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

It's been a tumultuous two weeks for teletherapy company Talkspace as three key executives have left, its stock has tumbled and now shareholder rights law firms say they are investigating potential claims that the company's officers and directors violated federal securities laws.

The company announced Monday that President and Chief Operating Officer Mark Hirschhorn had resigned following an internal review of his conduct “in connection with a company offsite event that took place late last week.” Further details were not available about what prompted the review.

In a statement, the company said Hirschhorn’s resignation was effective immediately and that Talkspace’s executive team would handle his responsibilities.

Hirschhorn's departure came a week after Talkspace co-founder and CEO Oren Frank and co-founder and head of clinical services Roni Frank stepped down from their roles.

As part of the transition plan, Chairman Douglas Braunstein will step in as interim CEO to oversee the executive leadership team until a new CEO has been identified, the company said. The Franks will serve as strategic advisers to the board for the next six months to provide continuity and strategic direction.

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In a statement, Oren Frank said Talkspace would benefit from new leadership "suited for the different set of needs and skills required for a publicly-traded company.”

Both Franks received a severance payment of $750,000 and will keep any stock options they had prior to the merger, according to financial filings.

At the same time, Talkspace disclosed in its third-quarter earnings release that its net revenue for the quarter "came in below management expectations due to a lower number of B2C [business-to-consumer] customers and a one-time non-cash reserve adjustment for credit losses on receivables related to prior periods."

Jennifer Fulk, Talkspace's chief financial officer, said in a statement that the $223 million of available liquidity will allow Talkspace to "invest in important operational enhancements and new initiatives that will continue to drive long‐term growth.”

The company's net revenue in the third quarter came to $26 million, a 23% increase over the prior-year period but down significantly from the $32 million it had projected for the quarter. Talkspace withdrew its full-year guidance. The current consensus from Talkspace's five analysts is for revenues of $156 million in 2022, down from the previous forecast of $196 million.

The leadership exodus, along with the company's disappointing quarterly results announced Nov. 15, caused the company's stock to plummet. Its value has dropped more than 36% in a week. The company's valuation was pegged at $1.4 billion when it went public. Now, the company's market cap is less than a quarter of that, currently sitting at $334 million.

In an analyst note, Citi wrote that Hirschhorn's departure “will make it more difficult to fix the problems telegraphed” in its third-quarter results.

Co-founded by Roni and Oren Frank in 2012, Talkspace connects users with licensed therapists via video chat or text. The company provides access to an extensive network of certified, credentialed and professional clinicians through two channels: direct-to-consumer and enterprise. 

In a statement, Roni Frank noted that the demand for mental health services continues to accelerate. "I have the greatest degree of confidence in the long-term growth opportunities for Talkspace," she said.

Capitalizing on the special purpose acquisition company frenzy during the pandemic, Talkspace went public through a merger with SPAC Hudson Executive Investment Corp. The deal provided the company with $250 million in cash to be used as growth capital.

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

Several shareholder rights law firms say they have initiated investigations into possible securities fraud and may file a class action on behalf of investors.

Law firm Hagens Berman said its investigation focuses on Talkspace’s statements leading up to and after its June 23, 2021, merger with Hudson Executive Investment Corp. The law firm noted that, in the past, Talkspace and senior management have touted the company’s “broad-based momentum” and its high year-over-year revenue growth.

“We’re focused on investors’ losses and whether Talkspace may have intentionally inflated its receivables and revenue growth and understated its credit loss allowance,” said Reed Kathrein, the Hagens Berman partner leading the investigation, in a statement.

The company’s future seems uncertain as the digital mental health space becomes more competitive with startups gaining traction with health plans.

But the turmoil at Talkspace doesn't look to have put investors off digital mental health companies. U.K.-based mental health firm Ieso just raised $53 million in a series B round for its development of digital therapeutic systems.

Digital mental health and behavioral health companies have banked $3.1 billion in investor dollars so far in 2021, according to Rock Health.

But, with the market growing rapidly, some experts are concerned about whether digital mental health tools deliver what they promise. Some investors have raised concerns about the potential downsides of venture backed-digital health companies and the risks to patients.

“It’s frustrating if you’re a customer of an expense report SaaS startup and the company goes out of business, but it’s potentially devastating if your tele-therapist or addiction counselor suddenly disappears because the platform that employed them ran out of money,” wrote Hunter Walk, a partner at venture capital firm HomeBrew, in a blog post earlier this 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?"