TALKSPACE EQUITY WARRANT(TALKW) - 2024 Q4 - Annual Report

Part I Business Talkspace connects patients with licensed behavioral health providers through Payor, DTE, and Consumer channels, leveraging a technology platform for personalized care Our Offerings Talkspace offers psychotherapy via text, audio, and video, and psychiatry for medication management, excluding controlled substances - Psychotherapy services involve licensed therapists treating mental health conditions through text, audio, and video-based sessions[21] - Psychiatry services offer expert care from prescribers for medication management. Providers can prescribe necessary medications but are prohibited from prescribing controlled substances[22] Our Customers The company serves a diverse customer base across all 50 U.S. states through Payor, Direct-to-Enterprise, and Consumer channels - Talkspace Payor: Contracts with health insurance plans and EAPs, where providers are in-network[24] - Talkspace DTE: Contracts directly with enterprises, offering services on a PMPM, PPU, or fixed-fee basis[25] - Talkspace Consumer: Offers monthly, quarterly, bi-annual, and annual subscriptions directly to individuals[26] Competition Talkspace competes with established telehealth platforms and anticipates future competition from large technology and retail companies entering the virtual health space - Key competitors include Teladoc Health, Inc., Lyra Health, Inc., Spring Care, Inc., and LifeStance Health Group Inc[34] - The company may face future competition from large technology companies like Apple, Meta, and Microsoft, as well as large retailers like Walmart[35] Human Capital Overview As of December 31, 2024, Talkspace employed 521 individuals and contracted with 5,804 providers, focusing on talent attraction and retention Workforce Composition (as of Dec 31, 2024) | Category | Count | | :--- | :--- | | Employees | 521 | | - Employee Providers | 288 | | - Support Professionals | 233 | | Independently Contracted Providers | 5,804 | U.S. Government Regulation Talkspace operations are subject to extensive U.S. federal and state regulations, including telehealth licensing, corporate practice of medicine, fraud and abuse laws, and health information privacy laws like HIPAA - The practice of medicine via telehealth requires providers to be licensed in the state where the patient is located, a compliance point the company actively manages[48] - The company's MSA structure is designed to comply with state laws prohibiting the corporate practice of medicine and fee-splitting by lay entities[49] - As some services are reimbursed by government healthcare programs, the company is subject to federal fraud and abuse laws, including the Stark Law and the Anti-Kickback Statute[51][52][53] - The company is subject to numerous privacy laws, including HIPAA, HITECH, and state laws like the CCPA/CPRA, which govern the use, disclosure, and safeguarding of protected health information (PHI)[58][63] - The company serves members through three primary channels: Health insurance plans (Payor), Direct-to-Enterprise (DTE), and individual subscribers (Consumer)[19] - Talkspace's technology platform uses a machine learning matching algorithm and a robust data ecosystem, including 8 billion words from 140 million anonymized messages, to optimize therapist-patient matching and clinical outcomes[30][31] - The company transitioned its provider relationship structure to operate under Management Services Agreements (MSAs) with affiliated professional entities (TPN and PC entities) to comply with corporate practice of medicine laws[36][37] Key Business Metrics (2023 vs. 2024) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Revenues | $187.6 million | $150.0 million | | Eligible Lives (Payor & DTE) | 179.4 million | 131.0 million | | Consumer Active Members | 7,200 | 11,700 | | Completed Payor Sessions | 1,229,200 | 850,600 | Risk Factors The company faces diverse risks including operational challenges, intense competition, reliance on key customers, regulatory compliance, data security, intellectual property, and public company volatility Risks Related to our Business and Industry Key business risks include intense competition, reliance on large customers, maintaining provider networks, marketing effectiveness, contract renewals, and platform security - The company operates in a highly competitive virtual behavioral health market, facing rivals like Teladoc, Lyra Health, and potential new entrants from large tech and retail companies[85][86] - A material portion of revenue is derived from its largest customers. In 2024, three customers each represented 10% or more of total revenue. The loss of any of these customers could significantly impact results[90] - The company's success is dependent on its ability to recruit and retain a sufficient network of qualified therapists and psychiatrists[101] - Security breaches of customer or member data could lead to significant liabilities, reputational harm, and loss of business[122][123] Risks Related to our Legal and Regulatory Environment Operating in a heavily regulated industry, the company faces risks from evolving telehealth laws, corporate practice of medicine challenges, and stringent data privacy regulations - The company's business model and relationships with affiliated professional entities could be challenged under state laws prohibiting the corporate practice of medicine or fee-splitting[150][152] - Evolving government regulations for telehealth, AI, and healthcare generally may increase costs and adversely affect operations[146][149] - Failure to comply with complex federal and state privacy laws (e.g., HIPAA, CCPA) and international laws (e.g., GDPR) regarding personal and health information could result in significant liability and reputational harm[164][169][172] Risks Related to our Intellectual Property The company's success relies on protecting its intellectual property, facing risks of infringement, defense costs, and open-source software issues - The company relies on a combination of trademark, patent, and trade secret laws to protect its intellectual property, but these provide only limited protection and may be challenged[181] - The company could incur substantial costs defending against claims of intellectual property infringement by other parties, which could divert management attention and financial resources[189][190] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[230] Cybersecurity Talkspace implements a comprehensive cybersecurity risk management strategy, overseen by the Audit Committee, with no material impact from prior threats to date - The Audit Committee is responsible for the oversight of risks from cybersecurity threats, receiving at least quarterly updates from management[239] - The company's cybersecurity program is managed by the CISO and CTO and includes periodic risk assessments, third-party penetration testing, vendor risk assessments, and employee training[234][236][241] - The company states that risks from prior cybersecurity threats have not materially affected its business, strategy, or financial condition to date[238] Properties The company's headquarters are in New York, with most employees remote, and no leased facilities are considered material to its business - The majority of the Company's employees are working remotely[243] - The Company does not view any of its leased facilities as material to its business[243] Legal Proceedings As of December 31, 2024, Talkspace reports no material pending legal proceedings, accruing for probable and estimable losses - The Company has no material pending legal proceedings as of December 31, 2024[244] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[245] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Talkspace common stock and warrants trade on Nasdaq; the company has not paid dividends and initiated a $40 million share repurchase program in 2024 - Common stock and warrants trade on Nasdaq under symbols "TALK" and "TALKW"[248] - The company has not paid any cash dividends to date and does not intend to in the foreseeable future[251] Share Repurchase Program Activity (2024) | Metric | Value | | :--- | :--- | | Total Authorization | $40.0 million | | Shares Repurchased in 2024 | 3,911,259 | | Total Cost of Repurchases | $11.0 million | | Average Price Per Share | $2.81 | | Amount Remaining Available | $29.0 million | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2024, Talkspace revenue grew 25.0% to $187.6 million, driven by Payor segment growth, leading to improved operating results and a net income of $1.1 million, supported by strong liquidity Key Business Metrics Key business metrics for 2024 show increased eligible lives and completed Payor sessions, while enterprise customers and Consumer active members declined due to strategic shifts Key Business Metrics Comparison | Metric (in thousands, except where noted) | 2024 | 2023 | | :--- | :--- | :--- | | Eligible lives at year end (millions) | 179.4 | 131.0 | | Completed Payor sessions during the year | 1,229.2 | 850.6 | | Health plan customers at year end | 27 | 22 | | Enterprise customers at year end | 188 | 210 | | Consumer active members at year end | 7.2 | 11.7 | | Unique Payor active members (Q4) | 95.7 | 79.2 | Results of Operations In 2024, revenues increased 25.0% to $187.6 million, driven by Payor growth, leading to a net income of $1.1 million despite a gross margin decline Consolidated Results of Operations (in thousands) | Line Item | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Total revenue | $187,593 | $150,045 | 25.0% | | Gross profit | $85,836 | $74,380 | 15.4% | | Gross Margin | 45.8% | 49.6% | -3.8 pts | | Total operating expenses | $90,333 | $97,589 | (7.4%) | | Loss from operations | ($4,497) | ($23,209) | 80.6% | | Net income (loss) | $1,148 | ($19,182) | N/A | - The 25.0% revenue increase was primarily driven by a $43.5 million (53.8%) increase in Payor revenue, reflecting a higher number of completed sessions. This was partially offset by a $10.8 million (30.4%) decrease in Consumer revenue due to a strategic shift in marketing focus[285] - Gross margin declined from 49.6% to 45.8% due to a shift in revenue mix towards the Payor segment[287] - Research and development expenses decreased by 40.2% primarily due to lower employee-related costs and an increase in capitalized internal-use software development costs[289] Non-GAAP Financial Measures The company uses Adjusted EBITDA, a non-GAAP measure, which improved significantly to $7.0 million in 2024 from a $13.5 million loss in 2023 Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Line Item | 2024 | 2023 | | :--- | :--- | :--- | | Net income (loss) | $1,148 | ($19,182) | | Depreciation and amortization | $859 | $1,285 | | Financial income, net | ($5,739) | ($4,245) | | Income tax expense | $94 | $218 | | Stock-based compensation | $9,173 | $8,395 | | Non-recurring expenses | $1,427 | $— | | Adjusted EBITDA | $6,962 | ($13,529) | Liquidity and Capital Resources As of December 31, 2024, Talkspace maintained strong liquidity with $117.8 million in cash and marketable securities, generating $11.7 million in operating cash flow Liquidity Position (as of Dec 31, in millions) | Asset | 2024 | 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $76.7 | $123.9 | | Marketable securities | $41.1 | $0 | | Total Liquidity | $117.8 | $123.9 | Summary Consolidated Cash Flow (in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $11,704 | ($16,393) | | Net cash used in investing activities | ($46,732) | ($141) | | Net cash (used in) provided by financing activities | ($12,188) | $1,897 | - The company repurchased and retired 3.9 million shares for $11.0 million under its Share Repurchase Program during 2024[305] Quantitative and Qualitative Disclosures About Market Risk The company's market risk is primarily from interest rate fluctuations on cash and investments, with foreign currency risk deemed immaterial - The company's earnings on cash and investments are subject to market risk from changes in interest rates, but this is not considered material[326] - Exposure to foreign currency risk is not material due to limited operations outside the U.S. and revenue being denominated in U.S. dollars[327] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, with an unqualified opinion from the independent auditor on both financials and internal controls - The independent auditor, Kost Forer Gabbay & Kasierer (a member of EY Global), issued an unqualified opinion on the consolidated financial statements[331] - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2024[332][342] - The auditor identified the estimation of transaction price and variable consideration for Payor revenue recognition as a Critical Audit Matter due to the complex and judgmental nature of the estimates involved[335][336][337] Notes to Consolidated Financial Statements The notes detail significant accounting policies, including revenue recognition, internal-use software, stock-based compensation, fair value measurements, and consolidation of Variable Interest Entities - Revenue Recognition (Note 3): Payor revenue is recognized at a point in time as sessions are rendered, net of estimated variable consideration (implicit price concessions). DTE revenue is recognized based on contract terms (PMPM, PPU), and Consumer revenue is recognized ratably over the subscription period[387][388][389] - Stock-Based Compensation (Note 10): Total stock-based compensation expense was $9.2 million in 2024, up from $8.4 million in 2023[440] - Variable Interest Entities (Note 13): The company consolidates its affiliated professional entities (TPN and PC entities) as VIEs for which it is the primary beneficiary, a structure designed to comply with healthcare regulations[452][456] - Income Taxes (Note 12): The company maintains a full valuation allowance on its net deferred tax assets due to a history of operating losses, resulting in minimal income tax expense[447][448] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[459] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with no material changes - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2024[460] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2024, and the independent auditor issued an unqualified opinion on its effectiveness[464][465] Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement in Q4 2024 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement in Q4 2024[467] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable[468] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference to the definitive Proxy Statement for the 2025 Annual Meeting of Stockholders[470] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference to the definitive Proxy Statement for the 2025 Annual Meeting of Stockholders[472] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference to the definitive Proxy Statement for the 2025 Annual Meeting of Stockholders[473] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference to the definitive Proxy Statement for the 2025 Annual Meeting of Stockholders[474] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2025 Proxy Statement - Information is incorporated by reference to the definitive Proxy Statement for the 2025 Annual Meeting of Stockholders[475] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including references to consolidated financial statements - This section provides a list of all financial statements, schedules, and exhibits filed with the Form 10-K[479] Form 10-K Summary No summary is provided under this item - None[478]