# Talkspace, Inc. (TALK) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from Talkspace, Inc.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1803901/000095017024030872/talk-20231231.htm Accession: 0000950170-24-030872 Filing date: 2024-03-13 Report date: 2023-12-31 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/fy2022/ (FY 2022) Next year: /company/TALK/mda/fy2024/ (FY 2024) 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, 2023 and 2022. For a discussion of our results of operations, liquidity and capital resources for the year ended December 31, 2021, 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, 2022. 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 payor clients (“Payor”), comprised of health plans and employee assistance programs such as Aetna, Cigna, and Optum, who offer their insured members access to our platform at in-network reimbursement rates, our Direct-to-Enterprise clients ("DTE") comprised of enterprise clients such as Google, the University of Kentucky and the New York City Department of Health and Mental Hygiene, who offer their enterprise members access to our platform while their enterprise is under an active contract with Talkspace, and individual consumers ("Consumer") who subscribe directly to our platform. As of December 31, 2023, we had approximately 131 million eligible lives compared to 92 million eligible lives as of December 31, 2022. As of December 31, 2023, we had approximately 11,700 consumer active members compared to approximately 15,400 consumer active members as of December 31, 2022. For the year ended December 31, 2023, our clinicians completed 850,600 sessions for members covered under our Payor clients, as compared to 426,400 completed sessions for the year ended December 31, 2022. Please refer to the “Key Business Metrics” section below for a description of eligible lives and consumer active members. Inflation Risk and Economic Conditions The demand for our solution is dependent on the general economy, which is in turn affected by geopolitical conditions, the stability of the global credit markets, inflationary pressures, increasing interest rates, the industries in which our Payor or DTE clients operate or serve, and other factors. Downturns in the general economy could disproportionately affect the demand for our solution and cause it to decrease. Our operations could also be impacted by inflation and increased interest rates. Inflation did not have a material effect on our business, financial condition or results of operations for the years ended December 31, 2023 and 2022. However, if our costs were to become subject to significant inflationary pressures (such as Provider cost), we may not be able to fully offset such higher costs through price increases or cost savings. Our inability or failure to do so could harm our business, financial condition or results of operations. 46 Table of Contents Quarterly Fluctuations Our financial results may fluctuate from period-to-period as a result of a variety of factors, many of which are outside of our control, including, without limitation, the factors described in this section. Most of our revenue in any given quarter is derived from contracts entered into with our clients during previous quarters. Consequently, a decline in new or renewed contracts in any one quarter may not be fully reflected in our revenue for that quarter. Such declines, however, would negatively affect our revenue in future periods and the effect of significant downturns in sales of and market demand for our solution, and potential changes in our renewals or renewal terms, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our total revenue through additional sales in any period, as revenue from new clients must be recognized over the applicable term of the contract. Accordingly, the effect of changes in the industry impacting our business or changes we experience in our new sales may not be reflected in our short-term results of operations. Any fluctuation in our quarterly results may not accurately reflect the underlying performance of our business and could cause a decline in the trading price of our securities. 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]] [["","","Year Ended December 31,"],["(in thousands, except number of health plan and enterprise clients or otherwise indicated)","","2023","","","2022"],["Number of eligible lives at year end (in millions)","","","131","","","","92"],["Number of completed Payor sessions","","","850.6","","","","426.4"],["Number of health plan clients at year end","","","22","","","","19"],["Number of enterprise clients at year end","","","210","","","","226"],["Number of Consumer active members at year end","","","11.7","","","","15.4"],["","","Three Months Ended December 31,"],["(in thousands)","","2023","","","2022"],["Unique Payor active members during the period","","","79.2","","","","47.5"]] [[/GREPCENT_TABLE]] Eligible Lives: We consider eligible lives “eligible” if such persons are eligible to receive treatment on the Talkspace platform, in the case of our Payor 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 eligible lives calculation, which may cause this amount to reflect a higher number of eligible lives than we actually serve. Consumer Active Members: We consider consumer members “active” 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. Unique Payor Active Members: Represents unique users who had a session completed during the period. Components of Results of Operations Revenues We generate revenues from services provided to individuals who are qualified to receive access to the Company's services through our commercial arrangements with health insurance plans, employee assistance organizations and enterprises. We also generate revenues from the sale of monthly, quarterly, bi-annual and annual membership subscriptions to the Company's therapy 47 Table of Contents platform as well as supplementary a la carte offerings directly to individual consumers through a subscription plan. See Note 2, “Summary of significant accounting policies and estimates” in the notes to the consolidated financial statements for further details. Revenue growth is generated from a combination of increasing our eligible covered lives through contracting with health insurance plans and employee assistance organizations, increasing utilization within eligible covered lives, expanding enterprise clients, and increasing membership subscriptions. Cost of Revenues Cost of revenues is comprised primarily of therapist payments. Cost of revenues is largely driven by the number of sessions and 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. Our employee providers 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 as well as pricing fluctuations. 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 and software-related costs. Clinical Operations Expenses Clinical operations expenses are associated with the management of our provider network of therapists. This item is 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. 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 Payor and DTE clients. 48 Table of Contents 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, compliance and human resources functions, as well as professional fees, occupancy costs, and other general overhead costs. 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. No impairment charges were incurred for the years ending December 31, 2023 and 2021. Financial (income), net Financial (income), net includes the impact from (i) non-cash changes in the fair value of our warrant liabilities, (ii) interest earned on cash equivalents deposited in our money market accounts and (iii) other financial expenses in connection with bank charges. 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. 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, 2023 and 2022 and the dollar and percentage change between the respective years: [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Variance"],["","","2023","","","2022","","","$","","","%"],["(in thousands, except percentages)"],["Payor revenue","","$","80,823","","","$","36,168","","","$","44,655","","","","123.5"],["DTE revenue","","","33,614","","","$","28,241","","","","5,373","","","","19.0"],["Consumer revenue","","","35,608","","","","55,158","","","","(19,550",")","","","(35.4",")"],["Total revenue","","","150,045","","","","119,567","","","","30,478","","","","25.5"],["Cost of revenues","","","75,665","","","","59,229","","","","16,436","","","","27.7"],["Gross profit","","","74,380","","","","60,338","","","","14,042","","","","23.3"],["Operating expenses:"],["Research and development, net","","","17,571","","","","21,659","","","","(4,088",")","","","(18.9",")"],["Clinical operations, net","","","6,159","","","","6,591","","","","(432",")","","","(6.6",")"],["Sales and marketing","","","52,544","","","","72,842","","","","(20,298",")","","","(27.9",")"],["General and administrative","","","21,315","","","","36,270","","","","(14,955",")","","","(41.2",")"],["Impairment of goodwill","","","\u2014","","","","6,134","","","","(6,134",")","","","(100.0",")"],["Total operating expenses","","","97,589","","","","143,496","","","","(45,907",")","","","(32.0",")"],["Operating loss","","","(23,209",")","","","(83,158",")","","","59,949","","","","72.1"],["Financial (income), net","","","(4,245",")","","","(3,740",")","","","(505",")","","","13.5"],["Loss before taxes on income","","","(18,964",")","","","(79,418",")","","","60,454","","","","76.1"],["Taxes on income","","","218","","","","254","","","","(36",")","","","(14.2",")"],["Net loss","","$","(19,182",")","","$","(79,672",")","","$","60,490","","","","75.9"]] [[/GREPCENT_TABLE]] 49 Table of Contents Year Ended December 31, 2023 compared to December 31, 2022 Revenues Revenues increased by $30.5 million, or 25.5%, to $150.0 million for the year ended December 31, 2023 from $119.6 million for the year ended December 31, 2022. The increase was principally due to a 123.5% increase in Payor revenue driven by a higher number of completed payor sessions, and 19.0% growth in DTE revenue, partially offset by a 35.4% decline in Consumer subscription revenue. Revenue from our Payor clients increased by $44.7 million, or 123.5% to $80.8 million for the year ended December 31, 2023 from $36.2 million for the year ended December 31, 2022. Revenue from our DTE clients increased by $5.4 million, or 19.0% to $33.6 million for the year ended December 31, 2023 from $28.2 million for the year ended December 31, 2022. Consumer member subscriptions revenue decreased by $19.6 million, or 35.4%, to $35.6 million for the year ended December 31, 2023 from $55.2 million for the year ended December 31, 2022 due to the Company's intentional and strategic decision to optimize and focus marketing efforts on attracting payor members and while we no longer have marketing resources dedicated solely to the Consumer category, it continues to have a positive contribution to our financial results. Costs of revenues Cost of revenues increased by $16.4 million or 27.7%, to $75.7 million for the year ended December 31, 2023 from $59.2 million for the year ended December 31, 2022 primarily due to increased hours worked by therapists to meet strong customer engagement. Gross profit Gross profit increased by $14.0 million, or 23.3%, to $74.4 million for the year ended December 31, 2023 from $60.3 million for the year ended December 31, 2022. Gross margin was 49.6% for the year ended December 31, 2023, compared to 50.5% during the year ended December 31, 2022. The increase in gross profit was primarily driven by an increase in Payor and DTE revenues. The decline in gross margin was driven by a shift in revenue mix towards Payor. Operating Expenses Overall, our operating expenses for the year ended December 31, 2023 have decreased compared to the year ended December 31, 2022 due to our efficiency initiatives in order to optimize for profitability. Research and development expenses Research and development expenses decreased by $4.1 million, or 18.9%, to $17.6 million for the year ended December 31, 2023 from $21.7 million for the year ended December 31, 2022, primarily due to a decrease in employee-related costs, inclusive of non-cash stock compensation expense. Clinical operations expenses Clinical operations expenses decreased by $0.4 million, or 6.6%, to $6.2 million for the year ended December 31, 2023 from $6.6 million for the year ended December 31, 2022, primarily due to a decrease in software subscriptions. Sales and marketing expenses Sales and marketing expenses decreased by $20.3 million, or 27.9%, to $52.5 million for the year ended December 31, 2023 from $72.8 million for the year ended December 31, 2022. The decrease in sales and marketing expenses was primarily driven by a decrease in direct marketing and promotional costs, subcontractor costs, and employee-related costs, inclusive of non-cash stock compensation expense. General and administrative expenses General and administrative expenses decreased by $15.0 million, or 41.2%, to $21.3 million for the year ended December 31, 2023 from $36.3 million for the year ended December 31, 2022. The decrease in general and administrative expenses was primarily due to a decrease in professional fees, employee-related costs, inclusive of non-cash stock compensation expense, and subcontractor costs. 50 Table of Contents Impairment of goodwill Impairment of goodwill consists of a $6.1 million impairment charge related to goodwill for the year ending December 31, 2022. No impairment charges were incurred for the years ending December 31, 2023 and 2021. Financial (income), net Financial (income), net was $4.2 million for the year ended December 31, 2023, compared to financial (income), net of $3.7 million for the year ended December 31, 2022. For the year ended December 31, 2023, financial (income), net, primarily consisted of $5.3 million of interest income from our money market accounts partially offset by $0.9 million in non-cash losses resulting from the remeasurement of warrant liabilities. For the year ended December 31, 2022, financial (income), net primarily consisted of $3.1 million in non-cash gains resulting from the remeasurement of warrant liabilities. 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. Taxes on income were immaterial for the years ending December 31, 2023 and 2022. Year Ended December 31, 2022 compared to December 31, 2021 For a detailed discussion of the results for the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to the "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, 2022 filed on March 10, 2023. 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 our management uses it as a key performance measure 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 do not provide a forward-looking reconciliation of adjusted EBITDA guidance as the amount and significance of the reconciling items required to develop meaningful comparable GAAP financial measures cannot be estimated at this time without unreasonable efforts. These reconciling items could be meaningful. 51 Table of Contents We calculate adjusted EBITDA as net loss income adjusted to exclude (i) depreciation and amortization, (ii) interest and other expenses (income), net, (iii) tax benefit and expense, (iv) stock-based compensation expense, (v) impairment of goodwill and (vi) certain non-recurring expenses that we believe do not represent our on-going operations, where applicable. The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net loss, for the years ended December 31, 2023 and 2022: [[GREPCENT_TABLE]] [["","","","Year Ended December 31,"],["(in thousands)","","","2023","","","2022"],["Net loss","","","$","(19,182",")","","$","(79,672",")"],["Add:"],["Depreciation and amortization","","","","1,285","","","","1,357"],["Financial (income), net (1)","","","","(4,245",")","","","(3,740",")"],["Taxes on income","","","","218","","","","254"],["Stock-based compensation","","","","8,395","","","","12,116"],["Impairment of goodwill","","","","\u2014","","","","6,134"],["Non-recurring expenses (2)","","","","\u2014","","","","4,880"],["Adjusted EBITDA","","","$","(13,529",")","","$","(58,671",")"]] [[/GREPCENT_TABLE]] (1) For the year ended December 31, 2023, financial (income), net, primarily consisted of $5.3 million of interest income from our money market accounts partially offset by $0.9 million in losses resulting from the remeasurement of warrant liabilities. For the year ended December 31, 2022, financial (income), net, primarily consisted of $3.1 million in gains resulting from the remeasurement of warrant liabilities. (2) For the year ended December 31, 2022, non-recurring expenses primarily consisted of a $5.5 million accrual for estimated litigation expenses. Liquidity and Capital Resources As of December 31, 2023, we had $123.9 million of cash and cash equivalents ($138.5 million as of December 31, 2022), which we use to finance our operations and support a variety of growth initiatives and investments. We had no debt as of December 31, 2023. 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 next twelve months and thereafter for the foreseeable future using available cash and cash equivalent balances as of December 31, 2023. However, in the future we may require additional capital to respond to technological advancements, competitive dynamics, customer demands, business and investment opportunities, acquisitions or unforeseen circumstances and we may determine to engage in equity or debt financings 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 liquidity. 52 Table of Contents Cash Flows from Operating, Investing and Financing Activities The following table presents the summary consolidated cash flow information for the years ended December 31, 2023 and 2022: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022"],["(in thousands)"],["Net cash used in operating activities","","$","(16,393",")","","$","(61,077",")"],["Net cash used in investing activities","","","(141",")","","","(317",")"],["Net cash provided by financing activities","","","1,897","","","","1,683"],["Net decrease in cash and cash equivalents","","$","(14,637",")","","$","(59,711",")"]] [[/GREPCENT_TABLE]] Operating Activities The decrease in net cash used in operating activities was driven primarily by a lower net loss for the year ended December 31, 2023 compared to the year ended December 31, 2022, partially offset by unfavorable timing of payments of accrued expenses. Investing Activities 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 primarily consists of cash proceeds from the exercise of stock options granted to employees in the prior years. Contractual Obligations, Commitments and Contingencies As of December 31, 2023, we did not have any short-term or long-term debt, or significant long-term liabilities. Our long-term operating lease for our office space in New York, NY is immaterial as of December 31, 2023. The Company reached settlements for certain class action lawsuits in February 2023 ending ongoing litigation, see Note 6, “Commitments and Contingent Liabilities” in the notes to the consolidated financial statements for further details. 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 has 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 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. 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. 53 Table of Contents 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. Critical Accounting Policies and Estimates The Company's accounting policies 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, “Summary of Significant Accounting Policies and Estimates” in the notes to the consolidated financial 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”. 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 at contract inception and reassesses this estimate at each reporting date. 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. 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. 54 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, 2023. 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.