Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, all references in this section as to “Talkspace,” the “Company,” “we,” “us” or “our” refer to the business of Talkspace, Inc. and its subsidiaries.
The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes contained in this Quarterly Report and the financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve risks and uncertainties. As a result of many factors, such as those discussed in Part I, Item 1A, “Risk Factors” of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and “Forward-Looking Statements” sections and elsewhere in this Quarterly Report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Talkspace is a healthcare company offering convenient and affordable access to a fully-credentialed network of highly qualified providers. We are a leading virtual behavioral health company and, since Talkspace’s founding in 2012, we have connected millions of patients, who we refer to as our members, with licensed mental health providers across a wide and growing spectrum of care through virtual counseling, psychotherapy and psychiatry. We created a purpose-built platform to address the vast, unmet and growing demand for mental health services of our members, serving our business-to-business (“B2B”) channel, comprised of large health plans and employee assistance programs (“health plan clients”) such as Aetna, Cigna, Premera and Optum and large enterprise clients such as Google and Expedia (collectively, our “clients”), who offer their employees and insured members access to our platform while their employer is under an active contract with Talkspace, or at in-network reimbursement rates, where applicable, and our business-to-consumer (“B2C”) channel, comprised of individual consumers who subscribe directly to our platform,
As of September 30, 2022, we had over 68,100 active members through our B2B and B2C channels, including approximately 86 million B2B eligible lives and approximately 17,900 B2C active members. For the three and nine months ended September 30, 2022, our clinicians completed 111,400 and 298,000 B2B sessions, respectively, related to members covered under our health plan clients, as compared to 71,300 and 192,100 completed B2B sessions for the three and nine months ended September 30, 2021, respectively. Please refer to the “Key Business Metrics” section below for a description of active members and B2B eligible lives.
The behavioral health market has traditionally been underserved for a number of reasons, including as a result of inadequate access, a limited universe of qualified providers, high cost and social stigma. We believe virtual is the ideal modality for mental health treatment because it removes or reduces these burdens associated with traditional face-to-face mental health services by improving convenience through 24/7 access to our platform, providing more accessible entry level price points, and reducing associated stigmas by promoting transparency, increasing ease of access and preserving privacy. Our platform connects consumers in need, including many of whom have never had an opportunity to benefit from high-quality behavioral healthcare, with experienced providers across all 50 U.S. states.
Through our psychotherapy offerings, our licensed therapists and counselors treat mental health conditions in over 21 specializations, such as depression, anxiety, trauma and other human challenges. Through our psychiatry offerings, our board-certified psychiatrists and prescription-eligible nurse practitioners treat a higher acuity patient demographic, including those who may have pharmacological needs. Talkspace providers treat a full range of mental health conditions treated by "traditional" providers, including schizophrenia-spectrum disorders, bipolar disorders and depression, including through prescription medication and management from psychiatrists, up and until the point that the provider, in their discretion, feels it prudent to refer the member to a face-to-face psychiatrist to address potential needs for “controlled substances” under the federal Controlled Substances Act, which generally prohibits the prescribing and dispensing of controlled substances via telehealth without performing an in-person examination.
While optimizing consumers’ access to care, we believe our platform also provides benefits to providers through expanded reach, steady access to member leads, reduced administrative burdens, more efficient time utilization and data-driven insights. These features, together with continuous training and professional growth opportunities we offer, empower providers to deliver what we believe will enable an enhanced care journey, higher member lifetime engagement, meaningful outcomes and greater margins when compared to face-to-face treatment.
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Table of Contents
Operating Segments
We operate our business in a single segment and as one reporting unit, which is how our chief operating decision maker (who is our interim chief executive officer) reviews financial performance and allocates resources.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business:
|
|
|
|
|
|
|
|
|
Unaudited |
|
Nine Months Ended September 30, |
|
(in thousands except number of health plan and enterprise clients or otherwise indicated) |
|
2022 |
|
|
2021 |
|
Number of B2B eligible lives at period end (in 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 |
|
B2B Eligible Lives: We consider B2B lives “eligible” if such persons are eligible to receive treatment on the Talkspace platform, in the case of our enterprise clients, while their employer is under an active contract with Talkspace, or, in the case of health plan clients, at an agreed upon reimbursement rate through insurance under an employee assistance program or other network behavioral health paid benefit program. There may be instances where a person may be covered through multiple solutions, typically through behavioral health plans and employee assistance programs. In these instances, the person is counted each time they are covered in the B2B eligible lives calculation, which may cause this amount to reflect a higher number of members than we actually serve.
Active Members: We consider members “active” (i) in the case of our B2C members, commencing on the date such member initiates contact with a provider on our platform until the term of their monthly, quarterly or bi-annual subscription plan expires, unless terminated early, and (ii) in the case of our B2B members, if such members have engaged on our platform during the preceding 25 days, such as sending a text, video or audio message to, or participating in a video call with, a provider, completing a satisfaction or progress report survey or signing up for our platform. While a growth in active members typically highlights strong engagement with our members, not all active members are associated with revenue in that particular period.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we believe adjusted EBITDA, a non-GAAP measure, is useful in evaluating our operating performance. Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes and in evaluating acquisition opportunities. We also use adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. We believe that the use of adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.
Some of the limitations of adjusted EBITDA include (i) adjusted EBITDA does not properly reflect capital commitments to be paid in the future and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and adjusted EBITDA does not reflect these capital expenditures. Our adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate adjusted EBITDA in the same manner as we calculate the measure, limiting its usefulness as a comparative measure. In addition, some of our competitors may use other measures to evaluate their performance. In evaluating adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments described herein. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. Adjusted EBITDA should not be considered as an alternative to loss before income taxes, net loss, loss per share, or any other performance measures derived in accordance with U.S. GAAP. When evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.
18
Table of Contents
A reconciliation is provided below for adjusted EBITDA to net (loss) income, the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review our GAAP financial measure and the reconciliation of our non-GAAP financial measure to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business.
We calculate adjusted EBITDA as net (loss) income adjusted to exclude (i) interest and other expenses (income), net, (ii) tax benefit and expense, (iii) depreciation and amortization, (iv) stock-based compensation expense and (v) certain non-recurring expenses, where applicable.
The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net (loss) income for the three and nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net (loss) income |
|
$ |
(17,983 |
) |
|
$ |
1,505 |
|
|
$ |
(61,365 |
) |
|
$ |
(41,674 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
309 |
|
|
|
503 |
|
|
|
1,006 |
|
|
|
1,458 |
|
Financial (income), net (1) |
|
|
(1,885 |
) |
|
|
(26,743 |
) |
|
|
(889 |
) |
|
|
(23,700 |
) |
Taxes on income |
|
|
17 |
|
|
|
11 |
|
|
|
127 |
|
|
|
29 |
|
Stock-based compensation |
|
|
3,179 |
|
|
|
3,875 |
|
|
|
9,386 |
|
|
|
20,584 |
|
Non-recurring expenses (2) |
|
|
900 |
|
|
|
— |
|
|
|
900 |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
(15,463 |
) |
|
$ |
(20,849 |
) |
|
$ |
(50,835 |
) |
|
$ |
(43,303 |
) |
(1) For the three and nine months ended September 30, 2022, financial income, net, primarily consisted of $1.6 million and $0.4 million, respectively, in gains resulting from the revaluation of warrant liabilities. For the three months ended September 30, 2021, financial income, net primarily consisted of $26.9 million in gains resulting from the revaluation of warrant liabilities. For the nine months ended September 30, 2021, financial income, net primarily consisted of $28.3 million in gains resulting from the revaluation of warrant liabilities, partially offset by $4.2 million in warrant issuance costs in connection with the Closing of the Business Combination.
(2) For the three and nine months ended September 30, 2022, non-recurring expenses consisted of $0.6 million in legal fees and $0.3 million in general and administrative expenses.
Components of Results of Operations
Revenues
We contract with health plans and other enterprises to provide services to individuals who are qualified to receive access to the Company’s services through the Company’s commercial arrangements. We generate revenues from payments from members and claims paid by their respective insurance companies and annually contracted platform access fees paid to us by our enterprise clients for the delivery of therapy services to their members or employees. We recognize revenues from services provided to insured members at a point in time, as virtual therapy session is rendered. We recognize contracted revenue from our enterprise clients from the commencement of their contracted term through the annual period based primarily on a per-member-per month model. Revenue is recognized in an amount that reflects the consideration that is expected in exchange for the service provided. Contracts with our enterprise clients are for one or more years with the ability to provide 60 days advance notice prior to termination at each year mark during the term. On occasion and depending on the client, we allow a 60 or 90 day intra-year termination notice but only after the client has completed the first year of service.
We also generates revenues from the sale of monthly, quarterly, bi-annual and annual membership subscriptions to our therapy platform as well as supplementary a la carte offerings. We provide these services directly to individuals through a subscription plan. We recognize B2C member subscription revenues ratably over the subscription period, beginning when therapy services commence. B2C members may cancel at any time and will receive a pro-rata refund for the subscription price.
Revenue growth is generated from increasing our eligible covered lives through contracting with enterprise clients and health plans, and increasing membership subscriptions.
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Table of Contents
Cost of Revenues
Cost of revenues is comprised of therapist payments and hosting costs. Cost of revenues is largely driven by the size of our provider network that is required to service the growth of our health plan and enterprise clients, in addition to the growth of our customer base.
We designed our business model and our provider network to be scalable and to leverage a hybrid model of both employee providers and independently contracted providers to support multiple growth scenarios. The compensation paid to our independently contracted providers is variable, and the amount paid to a provider is generally based on the amount of time committed by such provider to our members. In addition, our network supervisors have broad authority to approve the payment of incentive bonuses to providers with certain licenses during periods of higher demand for providers with such licenses. For our employee providers, they receive a fixed-salary and discretionary bonuses, where applicable.
While we expect to make increased investments to support accelerated growth and the required investment to scale our provider network, we also expect increased efficiencies and economies of scale. Our cost of revenues as a percentage of revenues is expected to fluctuate from period to period depending on the interplay of these factors.
Operating Expenses
Operating expenses consist of research and development, clinical operations, sales and marketing, and general and administrative expenses.
Research and Development Expenses
Research and development expenses include personnel and related expenses for software development and engineering, information technology infrastructure, security and privacy compliance and product development (inclusive of stock-based compensation for our research and development employees), third-party services and contractors related to research and development, information technology, software-related costs, and cost savings related to the application of research grant proceeds.
Clinical Operations Expenses
Clinical operations expenses are associated with the management of our provider network of therapists. Such costs are comprised of costs related to recruiting, onboarding, credentialing, training and ongoing quality assurance activities (inclusive of stock-based compensation for our clinical operations employees), costs of third-party services and contractors related to recruiting and training and software-related costs.
Sales and Marketing Expenses
Sales expenses consist primarily of employee-related expenses, including salaries, benefits, commissions, travel and stock-based compensation costs for our employees engaged in sales and account management. We expect our sales expenses to increase as we continue to invest in the expansion of our health plan and enterprise business.
Marketing expenses consist primarily of advertising and marketing expenses for consumer acquisition and engagement, as well as personnel costs, including salaries, benefits, bonuses, stock-based compensation expense for marketing employees, third-party services and contractors. Marketing expenses also include third-party software subscription services, third-party independent research, participation in trade shows, brand messaging and costs of communications materials that are produced for our clients to generate greater awareness and utilization of our platform among our health plan and enterprise clients.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, including salaries, benefits, bonuses and stock-based compensation expense for our executive, finance, accounting, legal and human resources functions, as well as professional fees, occupancy costs, and other general overhead costs. We expect to incur additional general and administrative expenses in compliance, legal, investor relations, director’s and officer’s insurance, and professional services related to our compliance and reporting obligations as a public company, however we expect further incremental increases to be minimal.
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Table of Contents
Financial income, net
Financial income, net includes the impact from (i) non-cash changes in the fair value of our warrant liabilities, (ii) issuance costs related to our warrants, (iii) interest earned on cash equivalents deposited in our bank accounts and (iv) other financial expenses in connection with bank charges.
Taxes on income
Our taxes on income consists primarily of foreign income taxes related to income generated by our subsidiary organized under the laws of Israel. If we expand the scale of our international business activities, any changes in the U.S. and foreign taxation of such activities may increase our overall provision for income taxes in the future.
We have a full valuation allowance for our U.S. deferred tax assets, including federal and state NOLs. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized through expected future taxable income in the United States.
Results of Operations
The following table presents the results of operations for the three and nine months ended September 30, 2022 and 2021 and the dollar and percentage change between the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
Unaudited |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
(in thousands, except percentages, share and per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
29,332 |
|
|
$ |
26,359 |
|
|
$ |
2,973 |
|
|
|
11.3 |
|
|
$ |
89,326 |
|
|
$ |
84,499 |
|
|
$ |
4,827 |
|
|
|
5.7 |
|
Cost of revenues |
|
|
14,737 |
|
|
|
12,187 |
|
|
|
2,550 |
|
|
|
20.9 |
|
|
|
45,163 |
|
|
|
33,698 |
|
|
|
11,465 |
|
|
|
34.0 |
|
Gross profit |
|
|
14,595 |
|
|
|
14,172 |
|
|
|
423 |
|
|
|
3.0 |
|
|
|
44,163 |
|
|
|
50,801 |
|
|
|
(6,638 |
) |
|
|
(13.1 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net |
|
|
6,182 |
|
|
|
4,278 |
|
|
|
1,904 |
|
|
|
44.5 |
|
|
|
16,793 |
|
|
|
12,023 |
|
|
|
4,770 |
|
|
|
39.7 |
|
Clinical operations |
|
|
2,222 |
|
|
|
1,896 |
|
|
|
326 |
|
|
|
17.2 |
|
|
|
6,314 |
|
|
|
5,886 |
|
|
|
428 |
|
|
|
7.3 |
|
Sales and marketing |
|
|
18,375 |
|
|
|
26,431 |
|
|
|
(8,056 |
) |
|
|
(30.5 |
) |
|
|
58,714 |
|
|
|
75,125 |
|
|
|
(16,411 |
) |
|
|
(21.8 |
) |
General and administrative |
|
|
7,667 |
|
|
|
6,794 |
|
|
|
873 |
|
|
|
12.8 |
|
|
|
24,469 |
|
|
|
23,112 |
|
|
|
1,357 |
|
|
|
5.9 |
|
Total operating expenses |
|
|
34,446 |
|
|
|
39,399 |
|
|
|
(4,953 |
) |
|
|
(12.6 |
) |
|
|
106,290 |
|
|
|
116,146 |
|
|
|
(9,856 |
) |
|
|
(8.5 |
) |
Operating (loss) |
|
|
(19,851 |
) |
|
|
(25,227 |
) |
|
|
5,376 |
|
|
|
21.3 |
|
|
|
(62,127 |
) |
|
|
(65,345 |
) |
|
|
3,218 |
|
|
|
4.9 |
|
Financial income, net |
|
|
1,885 |
|
|
|
26,743 |
|
|
|
(24,858 |
) |
|
|
(93.0 |
) |
|
|
889 |
|
|
|
23,700 |
|
|
|
(22,811 |
) |
|
|
(96.2 |
) |
(Loss) income before taxes on income |
|
|
(17,966 |
) |
|
|
1,516 |
|
|
|
(19,482 |
) |
|
* |
|
|
|
(61,238 |
) |
|
|
(41,645 |
) |
|
|
(19,593 |
) |
|
|
(47.0 |
) |
Taxes on income |
|
|
17 |
|
|
|
11 |
|
|
|
6 |
|
|
|
54.5 |
|
|
|
127 |
|
|
|
29 |
|
|
|
98 |
|
|
|
337.9 |
|
Net (loss) income |
|
$ |
(17,983 |
) |
|
$ |
1,505 |
|
|
$ |
(19,488 |
) |
|
* |
|
|
$ |
(61,365 |
) |
|
$ |
(41,674 |
) |
|
$ |
(19,691 |
) |
|
|
(47.3 |
) |
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.11 |
) |
|
$ |
0.01 |
|
|
$ |
(0.12 |
) |
|
* |
|
|
$ |
(0.39 |
) |
|
$ |
(0.64 |
) |
|
$ |
0.25 |
|
|
|
39.1 |
|
Diluted |
|
$ |
(0.11 |
) |
|
$ |
0.01 |
|
|
$ |
(0.12 |
) |
|
* |
|
|
$ |
(0.39 |
) |
|
$ |
(0.64 |
) |
|
$ |
0.25 |
|
|
|
39.1 |
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
158,330,684 |
|
|
|
152,267,870 |
|
|
|
|
|
|
|
|
|
156,056,900 |
|
|
|
64,638,182 |
|
|
|
|
|
|
|
Diluted |
|
|
158,330,684 |
|
|
|
165,179,012 |
|
|
|
|
|
|
|
|
|
156,056,900 |
|
|
|
64,638,182 |
|
|
|
|
|
|
|
* Percentage not meaningful.
Revenues. Revenues increased by $3.0 million, or 11.3% to $29.3 million for the three months ended September 30, 2022 from $26.4 million for the three months ended September 30, 2021. The increase was principally due to a 117.3% growth in B2B revenue driven by an increase in covered lives from health plan clients and new enterprise clients, and a higher number of completed B2B sessions, partially offset by revenue reserves on receivables from our existing health plan clients and a 32.7% decrease in B2C revenue. Revenue, net of reserves, from our health plan clients increased by $6.3 million, or 196.9%, to $9.5 million for the three months ended September 30, 2022 from $3.2 million for the three months ended September 30, 2021. The Company recorded an increase in revenue reserves of $0.9 million related to receivables from its health plan clients during the three months ended September 30, 2022. Enterprise client contracts increased by 76 clients, or 54.7%, to 215 clients as of September 30, 2022 from 139 clients as of September 30, 2021. This increase in the number of enterprise clients increased revenue by $2.8 million, or 62.2% to $7.3 million for the three months ended September 30, 2022 from $4.5 million for the three months ended September 30, 2021. B2C member subscriptions revenue decreased by $6.1 million, or 32.7%, to $12.5 million for the three months ended September 30, 2022 from $18.6 million for the three months ended September 30, 2021 due to the Company's intentional and strategic decision to reduce marketing spend.
21
Table of Contents
Revenues increased by $4.8 million, or 5.7% to $89.3 million for the nine months ended September 30, 2022, from $84.5 million for the nine months ended September 30, 2021. The increase was principally due to a 72.2% growth in B2B revenue driven by an increase in covered lives from health plan clients and new enterprise clients, and a higher number of completed B2B sessions, partially offset by higher revenue reserves on receivables from our existing health plan clients and a 24.2% decrease in B2C revenue. Revenue, net of reserves, from our health plan clients increased by $10.9 million, or 74.7% to $25.5 million for the nine months ended September 30, 2022 from $14.6 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, the Company recorded an increase in revenue reserves of $1.9 million related to receivables from its health plan clients. Enterprise client contracts increased by 76 clients, or 54.7%, to 215 clients as of September 30, 2022 from 139 clients as of September 30, 2021. This increase in the number of enterprise clients increased revenue by $8.0 million, or 69.0% to $19.6 million for the nine months ended September 30, 2022 from $11.6 million for the nine months ended September 30, 2021. B2C member subscriptions revenue decreased by $14.1 million, or 24.2% to $44.2 million for the nine months ended September 30, 2022 from $58.3 million for the nine months ended September 30, 2021 due to the Company's intentional and strategic decision to reduce marketing spend.
Costs of revenues. Cost of revenues increased by $2.6 million, or 20.9%, to $14.7 million for the three months ended September 30, 2022 from $12.2 million for the three months ended September 30, 2021, primarily due to costs associated with higher therapist compensation expense.
Cost of revenues increased by $11.5 million, or 34.0%, to $45.2 million for the nine months ended September 30, 2022 from $33.7 million for the nine months ended September 30, 2021, primarily due to costs associated with higher therapist compensation expense.
Gross profit. Gross profit increased by $0.4 million, or 3.0%, to $14.6 million for the three months ended September 30, 2022 from $14.2 million for the three months ended September 30, 2021, primarily due to higher revenues. Gross margin was 49.8% for the three months ended September 30, 2022, compared to 53.8% during the three months ended September 30, 2021. The decrease in gross margin was due primarily to a revenue shift to our B2B business, which generally realize lower margins, and higher therapist compensation expense during the three months ended September 30, 2022.
Gross profit decreased by $6.6 million, or 13.1%, to $44.2 million for the nine months ended September 30, 2022 from $50.8 million for the nine months ended September 30, 2021. Gross margin was 49.4% for the nine months ended September 30, 2022, compared to 60.1% during the nine months ended September 30, 2021. The decrease in gross margin was due primarily to a revenue shift to our B2B business and higher therapist compensation expense during the nine months ended September 30, 2022.
Research and development expenses. Research and development expenses increased by approximately $1.9 million, or 44.5% to $6.2 million for the three months ended September 30, 2022 from $4.3 million for the three months ended September 30, 2021. This was primarily due to an increase in employee-related costs, inclusive of non-cash stock compensation expense.
Research and development expenses increased by approximately $4.8 million, or 39.7%, to $16.8 million for the nine months ended September 30, 2022 from $12.0 million for the nine months ended September 30, 2021. This was primarily due to an increase in employee-related costs, inclusive of non-cash stock compensation expense.
Clinical operations expenses. Clinical operations expenses increased by $0.3 million, or 17.2% to $2.2 million for the three months ended September 30, 2022 from $1.9 million for the three months ended September 30, 2021. This was primarily due to an increase in employee-related costs, inclusive of non-cash stock compensation expense.
Clinical operations expenses increased by $0.4 million, or 7.3% to $6.3 million for the nine months ended September 30, 2022 from $5.9 million for the nine months ended September 30, 2021. This was primarily due to an increase in research tools and subscription expenses partially offset by a decrease in employee-related costs, inclusive of non-cash stock compensation expense.
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Sales and marketing expenses. Sales and marketing expenses decreased by $8.1 million, or 30.5%, to $18.4 million for the three months ended September 30, 2022 from $26.4 million for the three months ended September 30, 2021. The decrease in sales and marketing expenses primarily consisted of a decrease in direct marketing and promotional costs for our B2C business.
Sales and marketing expenses decreased by $16.4 million, or 21.8%, to $58.7 million for the nine months ended September 30, 2022 from $75.1 million for the nine months ended September 30, 2021. The decrease in sales and marketing expenses primarily consisted of a decrease in direct marketing and promotional costs for our B2C business.
General and administrative expenses. General and administrative expenses increased by $0.9 million, or 12.8%, to $7.7 million for the three months ended September 30, 2022 from $6.8 million for the three months ended September 30, 2021. This was driven primarily by an increase in professional fees, insurance costs, and employee-related costs, inclusive of non-cash stock compensation expense.
General and administrative expenses increased by $1.4 million, or 5.9%, to $24.5 million for the nine months ended September 30, 2022 from $23.1 million for the nine months ended September 30, 2021. This was driven primarily by an increase in professional fees and insurance costs partially offset by a decrease in employee-related costs, inclusive of non-cash stock compensation expense.
Financial income, net. Financial income, net was $1.9 million for the three months ended September 30, 2022, compared to financial income, net of $26.7 million for the three months ended September 30, 2021. For the three months ended September 30, 2022 and 2021, financial income, net was primarily driven by non-cash gains resulting from the revaluation of warrant liabilities.
Financial income, net was $0.9 million for the nine months ended September 30, 2022, compared to financial income, net of $23.7 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, financial income, net, primarily consisted of $0.4 million in non-cash gains resulting from the revaluation of warrant liabilities. For the nine months ended September 30, 2021, the change in financial income, net was primarily driven by non-cash gains resulting from the revaluation of warrant liabilities, partially offset by $4.2 million in warrant issuance costs related to the closing of the Business Combination.
Liquidity and Capital Resources
As of September 30, 2022, we had $152.6 million of cash and cash equivalents ($198.3 million as of December 31, 2021), which we use to finance our operations. We had no debt as of September 30, 2022 or December 31, 2021. We expect to generate operating losses for the foreseeable future.
Our primary cash needs are to fund operating activities and invest in technology development. Our future capital requirements will depend on many factors including our growth rate, contract renewal activity, the timing and extent of investments to support product development efforts, our expansion of sales and marketing activities, the introduction of new and enhanced service offerings, and the continuing market acceptance of virtual behavioral services. Additionally, we may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies.
We currently anticipate to be able to fund our cash needs for at least the foreseeable future using available cash and cash equivalent balances as of September 30, 2022. However, in the future we may require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and we may determine to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. If we raise additional funds through the issuance of equity or convertible debt or other equity-linked securities, our existing stockholders could experience significant dilution. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.
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Cash Flows from Operating, Investing and Financing Activities
The following table presents the summary condensed consolidated cash flow information for the periods presented:
Cash Flows
|
|
|
|
|
|
|
|
|
Unaudited |
|
Nine Months Ended September 30, |
|
(in thousands) |
|
2022 |
|
|
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 and cash equivalents |
|
$ |
(45,617 |
) |
|
$ |
209,617 |
|
Operating Activities
Net cash used in operating activities was $46.9 million and $41.1 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in net cash used in operating activities was driven primarily by the negative impact of the higher net loss and the unfavorable timing on collections of receivables during the current-year period offset by non-cash add back of stock based compensation, decrease in current assets and increase in account payables due to favorable timing of payments. The higher net loss for the nine months ended September 30, 2022 was driven primarily by an increase in cost of revenues and research and development expenses partially offset by a decrease in sales and marketing expenses.
Investing Activities
Net cash used in investing activities was $0.3 million for the nine months ended September 30, 2022, compared to $0.6 million for the nine months ended September 30, 2021. The change was driven primarily by a decrease in the purchases of computer equipment and software during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Financing Activities
Net cash provided by financing activities was $1.5 million and $251.3 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease was primarily driven by $251.3 million of proceeds, net of payment of transaction costs, received in the Business Combination during the nine months ended September 31, 2021.
Contractual Obligations, Commitments and Contingencies
As of September 30, 2022, we did not have any short-term or long-term debt, capital lease obligations, long-term operating lease obligations, or significant long-term liabilities.
Our commercial contract arrangements generally include certain provisions for indemnifying clients against liabilities if there is a breach of a client’s data or if our service infringes a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnifications.
We have also agreed to indemnify our officers and directors for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request. We maintain director and officer liability insurance coverage that would generally enable us to recover a portion of any future amounts paid. We may also be subject to indemnification obligations by law with respect to the actions of our employees under certain circumstances and in certain jurisdictions.
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Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Reference is also made to the Company’s consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2021.
The Company’s accounting policies are essential to understanding and interpreting the financial results reported on the condensed consolidated financial statements. The significant accounting policies used in the preparation of the Company’s audited consolidated financial statements are summarized in Note 2 to those financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Certain of those policies are considered to be particularly important to the presentation of the Company's financial results because they require management to make difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain.
During the nine months ended September 30, 2022, there were no material changes to matters discussed under the heading “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
Information regarding recent accounting developments and their impact on our results can be found in “Part I, Item 1. Financial Statements – Note 2 – Significant Accounting Policies” of this Quarterly Report.
Item 4. Controls and Procedures.
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of the disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report, the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2022 due to the material weaknesses in our internal control over financial reporting described below.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements could not be prevented or detected on a timely basis. We have identified material weaknesses in our controls related to the following (a) the aggregation of open control deficiencies across the Company’s financial reporting processes because the controls were not fully designed and operating effectively, (b) not fully designing, implementing and monitoring general information technology controls in the areas of user access and program change-management for systems supporting all of the Company’s internal control processes and (c) our controls on accounting for complex financial instruments such as warrants, did not operate effectively to appropriately apply the provisions of ASC 815-40, resulting in the failure to prevent a material error in our accounting for warrants and the resulting restatement of our previously issued financial statements.
In addition, on April 12, 2021, the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement (the “SEC Statement”) regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”). Specifically, the SEC Statement focused on certain settlement terms and provisions related to certain tender offers following a business combination, which terms are similar to those contained in the Warrant Agreement governing our warrants and the HEC Forward Purchase Agreement. Following the issuance of the SEC Statement, on May 4, 2021, HEC concluded that it was appropriate to restate its previously issued audited financial statements as of December 31, 2020 and for the period from February 6, 2020 (inception) through December 31, 2020, as well as its financial data as of June 11, 2020, and as part of such process, HEC identified a material weakness in its internal control over financial reporting. As the accounting acquirer in the Business Combination and the successful issuer of the warrants, we inherited this material weakness.
In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Quarterly Report present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.
Remediation Activities
We currently are implementing several actions, as described below, to remediate the material weaknesses described in this Item 4. Management is committed to ensuring that our internal controls over financial reporting are designed and operating effectively.
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Financial Reporting
We continue to make progress on our automated and manual business process controls, including reports generated from these IT systems, that are dependent upon the completeness and accuracy of information from the affected ITGC material weakness. We are leveraging these improvements in the design of our future state processes and controls within our new enterprise resource planning (“ERP”) system, which went live in the third quarter of 2022.
Our remediation plan includes, but is not limited to:
•Frequent communications between our Audit Committee and management regarding our financial reporting and internal control environment;
•The expansion of the finance, accounting, reporting and information technology teams through the addition of experienced and qualified resources;
•The improvement of the process and controls in the determination of the appropriate accounting and classification of our financial instruments and key agreements;
•Delivery of additional internal controls training, as well as policy and control standardization where possible;
•Re-designed internal controls processes as part of our Sarbanes-Oxley program to drive accountability and efficiency;
•Instituted monthly review of financial statements to evaluate results, observe adherence to policies and agree on necessary actions;
•Engaged outside resources to assist with the design and implementation of a risk-based internal controls plan, enhance process documentation, provide company-wide training, and help with management's self-assessment and testing of internal controls
Information Technology General Controls (“ITGCs”)
We continue to make progress in advancing foundational elements of our ITGCs as it relates to financial reporting. We are leveraging these foundational elements in the design of our future state processes and controls within our new ERP system. Our remediation plan includes, but is not limited to:
•Implementing new, relevant IT systems related to our revenue processes and financial reporting;
•Implementing improved IT change management policies and procedures, control activities, and tools impacting financial reporting to ensure changes affecting financial IT applications are identified, authorized, tested, and implemented appropriately;
•Implementing improved processes for requesting, authorizing, and reviewing user access to key systems which impact our financial reporting, including identifying access to roles where manual business process controls may be required;
•Implementing appropriate segregation of duties in relevant systems that impact internal control over financial reporting;
•Increasing resources dedicated to monitoring ITGCs related to financial reporting to ensure compliance with policies and procedures; and
•Implementing additional training to ensure a clear understanding of risk assessment and monitoring activities related to automated processes and IT systems and ITGCs related to financial reporting.
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Complex accounting requirements (such as warrants)
We intend to address this material weakness by enhancing our processes to identify and appropriately apply applicable accounting requirements to better evaluate our research and understanding of the nuances of the complex accounting standards that apply to our financial statements. We intend to provide enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. We have also retained the services of a valuation expert to assist in valuation analysis of our warrants on a quarterly basis.
When fully implemented and operational, we believe the controls we have designed or plan to design will remediate the control deficiencies that have led to the material weaknesses we have identified and strengthen our internal controls over financial reporting.
The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three and nine months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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