularly for Payor revenues, due to significant data inputs and subjective assumptions[347](index=347&type=chunk)[348](index=348&type=chunk) [Reports of Independent Registered Public Accounting Firm](index=85&type=section&id=Reports%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Kost Forer Gabbay & Kasierer provided an unqualified opinion on Talkspace's consolidated financial statements and internal control over financial reporting. - Kost Forer Gabbay & Kasierer, a member of EY Global, provided an unqualified opinion on the consolidated financial statements and internal control over financial reporting for Talkspace as of December 31, 2023[342](index=342&type=chunk)[343](index=343&type=chunk)[352](index=352&type=chunk) - The critical audit matter identified was the estimation of transaction price and variable consideration for revenue recognition, particularly for Payor revenues, due to complex data inputs and subjective assumptions[347](index=347&type=chunk)[348](index=348&type=chunk) [Consolidated Balance Sheets](index=90&type=section&id=Consolidated%20Balance%20Sheets) This section presents the company's consolidated balance sheets as of December 31, 2023 and 2022. Consolidated Balance Sheets (as of December 31, in thousands) | Item | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | **ASSETS** | | | | Cash and cash equivalents | $123,908 | $138,545 | | Total current assets | $139,800 | $152,557 | | Total assets | $142,221 | $156,254 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Total current liabilities | $21,648 | $27,318 | | Warrant liabilities | $1,842 | $939 | | Total liabilities | $23,575 | $28,718 | | Total stockholders' equity | $118,646 | $127,536 | | Total liabilities and stockholders' equity | $142,221 | $156,254 | [Consolidated Statements of Operations](index=91&type=section&id=Consolidated%20Statements%20of%20Operations) This section presents the company's consolidated statements of operations for the years ended December 31, 2023, 2022, and 2021. Consolidated Statements of Operations (Year Ended December 31, in thousands) | Item | 2023 | 2022 | 2021 | | :-------------------------- | :----- | :----- | :----- | | Revenues | $150,045 | $119,567 | $113,671 | | Cost of revenues | $75,665 | $59,229 | $46,899 | | Gross profit | $74,380 | $60,338 | $66,772 | | Total operating expenses | $97,589 | $143,496 | $160,695 | | Operating loss | $(23,209) | $(83,158) | $(93,923) | | Financial (income), net | $(4,245) | $(3,740) | $(31,228) | | Loss before taxes on income | $(18,964) | $(79,418) | $(62,695) | | Taxes on income | $218 | $254 | $47 | | Net loss | $(19,182) | $(79,672) | $(62,742) | | Basic and diluted net loss per share | $(0.12) | $(0.51) | $(0.72) | [Consolidated Statements of Changes in Stockholders' Equity (Deficit)](index=92&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity%20%28Deficit%29) Stockholders' equity decreased from $127.5 million in 2022 to $118.6 million in 2023, primarily due to net loss. - Stockholders' equity decreased from **$127.5 million in 2022 to $118.6 million in 2023**, primarily due to the net loss of **$19.2 million**, partially offset by stock option exercises and stock-based compensation[365](index=365&type=chunk) [Consolidated Statements of Cash Flows](index=93&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents the company's consolidated statements of cash flows for the years ended December 31, 2023, 2022, and 2021. Consolidated Statements of Cash Flows (Year Ended December 31, in thousands) | Cash Flow Activity | 2023 | 2022 | 2021 | | :-------------------------------- | :----- | :----- | :----- | | Net cash used in operating activities | $(16,393) | $(61,077) | $(65,711) | | Net cash used in investing activities | $(141) | $(317) | $(663) | | Net cash provided by financing activities | $1,897 | $1,683 | $251,382 | | Net (decrease) increase in cash and cash equivalents | $(14,637) | $(59,711) | $185,008 | | Cash and cash equivalents at end of year | $123,908 | $138,545 | $198,256 | [Notes to Consolidated Financial Statements](index=94&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes explaining the significant accounting policies, estimates, and specific financial statement items. - Financial statements are prepared in conformity with U.S. GAAP, requiring management estimates for contingent liabilities, revenue recognition, stock-based compensation, and warrant liabilities[372](index=372&type=chunk)[373](index=373&type=chunk) - The company consolidates all subsidiaries and Variable Interest Entities (VIEs) where it is the primary beneficiary[374](index=374&type=chunk)[375](index=375&type=chunk) - Goodwill is tested for impairment annually, with a **$6.1 million charge** recorded in 2022, and finite-lived intangible assets are amortized on a straight-line basis[384](index=384&type=chunk)[385](index=385&type=chunk)[386](index=386&type=chunk) [NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS](index=94&type=section&id=NOTE%201%2E%20DESCRIPTION%20OF%20ORGANIZATION%20AND%20BUSINESS%20OPERATIONS) Talkspace is a behavioral healthcare company providing online therapy, formed via a SPAC business combination, and consolidates Variable Interest Entities. - Talkspace, Inc. is a behavioral healthcare company providing online therapy via messaging, audio, and video, connecting patients with licensed providers[370](index=370&type=chunk) - The company was formed through a business combination with Hudson Executive Investment Corp. (HEC), a SPAC, on June 22, 2021[371](index=371&type=chunk) - Talkspace holds a variable interest in one professional association (TPN) and eight professional corporations (PC entities) to comply with corporate practice of medicine laws[371](index=371&type=chunk) [NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES](index=94&type=section&id=NOTE%202%2E%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) This note outlines the company's significant accounting policies and estimates, including basis of presentation, use of estimates, and consolidation principles. [Basis of Presentation](index=94&type=section&id=Basis%20of%20Presentation) Consolidated financial statements are prepared in conformity with U.S. GAAP. - Consolidated financial statements are prepared in conformity with U.S. GAAP[372](index=372&type=chunk) [Use of Estimates](index=94&type=section&id=Use%20of%20Estimates) Management makes estimates and judgments for contingent liabilities, revenue recognition, stock-based compensation, and warrant liabilities. - Management makes estimates and judgments for contingent liabilities, revenue recognition, stock-based compensation, and warrant liabilities, which are based on historical factors and current circumstances[373](index=373&type=chunk) [Consolidation](index=94&type=section&id=Consolidation) The company consolidates all subsidiaries with controlling financial interest and VIEs where it is the primary beneficiary. - The company consolidates all subsidiaries with controlling financial interest and VIEs where it is the primary beneficiary[374](index=374&type=chunk) [Operating Segments](index=95&type=section&id=Operating%20Segments) Talkspace operates as a single segment and reporting unit. - Talkspace operates as a single segment and reporting unit[375](index=375&type=chunk) [Financial statements in U.S. dollars](index=95&type=section&id=Financial%20statements%20in%20U%2E.S%2E%20dollars) The U.S. dollar is the company's functional and reporting currency, with non-dollar transactions re-measured. - The U.S. dollar is the company's functional and reporting currency, with non-dollar transactions re-measured[376](index=376&type=chunk) [Cash and cash equivalents](index=95&type=section&id=Cash%20and%20cash%20equivalents) Cash equivalents are short-term, highly liquid investments with original maturities of three months or less. - Cash equivalents are short-term, highly liquid investments with original maturities of three months or less, primarily bank deposits and money market funds[378](index=378&type=chunk) [Property and equipment, net](index=95&type=section&id=Property%20and%20equipment%2C%20net) Property and equipment are stated at cost, net of accumulated depreciation, and are immaterial. - Property and equipment are stated at cost, net of accumulated depreciation, and are immaterial as of December 31, 2023 and 2022[380](index=380&type=chunk) [Internal-use Software](index=95&type=section&id=Internal-use%20Software) Certain internal-use software development costs are capitalized during the application development stage and amortized. - Certain internal-use software development costs are capitalized during the application development stage and amortized over their estimated useful life[381](index=381&type=chunk) [Leases](index=97&type=section&id=Leases) Leases are accounted for under ASC 842, with ROU assets and lease liabilities recorded for terms over 12 months. - Leases are accounted for under ASC 842, with ROU assets and lease liabilities recorded for terms over 12 months; lease assets and liabilities were immaterial in 2023 and 2022[382](index=382&type=chunk)[383](index=383&type=chunk) [Goodwill](index=97&type=section&id=Goodwill) Goodwill is not amortized but tested for impairment annually, with a $6.1 million impairment charge recorded in 2022. - Goodwill is not amortized but tested for impairment annually, with a **$6.1 million impairment charge** recorded in 2022[384](index=384&type=chunk)[385](index=385&type=chunk) [Intangible Assets](index=97&type=section&id=Intangible%20Assets) Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. - Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives[386](index=386&type=chunk) [Impairment of long-lived assets and intangible assets subject to amortization, including ROU lease asset](index=97&type=section&id=Impairment%20of%20long-lived%20assets%20and%20intangible%20assets%20subject%20to%20amortization%2C%20including%20ROU%20lease%20asset) Long-lived assets are reviewed for impairment when circumstances indicate carrying amounts may not be recoverable. - Long-lived assets are reviewed for impairment when circumstances indicate carrying amounts may not be recoverable; no impairment charges were recorded for long-lived assets in 2021-2023[387](index=387&type=chunk) [Revenue recognition](index=97&type=section&id=Revenue%20recognition) Revenue is recognized under ASC 606 when performance obligations are satisfied, with variable consideration estimated. - Revenue is recognized under ASC 606 when performance obligations are satisfied, with variable consideration estimated based on historical collection experience[388](index=388&type=chunk) - Payor revenue is recognized at the point of service, DTE revenue primarily on a per-member-per-month basis, and Consumer revenue ratably over the subscription period[389](index=389&type=chunk)[390](index=390&type=chunk)[391](index=391&type=chunk) [Accounts Receivable](index=99&type=section&id=Accounts%20Receivable) Accounts receivables are stated net of credit losses allowance, estimated based on historical collection experience. - Accounts receivables are stated net of credit losses allowance, estimated based on historical collection experience and customer creditworthiness[392](index=392&type=chunk) [Deferred Revenue](index=99&type=section&id=Deferred%20Revenue) Deferred revenues are recorded when cash payments are received in advance of services, primarily for Consumer subscriptions. - Deferred revenues are recorded when cash payments are received in advance of services, primarily related to Consumer subscriptions, with most obligations expected to be satisfied within one year[393](index=393&type=chunk) [Stock-based compensation](index=100&type=section&id=Stock-based%20compensation) Stock-based compensation is measured at grant-date fair value and recognized over the service period. - Stock-based compensation is measured at grant-date fair value and recognized over the service period, with stock options valued using the Black-Scholes-Merton model and RSUs at closing price[395](index=395&type=chunk)[396](index=396&type=chunk)[397](index=397&type=chunk) [Determination of Fair Value of our Common Stock prior to the Business Combination](index=100&type=section&id=Determination%20of%20Fair%20Value%20of%20our%20Common%20Stock%20prior%20to%20the%20Business%20Combination) Prior to the Business Combination, common stock fair value was determined by management and the board, considering various factors. - Prior to the Business Combination, the fair value of common stock was determined by management and the board, considering operational developments, preferred share prices, and lack of marketability[398](index=398&type=chunk) [Employee Benefit Plan](index=100&type=section&id=Employee%20Benefit%20Plan) The company maintains a 401(k) plan for U.S. employees, with immaterial matching contributions for 2021-2023. - The company maintains a 401(k) plan for U.S. employees, with matching contributions that were immaterial for 2021-2023[399](index=399&type=chunk) [Fair value of financial instruments](index=100&type=section&id=Fair%20value%20of%20financial%20instruments) Fair value measurements follow ASC 820, using a three-level hierarchy based on input observability. - Fair value measurements follow ASC 820, using a three-level hierarchy (Level 1: quoted prices, Level 2: observable inputs, Level 3: unobservable inputs)[400](index=400&type=chunk)[402](index=402&type=chunk)[403](index=403&type=chunk) [Income taxes](index=102&type=section&id=Income%20taxes) Income taxes are accounted for under ASC 740, with deferred tax assets subject to a valuation allowance. - Income taxes are accounted for under ASC 740, with deferred tax assets subject to a valuation allowance due to uncertainty of realization[404](index=404&type=chunk) - The company applies a two-step approach for uncertain tax positions and did not record any provision for such positions as of December 31, 2023 and 2022[405](index=405&type=chunk)[407](index=407&type=chunk) [Net loss per share](index=102&type=section&id=Net%20loss%20per%20share) Basic and diluted net loss per share are calculated by dividing net loss by weighted-average common shares outstanding. - Basic net loss per share is calculated by dividing net loss by weighted-average common shares outstanding; diluted net loss per share is the same when potentially dilutive securities are anti-dilutive[408](index=408&type=chunk) [Recently Issued and Recently Adopted Accounting Pronouncements](index=102&type=section&id=Recently%20Issued%20and%20Recently%20Adopted%20Accounting%20Pronouncements) The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes). - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), effective for fiscal years beginning after December 15, 2023, and December 15, 2024, respectively[409](index=409&type=chunk)[410](index=410&type=chunk) [NOTE 3. REVENUE RECOGNITION](index=103&type=section&id=NOTE%203%2E%20REVENUE%20RECOGNITION) This note provides further details on the company's revenue recognition policies and related balances. Revenues from Sales to Unaffiliated Customers (Year Ended December 31, in thousands) | Revenue Source | 2023 | 2022 | 2021 | | :--------------- | :----- | :----- | :----- | | Payor | $80,823 | $36,168 | $22,272 | | DTE | $33,614 | $28,241 | $16,642 | | Consumer | $35,608 | $55,158 | $74,757 | | **Total** | **$150,045** | **$119,567** | **$113,671** | - The majority of revenues for 2021-2023 were generated from customers in the United States[411](index=411&type=chunk) - Two customers represented **10% or more of total revenue** in 2023 and 2022; no single customer met this threshold in 2021[412](index=412&type=chunk) [Accounts Receivable](index=103&type=section&id=Accounts%20Receivable) This section details accounts receivable balances by client type and customer concentration. Accounts Receivable Balances (as of December 31, in thousands) | Client Type | 2023 | 2022 | | :------------ | :----- | :----- | | DTE clients | $7,800 | $7,400 | | Payor clients | $2,400 | $2,200 | - No single customer represented **10% or more of the accounts receivable balance** as of December 31, 2023, compared to one customer in 2022[414](index=414&type=chunk) [Deferred Revenue](index=103&type=section&id=Deferred%20Revenue) This section details deferred revenue balances and the amount of revenue recognized from prior period deferrals. - The company recognized **$2.8 million** and **$6.2 million** in revenue from deferred revenues at the beginning of 2023 and 2022, respectively, mainly related to Consumer subscriptions[415](index=415&type=chunk) [NOTE 4. INTANGIBLE ASSETS, NET](index=103&type=section&id=NOTE%204%2E%20INTANGIBLE%20ASSETS%2C%20NET) This note details the company's intangible assets, including acquired technology, customer relationships, and non-competition agreements. Intangible Assets, Net (as of December 31, in thousands) | Intangible Asset | 2023 | 2022 | | :----------------------- | :----- | :----- | | Acquired technology | $3,201 | $3,201 | | Customer relationship | $1,350 | $1,350 | | Non-Competition agreement | $939 | $939 | | **Total gross intangible assets** | **$5,490** | **$5,490** | | Accumulated amortization | $(3,704) | $(2,961) | | **Intangible assets, net** | **$1,786** | **$2,529** | - Amortization expense for intangible assets was **$0.7 million in 2023**, down from **$0.9 million in 2022** and **$1.8 million in 2021**[416](index=416&type=chunk) Future Amortization of Acquired Technology (as of December 31, 2023, in thousands) | Year | Amount | | :--- | :----- | | 2024 | $446 | | 2025 | $446 | | 2026 | $446 | | 2027

[FORM 10-Q General Information](index=1&type=section&id=FORM%2010-Q_General_Information) This Quarterly Report (Form 10-Q) for the period ended September 30, 2023, is filed by TALKSPACE, INC - This is a Quarterly Report (Form 10-Q) for the period ended September 30, 2023, filed by TALKSPACE, INC[2](index=2&type=chunk) Filer Status | Filer Status | | | | | :---------------------- | :-- | :---------------------- | :-- | | Large accelerated filer | ☐ | Accelerated filer | ☒ | | Non-accelerated filer | ☐ | Smaller reporting company | ☒ | | Emerging growth company | ☐ | | | - As of November 3, 2023, the registrant had **167,095,019 shares** of common stock, $0.0001 par value per share, outstanding[4](index=4&type=chunk) [PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with notes on accounting policies, revenue, fair value, and capital [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of September 30, 2023, and December 31, 2022 | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Cash and cash equivalents | $125,332 | $138,545 | | Total current assets | $137,717 | $152,557 | | Total assets | $140,348 | $156,254 | | Total current liabilities | $20,851 | $27,318 | | Total liabilities | $22,627 | $28,718 | | Total stockholders' equity | $117,721 | $127,536 | | Accumulated deficit | $(269,078) | $(251,202) | - Total assets decreased by **$15,906 thousand**, and total stockholders' equity decreased by **$9,815 thousand** from December 31, 2022, to September 30, 2023[9](index=9&type=chunk) [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's financial performance, including revenues, costs, gross profit, operating loss, and net loss for the three and nine months ended September 30, 2023 and 2022 | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | YoY Change (%) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | YoY Change (%) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Revenues | $38,646 | $29,332 | 31.8% | $107,627 | $89,326 | 20.5% | | Cost of revenues | $19,797 | $14,737 | 34.3% | $54,218 | $45,163 | 20.0% | | Gross profit | $18,849 | $14,595 | 29.1% | $53,409 | $44,163 | 20.9% | | Operating loss | $(5,179) | $(19,851) | 73.9% (reduction) | $(20,626) | $(62,127) | 66.8% (reduction) | | Net loss | $(4,414) | $(17,983) | 75.5% (reduction) | $(17,876) | $(61,365) | 70.9% (reduction) | | Basic and Diluted EPS | $(0.03) | $(0.11) | 72.7% (reduction) | $(0.11) | $(0.39) | 71.8% (reduction) | - The company significantly reduced its net loss by **75.5%** for the three months and **70.9%** for the nine months ended September 30, 2023, compared to the prior year[12](index=12&type=chunk) [Condensed Consolidated Statements of Stockholder's Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholder%27s%20Equity) This section outlines changes in the company's stockholder's equity, including accumulated deficit and additional paid-in capital, for the nine months ended September 30, 2023 | Metric | December 31, 2022 (in thousands) | September 30, 2023 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------------------- | :-------------------------------- | :-------------------- | | Total Stockholders' Equity | $127,536 | $117,721 | $(9,815) | | Accumulated Deficit | $(251,202) | $(269,078) | $(17,876) | | Additional Paid-in Capital | $378,722 | $386,783 | $8,061 | - The decrease in total stockholders' equity was primarily due to the net loss of **$(17,876) thousand** for the nine months ended September 30, 2023, partially offset by **$6,401 thousand** in stock-based compensation and proceeds from stock option exercises[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 | Category | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in operating activities | $(14,863) | $(46,856) | $31,993 (improvement) | | Net cash used in investing activities | $(10) | $(254) | $244 (improvement) | | Net cash provided by financing activities | $1,660 | $1,493 | $167 (increase) | | Net decrease in cash and cash equivalents | $(13,213) | $(45,617) | $32,404 (smaller decrease) | | Cash and cash equivalents at period end | $125,332 | $152,639 | $(27,307) | - Net cash used in operating activities significantly decreased by **$31,993 thousand** for the nine months ended September 30, 2023, primarily due to a lower net loss[17](index=17&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS](index=7&type=section&id=NOTE%201.%20DESCRIPTION%20OF%20ORGANIZATION%20AND%20BUSINESS%20OPERATIONS) This note describes Talkspace, Inc.'s business as a virtual behavioral healthcare provider and its operational structure through subsidiaries and variable interest entities - Talkspace, Inc. is a leading virtual behavioral healthcare company providing online one-on-one therapy, connecting millions of patients with licensed providers[20](index=20&type=chunk) - The company operates through wholly-owned subsidiaries (Talkspace LLC, Talkspace Network LLC, Groop Internet Platform LTD) and holds variable interests in one professional association and eight professional corporations[21](index=21&type=chunk) [NOTE 2. SIGNIFICANT ACCOUNTING POLICIES](index=7&type=section&id=NOTE%202.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines the significant accounting policies and estimates used in preparing the unaudited condensed consolidated financial statements, including the impact of recent pronouncements - The unaudited condensed consolidated financial statements adhere to U.S. GAAP, relying on management's estimates for contingent liabilities, revenue, stock-based compensation, and warrant liabilities[22](index=22&type=chunk)[24](index=24&type=chunk) - No material effect is expected on the financial statements from recently issued and adopted accounting pronouncements[26](index=26&type=chunk) [NOTE 3. REVENUE RECOGNITION](index=8&type=section&id=NOTE%203.%20REVENUE%20RECOGNITION) This note details the company's revenue recognition policies, including how revenue is recognized from B2B and Consumer channels, and provides a breakdown of revenue sources - Revenue is recognized upon satisfaction of performance obligations, with variable consideration estimated based on historical collection experience and refund liabilities[27](index=27&type=chunk)[29](index=29&type=chunk)[31](index=31&type=chunk) Revenue by Source (3 Months Ended Sep 30) | Revenue Source | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | YoY Change (%) | | :------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Payor revenue | $22,112 | $9,513 | 132.4% | | DTE revenue | $8,002 | $7,280 | 9.9% | | Total B2B revenue | $30,114 | $16,793 | 79.3% | | Consumer revenue | $8,532 | $12,539 | (32.0%) | | **Total revenue** | **$38,646** | **$29,332** | **31.8%** | Revenue by Source (9 Months Ended Sep 30) | Revenue Source | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | YoY Change (%) | | :------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Payor revenue | $55,462 | $25,503 | 117.5% | | DTE revenue | $24,717 | $19,626 | 25.9% | | Total B2B revenue | $80,179 | $45,129 | 77.7% | | Consumer revenue | $27,448 | $44,197 | (37.9%) | | **Total revenue** | **$107,627** | **$89,326** | **20.5%** | [NOTE 4. FAIR VALUE MEASUREMENT](index=9&type=section&id=NOTE%204.%20FAIR%20VALUE%20MEASUREMENT) This note explains the fair value measurement of Private Placement Warrants, including the valuation model used and key inputs such as expected volatility and time to maturity - Private Placement Warrants are accounted for as liabilities and measured at fair value using the **Black-Scholes-Merton Model** (Level 3 fair value measurement)[36](index=36&type=chunk)[37](index=37&type=chunk) Fair Value of Warrant Liabilities (in thousands) | Period | Beginning Balance (in thousands) | Change in Fair Value (in thousands) | Ending Balance (in thousands) | | :--------------------------------- | :------------------------------- | :-------------------------------- | :---------------------------- | | 3 Months Ended Sep 30, 2023 | $820 | $766 | $1,586 | | 9 Months Ended Sep 30, 2023 | $939 | $647 | $1,586 | | 3 Months Ended Sep 30, 2022 | $5,287 | $(1,638) | $3,649 | | 9 Months Ended Sep 30, 2022 | $4,070 | $(421) | $3,649 | Key Inputs for Fair Value Measurement | Input | September 30, 2023 | September 30, 2022 | | :-------------------- | :----------------- | :----------------- | | Expected volatility | 65.90% | 102.00% | | Risk-free interest rate | 4.80% | 4.12% | | Time to maturity (years) | 2.73 | 3.73 | [NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES](index=10&type=section&id=NOTE%205.%20COMMITMENTS%20AND%20CONTINGENT%20LIABILITIES) This note discusses the resolution of securities class action and stockholder derivative lawsuits, along with the company's policy for accruing estimated loss contingencies related to legal matters - The company resolved securities class action and stockholder derivative lawsuits through mediation in February 2023, with final court approvals granted in October and August 2023, respectively[43](index=43&type=chunk)[45](index=45&type=chunk) - The Derivative Settlement included corporate governance changes and a payment of **$550,000** in attorney's fees and expenses[45](index=45&type=chunk) - The company accrues for estimated loss contingencies related to legal matters when a liability is probable and estimable[46](index=46&type=chunk) [NOTE 6. CAPITAL STOCK](index=11&type=section&id=NOTE%206.%20CAPITAL%20STOCK) This note provides details on the company's outstanding Private Placement Warrants and Public Warrants, including their exercise price, and confirms no preferred stock was issued - As of September 30, 2023, there were **12,780,000 Private Placement Warrants** and **21,350,000 Public Warrants** outstanding, each with an exercise price of **$11.50 per share**[49](index=49&type=chunk) - No shares of preferred stock were issued or outstanding as of September 30, 2023, and December 31, 2022[49](index=49&type=chunk) [NOTE 7. SHARE-BASED COMPENSATION](index=11&type=section&id=NOTE%207.%20SHARE-BASED%20COMPENSATION) This note outlines the company's share-based compensation plans, including the 2021 Incentive Award Plan and the 2021 Employee Stock Purchase Plan, and reports related expenses - The company adopted the 2021 Incentive Award Plan and the 2021 Employee Stock Purchase Plan (ESPP) in June 2021; no employee stock purchases have been made under the ESPP as of September 30, 2023[50](index=50&type=chunk)[51](index=51&type=chunk) Share-Based Compensation Expense (in thousands) | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | | 3 Months Ended Sep 30 | $1,969 | $3,179 | (38.0%) | | 9 Months Ended Sep 30 | $6,401 | $9,386 | (31.8%) | [NOTE 8. NET LOSS PER SHARE](index=12&type=section&id=NOTE%208.%20NET%20LOSS%20PER%20SHARE) This note presents the basic and diluted net loss per share for the three and nine months ended September 30, 2023 and 2022, and details anti-dilutive securities Basic and Diluted EPS | Period | 2023 | 2022 | YoY Change (%) | | :--------------------------------- | :----- | :----- | :------------- | | 3 Months Ended Sep 30 (Basic & Diluted) | $(0.03) | $(0.11) | (72.7%) | | 9 Months Ended Sep 30 (Basic & Diluted) | $(0.11) | $(0.39) | (71.8%) | - For the nine months ended September 30, 2023, **11.8 million stock options**, **9.6 million restricted stock units**, and **34.1 million warrants** were excluded from diluted net loss per share calculation due to their anti-dilutive effect[54](index=54&type=chunk) [NOTE 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES](index=12&type=section&id=NOTE%209.%20ACCRUED%20EXPENSES%20AND%20OTHER%20CURRENT%20LIABILITIES) This note provides a breakdown of accrued expenses and other current liabilities, highlighting the significant reduction in litigation costs from December 31, 2022, to September 30, 2023 Accrued Expenses and Other Current Liabilities (in thousands) | Category | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | | Employee compensation | $5,258 | $5,290 | $(32) | | User acquisition | $1,660 | $2,256 | $(596) | | Professional fees | $693 | $543 | $150 | | Litigation costs | $118 | $5,500 | $(5,382) | | Other | $2,988 | $2,913 | $75 | | **Total** | **$10,717** | **$16,502** | **$(5,785)** | - The significant decrease in accrued expenses and other current liabilities was primarily driven by a **$5,382 thousand** reduction in litigation costs[56](index=56&type=chunk) [NOTE 10. VARIABLE INTEREST ENTITIES ("VIEs")](index=13&type=section&id=NOTE%2010.%20VARIABLE%20INTEREST%20ENTITIES%20%28%22VIEs%22%29) This note explains Talkspace's consolidation of Talkspace Provider Network, PA (TPN) and affiliated professional corporations as Variable Interest Entities (VIEs), and presents their financial data - Talkspace consolidates Talkspace Provider Network, PA (TPN) and eight affiliated professional corporations (PC entities) as Variable Interest Entities (VIEs), as it is the primary beneficiary with power to direct activities and absorb losses[57](index=57&type=chunk)[58](index=58&type=chunk) VIEs Financial Data (in thousands) | Category | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | **ASSETS** | | | | Cash and cash equivalents | $343 | $883 | | Accounts receivable | $1,471 | $1,716 | | Other assets | $8,203 | $4,813 | | **Total Assets** | **$10,017** | **$7,412** | | **LIABILITIES** | | | | Accrued expenses and other current liabilities | $3,117 | $3,758 | | **Total Liabilities** | **$3,117** | **$3,758** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=14&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Talkspace's financial condition, liquidity, capital resources, and operational results, including business model, key metrics, revenue drivers, cost structure, and non-GAAP financial measures [Overview](index=14&type=section&id=Overview) This overview introduces Talkspace as a virtual behavioral health company, detailing its B2B and Consumer channels and key operational metrics - Talkspace is a leading virtual behavioral health company connecting millions of patients with licensed mental health providers through its B2B (Payors and DTE) and Consumer channels[64](index=64&type=chunk) Key Operational Metrics | Metric | September 30, 2023 | September 30, 2022 | YoY Change | | :------------------------------------ | :----------------- | :----------------- | :--------- | | B2B eligible lives (in millions) | 113 | 86 | +31.4% | | Consumer active members | 13,300 | 17,900 | (25.7%) | | B2B sessions (3 months, in thousands) | 228.6 | 111.4 | +105.2% | | B2B sessions (9 months, in thousands) | 600.8 | 298.0 | +101.6% | [Principal External Factors that Affect our Business](index=14&type=section&id=Principal%20External%20Factors%20that%20Affect%20our%20Business) This section discusses how the general economy, geopolitical conditions, and global credit market stability influence the demand for Talkspace's services - The demand for Talkspace's services is dependent on the general economy, which is affected by geopolitical conditions and global credit market stability[67](index=67&type=chunk) - Ongoing global conflicts (e.g., Russia and Ukraine, Middle East) have heightened global economic and geopolitical uncertainty[67](index=67&type=chunk) - While Talkspace has a small back-office presence in Israel, its global operations are not dependent on it, limiting the conflict's impact to broader global economic conditions[68](index=68&type=chunk) [Operating Segments](index=15&type=section&id=Operating%20Segments) This section clarifies that the company operates as a single segment and reporting unit, with the CEO overseeing financial performance and resource allocation - The company operates as a single segment and one reporting unit, with the chief executive officer reviewing financial performance and allocating resources[69](index=69&type=chunk) [Key Business Metrics](index=15&type=section&id=Key%20Business%20Metrics) This section presents key operational metrics, including B2B eligible lives, completed B2B sessions, health plan clients, enterprise clients, and consumer active members, highlighting year-over-year changes | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | YoY Change | | :---------------------------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Number of B2B eligible lives at period end (in millions) | 113 | 86 | +31.4% | | Number of completed B2B sessions during the period (in thousands) | 600.8 | 298.0 | +101.6% | | Number of health plan clients at period end | 21 | 17 | +23.5% | | Number of enterprise clients at period end | 212 | 215 | (1.4%) | | Number of Consumer active members at period end (in thousands) | 13.3 | 17.9 | (25.7%) | - B2B eligible lives increased by **31.4%** and completed B2B sessions more than doubled, while consumer active members decreased by **25.7%** year-over-year[70](index=70&type=chunk) [Components of Results of Operations](index=15&type=section&id=Components%20of%20Results%20of%20Operations) [Revenues](index=15&type=section&id=Components_Revenues) This section describes the company's revenue generation from B2B and Consumer channels, outlining recognition policies and growth drivers - Revenues are generated from B2B (health insurance plans, employee assistance organizations, enterprises) and Consumer (individual subscriptions, a la carte offerings) channels[72](index=72&type=chunk)[73](index=73&type=chunk) - B2B revenue from insured members is recognized at the point of service, while enterprise access fees and consumer subscriptions are recognized ratably over the contractual term or subscription period[72](index=72&type=chunk)[73](index=73&type=chunk) - Revenue growth is driven by increasing eligible covered lives, utilization within eligible lives, expanding enterprise clients, and increasing membership subscriptions[74](index=74&type=chunk) [Cost of Revenues](index=16&type=section&id=Components_Cost_of_Revenues) This section details the primary components of cost of revenues, mainly therapist payments, and discusses factors influencing its fluctuation as a percentage of revenues - Cost of revenues primarily consists of therapist payments, driven by the number of sessions and the size of the provider network[76](index=76&type=chunk) - The company utilizes a hybrid model of employee and independently contracted providers, with compensation varying based on time committed and demand[77](index=77&type=chunk) - Cost of revenues as a percentage of revenues is expected to fluctuate based on growth investments, network scaling, efficiencies, and pricing[78](index=78&type=chunk) [Operating Expenses](index=16&type=section&id=Components_Operating_Expenses) [Research and Development Expenses](index=16&type=section&id=Components_Research_and_Development_Expenses) This section outlines research and development expenses, including personnel, software development, IT infrastructure, security, and product development costs - Includes personnel and related expenses for software development, engineering, IT infrastructure, security, privacy compliance, product development, and third-party services[80](index=80&type=chunk) [Clinical Operations Expenses](index=16&type=section&id=Components_Clinical_Operations_Expenses) This section describes clinical operations expenses, covering costs for therapist recruitment, onboarding, credentialing, training, and quality assurance - Covers costs related to recruiting, onboarding, credentialing, training, and ongoing quality assurance activities for the therapist network[81](index=81&type=chunk) [Sales and Marketing Expenses](index=16&type=section&id=Components_Sales_and_Marketing_Expenses) This section details sales and marketing expenses, encompassing employee-related costs, advertising, member acquisition, and brand messaging - Sales expenses include employee-related costs (salaries, benefits, commissions, travel, stock-based compensation)[82](index=82&type=chunk) - Marketing expenses cover advertising, member acquisition and engagement, personnel costs, third-party services, trade shows, and brand messaging[83](index=83&type=chunk) [General and Administrative Expenses](index=16&type=section&id=Components_General_and_Administrative_Expenses) This section outlines general and administrative expenses, primarily personnel costs for executive, finance, legal, and HR functions, along with professional fees and occupancy costs - Primarily consists of personnel costs for executives, finance, accounting, legal, and human resources, along with professional fees, occupancy costs, and other general overhead[84](index=84&type=chunk) [Financial income, net](index=16&type=section&id=Components_Financial_income_net) This section describes financial income, net, including non-cash changes in warrant fair value, interest earned on cash equivalents, and other financial expenses - Includes non-cash changes in the fair value of warrant liabilities, interest earned on cash equivalents, and other financial expenses related to bank charges[85](index=85&type=chunk) [Taxes on income](index=17&type=section&id=Components_Taxes_on_income) This section discusses taxes on income, noting immaterial foreign income taxes and the company's full valuation allowance for U.S. deferred tax assets - Immaterial taxes on income primarily consist of foreign income taxes from the Israeli subsidiary[86](index=86&type=chunk) - The company maintains a full valuation allowance for its U.S. deferred tax assets, including federal and state NOLs[86](index=86&type=chunk) [Results of Operations](index=17&type=section&id=Results%20of%20Operations) [Revenues](index=17&type=section&id=Results_Revenues) This section provides a detailed analysis of revenue performance, breaking down Payor, DTE, and Consumer revenues for the three and nine months ended September 30, 2023 and 2022 | Revenue Source | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :------------- | :--------------------------------------- | :--------------------------------------- | :------------- | :------------- | | Payor revenue | $22,112 | $9,513 | $12,599 | 132.4% | | DTE revenue | $8,002 | $7,280 | $722 | 9.9% | | Total B2B revenue | $30,114 | $16,793 | $13,321 | 79.3% | | Consumer revenue | $8,532 | $12,539 | $(4,007) | (32.0%) | | **Total revenue** | **$38,646** | **$29,332** | **$9,314** | **31.8%** | | Revenue Source | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :------------- | :--------------------------------------- | :--------------------------------------- | :------------- | :------------- | | Payor revenue | $55,462 | $25,503 | $29,959 | 117.5% | | DTE revenue | $24,717 | $19,626 | $5,091 | 25.9% | | Total B2B revenue | $80,179 | $45,129 | $35,050 | 77.7% | | Consumer revenue | $27,448 | $44,197 | $(16,749) | (37.9%) | | **Total revenue** | **$107,627** | **$89,326** | **$18,301** | **20.5%** | - The decline in consumer revenue was due to an intentional and strategic decision to reduce marketing spend related to this service[87](index=87&type=chunk)[88](index=88&type=chunk) [Costs of revenues](index=18&type=section&id=Results_Costs_of_revenues) This section analyzes the cost of revenues for the three and nine months ended September 30, 2023 and 2022, attributing increases to higher therapist hours | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $19,797 | $14,737 | $5,060 | 34.3% | | 9 Months Ended Sep 30 | $54,218 | $45,163 | $9,055 | 20.0% | - The increase in cost of revenues was primarily due to increased hours worked by therapists to meet strong customer engagement[89](index=89&type=chunk) [Gross profit](index=18&type=section&id=Results_Gross_profit) This section examines gross profit and gross margin for the three and nine months ended September 30, 2023 and 2022, noting impacts from revenue mix shifts | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $18,849 | $14,595 | $4,254 | 29.1% | | 9 Months Ended Sep 30 | $53,409 | $44,163 | $9,246 | 20.9% | | Period | 2023 Gross Margin | 2022 Gross Margin | Change (pp) | | :-------------------------- | :---------------- | :---------------- | :---------- | | 3 Months Ended Sep 30 | 48.8% | 49.8% | (1.0) pp | | 9 Months Ended Sep 30 | 49.6% | 49.4% | 0.2 pp | - The decrease in gross margin for the three months was primarily driven by a shift in revenue mix towards Payor, while the nine-month increase was due to higher B2B revenues[91](index=91&type=chunk) [Operating expenses](index=18&type=section&id=Results_Operating_expenses) [Research and development expenses](index=18&type=section&id=Results_Research_and_development_expenses) This section analyzes research and development expenses, noting decreases primarily due to lower employee-related costs and non-cash stock compensation | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $4,180 | $6,073 | $(1,893) | (31.2%) | | 9 Months Ended Sep 30 | $13,704 | $16,869 | $(3,165) | (18.8%) | - The decrease was primarily due to lower employee-related costs, including non-cash stock compensation expense[93](index=93&type=chunk) [Clinical operations expenses](index=18&type=section&id=Results_Clinical_operations_expenses) This section analyzes clinical operations expenses, noting decreases primarily due to lower provider recruitment and employee-related costs | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $1,405 | $2,387 | $(982) | (41.1%) | | 9 Months Ended Sep 30 | $4,681 | $6,257 | $(1,576) | (25.2%) | - The decrease was primarily due to lower provider recruitment costs and employee-related costs, including non-cash stock compensation expense[94](index=94&type=chunk) [Sales and marketing expenses](index=18&type=section&id=Results_Sales_and_marketing_expenses) This section analyzes sales and marketing expenses, noting decreases primarily due to reduced direct marketing, promotional, and employee-related costs | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $13,184 | $18,511 | $(5,327) | (28.8%) | | 9 Months Ended Sep 30 | $39,698 | $60,098 | $(20,400) | (33.9%) | - The decrease was primarily driven by a reduction in direct marketing and promotional costs, subcontractor costs, and employee-related costs[95](index=95&type=chunk) [General and administrative expenses](index=18&type=section&id=Results_General_and_administrative_expenses) This section analyzes general and administrative expenses, noting decreases primarily due to lower professional fees, subcontractor, and employee-related costs | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $5,259 | $7,475 | $(2,216) | (29.6%) | | 9 Months Ended Sep 30 | $15,952 | $23,066 | $(7,114) | (30.8%) | - The decrease was primarily due to lower professional fees, subcontractor costs, and employee-related costs[96](index=96&type=chunk) [Financial income, net](index=19&type=section&id=Results_Financial_income_net) This section analyzes financial income, net, for the three and nine months, highlighting interest income and non-cash losses from warrant remeasurement | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $(779) | $(1,885) | $1,106 | (58.7%) | | 9 Months Ended Sep 30 | $(2,915) | $(889) | $(2,026) | 227.9% | - For the three months, financial income, net, was primarily driven by **$1,600 thousand** in interest income, partially offset by **$800 thousand** in non-cash losses from warrant remeasurement[97](index=97&type=chunk) - For the nine months, financial income, net, was primarily driven by **$3,700 thousand** in interest income, partially offset by **$600 thousand** in non-cash losses from warrant remeasurement[98](index=98&type=chunk) [Taxes on income](index=19&type=section&id=Results_Taxes_on_income) This section analyzes taxes on income, noting they are immaterial and primarily consist of foreign income taxes from the Israeli subsidiary | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $14 | $17 | $(3) | (17.6%) | | 9 Months Ended Sep 30 | $165 | $127 | $38 | 29.9% | - Immaterial taxes on income primarily consist of foreign income taxes related to income generated by the Israeli subsidiary[99](index=99&type=chunk) [Non-GAAP Financial Measures](index=20&type=section&id=Non-GAAP%20Financial%20Measures) This section defines Adjusted EBITDA as a non-GAAP measure for evaluating operating performance and business planning, providing a reconciliation to net loss - Adjusted EBITDA is used as a non-GAAP measure to evaluate operating performance, facilitate internal comparisons, and for business planning purposes[101](index=101&type=chunk) Adjusted EBITDA Reconciliation (in thousands) | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net loss | $(4,414) | $(17,983) | $(17,876) | $(61,365) | | Depreciation and amortization | 305 | 309 | 913 | 1,006 | | Financial (income), net | (779) | (1,885) | (2,915) | (889) | | Taxes on income | 14 | 17 | 165 | 127 | | Stock-based compensation | 1,969 | 3,179 | 6,401 | 9,386 | | Non-recurring expenses | 105 | 900 | 89 | 900 | | **Adjusted EBITDA** | **$(2,800)** | **$(15,463)** | **$(13,223)** | **$(50,835)** | - Adjusted EBITDA showed significant improvement, reducing from **$(15,463) thousand** to **$(2,800) thousand** for the three months, and from **$(50,835) thousand** to **$(13,223) thousand** for the nine months ended September 30, 2023[104](index=104&type=chunk) [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's liquidity, including cash and cash equivalents, debt status, and anticipated funding for future cash needs and capital requirements - As of September 30, 2023, the company had **$125.3 million** in cash and cash equivalents and no debt[106](index=106&type=chunk) - The company anticipates funding its cash needs for at least the next 12 months using available cash and cash equivalent balances[108](index=108&type=chunk) - Future capital requirements depend on growth rate, product development, sales and marketing expansion, and market acceptance, with potential for additional equity or debt financings[107](index=107&type=chunk)[108](index=108&type=chunk) [Cash Flows from Operating, Investing and Financing Activities](index=21&type=section&id=Cash%20Flows%20from%20Operating%2C%20Investing%20and%20Financing%20Activities) This section analyzes cash flows from operating, investing, and financing activities, highlighting the significant decrease in net cash used in operations due to a lower net loss | Category | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in operating activities | $(14,863) | $(46,856) | $31,993 (improvement) | | Net cash used in investing activities | $(10) | $(254) | $244 (improvement) | | Net cash provided by financing activities | $1,660 | $1,493 | $167 (increase) | | **Net decrease in cash and cash equivalents** | **$(13,213)** | **$(45,617)** | **$32,404 (smaller decrease)** | - The decrease in net cash used in operating activities was primarily driven by a lower net loss[110](index=110&type=chunk) - Net cash used in investing activities decreased due to fewer purchases of computer equipment and software[111](index=111&type=chunk) [Contractual Obligations, Commitments and Contingencies](index=21&type=section&id=Contractual%20Obligations%2C%20Commitments%20and%20Contingencies) This section outlines the company's contractual obligations, commitments, and contingencies, including the settlement of class action lawsuits and indemnification policies - As of September 30, 2023, the company had no short-term or long-term debt, or significant long-term liabilities, only a non-material long-term operating lease[113](index=113&type=chunk) - The company settled certain class action lawsuits in February 2023 and accrues for estimated loss contingencies when probable and estimable[114](index=114&type=chunk) - The company indemnifies clients against data breaches or intellectual property infringement and its directors/executive officers for service-related costs[115](index=115&type=chunk)[116](index=116&type=chunk) [Off-Balance Sheet Arrangements](index=22&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the company does not engage in off-balance sheet arrangements or activities that expose it to unreflected liabilities - The company does not invest in any off-balance sheet vehicles or engage in activities that expose it to unreflected liabilities[117](index=117&type=chunk) [Inflation Risk](index=22&type=section&id=Inflation%20Risk) This section assesses inflation risk, stating that it has not materially affected the company's business, but acknowledges potential harm if cost pressures cannot be offset - The company does not believe inflation has had a material effect on its business, financial condition, or results of operations[118](index=118&type=chunk) - Inability to fully offset significant inflationary cost pressures through price increases could harm the business[118](index=118&type=chunk) [Critical Accounting Policies and Estimates](index=22&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section refers to the company's Annual Report for details on significant accounting policies and critical estimates, noting no material changes in the current period - The company's financial statements rely on significant accounting policies and critical estimates, as detailed in its Annual Report on Form 10-K[119](index=119&type=chunk)[120](index=120&type=chunk) - No material changes to critical accounting policies and estimates occurred during the nine months ended September 30, 2023[121](index=121&type=chunk) [Recent Accounting Pronouncements](index=22&type=section&id=Recent%20Accounting%20Pronouncements) This section states that recent accounting pronouncements are not expected to have a material effect on the company's financial statements - The company has reviewed recent accounting pronouncements and concluded they are either not applicable or not expected to have a material effect on its financial statements[122](index=122&type=chunk) [FORWARD-LOOKING STATEMENTS](index=23&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section clarifies that the Quarterly Report contains forward-looking statements, subject to known and unknown risks and uncertainties that could cause actual results to differ materially from projections - The Quarterly Report contains forward-looking statements covered by safe harbor provisions of the Securities Act and Exchange Act[124](index=124&type=chunk) - These statements are based on current expectations and projections about future events and financial trends, but involve known and unknown risks and uncertainties[125](index=125&type=chunk) - Investors are cautioned not to unduly rely on these statements, which speak only as of the report date, and the company does not plan to publicly update or revise them[125](index=125&type=chunk)[126](index=126&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes occurred to market risk disclosures during the nine months ended September 30, 2023, as previously reported in the Annual Report on Form 10-K - No material changes to the information contained in Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, during the nine months ended September 30, 2023[127](index=127&type=chunk) [Item 4. Controls and Procedures](index=24&type=section&id=Item%204.%20Controls%20and%20Procedures) As of September 30, 2023, disclosure controls and procedures were ineffective due to material weaknesses in IT general controls and oversight of testing, with management actively implementing a remediation plan [Material Weaknesses Identified](index=24&type=section&id=Material_Weaknesses_Identified) This section identifies material weaknesses in disclosure controls and internal controls over financial reporting, specifically in IT general controls and oversight of testing - Disclosure controls and procedures were not effective as of September 30, 2023, due to material weaknesses in internal controls over financial reporting[129](index=129&type=chunk) - Identified material weaknesses include ineffective **IT general controls (ITGCs)** and inadequate process to monitor and provide oversight over the completion of testing and assessment of internal control over financial reporting[130](index=130&type=chunk)[136](index=136&type=chunk) - These material weaknesses did not result in any identified misstatements to the financial statements or changes to previously released financial results[130](index=130&type=chunk) [Remediation Plan for the Material Weakness](index=24&type=section&id=Remediation%20Plan%20for%20the%20Material%20Weakness) This section outlines management's remediation plan, including hiring personnel, developing control testing, establishing training, and actively monitoring corrective actions - Management is committed to remediation by hiring additional personnel, developing an execution plan and resources for control testing, establishing a training program, and actively monitoring corrective actions[131](index=131&type=chunk)[132](index=132&type=chunk) - The material weakness will be considered remediated once applicable controls operate for a sufficient period and management concludes, through testing, that controls are operating effectively[133](index=133&type=chunk) [Changes in Internal Control Over Financial Reporting](index=24&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section details management's efforts to enhance internal control over financial reporting through personnel hires, control testing plans, training, and status reporting - During the nine months ended September 30, 2023, management hired additional personnel, developed control testing plans, provided training, and implemented status reporting to enhance internal control over financial reporting[135](index=135&type=chunk) - Other than these remediation efforts, there have been no other changes in the company's internal control over financial reporting that materially affected or are reasonably likely to materially affect it[134](index=134&type=chunk) [PART II. OTHER INFORMATION](index=25&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) The company settled class action lawsuits in February 2023 to avoid litigation costs, without admitting liability, and accrues for probable and estimable loss contingencies - The company reached settlements for certain class action lawsuits in February 2023, which have been approved or are in the process of being approved by the court[138](index=138&type=chunk) - Settlements were entered into solely to avoid the costs, risks, distraction, and uncertainties of continued litigation, without admitting any liability or wrongdoing[138](index=138&type=chunk) - The company accrues for estimated loss contingencies related to legal matters when it is probable a liability has been incurred and the amount can be reasonably estimated[139](index=139&type=chunk) [Item 1A. Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) No material changes occurred to the risk factors discussed in the Annual Report on Form 10-K during the nine months ended September 30, 2023 - No material changes to the risk factors discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, during the nine months ended September 30, 2023[140](index=140&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=25&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable to the current report - Not applicable[141](index=141&type=chunk) [Item 3. Defaults Upon Senior Securities](index=25&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities were reported in this period - None[142](index=142&type=chunk) [Item 4. Mine Safety Disclosures](index=25&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the current report - Not applicable[143](index=143&type=chunk) [Item 5. Other Information](index=25&type=section&id=Item%205.%20Other%20Information) No other information is reported under this item - None[144](index=144&type=chunk) [Item 6. Exhibits](index=26&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Quarterly Report, including CEO and CFO certifications and various Inline XBRL documents - Includes certifications of the Chief Executive Officer (31.1, 32.1) and Chief Financial Officer (31.2, 32.2)[145](index=145&type=chunk) - Includes Inline XBRL Instance Document and Taxonomy Extension Documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[145](index=145&type=chunk) [Signatures](index=27&type=section&id=Signatures) The report is signed by Jon Cohen, Chief Executive Officer, and Jennifer Fulk, Chief Financial Officer, on November 7, 2023 - The report is signed by Jon Cohen, Chief Executive Officer, and Jennifer Fulk, Chief Financial Officer[149](index=149&type=chunk) - Date of signing: November 7, 2023[149](index=149&type=chunk)

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 June 30, 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 oth ...

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 ot ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 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 ju ...