TALKSPACE EQUITY WARRANT(TALKW) - 2023 Q4 - Annual Report

PART I Item 1. Business 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] - The company serves Payor clients (health plans, EAPs), Direct-to-Enterprise (DTE) clients (employers, academic organizations), and individual Consumer subscribers[15] 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 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][18] 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] - 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] - Talkspace does not prescribe controlled substances in accordance with the DEA Ryan Haight Act[16] Our Offerings 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][21] - Psychiatry services include initial video consultations and follow-up appointments with board-certified psychiatrists and nurse practitioners for prescription management, excluding controlled substances[22] Our Customers 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][24] - 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][25] - 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] Technology Platform 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][30] - 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][32] - 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] 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] - 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] Therapists, Physicians and Healthcare Professionals 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][38] - 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] Human Capital Overview 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] - The company emphasizes a respectful, secure, and supportive workplace culture, with mandatory training on the Code of Business Conduct and Ethics[43] - Talkspace is committed to diversity and inclusion, providing equal employment opportunities and fostering growth through recruitment, development, and mentoring programs[44] U.S. Government Regulation 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][49] - 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][52] - 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][64][65] Intellectual Property 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] - As of March 13, 2024, the company has one approved patent related to 'System and Method in Monitoring Engagement' and several pending applications[69] Additional Information 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] Item 1A. Risk Factors 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][82][84] - 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][92][93][94] - 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][78][79][106][127][159][190] SUMMARY RISK FACTORS 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][78][79] Risks Related to our Operating Results and Early Stage of Growth 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][84] - 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][88] - 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][91] Risks Related to our Business and Industry 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] - 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][94] - 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] - Reliance on third-party platforms (Apple App Store, Google Play App Store) for distribution poses risks if terms change or access is limited[117][118] - 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][129] Risks Related to our Legal and Regulatory Environment 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][154] - 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][160][161] - 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][174][178][182][185] Risks Related to our Intellectual Property 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][197] - 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][199] - 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] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report. - No unresolved staff comments were reported[242] Item 1C. Cybersecurity 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][246][247] - All employees are required to participate in annual cybersecurity awareness, privacy, and security training[249] - 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][253][254] Risk Management and Strategy 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] - The company uses the HITRUST CSF Assurance Program for Cloud assessment and engages third parties for program reviews, vulnerability scanning, and penetration testing[246][247] - 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] Cybersecurity Governance 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] - 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] Item 2. Properties 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] - The company has limited international operations, including a foreign subsidiary in Israel that leases its operating facilities under a month-to-month agreement[256] - None of the company's leased facilities are considered material to its business[256] Item 3. Legal Proceedings 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][428] - A derivative action was settled in August 2023, leading to corporate governance changes, including enhancements to the Audit Committee and employee compliance training[430] - The company accrues for estimated loss contingencies when a liability is probable and estimable, acknowledging the inherent difficulty in determining loss amounts[258][431] Item 4. Mine Safety Disclosures This item is not applicable to Talkspace, Inc. - Mine Safety Disclosures are not applicable to the company[259] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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][264] - 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] Market Information 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] 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] 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][264] Share-Based Compensation Plans 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][434] Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities 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] Issuer Repurchases of Equity Securities 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] Equity Compensation Plan Information 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] Share Repurchase Program 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] - 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][270] Item 6. Reserved This item is reserved and contains no information. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - Operating expenses decreased significantly by 32.0% in 2023 due to efficiency initiatives, contributing to a substantial reduction in net loss[302] 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] - 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] - Completed sessions for Payor clients nearly doubled to 850,600 in 2023 from 426,400 in 2022[276] Inflation Risk and Economic Conditions 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] - 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] Quarterly Fluctuations 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] - Declines in new or renewed contracts may not be fully reflected in current quarter revenue but will negatively affect future periods[279] Operating Segments 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] Key Business Metrics 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 This section details the components of Talkspace's financial results, including revenues, cost of revenues, and operating expenses. 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][284] - Revenue growth is driven by increasing eligible covered lives, higher utilization within covered lives, expanding enterprise clients, and increasing membership subscriptions[285] Cost of Revenues 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] - 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] Operating Expenses 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] Research and Development Expenses 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] Clinical Operations Expenses 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] Sales and Marketing Expenses 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][293] General and Administrative Expenses 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] Impairment of goodwill A goodwill impairment charge of $6.1 million was incurred in 2022, with no charges in 2023 or 2021. - A goodwill impairment charge of $6.1 million was incurred in 2022; no impairment charges were recorded in 2023 or 2021[295] Financial (income), net Financial (income), net includes non-cash changes in warrant liabilities fair value, interest earned, and other financial expenses. - Financial (income), net includes non-cash changes in warrant liabilities fair value, interest earned on cash equivalents, and other financial expenses[296] Taxes on income Taxes on income primarily consist of foreign income taxes, with a full valuation allowance on U.S. deferred tax assets. - Taxes on income primarily consist of foreign income taxes from the Israeli subsidiary[297] - The company maintains a full valuation allowance for its U.S. deferred tax assets, including federal and state Net Operating Losses (NOLs), due to uncertainty of realization[297] Results of Operations This section provides a detailed comparison of the company's financial performance for the years ended December 31, 2023, 2022, and 2021. Year Ended December 31, 2023 compared to December 31, 2022 This section compares the company's financial results for the years 2023 and 2022, highlighting revenue and expense changes. Revenue Breakdown (2023 vs. 2022) | Revenue Source | 2023 (in thousands) | 2022 (in thousands) | Change ($) | 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] - Gross profit increased by 23.3% to $74.4 million, but gross margin slightly declined to 49.6% (from 50.5% in 2022) due to a shift in revenue mix towards Payor[301] Operating Expenses (2023 vs. 2022) | Expense Category | 2023 (in thousands) | 2022 (in thousands) | Change ($) | 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] Year Ended December 31, 2022 compared to December 31, 2021 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] Non-GAAP Financial Measures 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] - 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] 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 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] - 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] Cash Flows from Operating, Investing and Financing Activities 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 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] Investing Activities 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] Financing Activities 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] Contractual Obligations, Commitments and Contingencies 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] - 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] - Directors and executive officers are indemnified for costs associated with legal actions, with liability insurance in place[327] Off-Balance Sheet Arrangements 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] Critical Accounting Policies and Estimates 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][373] Revenue Recognition 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] Recent Accounting Pronouncements 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][410] Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Interest Rate Risk 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] - 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] Foreign Currency Exchange Risk 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] - Future international expansion could increase exposure to foreign currency exchange risk[338] Item 8. Financial Statements and Supplementary Data 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][372] - 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][343][352] - 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][348] Reports of Independent Registered Public Accounting Firm 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][343][352] - 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][348] Consolidated Balance Sheets 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 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) 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] Consolidated Statements of Cash Flows 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 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][373] - The company consolidates all subsidiaries and Variable Interest Entities (VIEs) where it is the primary beneficiary[374][375] - 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][385][386] NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS 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] - The company was formed through a business combination with Hudson Executive Investment Corp. (HEC), a SPAC, on June 22, 2021[371] - 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] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES This note outlines the company's significant accounting policies and estimates, including basis of presentation, use of estimates, and consolidation principles. Basis of Presentation Consolidated financial statements are prepared in conformity with U.S. GAAP. - Consolidated financial statements are prepared in conformity with U.S. GAAP[372] Use of Estimates 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] 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] Operating Segments Talkspace operates as a single segment and reporting unit. - Talkspace operates as a single segment and reporting unit[375] Financial statements in U.S. dollars 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] Cash and cash equivalents 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] Property and equipment, net 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] Internal-use Software 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] 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][383] 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][385] Intangible Assets 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] Impairment of long-lived assets and intangible assets subject to amortization, including ROU lease asset 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] Revenue recognition 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] - 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][390][391] Accounts Receivable 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] Deferred Revenue 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] Stock-based compensation 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][396][397] Determination of Fair Value of our Common Stock prior to the Business Combination 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] Employee Benefit Plan 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] Fair value of financial instruments 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][402][403] Income taxes 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] - 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][407] Net loss per share 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] Recently Issued and Recently Adopted Accounting Pronouncements 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][410] NOTE 3. REVENUE RECOGNITION 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] - Two customers represented 10% or more of total revenue in 2023 and 2022; no single customer met this threshold in 2021[412] Accounts Receivable 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] Deferred Revenue 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] NOTE 4. INTANGIBLE ASSETS, NET 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] Future Amortization of Acquired Technology (as of December 31, 2023, in thousands) | Year | Amount | | :--- | :----- | | 2024 | $446 | | 2025 | $446 | | 2026 | $446 | | 2027