Talkspace(TALK) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited financial statements, management's analysis of operations and liquidity, market risk disclosures, and an assessment of internal controls and procedures Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows, along with explanatory notes Condensed Consolidated Balance Sheets As of September 30, 2022, total assets decreased to $175.6 million, primarily due to reduced cash, while total liabilities slightly increased and stockholders' equity declined to $142.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $152,639 | $198,256 | | Total current assets | $165,937 | $213,330 | | Total assets | $175,630 | $223,606 | | Liabilities & Equity | | | | Total current liabilities | $29,024 | $27,177 | | Total liabilities | $32,961 | $31,333 | | Accumulated deficit | $(232,895) | $(171,530) | | Total stockholders' equity | $142,669 | $192,273 | Condensed Consolidated Statements of Operations Q3 2022 revenues increased to $29.3 million, but the company reported a net loss of $18.0 million, widening to $61.4 million for the nine months ended September 30, 2022 Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $29,332 | $26,359 | $89,326 | $84,499 | | Gross Profit | $14,595 | $14,172 | $44,163 | $50,801 | | Operating (loss) | $(19,851) | $(25,227) | $(62,127) | $(65,345) | | Net (loss) income | $(17,983) | $1,505 | $(61,365) | $(41,674) | | Diluted EPS | $(0.11) | $0.01 | $(0.39) | $(0.64) | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash used in operating activities increased to $46.9 million, resulting in a $45.6 million decrease in cash and cash equivalents Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(46,856) | $(41,109) | | Net cash used in investing activities | $(254) | $(622) | | Net cash provided by financing activities | $1,493 | $251,348 | | Net (decrease) increase in cash | $(45,617) | $209,617 | | Cash at end of period | $152,639 | $222,865 | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail accounting policies, revenue recognition, fair value measurements, and legal proceedings, notably the Q2 2022 transition to a consolidated Variable Interest Entity (VIE) structure for healthcare provider relationships - The company's revenue is disaggregated into B2B and B2C channels. For Q3 2022, B2B revenue grew significantly to $16,800 thousand from $7,700 thousand YoY, while B2C revenue declined to $12,500 thousand from $18,600 thousand YoY[39] - In Q2 2022, the company transitioned its relationships with healthcare providers into a Variable Interest Entity (VIE) structure. The company determined it is the primary beneficiary of these VIEs and has consolidated them in its financial statements[29][72][74] - The company is involved in securities class action and stockholder derivative lawsuits related to its merger with HEC. The company believes the lawsuits are without merit and intends to defend against them vigorously[54][56][57] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Q3 2022 financial performance, emphasizing a strategic shift to the B2B channel, which drove revenue growth despite reduced B2C marketing spend, and assesses liquidity and capital resources Overview and Key Business Metrics Talkspace, a virtual behavioral health company, saw B2B eligible lives increase to 86.1 million by September 30, 2022, while B2C active members decreased, reflecting a strategic channel shift Key Business Metrics (in thousands, except where noted) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | B2B eligible lives at period end (millions) | 86.1 | 56.6 | | Number of completed B2B sessions | 298.0 | 192.1 | | Number of health plan clients at period end | 17 | 11 | | Number of enterprise clients at period end | 215 | 139 | | Number of B2C active members at period end | 17.9 | 28.0 | Results of Operations Q3 2022 revenues grew 11.3% to $29.3 million, driven by B2B growth, while gross margin declined to 49.8% and sales and marketing expenses decreased 30.5% - Q3 2022 revenue growth was driven by a 117.3% increase in B2B revenue, while B2C revenue fell 32.7% due to an intentional and strategic decision to reduce marketing spend[108] - Gross margin for Q3 2022 decreased to 49.8% from 53.8% in Q3 2021, primarily due to a revenue shift to the B2B business, which generally has lower margins, and higher therapist compensation[112] - Sales and marketing expenses for Q3 2022 decreased by $8.1 million (30.5%) YoY, mainly due to a reduction in direct marketing and promotional costs for the B2C business[118] Liquidity and Capital Resources As of September 30, 2022, the company held $152.6 million in cash with no debt, and management expects current balances to fund operations despite $46.9 million net cash used in operations - The company held $152.6 million in cash and cash equivalents as of September 30, 2022, down from $198.3 million at the end of 2021[124] - Net cash used in operating activities for the nine months ended September 30, 2022, was $46.9 million[129] - Management expects to be able to fund cash needs for at least the foreseeable future with available cash balances[126] Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes to the market risk disclosures previously provided in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - There were no material changes to the information on market risk during the nine months ended September 30, 2022[141] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2022, due to material weaknesses in internal control over financial reporting, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in internal control over financial reporting[143] - Identified material weaknesses relate to: (a) aggregation of open control deficiencies, (b) general IT controls for user access and change-management, and (c) controls over accounting for complex financial instruments such as warrants[144] - Remediation plans are underway, including implementing a new ERP system, expanding the finance and IT teams, improving processes for complex accounting, and engaging outside resources to assist with internal controls[149][150][151] PART II. OTHER INFORMATION This section details legal proceedings, updates on risk factors, and lists exhibits filed with the quarterly report Legal Proceedings The company is involved in various legal proceedings arising from normal business operations, with specific details on securities class action and stockholder derivative lawsuits provided in Note 5 - The company is party to various legal proceedings. For details, the report refers to Note 5, "Commitments and Contingent Liabilities"[154] Risk Factors There were no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - During the nine months ended September 30, 2022, there were no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[155] Exhibits This section lists exhibits filed with the quarterly report, including CEO and CFO certifications and Inline XBRL data files - The report includes CEO and CFO certifications pursuant to Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350, as well as Inline XBRL documents[160]