Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

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, 2025 and 2024. For a discussion of our results of operations, liquidity and capital resources for the year ended December 31, 2023, 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, 2024.

Overview

Talkspace is a leading virtual behavioral healthcare company offering its members convenient and affordable access to a fully-credentialed network of highly qualified providers across a wide and growing spectrum of care through virtual psychotherapy and psychiatry. All care offered at Talkspace is delivered through an easy-to-use, fully-encrypted web and mobile platform that meets HIPAA, federal, and state regulatory requirements.

Our customers are comprised of the following:

For the year ended December 31, 2025 our revenues were $228.9 million compared to $187.6 million for the year ended December 31, 2024. For the year ended December 31, 2025, our clinicians completed 1,617,000 sessions related to members covered under our Payor customers compared to 1,229,200 completed sessions for the year ended December 31, 2024. As of December 31, 2025, we had approximately 5,000 Consumer active members compared to 7,200 Consumer active members as of December 31, 2024.

Pending Merger with Universal Health Services, Inc.

On March 9, 2026, we entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Universal Health Services, Inc., a Delaware corporation ("UHS"), and UHS Merger Subsidiary, Inc., a Delaware corporation and an indirect wholly owned subsidiary of UHS ("Merger Subsidiary"), pursuant to which, among other things, Merger Subsidiary will merge with and into us (the "Merger"), with us continuing as the surviving corporation and a wholly-owned subsidiary of UHS.

Under the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our common stock (subject to certain exceptions set forth in the Merger Agreement) will be cancelled and converted into the right to receive $5.25 per share in cash. Following completion of the Merger, we will be delisted from the NASDAQ Global Select Market and deregistered under the Securities Exchange Act of 1934.

We have made customary representations and warranties in the Merger Agreement and have agreed to customary covenants regarding the operation of our business prior to the consummation of the Merger.

Consummation of the Merger is subject to customary closing conditions, including termination or expiration of any waiting periods required under the Hart-Scott-Rodino ("HSR") Act and certain specified state healthcare laws, approval by our stockholders and other customary closing conditions. The transaction is expected to close in the third quarter of 2026.

We have incurred, and expect to continue to incur, significant transaction-related costs, including financial advisory, legal, and accounting fees, which will be recognized as expense in the periods incurred during fiscal year 2026.

The foregoing description of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which was filed as Exhibit 2.1 to the Current Report on Form 8-K filed by us on March 9, 2026. For additional information related to the Merger Agreement, please also refer to the other relevant materials in connection with the transaction that we will file with the SEC and that will contain important information about us and the Merger.

Clinical Automation and Artificial Intelligence

Sentia AI, LLC is Talkspace's wholly-owned subsidiary dedicated to proprietary Artificial Intelligence ("AI") development. "Sentia" refers to Talkspace's behavioral-health-focused large language model ("LLM") that Talkspace intends to utilize in future products, primarily where a member has a conversation with an agent. Sentia currently exists as a beta-tested, user-facing interface product where members engage with our LLM regarding their mental well-being. This model does not replace clinicians but extends their reach, adhering to strict clinical standards while identifying millions of new users who may require human intervention. While we believe this integration will enhance member engagement and reduce clinician burnout, the cost of compute resources associated with LLMs may impact our technology and development expenses. Furthermore, if the AI-generated outputs fail to meet clinical or regulatory standards, it could result in increased liability or decreased user trust, reputational harm, additional regulatory scrutiny, and reduced demand for our services.

Business Acquisition

On October 1, 2025, Talkspace acquired Wisdo Health,a clinically-proven and AI-powered social health and peer support platform. Social health and the presence of supportive human connections are critical components of overall health and the acquisition of Wisdo better positions Talkspace to address loneliness and isolation, conditions that affect nearly half of U.S. adults, drive significant costs, and were declared a public health crisis by the U.S. Surgeon General. Backed by peer-reviewed research, Wisdo has demonstrated significant improvements in health outcomes, including reductions in loneliness and depression. The results of this acquisition is included in the Company's consolidated financial statements from the date of acquisition. Refer to Note 2, "Summary of Significant Accounting Policies and Estimates" in notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

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, higher interest rates, the industries in which our Payor and DTE customers 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 higher interest rates. Inflation did not have a material effect on our business, financial condition or results of operations for the years ended December 31, 2025 and 2024. 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.

One Big Beautiful Bill Act

In July 2025, the One Big Beautiful Act ("OBBBA") was enacted, introducing amendments to the U.S. federal income tax code. The OBBBA permanently restores 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025, and allows immediate expensing of domestic research and experimental expenditures for tax years beginning after December 31, 2024. Although we continue to maintain a full valuation allowance against our U.S. deferred tax assets as of December 31, 2025, we expect these provisions to increase available deductions and extend the period during which future taxable income may be sheltered, improving liquidity to the extent we generate taxable income.

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 customers 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 customers 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, which is how the chief operating decision maker ("CODM"), 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:

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

Revenue

We generate revenues from services provided to individuals who are qualified to receive access to the Company's services through our 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 platform as well as supplementary a la carte offerings directly to individual consumers through a subscription plan. Revenue growth is generated from a combination of increasing utilization within our Payor members and expanding enterprise customers. See Note 2, "Summary of Significant Accounting Policies and Estimates" in notes to the consolidated financial statements for further details.

Costs and Operating Expenses

Cost of Revenue, excluding depreciation and amortization

Cost of revenue is comprised primarily of therapist payments. Cost of revenue is largely driven by the number of sessions and the size of our provider network that is required to service the growth of our Payor and DTE customers, 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 revenue.

While we expect to make increased investments to support accelerated growth and scale our provider network, we also expect increased efficiencies and economies of scale. Our cost of revenue as a percentage of revenue is expected to fluctuate from period to period depending on the interplay of these factors as well as pricing fluctuations.

Operating Expenses:

Research and Development Expenses

Research and development expenses include personnel and related expenses for software development and engineering, information technology infrastructure, security, 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. Research and development expenses exclude amounts reflected as capitalized internal-use software costs.

Clinical Operations Expenses

Clinical operations expenses are associated with the management of our 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, participation in trade shows, brand messaging and costs of communications materials that are produced for our customers to generate greater awareness and utilization of our platform among our Payor and DTE customers.

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.

Depreciation and amortization

Depreciation and amortization expense consist primarily of depreciation expense on computer and equipment, and amortization of capitalized internal use-software costs and intangible assets.

Financial income, net

Financial income, net includes the impact from (i) interest earned in investments in marketable securities and other highly liquid investments, (ii) non-cash changes in the fair value of our warrant liabilities, and (iii) other financial expenses in connection with bank charges.

Income tax expense

Income tax expense consists of U.S. State income taxes related to income generated by our U.S. subsidiaries and 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, 2025 and 2024 and the dollar and percentage change between the respective years:

Year Ended December 31, 2025 compared to December 31, 2024

Revenue

Overall, the increase in revenue for the year ended December 31, 2025 compared to year ended December 31, 2024 was predominantly volume-driven reflecting a shift in revenue mix towards Payor.

Total revenue increased by $41.3 million, or 22.0%, to $228.9 million for the year ended December 31, 2025 from $187.6 million for the year ended December 31, 2024, primarily due to a 37.9% increase in Payor revenue, which was driven by a 31.5% increase in the number of completed Payor sessions, partially offset by a 29.5% decline in Consumer revenue. The increase in Payor sessions is primarily due to a 29.7% increase in active payor members and a 29.6% increase in the number of health plan customers. Consumer subscription revenue decreased by $7.3 million, or 29.5%, to $17.5 million for the year ended December 31, 2025 from $24.8 million for the year ended December 31, 2024, primarily due to a 30.0% decline in Consumer active members due to the Company's intentional and strategic decision to optimize and focus marketing efforts on attracting Payor members.

Costs and Operating Expenses

Cost of revenue, excluding depreciation and amortization

Cost of revenues, excluding depreciation and amortization, increased by $29.2 million or 28.8%, to $130.5 million for the year ended December 31, 2025 from $101.3 million for the year ended December 31, 2024, primarily due to a 21.7% increase in hours worked by therapists as a result of increased Payor sessions.

Operating Expenses:

Research and development expenses

Research and development expenses decreased by $0.7 million, or 7.2%, to $9.5 million for the year ended December 31, 2025 from $10.3 million for the year ended December 31, 2024, primarily due to a $0.8 million decrease in employee-related costs, as a result of the exclusion of amounts reflected as capitalized internal-use software development costs.

Clinical operations expenses.

Clinical operations expenses increased by $0.7 million, or 10.2%, to $7.2 million for the year ended December 31, 2025 from $6.5 million for the year ended December 31, 2024, primarily due to a $0.6 million increase in employee-related costs.

Sales and marketing expenses

Sales and marketing expenses increased by $3.3 million, or 6.5%, to $53.8 million for the year ended December 31, 2025 from $50.5 million for the year ended December 31, 2024. The increase in sales and marketing expenses was primarily driven by a $4.6 million increase in direct marketing and promotional costs, partially offset by a $1.0 million decrease in employee-related costs.

General and administrative expenses

General and administrative expenses decreased by $0.8 million, or 3.6%, to $21.8 million for the year ended December 31, 2025 from $22.6 million for the year ended December 31, 2024. The decrease in general and administrative expenses was primarily due to a $1.1 million decrease in employee-related costs, partially offset by a $0.4 million increase in software tools and subscriptions.

Depreciation and amortization expenses

Depreciation and amortization expenses increased by $2.0 million to $2.9 million for the year ended December 31, 2025 from $0.9 million for the year ended December 31, 2024. The increase in depreciation and amortization expense was primarily due a $1.8 million increase in amortization expense related to capitalized internal-use software assets.

Financial income, net

Financial income, net decreased by $0.5 million, or 9.1%, to $5.2 million for the year ended December 31, 2025 from $5.7 million for the year ended December 31, 2024. The decrease in financial income, net was primarily due to a $1.6 million decrease in interest income earned on marketable securities and other highly liquid investments due to a reduction in interest rates, partially offset by a $1.3 million unrealized gain on the remeasurement of warrant liabilities.

Income tax expense

Income tax expense increased by $0.5 million, or 510.6%, to $0.6 million for the year ended December 31, 2025 from $0.1 million for the year ended December 31, 2024, mainly due to U.S. State income taxes.

Year Ended December 31, 2024 compared to December 31, 2023

For a detailed discussion of the results for the year ended December 31, 2024 compared to the year ended December 31, 2023, 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, 2024 filed on March 12, 2025.

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 income (loss) before income taxes, net income (loss), income (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 income and other GAAP results.

A reconciliation is provided below for adjusted EBITDA to net income, 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.

We calculate adjusted EBITDA as net income adjusted to exclude (i) depreciation and amortization, (ii) stock-based compensation expense, (iii) financial income, net, (iv) income tax expense, and (v) certain non-recurring expenses, where applicable.

The following table presents a reconciliation of adjusted EBITDA from the most comparable GAAP measure, net income for the years ended December 31, 2025 and 2024:

Liquidity and Capital Resources

As of December 31, 2025, we maintained a strong capital position with $92.6 million in cash, cash equivalents, and short-term marketable securities ($117.8 million as of December 31, 2024), which we use to finance our operations and support a variety of growth initiatives and investments. We have no debt as of December 31, 2025 and December 31, 2024.

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 healthcare services. Additionally, we may 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 12 months and thereafter for the foreseeable future using available cash and cash equivalent balances. 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.

Share Repurchase Program

On February 22, 2024, the Company announced that its Board of Directors approved a share repurchase program to authorize the repurchase of up to $15.0 million of the currently outstanding shares of the Company's common stock over a period of 24 months beginning on March 1, 2024 (the "Share Repurchase Program"). On August 1, 2024, the Company's Board of Directors amended the Share Repurchase Program to authorize the Company to repurchase up to an additional $25.0 million of its common stock for a total of $40.0 million. The Share Repurchase Program will remain in effect until the earliest: 1) the total authorized dollar amount of shares is repurchased or 2) August 1, 2026. All shares repurchased will be retired. Refer to Note 9, "Capital Stock" in notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

Cash Flows from Operating, Investing and Financing Activities

The following table presents the summary consolidated cash flow information for the years ended December 31, 2025 and 2024:

Operating Activities

Net cash provided by operating activities was $8.5 million for the year ended December 31, 2025 compared to $11.7 million for the year ended December 31, 2024. The decline in net cash provided by operating activities was primarily due to timing of customer payments which increased accounts receivable, partially offset by higher net income during the year ended December 31, 2025 compared to December 31, 2024.

Investing Activities

Net cash used in investing activities was $28.9 million for the year ended December 31, 2025 compared to $46.7 million for the year ended December 31, 2024. The decrease in net cash used in investing activities was driven primarily by higher proceeds from maturities of marketable securities, partially offset by purchases of marketable securities, capitalized internal-use software development costs and the acquisition of Wisdo Health.

Financing Activities

Net cash used in financing activities was $19.0 million for the year ended December 31, 2025 compared to $12.2 million for the year ended December 31, 2024. The increase in net cash used in financing activities was driven primarily by an increase in repurchases of common stock for retirement, partially offset by a decrease in proceeds from the exercise of stock options.

Contractual Obligations, Commitments and Contingencies

As of December 31, 2025, we did not have any short-term or long-term debt, or any significant long-term liabilities. As of December 31, 2025, we have a non-material long-term operating lease for our office space in New York, NY.

As of December 31, 2025 there were no material legal proceedings, claims or litigation. 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 customers against liabilities if there is a breach of a customer'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.

Critical Accounting Policies and Estimates

Our 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 our 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 our 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

We recognize revenues in accordance with ASC 606, "Revenue from Contracts with Customers". Revenues are recognized when we satisfy our performance obligation to perform our defined contractual obligations to provide virtual behavioral healthcare services. The transaction price is determined based on the consideration to which we will be entitled in exchange for the service rendered. To the extent the transaction price includes variable consideration, we estimate 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. Variable consideration estimate is primarily based on actual historical collection experience.

Internal-use Software Costs

We capitalize certain costs related to the development of our proprietary virtual behavioral health platform and clinical automation tools, including those incorporating generative AI. In accordance with ASC 350-40, Internal Use Software, software development activities generally consist of three stages (i) the preliminary project stage, (ii) the application development stage, and (iii) the post-implementation operational stage. Costs incurred during the preliminary project stage and during the post-implementation operational stage are expensed as incurred. Eligible costs incurred during the application development stage of the project are capitalized and are amortized on a straight-line basis over the software's estimated useful life, generally 3 years. Maintenance costs are expensed as incurred.

Stock-based Compensation

We account for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation". Compensation costs for share-based awards are measured at the fair value on the grant date and recognized as expense using the straight-line method for service-based awards over the requisite service period. The fair value of stock options is determined using the Black-Scholes-Merton option pricing model. The option-pricing model requires a number of assumptions, of which the most significant is the expected stock price volatility and the expected option term. Expected volatility is calculated based upon our 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 our share price. Expected term is calculated based on the simplified method as adequate historical experience is not yet 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.

Recent Accounting Pronouncements

See Note 2, "Summary of Significant Accounting Policies and Estimates" in notes to the consolidated financial statements for information regarding recent accounting developments and their impact on our results.

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, 2025. 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.