JPM 2022: Talkspace faces securities fraud class-action suit as consumer revenue declines

smartphones with screenshots of Talkspace mental health app
Talkspace now expects approximately $112 million in full-year 2021 revenue, down from previous projections of $125 million, which the company withdrew after releasing third-quarter earnings. (Talkspace)

EDITOR'S NOTE: This story has been updated to include comment from a Talkspace representative.

After losing its two founders and pushing out its chief operating officer last November, Talkspace’s woes aren’t over. The online therapy app now faces a securities fraud lawsuit.

The digital health company, which connects patients with licensed therapists or psychiatrists for video or text conversations, has been accused of misleading investors before it went public last year by misrepresenting its financials and growth.

Namely, the class-action suit filed Jan. 7 alleges Talkspace failed to disclose critical growth headwinds, including increased advertising and customer acquisition costs and worsening growth and gross margin trends, and overvalued its accounts receivable from certain health plan clients.

In an email statement to Fierce Healthcare, the company said they "do not believe (the allegations) have any merit," and stated they are prepared to "defend the company vigorously."

Talkspace’s market value has plummeted in the last seven months since going public in a $1.4 billion deal with a blank check firm.

That deal made Talkspace the first publicly traded virtual behavioral health company, providing it with $250 million in cash to be used as growth capital.

But the company’s stock has seen a steep decline since then, falling 82% since its first day of trading in late June, with a current market cap of approximately $248.3 million.

The behavioral health company took several hits in November after its co-founder and CEO Oren Frank, as well as co-founder and head of clinical services Roni Frank, stepped down.

A week later, President and COO Mark Hirschhorn was pushed out after an internal review of his conduct “in connection with a company offsite event that took place” the prior week. In seven days, the company’s shares dropped more than 36%.

RELATED: Rocky road ahead for Talkspace as COO resigns following internal review, stock value plummets

Interim CEO Doug Braunstein said Thursday during the company’s presentation at the all-virtual J.P. Morgan Healthcare Conference that while Talkspace’s B2B business did see growth in the fourth quarter of 2021, consumer revenue fell compared to both the previous quarter and the previous year.

According to Braunstein, changes in the company’s advertising spend are largely to blame for that decrease—namely, he said, Talkspace cut down on advertising “as a purposeful way to begin the process of optimizing our returns in the B2C business.”

“While disappointed obviously in the revenue, we have seen some modest positive signs of stabilization in both our conversion and retention rate,” he said. Multiple times throughout the presentation, he stressed that qualifier: “modest.”

Braunstein also said the company has significant cash resources, which they’ll use to drive growth in the business.

Talkspace now expects approximately $112 million in full-year 2021 revenue, down from previous projections of $125 million which the company withdrew after releasing third-quarter earnings.

Braunstein didn’t address the lawsuit in Thursday’s presentation. However, he did field questions from investors about an 8-K filing with the U.S. Securities and Exchange Commission in December, which reduced the number of covered lives listed in Talkspace’s B2B business.

According to Braunstein, Talkspace had conversations earlier in the year with “a very large payer” that provided their network access to the company’s behavioral health offerings. Talkspace believed they had access to a large number of that payer’s network and included them in the total number of covered lives, writing in their second- and third-quarter earnings that 75 million were eligible for Talkspace via the B2B business.

“Subsequent conversations, it was clear that we did not have access to that payer’s covered lives,” he said. The company revised those numbers and now claims to have covered 69 million lives through the end of 2021.

RELATED: The digital mental health market is booming. Here’s why some experts are concerned

Demand for virtual behavioral health care remains even as offices reopened after the initial phase of the pandemic. Investors have taken notice, pooling billions into digital mental health startups last year.

But significant concerns can arise with those investments, too, especially if a company appears to be sinking. Patients rely on the providers on these platforms to maintain their mental health, which could be devastating if those platforms disappear, wrote Hunter Walker, partner at HomeBrew, in a blog post last year.

“This is my most significant concern about the wave of mental wellness startups being funded with venture dollars—what happens to the clients of the ones which fail?” he wrote.