TALK US Equity☆

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:

For the Year EndedDecember 31,

Number of B2B eligible lives at year end (in millions) 92 69

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

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:

For the Year EndedDecember 31,

Add:

Depreciation and amortization 1,357 1,973

Impairment of goodwill 6,134 —

(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:

For the Year Ended December 31,

(in thousands, except percentages, share and per share data)

Operating expenses:

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:

For the Years EndedDecember 31,

(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

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.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We had cash and cash equivalents totaling $138.5 million and $198.3 million as of December 31, 2022 and December 31, 2021, respectively. Cash and cash equivalents are held for a variety of growth and investments as well as working capital purposes.

We do not believe that a hypothetical increase or decrease of 100 basis points in interest rates would have a material effect on our business, financial condition or results of operations. However, our earnings on cash equivalents are subject to market risk due to changes in interest rates.

Foreign Currency Exchange Risk

To date, a substantial majority of our revenue from customer arrangements has been denominated in U.S. dollars. We have limited operations outside the United States. Accordingly, we believe we do not have a material exposure to foreign currency risk. In the future, we may choose to focus on international expansion, which may increase our exposure to foreign currency exchange risk.

54

Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm 56

Consolidated Balance Sheets as of December 31, 2022 and 2021 60

Notes to Consolidated Financial Statements 64

55

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Talkspace, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Talkspace, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)and our report dated March 10, 2023 expressed an adverse opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

56

Table of Contents

/s/ Kost Forer Gabbay & Kasierer

A Member of EY Global

We have served as the Company’s auditor since 2014.

Tel-Aviv, Israel

March 10, 2023

57

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Talkspace, Inc.

Opinion on Internal Control Over Financial Reporting

We have audited Talkspace, Inc.'s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Talkspace, Inc. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified the following material weaknesses in internal controls:

a)

Management was able to complete the design and establish effective information technology general controls (ITGCs) for the majority of tested ITGCs; however, some ineffective ITGC controls existed at December 31, 2022. As a result, business process controls (automated and IT-dependent manual controls) that are dependent on the ineffective ITGCs, or that use data produced from systems impacted by the ineffective ITGCs were deemed ineffective at December 31 2022; and

b)

Management did not have an adequate process in place to monitor and provide oversight over the completion of its testing and assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Talkspace Inc. as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes. This material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 10, 2023, which expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

58

Table of Contents

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Kost Forer Gabbay & Kasierer

A Member of EY Global

We have served as the Company’s auditor since 2014.

Tel-Aviv, Israel

March 10, 2023

59

Table of Contents

TALKSPACE, INC.

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands (except share and per share data)

December 31,

ASSETS

CURRENT ASSETS:

Property and equipment, net 677 624

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accrued expenses and other current liabilities 16,502 12,562

Commitments and contingencies (Note 7)

STOCKHOLDERS’ EQUITY:

Total liabilities and stockholders’ equity $ 156,254 $ 223,606

The accompanying notes are an integral part of the consolidated financial statements.

60

Table of Contents

TALKSPACE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands (except share and per share data)

For the Year EndedDecember 31,

Operating expenses:

Impairment of goodwill 6,134 — —

Net loss per share:

Basic and diluted net loss per share $ (0.51 ) $ (0.72 ) $ (1.67 )

The accompanying notes are an integral part of the consolidated financial statements.

61

Table of Contents

TALKSPACE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

U.S. dollars in thousands (except share and per share data)

Convertible Preferred Stock Common Stock

Stock-based compensation — — — — 2,977 — 2,977

Restricted stock units vested, net of tax 282,415 * (491 ) — (491 )

Issuance of warrants — — — — 125 — 125

Common stock issued related to exercise of warrants — — 98,871 * 609 — 609

Restricted stock units vested, net of tax 2,960,949 * (362 ) — (362 )

* Represents an amount lower than $1

The accompanying notes are an integral part of the consolidated financial statements.

62

Table of Contents

TALKSPACE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

For the Year EndedDecember 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of debt issuance costs — 175 —

Remeasurement of warrant liabilities (3,131 ) (31,784 ) —

Impairment of goodwill 6,134 — —

(Increase) decrease in accounts receivable (4,126 ) 402 (5,017 )

Decrease (increase) in other current assets 5,080 (8,053 ) (695 )

(Decrease) increase in accounts payable (968 ) 503 2,561

(Decrease) increase in deferred revenues (2,831 ) 2,014 2,028

Increase in accrued expenses and other current liabilities 4,862 4,396 4,962

Increase in other liabilities 102 — —

Cash flows from investing activities:

Purchase of property and equipment (350 ) (663 ) (126 )

Proceeds from sale of property and equipment 33 — —

Acquisition of business — — (10,685 )

Purchase of an intangible asset — — (939 )

Proceeds from restricted long-term bank deposit — — 447

Net cash used in investing activities (317 ) (663 ) (11,303 )

Cash flows from financing activities:

Proceeds from exercise of stock options 3,181 2,098 94

Proceeds from borrowings — 6,000 —

Repayment of borrowings — (6,000 ) —

Payment of debt issuance costs — (50 ) —

Supplemental cash flow data:

Cash paid during the year for interest $ 68 $ 538 $ 37

Cash paid during the year for income taxes $ 122 $ — $ —

Non-cash investing activity:

Lease liabilities arising from obtaining right-of-use assets $ 466 $ — $ —

Non-cash financing activity:

Employee taxes withheld related to restricted stock units vested $ — $ 491 $ —

Deferred issuance cost on credit $ — $ — $ 692

Conversion of preferred stock to common stock $ — $ 111,282 $ —

The accompanying notes are an integral part of the consolidated financial statements.

63

Table of Contents

TALKSPACE, INC.

Notes to Consolidated Financial Statements

NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

Talkspace, Inc. (together with its consolidated subsidiaries, the “Company” or “Talkspace”) is a leading behavioral healthcare company enabled by a purpose-built technology platform. Talkspace provides individuals and licensed therapists, psychologists and psychiatrists with an online platform for one-on-one therapy delivered via messaging, audio and video. The Company offers convenient and affordable access to a fully credentialed network of highly qualified providers. Since Talkspace’s founding in 2012, the Company has connected millions of patients with licensed behavioral health providers across a wide and growing spectrum of care through virtual counseling, psychotherapy, and psychiatry. Through its platform, Talkspace serves its business-to-business ("B2B") channel, comprised of large enterprise clients, large health plans and employee assistance programs who offer their employees and insured members access to the Company's platform while their employer is under an active contract with Talkspace, or at in-network reimbursement rates, where applicable, and its business-to-consumer ("B2C") channel, comprised of individual consumers who subscribe directly to the Company's platform.

Talkspace was originally incorporated as Hudson Executive Investment Corp. (“HEC”), a special purpose acquisition company, for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization or other similar business combination with one or more businesses or entities. On January 12, 2021, HEC, entered into an Agreement and Plan of Merger, dated as of January 12, 2021 (the “Merger Agreement”), with Groop Internet Platform, Inc. (“Old Talkspace”), Tailwind Merger Sub I, Inc., a Delaware corporation and a direct wholly owned subsidiary of HEC (“First Merger Sub”), and Tailwind Merger Sub II, LLC, a Delaware limited liability company (“Second Merger Sub”). On June 22, 2021, as contemplated by the Merger Agreement, First Merger Sub merged with and into Old Talkspace (the “First Merger”) with Old Talkspace surviving the First Merger, and immediately following the First Merger and as part of the same overall transaction as the First Merger, Old Talkspace merged with and into Second Merger Sub, with Second Merger Sub surviving the merger as a wholly owned subsidiary of HEC. The Company refers to this transaction as the Business Combination. In connection with the Business Combination, HEC filed the Certificate of Incorporation and changed its name to “Talkspace, Inc.”

The Company's principal executive office is located in New York, NY. The Company has three wholly owned subsidiaries, Talkspace LLC, Talkspace Network LLC and Groop Internet Platform LTD. In addition, the Company holds a variable interest in one professional association and six professional corporations, which have been established pursuant to the requirements of their respective domestic jurisdiction governing the corporate practice of medicine. See Note 15, “Variable Interest Entities,” in the notes to the consolidated financial statements for further details.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Basis of Presentation

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany transactions and balances have been eliminated in the preparation of the consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the consolidated financial statements. The Company’s significant estimates and assumptions used in these financial statements include, but are not limited to, the recognition and disclosure of contingent liabilities, revenue recognition, stock-based compensation awards, the fair value of warrant liabilities and the estimates and assumptions related to the impairment analysis of goodwill and intangible assets. The Company bases its estimates on historical factors, current circumstances and the experience and judgment of management. Estimates, by their nature, are based on judgment and available information, therefore, actual results could be materially different from these estimates.

64

Table of Contents

Consolidation

The Business Combination was accounted for as a reverse recapitalization, and Old Talkspace was deemed to be the accounting acquirer. Consequently, the consolidated assets, liabilities and results of operations prior to the Business Combination are those of Old Talkspace. The shares and corresponding capital amounts and losses per share, prior to the Business Combination, have been retroactively restated based on shares reflecting the exchange ratio established in the Business Combination.

The Company consolidates all subsidiaries in which it has a controlling financial interest, as well as any VIEs where the Company is deemed to be the primary beneficiary. In the second quarter of 2022, the Company completed the transition of its structure with respect to its relationships with healthcare providers under certain affiliated professional association (“PA”) and professional corporations (“PC”) entities. The Company determined that the PA and PC entities are VIEs. The Company also determined that it is able to direct the activities of these entities that most significantly impact their economic performance and it funds and absorbs all losses of these VIEs resulting in the Company being the primary beneficiary of the PA and PC entities. Accordingly, the Company consolidates the VIEs. See Note 15, “Variable Interest Entities,” in the notes to the consolidated financial statements for further details.

Business Combination

The Company accounts for business combinations in accordance with Accounting Standard Codification (“ASC”) 805, “Business Combinations”. ASC 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. The excess of the fair value of the purchase price over the fair values of the identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Acquisition related costs are expensed to the statement of operations in the period incurred.

Operating Segments

The Company operates its business as a single segment and as one reporting unit, which is how the chief operating decision maker, the Company's Chief Executive Officer, reviews financial performance and allocates resources. The majority of the Company’s operations are based in the United States.

Financial statements in U.S. dollars

Most of the Company’s revenues and costs are denominated in United States dollar (“dollar”). The Company’s management believes that the dollar is the primary currency of the economic environment in which the Company and each of its subsidiaries operate. Thus, the dollar is the Company’s functional and reporting currency.

Accordingly, non-dollar denominated transactions and balances have been re-measured into the functional currency in accordance with ASC 830, “Foreign Currency Matters”. These transactions were not material for the year ended December 31, 2022, 2021 and 2020.

Cash and cash equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible to cash, with original maturities of three months or less at the date acquired. The Company’s cash and cash equivalents generally consist of bank deposits and investments in money market funds. The carrying value of cash and cash equivalents approximate their fair values due to the short-term maturities of such instruments.

The majority of the Company’s cash and cash equivalents are invested in one major bank in the United States. Generally, these cash and cash equivalents and deposits may be redeemed upon demand. The Company deposits its cash with one major financial institution in the U.S., and its deposits may exceed federally insured limits. Management believes that the financial institution that holds the Company’s and its subsidiaries’ cash and cash equivalents is an institution with high credit standing, and accordingly, minimal credit risk exists with respect to these assets.

65

Table of Contents

Property and equipment, net

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:

%

Computers 33

Furniture and equipment 15

Leases

The Company accounts for leases in accordance with ASC 842, "Leases". The right-of-use ("ROU") asset represents the Company’s right to use an underlying asset for the lease term and the lease liability represents an obligation to make payments based on the present value of lease payments over the lease term. The Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The lease term includes options to extend or terminate the lease when it is reasonably certain they will be exercised.

The Company has elected not to record operating lease ROU assets and lease liabilities for leases with an initial term of 12 months or less. The Company also elected the practical expedient to not separate lease and non-lease components for its leases. See Note 9, "Leases" in the notes to the consolidated financial statements for further details.

Goodwill

Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any non-controlling interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is tested for impairment at least on an annual basis. The Company operates as one reporting unit and the fair value of the reporting unit is estimated using quoted market prices of the Company’s stock in active markets. The Company tests goodwill for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. When testing goodwill for impairment, the Company may first perform a qualitative assessment. If the Company determines it is not more likely than not the reporting unit’s fair value is less than its carrying value, then no further analysis is necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. The Company may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis. Under the quantitative impairment test, if the carrying amount of the Company’s reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill. See Note 4, "Goodwill" in the notes to the consolidated financial statements for further details.

Intangible Assets

Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful lives. The Company routinely reviews the remaining estimated useful lives of finite-lived intangible assets. In cases where the Company reduces the estimated useful life for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life. See Note 5, "Intangible Assets, net" in the notes to the consolidated financial statements for further details.

Impairment of long-lived assets and intangible assets subject to amortization, including ROU lease asset

Property and equipment, intangible assets subject to amortization and ROU lease assets are reviewed for impairment in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment losses were recorded during the years ended December 31, 2022, 2021 or 2020 for these assets.

66

Table of Contents

Revenue recognition

The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, when the Company satisfies its performance obligation to perform its defined contractual obligations to provide virtual behavioral healthcare services. Revenue is recognized in an amount that reflects the consideration that 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 in accordance 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 to the extent 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's revenue is generated from two revenue streams: B2B and B2C.

B2B Revenue - Comprised of large enterprise clients and large health plans and employee assistance programs who offer their employees and insured members access to the Company's platform while their employer is under an active contract with Talkspace, or at in-network reimbursement rates, where applicable.

The Company contracts with enterprises to provide access to its therapist platform for their employees, primarily based on a per-member-per-month access fee model. Revenues from access fees are recognized ratably over the contractual term. The majority of contracts with enterprise clients typically range in length from one to three years and are non-cancelable during the initial contractual term. Customers typically have the right to terminate their contracts for cause if the Company fails to perform in accordance with the contractual terms.

The Company also contracts with health insurance plans and employee assistance (EAP) organizations ("insurance payors") to provide its therapy and psychiatry services to their eligible covered members. Revenue is recognized at a point in time, as virtual therapy or psychiatry session is rendered. The transaction price is determined based on contracted rates and includes variable consideration in the form of implicit price concessions. The Company determines the total transaction price, including an estimate of variable consideration, at contract inception and reassesses this estimate at each reporting date. The Company estimates the amount of variable consideration that is included in the transaction price using the expected value method primarily based on actual historical collection experience for each insurance payor over a twelve-month period. Revenue from health insurance plans and EAP organizations is presented net of implicit price concessions. Contracts with health insurance plans and EAP organizations include annual evergreen clauses and generally may be terminated by either party typically upon a minimum 60-day advance notice.

B2C Revenue - The Company generates 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. The Company recognizes member subscription revenues ratably over the subscription period, beginning when therapy services commence. The Company recognizes 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.

The transaction price from member subscription revenue and supplementary a la carte offerings includes variable consideration in the form of refunds. The Company estimates the refund liability for the variable consideration portion of the transaction price primarily based on historical experience. The refund liability is recorded within the “Accrued expenses and other current liabilities” line item in the consolidated balance sheet. Revenue from individual consumers is presented net of refunds.

Accounts Receivable

Accounts receivables are stated net of credit losses allowance. The Company is exposed to credit losses primarily through its contracts with enterprise clients, health insurance plans and EAP organizations. The Company’s methodology is based on historical collection experience, customer creditworthiness, current and future economic condition and market condition. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Accounts receivables are written off after all reasonable means to collect the full amount have been exhausted. The allowance for credit losses is immaterial for the years ended December 31, 2022 and 2021.

67

Table of Contents

Deferred Revenue

The Company records deferred revenues when cash payments from customers are received in advance of the Company's performance obligations to provide services. The Company recognizes deferred revenues as revenues in the statement of operations once the related performance obligations have been performed and satisfied. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as a current liability and the remaining portion is recorded as a noncurrent liability on the consolidated balance sheet. The Company expects to satisfy the majority of its performance obligations associated with deferred revenue within one year or less.

Stock-based compensation

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation”. Compensation cost for share-based awards is 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 Company recognizes forfeitures of awards as they occur.

The fair value of restricted stock units is measured as the grant-date closing price of the Company’s common stock. 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 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. The Company has historically not paid dividends and have no foreseeable plans to pay dividends.

Determination of Fair Value of our Common Stock prior to the Business Combination

Due to the absence of an active market for our shares of common stock prior to the Business Combination, the grant-date fair market value of the common shares underlying stock options was historically determined by management and approved by the Company’s board of directors. Because there was no public market for the Company’s common shares, the Board of Directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair market value, which included important developments in the Company’s operations, the prices at which the Company sold shares of its convertible preferred shares, the rights, preferences and privileges of the Company’s convertible preferred shares relative to those of the Company’s common shares, actual operating results, financial performance and the lack of marketability of the Company’s common shares.

Employee Benefit Plan

The Company has established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the Internal Revenue Code. All U.S. employees over the age of 21 are eligible to participate in the plan. The Company contributes 100% of eligible employee’s elective deferral up to 4% of eligible earnings. The Company's matching contributions to participants’ accounts were immaterial for the years ended December 31, 2022, 2021 and 2020, respectively.

Fair value of financial instruments

The Company applies ASC 820, “Fair Value Measurements and Disclosures”. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs used to measure fair value to the extent that relevant observable inputs are not available. An entity develops

68

Table of Contents

unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available.

Three levels of inputs may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets of liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Income taxes

The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". The net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of currently enacted tax rates. Included in net deferred tax assets is a valuation allowance for deferred tax assets, where management believes it is more-likely-than-not that the deferred tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of net earnings at that time. Accrued interest and penalties are included within the related tax asset or liability in the accompanying consolidated financial statements.

The Company follows the provisions in ASC 740 and the guidance related to accounting for uncertainty in income taxes. ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses.

The Company does not provide deferred tax liabilities when it intends to reinvest earnings of a foreign subsidiary indefinitely or if distributed, no tax liability will be imposed. Undistributed earnings of a foreign subsidiary and unrecognized deferred tax liability related to such earnings are immaterial as of December 31, 2022.

As of December 31, 2022 and 2021 the Company did not record any provision for uncertain tax positions. The Company does not anticipate that the assessment will significantly increase or decrease within the next 12 months. No accrued interest or penalties were accrued as of December 31, 2022 and 2021.

Net loss per share

The Company computes net loss per share using the two-class method required for participating securities. For the year ended December 31, 2020, the Company considered its convertible preferred shares to be participating securities as the holders of the convertible preferred shares would be entitled to dividends that would be distributed to the holders of shares of common stock, on a pro-rata basis assuming conversion of all convertible preferred shares into shares of common stock. These participating securities did not contractually require the holders of such shares to participate in the Company’s losses. As such, net loss for the year ended December 31, 2020 was not allocated to the Company’s participating securities.

The Company’s basic net loss per share is calculated by dividing net loss attributable to ordinary shareholders by the weighted-average number of shares of common stock outstanding for the period, without consideration of potentially dilutive securities. The diluted net loss per share is calculated by giving effect to all potentially dilutive securities outstanding for the period using the treasury share method or the if-converted method based on the nature of such securities. Diluted net loss per share is the same as basic net loss per share in periods when the effects of potentially dilutive shares of shares of common stock are anti-dilutive.

69

Table of Contents

Recently Issued and Adopted Accounting Pronouncements

The Company has reviewed recent accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on the consolidated financial statements as a result of their future adoption.

NOTE 3. REVENUE RECOGNITION

The following table presents the Company’s revenues from sales to unaffiliated customers disaggregated by revenue source:

For the Year Ended December 31,

Revenues from sales to unaffiliated customers:

For the years ended December 31, 2022, 2021 and 2020, the majority of the Company’s revenues were generated from customers located in the United States.

For the year ended December 31, 2022, two customers represented 10% or more of total revenue and no single customer represented 10% or more of total revenue for the years ended December 31, 2021 and 2020.

Accounts Receivable

The Company had receivables related to revenue from contracts with enterprise clients of $7.4 million and $4.0 million at December 31, 2022 and December 31, 2021, respectively. As of December 31, 2022 and 2021, the balance of receivables related to health insurance plans and EAP organizations was $2.2 million and $1.5 million, respectively.

As of December 31, 2022, four customers represented 10.4%, 15.1%, 16.9%, 25.0% of the accounts receivable balance. As of December 31, 2021, one customer represented 16.8% of the accounts receivable balance.

Deferred Revenue

For the year ended December 31, 2022 and 2021, the Company recognized revenues of $6.2 million and $5.2 million, respectively, that were included in deferred revenues at the beginning of the year. As of December 31, 2022, deferred revenue related mainly to the Company’s B2C subscription business.

NOTE 4. GOODWILL

For the year ended December 31, 2022, the Company decided to by-pass the qualitative assessment and proceed directly to step one of the impairment test. The Company operates as one reporting unit and the fair value of the reporting unit is estimated using quoted market prices of the Company’s stock in active markets. The annual impairment test indicated that the carrying amount of the reporting unit exceeded its fair value, which was primarily due to the continuous decline in our market capitalization as a result of a deterioration of the current economic environment.

For the year ended December 31, 2022, the Company recorded a goodwill impairment charge of $6.1 million. For the years ended December 31, 2021 and 2020, the Company did not record any impairment charge of goodwill.

70

Table of Contents

NOTE 5. INTANGIBLE ASSETS, NET

Intangible assets are comprised of the following:

As of December 31,

Intangible assets with finite lives:

Non-Competition agreement 939 939

Accumulated amortization:

Non-Competition agreement 643 346

Amortization expense for intangible assets was $0.9 million for the year ended December 31, 2022 ($1.8 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively). Amortization related to intangible assets for acquired technology was included in cost of revenues and amortization related to intangible assets for customer relationships was included in sales and marketing expenses in the Company’s consolidated statement of operations for the periods presented.

Future amortization that will be charged to expense over the remaining life of the intangible assets as of December 31, 2022 is as follows:

December 31, In thousands

NOTE 6. FAIR VALUE MEASUREMENT

The carrying value of the Company’s cash equivalents, accounts receivable, other current assets, accounts payable, and accrued liabilities approximate fair value because of the relatively short-term nature of the underlying assets. The Company’s Private Placement Warrants are carried at fair value with changes in fair value recognized in earnings each period.

The Private Placement Warrants assumed in connection with the consummation of the Business Combination and the closing of the Forward Purchase Agreement with the HEC Fund 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 were measured at fair value at inception and thereafter on a recurring, quarterly basis, with changes in fair value presented within financial (income) expense, 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. For the year ended December 31, 2022, the Company had gains related to the revaluation of the Private Placement Warrants of $3.1 million compared to $36.0 million for the year ended December 31, 2021.

Prior to the Business Combination, Old Talkspace had issued warrants to purchase its common stock and its Series D preferred stock. In connection with the Business Combination, the warrants to purchase Old Talkspace’s common stock and its Series D preferred stock were exercised and converted into common shares of the Company during June 2021. As of December 31, 2020, there were 60,000 outstanding warrants to purchase the Old Talkspace’s common stock for a price of $0.44 per share and 50,881 outstanding warrants to purchase the Company’s preferred D stock for a price of $2.75 per share. The inputs related to Old

71

Table of Contents

Talkspace’s share prices prior to the Business Combination were determined based on management’s assumptions and based on the Option Pricing Model (“OPM”). The fair value of the underlying preferred share price was determined by the board of directors. These inputs were considered to be a Level 3 measurement.

The following table presents the changes in the fair value of warrant liabilities during the year ended December 31, 2022 and 2021:

Level 3 Liabilities

For the Year Ended December 31, 2022

Private Placement Warrants $ 4,070 $ - $ (3,131 ) $ - $ 939

Level 3 Liabilities

For the Year Ended December 31, 2021

Old Talkspace Warrants $ 444 $ - $ 165 $ (609 ) $ -

In connection with the consummation of the Business Combination, the Company also acquired Public Warrants from HEC and also issued equity warrants to certain consultants. The Company determined these warrants met the criteria to be classified as equity in accordance with ASC 815-40. The Company valued these warrants using the instrument’s publicly listed trading price on the date of acquisition or issuance, where applicable, and included in additional paid-in capital within stockholder’s deficit. This is considered to be a non-recurring Level 1 measurement due to the use of an observable market quote in an active market.

NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES

Contingencies

In January 2022, the Company and certain of its current and former officers and directors were named as defendants in securities class action complaints filed in the United States District Court for the Southern District of New York under the case headings: (1) Baron v. Talkspace et al., No. 22-cv-00163 (S.D.N.Y.) and (2) Valdez v. Talkspace et al., No. 22-cv-00840 (S.D.N.Y.). These securities actions asserted violations of sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and SEC Rules 10b-5 and 14a-9 promulgated thereunder. These actions generally relate to public disclosures and statements by the Company in connection with its merger with HEC. In June 2022, these actions were consolidated under the caption In re Talkspace, Inc. Securities Litigation (the “Consolidated Securities Action”).

In December 2022, the company’s subsidiary Tailwind Merger Sub II, LLC, certain of the Company’s current and former directors and officers, and others were named as defendants in a putative class action complaint filed in the Delaware Court of Chancery under the case caption Valdez v. Braunstein, et al., Case No. 2022-1148 (the “Delaware Action”). The Delaware Action asserts claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty relating to the merger with HEC, among other things, based on many of the same facts at issue in the Consolidated Securities Action. The complaint seeks, among other things damages on behalf of putative class members who did not redeem their shares in connection with the Company’s merger with HEC.

In February 2023, the Company resolved the Consolidated Securities Action and the Delaware Action through mediation. The settlement resolves these litigations with respect to all named defendants. The Company recorded an accrual for its respective share of the settlement agreement as of December 31, 2022. The settlement will have to be approved by the court, which the Company expects will occur in the second or third quarter of 2023.

In June and July 2022, two individuals filed stockholder derivative lawsuits purportedly on behalf of Talkspace in the United States District Court for the Southern District of New York under the case captions: (1) Odsvall v. Oren Frank et al., No. 22-cv-05016 (S.D.N.Y.) and (2) Nayman v. Berg, et al., No. 22-cv-06258 (S.D.N.Y.), which were subsequently consolidated (the “Derivative Action”). The Derivative Action names certain of the Company’s current and former officers and directors as defendants and the Company as a nominal defendant. The Derivative Action asserts claims for violations of federal securities laws, breach of fiduciary duty, and aiding and abetting breaches of fiduciary duty relating to the merger with HEC, among other things, based on many of the same facts at issue in the Consolidated Securities Action. In February 2023 the parties agreed to

72

Table of Contents

resolve the Derivative Action with respect to all named defendants in exchange for the Company’s agreement to implement certain changes to its Governance environment. The settlement will have to be approved by the court, which the Company expects will occur in the second or third quarter of 2023. The Company is responsible for payment of legal fees to the counsel representing the plaintiffs in the Derivative Action. The Company accrued the estimated total legal fees as of December 31, 2022.

In addition to the foregoing, the Company may in the future be involved in various legal proceedings, claims and litigation that arise in the normal course of business. The Company accrues for estimated loss contingencies related to legal matters when available information indicates that it is probable a liability had been incurred and the Company 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.

Warranties and Indemnification

The Company’s arrangements generally include certain provisions for indemnifying clients against liabilities if there is a breach of a client’s data or if the Company’s service infringes a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications.

The Company has also agreed to indemnify its directors and executive officers 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 the Company, arising out of that person’s services as a director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer liability insurance coverage that would generally enable it to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.

NOTE 8. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following:

As of December 31,

Computer equipment and software $ 1,319 $ 926

Less accumulated depreciation (642 ) (302 )

Property and equipment, net $ 677 $ 624

Depreciation expense, included in general and administrative expense in the consolidated statement of operations, was $0.4 million, $0.2 million and $0.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

NOTE 9. LEASES

In November 2022, the Company entered into a long-term lease agreement lease for new office space in New York, NY. This operating lease expires two years from the commencement date and has the option to be renewed for an additional year. The Company recognized ROU lease asset and lease liability based on the present value of the future minimum lease payments at the lease commencement date. The Company did not include the renewal options as part of the ROU lease asset and lease liability at the commencement date as it was not reasonably certain that the renewal option will be exercised. The Company used incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date in determining the present value of future payments. As of December 31, 2022, the weighted-average remaining lease term was 1.83 years and weighted-average discount rate was 7.17%. As of December 31, 2022, the ROU lease asset was of $0.4 million and is included within the "Other assets" line item in the consolidated balance sheet. As of December 31, 2022, the short-term portion of the lease liability was $0.2 million and is included within the "Accrued expenses and other current liabilities" line item in the consolidated balance sheet. As of December 31, 2022, the long-term portion of the lease liability was $0.3 million and is included within the "Other liabilities" line item in the consolidated balance sheet. Operating lease costs recognized for the year ended December 31, 2022 were immaterial.

73

Table of Contents

In addition, the Company's wholly owned subsidiary, Groop Internet Platform LTD, located in Israel, leases its operating facilities under a month-to-month operating lease agreement. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes rent expense for these leases on a straight-line basis over the lease term. Rent expense related to these leases for the years ended December 31, 2022, 2021 and 2020 was $0.2 million, $0.1 million and $0.5 million, respectively.

The following table outlines the maturities of the Company’s lease liabilities as of December 31, 2022:

December 31, In thousands

Total undiscounted lease payments $ 495

Less interest (29 )

Present value of operating lease liability $ 466

NOTE 10. CAPITAL STOCK

The Company’s authorized capital stock consists of (a) 1,000,000,000 shares of common stock, par value $0.0001 per share; and (b) 100,000,000 shares of preferred stock, par value $0.0001 per share. As of December 31, 2022 and 2021 there were 12,780,000 Private Placement Warrants and 21,350,000 Public Warrants to purchase the Company’s common stock at an exercise price of $11.50 per share. As of December 31, 2022 and 2021, no shares of preferred stock were issued or outstanding.

NOTE 11.SHARE-BASED COMPENSATION

The Company adopted the 2014 Stock Incentive Plan (the “2014 Plan”) pursuant to which incentive and nonqualified stock options and stock purchase rights to purchase the Company’s common stock may be granted to officers, employees, directors, consultants and service providers.

In connection with the closing of the Business Combination, the Company adopted the 2021 Incentive Award Plan (the “2021 Plan”) under which the Company may grant cash and equity incentive awards to officers, employees, directors, consultants and service providers in order to attract, motivate and retain the talent. In connection with the effectiveness of the 2021 Plan, no further awards will be granted under the 2014 Plan.

In connection with the closing of the Business Combination, the Company also adopted the 2021 Employee Stock Purchase Plan (the “2021 ESPP”) under which employees of Talkspace and its participating subsidiaries are provided with the opportunity to purchase Talkspace common stock at a discount through accumulated payroll deductions during successive offering periods. As of December 31, 2022, no employee stock purchases have been made under the 2021 ESPP.

All stock-based awards are measured based on the grant date fair value and are generally recognized on a straight-line basis in the Company’s consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award.

74

Table of Contents

Stock Options

Stock options generally vest over a four-year period and are exercisable a maximum period of ten years. A summary of the Company’s stock option activity for the year ended December 31, 2022 is as follows:

(1)

The aggregate intrinsic value of options outstanding at end of the year and options exercisable at end of the year does not include 11,861,426 and 6,626,765 options that are out of the money, respectively.

(2)

Excludes 650,000 fully-vested options with an exercise price of $11.50 issued in June 2021 to a consultant in connection with the Business Combination.

The weighted average grant-date fair value of stock options granted to employees during the years ended December 31, 2022 and 2021 was $0.88 and $3.81 per share, respectively.

The fair value for options granted for the years ended December 31, 2022, 2021 and 2020 was estimated on the date of grant using a Black-Scholes-Merton options pricing model with the following weighted average assumptions:

Years ended December 31,

Dividend yield (1) 0% 0% 0%

(1)

No dividends were paid during the years ending December 31, 2022, 2021 and 2020.

(2)

The expected volatility was calculated based upon historical stock price movements of the Company and similar publicly traded peer companies over the most recent periods ending on the grant date, equal to the expected term of the options, as adequate historical experience is not available to provide a reasonable estimate.

(3)

The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term to the expected term of the options

(4)

The expected term of options granted is calculated using the simplified method for “plain vanilla” stock options awards.

As of December 31, 2022, there was $11.5 million of total unrecognized compensation cost related to non-vested options that are expected to be recognized over a period of up to 5.2 years.

Restricted Stock Units

Restricted Stock Units ("RSUs") typically vest over a four-year period. The following table summarizes the activity for RSUs for the year ended December 31, 2022:

Number ofrestricted stockunits Weightedaverage grant-datefair value

75

Table of Contents

As of December 31, 2022, there was $12.6 million of total unrecognized compensation cost related to non-vested RSUs that are expected to be recognized over a period of up to 5.2 years.

The following table sets forth the total share-based compensation expense related to stock options and restricted stock units included in the respective components of operating expenses in the consolidated statement of operations:

For the Year Ended December 31,

Upon closing of the Business Combination, vested and unvested stock options of Old Talkspace were converted into Talkspace stock options using an exchange ratio of 1.134140. As a result of this modification, the Company recognized $15.2 million in additional share-based compensation expense during the year ended December 31, 2021. Additionally, the Company recognized $3.8 million in share-based compensation expense as a result of the modification of Mr. and Ms. Frank's equity awards during the year ended December 31, 2021, in connection with their departure from the Company.

NOTE 12. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the years ended December 31, 2022, 2021 and 2020:

For the Year EndedDecember 31,

(in thousands except share and per share data) 2022 2021 2020

Weighted-average shares used to compute net loss per share:

Net loss per share:

Basic and diluted $ (0.51 ) $ (0.72 ) $ (1.67 )

For the year ended December 31, 2022, the following were excluded from the calculation of diluted loss per share since each would have had an anti-dilutive effect given the Company’s net loss: 17,526,326 stock options, 9,127,051 restricted stock units, 12,780,000 Private Placement Warrants and 21,350,000 Public Warrants to purchase the Company’s common stock.

For the year ended December 31, 2021, the following were excluded from the calculation of diluted loss per share since each would have had an anti-dilutive effect given the Company’s net loss: 19,494,861 stock options, 2,330,094 restricted stock units, 12,780,000 Private Placement Warrants and 21,350,000 Public Warrants to purchase the Company's common stock.

For the year ended December 31, 2020, the following were excluded from the calculation of diluted loss per share since each would have had an anti-dilutive effect given the Company’s net loss: 83,395,815 shares of convertible preferred stock, 18,097,815 stock options, 60,000 warrants to the Company’s common stock and 50,881 warrants to the Company’s series D convertible preferred stock.

76

Table of Contents

NOTE 13. TAXES ON INCOME

The Company and its subsidiaries file income tax returns in the U.S. federal, and various states and foreign jurisdictions. The Company assessed its uncertain tax positions and determined that it has no uncertain tax positions at December 31, 2022.

A reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows:

For the Year endedDecember 31,

Statutory tax rate 21 % 21 % 21 %

Increase (decrease) in effective tax rate due to:

Impairment of goodwill (1,288 )

Other Adjustments 7,177 — —

The main reconciling item between the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowance in respect of deferred taxes relating to accumulated net operating losses carried forward due to the uncertainty of the realization of such deferred taxes.

Loss (income) before taxes is attributable to the following tax jurisdictions:

For the Year EndedDecember 31,

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

As ofDecember 31,

Net deferred tax assets:

Net deferred tax assets

Deferred tax liabilities (long term):

Net deferred tax assets $ — $ —

Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. A valuation allowance is provided for deferred tax assets when it is “more likely than not” that some portion of the deferred tax asset will not be realized. Because of the Company’s recent history of operating losses, management believes the recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not more likely than not to be realized and, accordingly, has provided a full valuation allowance. A valuation allowance has been recorded for the net deferred tax assets at December 31, 2022 and 2021.

77

Table of Contents

The Company maintains a full valuation allowance on its net deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. Management considered the Company’s cumulative loss in recent years and forecasted losses in the near term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, management determined that the negative evidence outweighed the positive evidence and that a full valuation allowance on the net deferred tax assets will be maintained. Management will continue to assess the realizability of our deferred tax assets going forward and will adjust the valuation allowance as needed. The Company’s valuation allowance increased by $26.3 million during the year ended December 31, 2022 primarily due to increases in its net operating loss carryforwards.

At December 31, 2022, the Company has federal and state net operating loss carryovers (“NOL”) of approximately $255.1 million and $224.3 million, respectively, which are available to reduce future taxable income. The NOL carryforwards begin to expire in 2032 and may become subject to annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under I.R.C. Section 382. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or future tax liabilities. The federal losses generated from 2018 onward do not expire.

The Company is subject to U.S. federal and state and Israeli income taxes with varying statutes of limitations. The Company is not currently under examination by any income tax authority, nor has it been notified that an examination is contemplated. The Company is no longer subject to U.S. federal, state or local income tax examinations by the tax authorities for years before 2019. The Israel subsidiary tax assessments filed by the Company through the year 2017 are considered closed.

NOTE 14. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are comprised of the following:

For the Years Ended December 31,

Litigation costs $ 5,500 $ —

Accrued expenses and other current liabilities $ 16,502 $ 12,562

NOTE 15. VARIABLE INTEREST ENTITIES ("VIEs")

In the second quarter of 2022, the Company completed a transition with respect to its relationships with healthcare providers, transitioning to a structure whereby Talkspace LLC has entered into various agreements with a Texas professional association entity (Talkspace Provider Network, PA or “TPN”), which in turn contracts with affiliated professional entities ("PC entities"), and physicians, therapists, and other licensed professionals for clinical and professional services provided to the Company's members. Talkspace LLC is party to various Management Services Agreements (“MSAs”) with TPN as well the PC entities as part of this transition. The Company believes the transition to a structure where it operates under various MSAs with professional associations and professional corporations authorized by state law to contract with affiliated professionals to delivery teletherapy services to its members, helps ensure the Company is able to comply with all applicable regulatory requirements, including the corporate practice of medicine and fee-splitting laws, that are necessarily implicated by engaging in telehealth care that can only be delivered by physicians. The Company is continuing to transition its current agreements with its clients, members and other business partners to TPN or the PC entities, where applicable.

Pursuant to the MSAs, Talkspace LLC is the managing entity (the “Manager”) and provides management and administrative resources and services essential to the operations of TPN and the PC entities and receives a management fee for these services and reimbursement of expenses incurred. TPN and the PC entities in turn have the obligation under the MSAs to engage all licensed physicians and other health professionals to provide behavioral healthcare services to the Company's members. In addition, to the extent that TPN or the PC entities lack sufficient funds to meet their obligations, the Manager may, at its sole discretion, advance funds to TPN or the PC entities to cover these obligations. Such advances would be considered loans made

78

Table of Contents

by Manager and should be repaid as per the terms of the management agreement. No such advances have been made by the Manager to TPN or the PC entities for years ended December 31, 2022 and 2021.

The Company holds a variable interest in TPN and the PC entities. The Company evaluates whether an entity in which it has a variable interest is considered a VIE. VIEs are generally entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest (i.e., ability to direct the activities of the entity that most significantly impact the entity's economic performance through voting rights and a right to receive the expected residual returns of the entity or an obligation to absorb the expected losses of the entity).

Under the provisions of ASC 810, “Consolidation”, an entity consolidates a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company determined that TPN and the PC entities are VIEs. The Company also determined that it is able to direct the activities of TPN and the PC entities that most significantly impact their economic performance and it funds and absorbs all losses of these VIEs resulting in the Company being the primary beneficiary of these entities. Accordingly, the Company consolidates these VIEs.

The following table details the assets and liabilities of the VIEs as of December 31, 2022:

(in thousands) December 31, 2022

ASSETS

Cash and cash equivalents $ 883

Accounts receivable 1,716

LIABILITIES

Accrued expenses and other current liabilities 3,758

Total Liabilities $ 3,758

79

Table of Contents

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

In connection with the preparation of this report, an evaluation was carried out by certain members of Company management, with the participation of the Chief Executive Officer and our Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Securities and Exchange Commission’s (“SEC”) Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), as of December 31, 2022. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Although management has made significant progress in the design and implementation of IT and business process controls, management concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2022, due to the material weakness in internal control over financial reporting described below. Notwithstanding the results of this evaluation, management believes that the consolidated financial statements in this Annual Report on Form 10-K present, in all material aspects, the company’s financial condition as reported, in conformity with U.S. Generally Accepted Accounting Principles (“US GAAP”).

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013).

A material weakness is a deficiency, or a combinations of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Clarified Audit Standard No. 2201: An audit of internal control over financial reporting that is integrated with an audit of financial statements, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As of December 31, 2022, management has identified the following material weaknesses in internal controls:

a)

Management was able to complete the design and establish effective information technology general controls (ITGCs) for the majority of tested ITGCs; however, some ineffective ITGC controls existed at December 31, 2022. As a result, business process controls (automated and IT-dependent manual controls) that are dependent on the

80

Table of Contents

ineffective ITGCs, or that use data produced from systems impacted by the ineffective ITGCs were deemed ineffective at December 31 2022; and

b)

Management did not have an adequate process in place to monitor and provide oversight over the completion of its testing and assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner.

As such, management determined that it did not fully implement components of the COSO framework, including elements of the control environment, information and communication, control activities and monitoring activities components, relating to: (i) providing sufficient and timely management oversight and ownership over the internal control evaluation process; (ii) hiring and training sufficient personnel to timely support the Company’s internal control objectives; (iii) performing timely monitoring and oversight to ascertain whether the components of internal control are present and functioning effectively.

These deficiencies aggregated with other business process level control deficiencies could result in material misstatement in the financial statements and therefore constitute a material weakness. Based on this material weakness, the Company’s management concluded that as of December 31, 2022, the Company’s internal control over financial reporting was not effective.

The Company’s independent registered public accounting firm, Kost Forer Gabbay & Kasierer, A Member of EY Global, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, and has expressed an adverse opinion, which appears in their report above.

Remediation Plan for the Material Weakness

Management is committed to the remediation of the material weakness described above, as well as the continued improvement of the Company’s internal control over financial reporting. Management has implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented and operating effectively.

As of the date of this Annual Report on Form 10-K, management is re-assessing the design of controls and modifying processes designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including but not limited to, (a) hiring additional personnel with appropriate technical skillsets, (b) developing an execution plan and resourcing to test controls and providing timely feedback of any deficiencies noted to complete remediation (c) establishing a training program for the entire organization to support ongoing execution of internal controls and adherence to control activities (d) actively monitoring corrective actions and providing status reporting to leadership on the progress.

We will continue to evaluate and improve the internal controls over financial reporting and take additional measures to address control deficiencies. Management will test and evaluate the implementation of internal controls and revised processes to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in our financial statements.

We believe that once these actions have been completed, it will remediate the material weakness. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that controls are operating effectively.

Changes in Internal Control Over Financial Reporting

We have implemented a new Enterprise Resource Planning (“ERP”) system. Except for the changes in connection with the implementation of the ERP system discussed above, there have been no other changes in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

81

Table of Contents

Item 9B. OTHER INFORMATION

None.

Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not Applicable.

82

Table of Contents

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to the definitive Proxy Statement for our 2023 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after December 31, 2022.

Item 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the definitive Proxy Statement for our 2023 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after December 31, 2022.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the definitive Proxy Statement for our 2023 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after December 31, 2022.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the definitive Proxy Statement for our 2023 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after December 31, 2022.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference to the definitive Proxy Statement for our 2023 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after December 31, 2022.

83

Table of Contents