# Talkspace, Inc. (TALK) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Talkspace, Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1803901/000095017023007147/talk-20221231.htm Accession: 0000950170-23-007147 Filing date: 2023-03-10 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/TALK/ All MD&A years: /company/TALK/mda/ Previous year: /company/TALK/mda/fy2021/ (FY 2021) Next year: /company/TALK/mda/fy2023/ (FY 2023) Item 7. 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 consolidated 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 Annual Report. 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 the “Risk Factors” and “Forward-Looking Statements” sections and elsewhere in this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements. The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations for the years ended December 31, 2022 and 2021. For a discussion of our results of operations, liquidity and capital resources for the year ended December 31, 2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Overview Talkspace is a healthcare company offering its members 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 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 December 31, 2022, we had over 62,000 active members receiving care through our B2B and B2C channels, with over 92 million B2B eligible lives and over 15,000 B2C active members. For the year ended December 31, 2022, our clinicians completed 426,400 B2B sessions related to members covered by our health plan clients, as compared to 273,700 completed B2B sessions for the year ended December 31, 2021. Please refer to the “Key Business Metrics” section below for a description of active members and B2B eligible lives. Operating Segments The Company operates as a single segment and as one reporting unit, which is how the chief operating decision maker (who is the 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: [[GREPCENT_TABLE]] [["","","For the Year Ended December 31,"],["(in thousands, except number of health plan and enterprise clients or otherwise indicated)","","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"]] [[/GREPCENT_TABLE]] 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, 45 Table of Contents 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 B2B eligible lives than we actually serve. Active Members: We consider members “active” (i) 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, and (ii) 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. 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. The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net loss for the year ended December 31, 2022 and 2021: [[GREPCENT_TABLE]] [["","","","For the Year Ended December 31,"],["(in thousands)","","","2022","","","2021"],["Net loss","","","$","(79,672",")","","$","(62,742",")"],["Add:"],["Depreciation and amortization","","","","1,357","","","","1,973"],["Financial (income), net (1)","","","","(3,740",")","","","(31,228",")"],["Taxes on income","","","","254","","","","47"],["Stock-based compensation","","","","12,116","","","","27,405"],["Impairment of goodwill","","","","6,134","","","","\u2014"],["Non-recurring expenses (2)","","","","4,880","","","","3,677"],["Adjusted EBITDA","","","$","(58,671",")","","$","(60,868",")"]] [[/GREPCENT_TABLE]] (1) For the year ended December 31, 2022, financial income, net, primarily consisted of $3.1 million in gains resulting from the remeasurement of the warrant liabilities. For the year ended December 31, 2021, financial income, net, primarily consisted of $36.0 million in gains resulting from the remeasurement of the warrant liabilities, partially offset by $4.2 million in warrant issuance costs in connection with the closing of the Business Combination. (2) For the year ended December 31, 2022, non-recurring expenses primarily consisted of a $5.5 million accrual for estimated litigation expenses; such accrual represents our best estimate of the total cost the Company may incur for settling the outstanding shareholder litigation claims, including federal, state and derivative actions, pursuant to binding agreements reached with the relevant parties, net of insurance proceeds. For the year ended December 31, 2021, non-recurring expenses primarily consisted of severance costs related to the separation of Oren Frank and Roni Frank, co-founders and former executives of the Company, in November 2021. Components of Results of Operations Revenues We contract with enterprises, health insurance plans and employee assistance organizations 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 contracted platform access fees paid to us by our enterprise clients for the delivery of therapy services to their members or employees and from payments from insured members and claims paid by their respective insurance companies. We recognize revenue from our enterprise clients ratably over the contractual term based primarily on a per-member-per month access fee model. We recognize revenues from services provided to insured members at a point in time, as virtual therapy or psychiatry session is rendered. We also generate revenues from the sale of monthly, quarterly, bi-annual and annual membership subscriptions to the Company's therapy platform as well as supplementary a la carte offerings directly to individual consumers through a subscription plan. We recognize member subscription revenues ratably over the subscription period, beginning when therapy services commence. We recognize revenues from supplementary a la carte offerings at a point in time, as virtual therapy session is rendered. Members may cancel their subscription 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 health plans, increasing utilization within eligible covered lives, expanding enterprise clients, and increasing membership subscriptions. 46 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 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, all of which is included in cost of revenues. 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, general and administrative expenses, and impairment of goodwill. 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 and software-related costs. 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 member 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 certain executives, 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. 47 Table of Contents Impairment of goodwill Impairment of goodwill represents an impairment charge for goodwill as a result of the annual impairment test performed for the year ended December 31, 2022. 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. 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 years ended December 31, 2022 and 2021 and the dollar and percentage change between the respective periods: [[GREPCENT_TABLE]] [["","","","For the Year Ended December 31,"],["","","","2022","","","2021","","","Change","","","% Change"],["(in thousands, except percentages, share and per share data)"],["Revenues","","","$","119,567","","","$","113,671","","","$","5,896","","","","5.2"],["Cost of revenues","","","","59,229","","","","46,899","","","","12,330","","","","26.3"],["Gross profit","","","","60,338","","","","66,772","","","","(6,434",")","","","(9.6",")"],["Operating expenses:"],["Research and development, net","","","","21,659","","","","15,919","","","","5,740","","","","36.1"],["Clinical operations","","","","6,591","","","","9,365","","","","(2,774",")","","","(29.6",")"],["Sales and marketing","","","","72,842","","","","100,641","","","","(27,799",")","","","(27.6",")"],["General and administrative","","","","36,270","","","","34,770","","","","1,500","","","","4.3"],["Impairment of goodwill","","","","6,134","","","","\u2014","","","","6,134","","","","100.0"],["Total operating expenses","","","","143,496","","","","160,695","","","","(17,199",")","","","(10.7",")"],["Operating loss","","","","(83,158",")","","","(93,923",")","","","10,765","","","","11.5"],["Financial (income), net","","","","(3,740",")","","","(31,228",")","","","27,488","","","","(88.0",")"],["Loss before taxes on income","","","","(79,418",")","","","(62,695",")","","","(16,723",")","","","(26.7",")"],["Taxes on income","","","","254","","","","47","","","","207","","","","440.4"],["Net loss","","","$","(79,672",")","","$","(62,742",")","","$","(16,930",")","","","(27.0",")"]] [[/GREPCENT_TABLE]] Year Ended December 31, 2022 compared to December 31, 2021 Revenues Revenues increased by $5.9 million, or 5.2%, to $119.6 million for the year ended December 31, 2022 from $113.7 million for the year ended December 31, 2021. The increase was principally due to a 65.5% 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, offset by a 26.2% decline in B2C revenue. Revenue from our health plan clients, increased by $13.9 million, or 62.4%, to $36.2 million for the year ended December 31, 2022 from $22.3 million for the year ended December 31, 2021. Enterprise client contracts increased by 68 clients, or 43.0%, to 226 clients as of December 31, 2022 from 158 clients as of December 31, 2021. The increase in the number of enterprise clients increased revenue by $11.6 million, or 69.7%, to $28.2 million for the year ended December 31, 2022 from $16.6 million for the year ended December 31, 2021. 48 Table of Contents B2C member subscriptions revenue decreased by $19.6 million, or 26.2%, to $55.2 million for the year ended December 31, 2022 from $74.8 million for the year ended December 31, 2021 due to the Company's intentional and strategic decision to reduce marketing spend related to this service. Costs of revenues Cost of revenues increased by $12.3 million or 26.3%, to $59.2 million for the year ended December 31, 2022 from $46.9 million for the year ended December 31, 2021 due to higher therapist compensation expense, primarily due to an increase in compensation rates. Gross profit Gross profit decreased by $6.4 million, or 9.6%, to $60.3 million for the year ended December 31, 2022 from $66.8 million for the year ended December 31, 2021. Gross margin was 50.5% for the year ended December 31, 2022, compared to 58.7% during the year ended December 31, 2021. The decrease in gross margin was due primarily to a shift to our B2B business, which has a lower margin than our B2C business, and higher therapist compensation expense during the year ended December 31, 2022. Research and development expenses Research and development expenses increased by $5.7 million, or 36.1%, to $21.7 million for the year ended December 31, 2022 from $15.9 million for the year ended December 31, 2021. This was primarily due to higher investments in our technology platform. Clinical operations expenses Clinical operations expenses decreased by $2.8 million, or 29.6%, to $6.6 million for the year ended December 31, 2022 from $9.4 million for the year ended December 31, 2021. This was primarily due to a decrease in provider recruitment costs and employee-related costs, inclusive of non-cash stock compensation expense. Sales and marketing expenses Sales and marketing expenses decreased by $27.8 million, or 27.6%, to $72.8 million for the year ended December 31, 2022 from $100.6 million for the year ended December 31, 2021. The decrease in sales and marketing expenses primarily consists of a decrease in direct marketing and promotional costs for our B2C business due to the Company's intentional and strategic decision to reduce marketing spend related to this service. General and administrative expenses General and administrative expenses increased by $1.5 million, or 4.3%, to $36.3 million for the year ended December 31, 2022 from $34.8 million for the year ended December 31, 2021. The increase in general and administrative expenses primarily consists of an increase in estimated litigation expenses and third-party contractor and professional fees, partially offset by a decrease in employee-related costs, inclusive of non-cash stock compensation expense. Impairment of goodwill Impairment of goodwill consists of a $6.1 million impairment charge related to goodwill acquired in connection with the business acquisition of the relationship counseling App "Lasting" in November 2020. Financial (income), net Financial (income), net was $3.7 million for the year ended December 31, 2022, compared to financial (income), net of $31.2 million for the year ended December 31, 2021. For the year ended December 31, 2022, financial (income), net, primarily consisted of $3.1 million in non-cash gains resulting from the revaluation of warrant liabilities. For the year ended December 31, 2021, financial (income), net primarily consisted of $36.0 million in non-cash 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. 49 Table of Contents Taxes on income Taxes on income consists primarily of foreign income taxes related to income generated by our subsidiary organized under the laws of Israel. Year Ended December 31, 2021 compared to December 31, 2020 For a detailed discussion of the results for the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s 2021 Form 10-K filed on February 25, 2022. 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 and 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 necessarily 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 requirements. 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. 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. 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. A reconciliation is provided below for adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review our financial statements prepared in accordance with GAAP 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, (v) Impairment of goodwill and (vi) certain non-recurring expenses that do not represent our on-going operations, where applicable. Liquidity and Capital Resources As of December 31, 2022, we had $138.5 million of cash and cash equivalents, compared to $198.3 million as of December 31, 2021, which we use to finance our operations and support a variety of growth initiatives and investments. We had no debt as of December 31, 2022 and 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. 50 Table of Contents 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 December 31, 2022. However, in the future we may require additional capital to respond to technological advancements, competitive dynamics, customer demands, business opportunities, 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 cannot raise capital when needed we may be forced to undertake asset sales or similar measures to ensure adequate capital. 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. Cash Flows from Operating, Investing and Financing Activities The following table presents the summary consolidated cash flow information for the years ended December 31, 2022 and 2021: [[GREPCENT_TABLE]] [["","","For the Years Ended December 31,"],["","","2022","","","2021"],["(in thousands)"],["Net cash used in operating activities","","$","(61,077",")","","$","(65,711",")"],["Net cash used in investing activities","","","(317",")","","","(663",")"],["Net cash provided by financing activities","","","1,683","","","","251,382"],["Net (decrease) increase in cash and cash equivalents","","$","(59,711",")","","$","185,008"]] [[/GREPCENT_TABLE]] Operating Activities Net cash used in operating activities was $61.1 million and $65.7 million for the year ended December 31, 2022 and 2021, respectively. The decrease in net cash used in operating activities was driven primarily by the positive impact of lower operating expenses offset by unfavorable timing of collections on receivables and payments of account payables and accrued expenses. Investing Activities Net cash used in investing activities was $0.3 million and $0.7 million for the years ended December 31, 2022 and 2021, respectively. The decrease in net cash used in investing activities was driven primarily by a decrease in the purchases of computer equipment and software. Financing Activities Net cash provided by financing activities was $1.7 million and $251.4 million for the year ended December 31, 2022 and 2021, respectively. The decrease in cash provided by financing activities is due to proceeds of $249.3 million, net of payment of transaction costs, received in the Business Combination during the year ended December 31, 2021. Contractual Obligations, Commitments and Contingencies As of December 31, 2022, we did not have any short-term or long-term debt, or significant long-term liabilities. As of December 31, 2022, we have a long-term operating lease for our new office space in New York, NY. See Note 9, “Leases” in the notes to the consolidated financial statements for further details. We are presently a party to certain class action lawsuits for which a settlement was reached in February 2023 ending the ongoing litigation. In addition, we may in the future be involved in various legal proceedings, claims and litigation that arise in the normal course of business. We accrue for estimated loss contingencies related to legal matters when available information indicates that it is probable a liability had been incurred and we can reasonably estimate the amount of that loss. In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a 51 Table of Contents previously recognized loss contingency, it is often not possible to reasonably estimate the size of the possible loss or range of loss or possible additional losses or range of additional losses. Should any of our estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows. See Note 7, “Commitments and Contingent Liabilities” in the notes to the consolidated financial statements for further details. Our commercial contract arrangements generally include certain provisions requiring us to indemnify 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. 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 consolidated financial statements. Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition or results of operations. Critical Accounting Policies and Estimates The Company's accounting estimates are essential to understanding and interpreting the financial results reported on the consolidated financial statements. The significant accounting policies used in the preparation of the Company's consolidated financial statements are summarized in note 2 to those statements. 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. The following is a discussion of these estimates: Revenue Recognition The Company recognizes revenues in accordance with ASC 606, “Revenue from Contracts with Customers”. As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation. A contract with a customer exists only when the parties to the contract have approved it and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”), the Company can determine the transaction price for the services to be transferred, the contract has commercial substance and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the services that will be transferred to the customer. Revenues are recognized when the Company satisfies its performance obligation to perform its defined contractual obligations to provide virtual behavioral healthcare services. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for the service rendered. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that is included in the transaction price using the expected value method, as this method best predicts the amount of consideration to which the Company will be entitled based on the terms of its contracts. Variable consideration is included in the transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company determines its estimate of variable consideration primarily based on actual historical collection experience for each insurance payor over a twelve-month period. 52 Table of Contents Warrant Liabilities In connection with the consummation of the Business Combination, the Company acquired Private Placement Warrants from HEC. Additionally, there were Private Placement Warrants that were issued related to the closing of the Forward Purchase Agreement with the HEC Fund. The Private Placement Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the accompanying consolidated balance sheets. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within financial (income), net in the consolidated statement of operations. The Private Placement Warrants were valued using the Black-Scholes-Merton Model, which is considered to be a Level 3 fair value measurement. The primary unobservable input utilized in determining the fair value of the Private Placement Warrants is the expected volatility of the Company’s common stock. Stock-based Compensation We account for stock-based compensation in accordance with ASC No. 718, “Compensation—Stock Compensation” which requires equity-based awards to be measured at fair value on the grant date and the resulting compensation cost to be recognized over the requisite service period. ASC No. 718 requires companies to estimate the fair value of stock options awards using an option-pricing model. We have selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for our stock-options awards. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon the Company's historical share price movements as well as similar traded companies’ historical share price movements as adequate historical experience is not available to provide a reasonable estimate based only on the Company's share price. Expected term is calculated based on the simplified method as adequate historical experience is not available to provide a reasonable estimate. The simplified method will continue to apply until enough historical experience is available to provide a reasonable estimate of the expected term. The risk-free interest rate is calculated based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. We have historically not paid dividends and have no foreseeable plans to pay dividends. We recognize forfeitures of awards as they occur. Goodwill Goodwill represents the excess of the total purchase consideration over the fair value of the identifiable assets acquired and liabilities assumed in a business combination. In accordance with ASC 350, we test goodwill for impairment at least on an annual basis or more frequently if events or changes in circumstances indicate that the fair value of the reporting unit may be reduced below its carrying value. When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that carrying value exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative goodwill impairment test, if our reporting unit’s carrying amount exceeds its fair value, we will record an impairment charge equal to the excess but limited to the total amount of goodwill. As part of our annual goodwill impairment tests performed for the year ended December 31, 2022, the Company recognized an impairment charge of $6.1 million. See Note 4, "Goodwill" in the notes to the consolidated financial statements for further details. Recent Accounting Pronouncements See Note 2, “Summary of Significant Accounting Policies and Estimates” in the notes to the consolidated financial statements for information regarding recent accounting developments and their impact on our results. 53 Table of Contents FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Annual Report on Form 10-K may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements regarding our future results of operations and financial position, industry and business trends, stock-based compensation, revenue recognition, business strategy, plans and market growth. The forward-looking statements in this Annual Report on Form 10-K and other such statements we publicly make from time-to-time are only predictions. We base these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The forward-looking statements in this Annual Report on Form 10-K are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. This Annual Report on Form 10-K and the documents that we reference herein and have filed as exhibits to this Annual Report on Form 10-K should be read with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Annual Report on Form 10-K or any forward-looking statements we may publicly make from time-to-time, whether as a result of any new information, future events or otherwise.