TALKSPACE EQUITY WARRANT(TALKW) - 2023 Q3 - Quarterly Report

FORM 10-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] 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] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 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 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] Condensed Consolidated Statements of Operations 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] Condensed Consolidated Statements of Stockholder's Equity 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] Condensed Consolidated Statements of Cash Flows 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] Notes to Unaudited Condensed Consolidated Financial Statements NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS 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] - 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] NOTE 2. SIGNIFICANT ACCOUNTING POLICIES 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][24] - No material effect is expected on the financial statements from recently issued and adopted accounting pronouncements[26] NOTE 3. REVENUE RECOGNITION 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][29][31] 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 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][37] 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 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][45] - The Derivative Settlement included corporate governance changes and a payment of $550,000 in attorney's fees and expenses[45] - The company accrues for estimated loss contingencies related to legal matters when a liability is probable and estimable[46] NOTE 6. CAPITAL STOCK 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] - No shares of preferred stock were issued or outstanding as of September 30, 2023, and December 31, 2022[49] NOTE 7. SHARE-BASED COMPENSATION 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][51] 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 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] NOTE 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 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] NOTE 10. VARIABLE INTEREST ENTITIES ("VIEs") 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][58] 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 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 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] 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 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] - Ongoing global conflicts (e.g., Russia and Ukraine, Middle East) have heightened global economic and geopolitical uncertainty[67] - 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] Operating Segments 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] Key Business Metrics 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] Components of Results of Operations 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][73] - 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][73] - Revenue growth is driven by increasing eligible covered lives, utilization within eligible lives, expanding enterprise clients, and increasing membership subscriptions[74] 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] - The company utilizes a hybrid model of employee and independently contracted providers, with compensation varying based on time committed and demand[77] - Cost of revenues as a percentage of revenues is expected to fluctuate based on growth investments, network scaling, efficiencies, and pricing[78] Operating Expenses 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] 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] 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] - Marketing expenses cover advertising, member acquisition and engagement, personnel costs, third-party services, trade shows, and brand messaging[83] 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] 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] 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] - The company maintains a full valuation allowance for its U.S. deferred tax assets, including federal and state NOLs[86] Results of Operations 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 | $18,301 | 20.5% | - The decline in consumer revenue was due to an intentional and strategic decision to reduce marketing spend related to this service[87][88] Costs of revenues This section analyzes the cost of revenues for the three and nine months ended September 30, 2023 and 2022, attributing increases to higher therapist hours | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $19,797 | $14,737 | $5,060 | 34.3% | | 9 Months Ended Sep 30 | $54,218 | $45,163 | $9,055 | 20.0% | - The increase in cost of revenues was primarily due to increased hours worked by therapists to meet strong customer engagement[89] Gross profit This section examines gross profit and gross margin for the three and nine months ended September 30, 2023 and 2022, noting impacts from revenue mix shifts | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $18,849 | $14,595 | $4,254 | 29.1% | | 9 Months Ended Sep 30 | $53,409 | $44,163 | $9,246 | 20.9% | | Period | 2023 Gross Margin | 2022 Gross Margin | Change (pp) | | :-------------------------- | :---------------- | :---------------- | :---------- | | 3 Months Ended Sep 30 | 48.8% | 49.8% | (1.0) pp | | 9 Months Ended Sep 30 | 49.6% | 49.4% | 0.2 pp | - The decrease in gross margin for the three months was primarily driven by a shift in revenue mix towards Payor, while the nine-month increase was due to higher B2B revenues[91] Operating expenses Research and development expenses This section analyzes research and development expenses, noting decreases primarily due to lower employee-related costs and non-cash stock compensation | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $4,180 | $6,073 | $(1,893) | (31.2%) | | 9 Months Ended Sep 30 | $13,704 | $16,869 | $(3,165) | (18.8%) | - The decrease was primarily due to lower employee-related costs, including non-cash stock compensation expense[93] Clinical operations expenses This section analyzes clinical operations expenses, noting decreases primarily due to lower provider recruitment and employee-related costs | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $1,405 | $2,387 | $(982) | (41.1%) | | 9 Months Ended Sep 30 | $4,681 | $6,257 | $(1,576) | (25.2%) | - The decrease was primarily due to lower provider recruitment costs and employee-related costs, including non-cash stock compensation expense[94] Sales and marketing expenses This section analyzes sales and marketing expenses, noting decreases primarily due to reduced direct marketing, promotional, and employee-related costs | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $13,184 | $18,511 | $(5,327) | (28.8%) | | 9 Months Ended Sep 30 | $39,698 | $60,098 | $(20,400) | (33.9%) | - The decrease was primarily driven by a reduction in direct marketing and promotional costs, subcontractor costs, and employee-related costs[95] General and administrative expenses This section analyzes general and administrative expenses, noting decreases primarily due to lower professional fees, subcontractor, and employee-related costs | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | YoY Change (%) | | :-------------------------- | :------------------ | :------------------ | :------------- | :------------- | | 3 Months Ended Sep 30 | $5,259 | $7,475 | $(2,216) | (29.6%) | | 9 Months Ended Sep 30 | $15,952 | $23,066 | $(7,114) | (30.8%) | - The decrease was primarily due to lower professional fees, subcontractor costs, and employee-related costs[96] Financial income, net This section analyzes financial income, net, for the three and nine months, highlighting interest income and non-cash losses from warrant remeasurement | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | 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] - For the nine months, financial income, net, was primarily driven by $3,700 thousand in interest income, partially offset by $600 thousand in non-cash losses from warrant remeasurement[98] Taxes on income This section analyzes taxes on income, noting they are immaterial and primarily consist of foreign income taxes from the Israeli subsidiary | Period | 2023 (in thousands) | 2022 (in thousands) | YoY Change ($) | 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] Non-GAAP Financial Measures 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] 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] Liquidity and Capital Resources 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] - The company anticipates funding its cash needs for at least the next 12 months using available cash and cash equivalent balances[108] - 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][108] Cash Flows from Operating, Investing and Financing Activities 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] - Net cash used in investing activities decreased due to fewer purchases of computer equipment and software[111] Contractual Obligations, Commitments and Contingencies 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] - The company settled certain class action lawsuits in February 2023 and accrues for estimated loss contingencies when probable and estimable[114] - The company indemnifies clients against data breaches or intellectual property infringement and its directors/executive officers for service-related costs[115][116] Off-Balance Sheet Arrangements 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] Inflation Risk 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] - Inability to fully offset significant inflationary cost pressures through price increases could harm the business[118] Critical Accounting Policies and Estimates 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][120] - No material changes to critical accounting policies and estimates occurred during the nine months ended September 30, 2023[121] Recent Accounting Pronouncements 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] FORWARD-LOOKING STATEMENTS 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] - These statements are based on current expectations and projections about future events and financial trends, but involve known and unknown risks and uncertainties[125] - 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][126] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 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] - 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][136] - These material weaknesses did not result in any identified misstatements to the financial statements or changes to previously released financial results[130] Remediation Plan for the Material Weakness 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][132] - 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] Changes in Internal Control Over Financial Reporting 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] - 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] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] - Settlements were entered into solely to avoid the costs, risks, distraction, and uncertainties of continued litigation, without admitting any liability or wrongdoing[138] - 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report - Not applicable[141] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported in this period - None[142] Item 4. Mine Safety Disclosures This item is not applicable to the current report - Not applicable[143] Item 5. Other Information No other information is reported under this item - None[144] Item 6. Exhibits 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] - Includes Inline XBRL Instance Document and Taxonomy Extension Documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[145] 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] - Date of signing: November 7, 2023[149]