Talkspace(TALK) - 2022 Q4 - Annual Report

PART I Business Talkspace, a virtual behavioral healthcare company, offers psychotherapy and psychiatry services via B2B and B2C channels, with 2022 revenues of $119.6 million driven by B2B growth Key Operational and Financial Metrics (2021 vs 2022) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $119.6 million | $113.7 million | | Completed B2B Sessions | ~426,400 | ~273,700 | | Total Active Members (Year-End) | >62,000 | ~56,000 | | B2B Eligible Lives (Year-End) | >92 million | ~69 million | | B2C Active Members (Year-End) | >15,000 | ~24,000 | - The company serves clients through two primary channels: B2B (enterprise clients like Google, health plans like Aetna and Cigna) and B2C (individual consumers)[15] - In the second quarter of 2022, the company transitioned its provider relationships to a structure utilizing Management Services Agreements (MSAs) with Talkspace Provider Network, PA (TPN) and other affiliated professional entities to comply with corporate practice of medicine laws[37][38] Our Offerings Talkspace offers psychotherapy via text, audio, and video, and psychiatry services for mental healthcare and prescription management, excluding controlled substances - Psychotherapy services include text, audio, and video-based therapy through various individual, couples, and teen plans[23] - Psychiatry services are provided by board-certified psychiatrists and prescription-eligible nurse practitioners, who can prescribe medications but not controlled substances, in compliance with the Ryan Haight Act[16][25] Our Customers The customer base includes B2B, covering 92 million eligible lives through health plans and enterprises, and B2C, serving over 15,000 active members across the U.S - As of December 31, 2022, the B2B channel covered approximately 92 million eligible lives through health plans and enterprise clients[27] - As of December 31, 2022, the B2C channel had over 15,000 active members across all 50 U.S. states and select international markets[29] Technology Platform The technology platform leverages data science and machine learning for therapist matching, utilizes a vast data ecosystem, and provides HIPAA-compliant tools for enhanced behavioral health outcomes - A machine learning matching algorithm is used to predict provider efficacy and match patients with therapists based on characteristics, clinical needs, and preferences[31] - The platform's data ecosystem contains over 6 billion words from 110 million anonymized messages and approximately 4 million completed psychological assessments, providing a multi-dimensional view of users[32] - The company maintains compliance with HIPAA and other legal requirements, obtaining regular Type II SOC 2 reports and retaining outside consultants for vulnerability assessments[30] Competition Talkspace faces intense competition from established telehealth platforms, large health systems, and potential new entrants from major technology companies in the virtual behavioral health market - Key competitors include American Well, Teladoc, Included Health, MDLive, BetterHelp, Lyra Health, and Headspace[35] - Potential future competition may arise from large technology companies (Apple, Amazon, Meta) and large retailers (Amazon, Walmart) developing their own virtual behavioral health solutions[36] Human Capital Overview As of December 31, 2022, Talkspace employed 339 individuals and contracted with 3,203 providers, fostering a culture of respect, diversity, and continuous training Workforce Composition (as of Dec 31, 2022) | Category | Count | | :--- | :--- | | Total Employees | 339 | | Employee Providers | 129 | | Support Professionals | 210 | | Independently Contracted Providers | 3,203 | U.S. Government Regulation Talkspace is subject to extensive U.S. federal and state regulations, including telehealth licensing, corporate practice of medicine, fraud and abuse laws, and critical data privacy laws like HIPAA and CCPA - The company must ensure its affiliated professionals hold valid licenses in the state where the patient is located, as failure to comply can lead to penalties and non-reimbursement[51] - The company's MSA structure is designed to comply with state laws prohibiting the corporate practice of medicine and fee-splitting, which are intended to prevent unlicensed entities from influencing a professional's clinical judgment[52] - The company is subject to numerous privacy laws, including HIPAA, HITECH, and the CCPA, which govern the use, disclosure, and safeguarding of protected health information (PHI) and other personal data; violations can result in significant civil and criminal penalties[63][68] Intellectual Property Talkspace protects its intellectual property through patents, trademarks, copyrights, and trade secrets, holding one approved patent and one pending as of March 2023 - The company has one approved patent related to tracking therapeutic progress and one patent pending as of March 10, 2023[75] - Protection strategies include patents, trademarks, trade secrets, and confidentiality agreements with employees and consultants[74][77] Risk Factors Talkspace faces significant risks including persistent net losses, intense competition, complex regulatory compliance, material weaknesses in internal controls, and potential Nasdaq delisting - The company has a history of significant losses and expects to continue incurring losses as it invests in growth, with no guarantee of achieving or sustaining profitability[91] - The company operates in a highly competitive industry, facing threats from specialized providers like Teladoc and BetterHelp, large health systems, and potential new entrants from big tech[96] - The business is subject to extensive and evolving government regulations, including laws on the corporate practice of medicine, fee-splitting, and data privacy (HIPAA, CCPA), which could increase costs or require changes to operations[163][167][181] - The company has identified material weaknesses in its internal control over financial reporting, which could impair its ability to produce accurate financial statements and affect investor confidence[224] - The company received a notice from Nasdaq in November 2022 for failing to maintain a minimum bid price of $1.00 per share, posing a risk of delisting[247] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[255] Properties Talkspace, primarily remote, secured a New York office sublease in Q4 2022, with no leased facilities considered material to its operations - In Q4 2022, the company entered into a long-term sublease for new office space in New York, NY[256] Legal Proceedings A settlement for class action lawsuits was reached in February 2023, with court approval anticipated in Q2 or Q3 2023 - A settlement was reached in February 2023 for ongoing class action lawsuits, with court approval anticipated in Q2 or Q3 2023[258] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[260] 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 since June 2021; the company has not paid dividends and made no share repurchases in Q4 2022 - Common stock and warrants began trading on Nasdaq on June 23, 2021, under symbols "TALK" and "TALKW"[263] - The company has never paid cash dividends and does not plan to in the foreseeable future, retaining earnings for business development[266] - No shares of common stock were repurchased by the company in the fourth quarter of 2022[268] Reserved This item is reserved - None[255] Management's Discussion and Analysis of Financial Condition and Results of Operations For 2022, Talkspace reported $119.6 million revenue, a 5.2% increase driven by B2B growth, but a net loss of $79.7 million and reduced gross margin due to strategic shifts Financial Highlights (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $119.6M | $113.7M | | Gross Profit | $60.3M | $66.8M | | Gross Margin | 50.5% | 58.7% | | Operating Loss | $(83.2M) | $(93.9M) | | Net Loss | $(79.7M) | $(62.7M) | | Adjusted EBITDA | $(58.7M) | $(60.9M) | - Revenue growth was driven by a 65.5% increase in B2B revenue, while B2C revenue declined 26.2% following a strategic decision to reduce related marketing spend[299][300] - The company recorded a $6.1 million goodwill impairment charge related to the 2020 acquisition of the relationship counseling app "Lasting"[295][307] - As of December 31, 2022, the company had $138.5 million in cash and cash equivalents and no debt[316] Key Business Metrics Key business metrics for 2022 show B2B eligible lives grew to 92 million and completed sessions to 426,400, while B2C active members decreased to 15,400 Key Business Metrics Comparison | Metric (in thousands, except where noted) | 2022 | 2021 | | :--- | :--- | :--- | | Number of B2B eligible lives at year end (in millions) | 92 | 69 | | Number of completed B2B sessions | 426.4 | 273.7 | | Number of health plan clients at year end | 19 | 11 | | Number of enterprise clients at year end | 226 | 158 | | Number of B2C active members at year end | 15.4 | 23.8 | Results of Operations In 2022, revenues grew 5.2% to $119.6 million due to B2B, but a $79.7 million net loss resulted from increased cost of revenues and a goodwill impairment charge - B2B revenue grew by 65.5%, driven by an increase in covered lives from health plans and 68 new enterprise clients[299] - Cost of revenues increased by 26.3% primarily due to higher therapist compensation rates[301] - Sales and marketing expenses decreased by 27.6% due to an intentional reduction in marketing spend for the B2C business[305] Liquidity and Capital Resources As of December 31, 2022, Talkspace held $138.5 million in cash with no debt, despite $61.1 million net cash used in operations, anticipating sufficient liquidity for the foreseeable future Cash and Cash Equivalents | Date | Amount | | :--- | :--- | | December 31, 2022 | $138.5 million | | December 31, 2021 | $198.3 million | Summary of Cash Flows (Year Ended Dec 31, 2022) | Activity | Net Cash Flow | | :--- | :--- | | Operating Activities | $(61.1) million | | Investing Activities | $(0.3) million | | Financing Activities | $1.7 million | Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment, including revenue recognition for B2B contracts, warrant liability valuation, stock-based compensation, and annual goodwill impairment testing - Revenue Recognition: The company estimates variable consideration for B2B contracts using the expected value method based on historical collection experience[333] - Warrant Liabilities: Private Placement Warrants are accounted for as liabilities and measured at fair value on a recurring basis using the Black-Scholes-Merton Model[334] - Goodwill: Goodwill is tested for impairment annually or more frequently if indicators exist; a $6.1 million impairment charge was recognized in 2022[338] Quantitative and Qualitative Disclosures About Market Risk The company has minimal market risk exposure, with immaterial interest rate and foreign currency risks due to its cash position and U.S. dollar-denominated revenues - The company does not believe a 100 basis point change in interest rates would materially affect its financial condition[346] - Exposure to foreign currency risk is not material as the majority of revenue is in U.S. dollars[347] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2020-2022, with an unqualified audit opinion on financials but an adverse opinion on internal controls due to material weaknesses - The independent auditor issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in all material respects[352] - The independent auditor issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2022, due to material weaknesses[353][364] - The auditor identified the estimation of transaction price with respect to variable consideration for revenue recognition as a Critical Audit Matter due to the complex and judgmental nature of the estimates involved[357][360] Consolidated Financial Statements As of December 31, 2022, total assets were $156.3 million, total liabilities $28.7 million, with $119.6 million in revenues and a $79.7 million net loss Consolidated Balance Sheet Summary (As of Dec 31, 2022) | Category | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $152,557 | | Cash and cash equivalents | $138,545 | | Total Assets | $156,254 | | Total Current Liabilities | $27,318 | | Total Liabilities | $28,718 | | Total Stockholders' Equity | $127,536 | Consolidated Statement of Operations Summary (Year Ended Dec 31, 2022) | Category | Amount (in thousands) | | :--- | :--- | | Revenues | $119,567 | | Gross Profit | $60,338 | | Total Operating Expenses | $143,496 | | Operating Loss | $(83,158) | | Net Loss | $(79,672) | | Net Loss Per Share | $(0.51) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants regarding accounting and financial disclosure - None[483] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2022, due to material weaknesses in ITGCs and internal control oversight, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses in internal control over financial reporting[485] - A material weakness was identified related to ineffective ITGCs, which in turn rendered dependent business process controls ineffective[490][491] - A second material weakness was identified due to an inadequate process to monitor and provide oversight over the completion of internal control testing and assessment in a timely manner[491] - A remediation plan is underway, involving hiring additional personnel, developing an execution plan for testing controls, and establishing training and monitoring programs[495] Other Information The company reports no other information under this item - None[500] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable[501] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[503] Executive Compensation Information on executive compensation is incorporated by reference from the 2023 Annual Meeting Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[504] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[505] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[506] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2023 Annual Meeting Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[507] PART IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and exhibits filed as part of the Form 10-K - This section contains the list of financial statements and the Exhibit Index[510][511] Form 10-K Summary The company provides no summary under this item - None[509]