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Feb. 28, 2022, 5:49 p.m. EST

10-K: NERDY INC.

(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and capital resources of Nerdy Inc. The following discussion should be read in conjunction with the financial statements under Part II, Item 8 of this report, "Cautionary Note On Forward-Looking Statements" on page 1 of this report, and "Risk Factors" in Part I, Item 1A of this report. This section of this report generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this report, and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Nerdy Inc.'s Registration Statement on Form S-1 filed with the SEC on October 15, 2021, which became effective as of October 25, 2021.

OVERVIEW

We operate a platform for live online learning. Our mission is to transform the way people learn through technology. Our purpose-built proprietary platform leverages technology, including artificial intelligence ("AI"), to connect students, users, parents, guardians, and purchasers ("Learner(s)") of all ages to tutors, instructors, subject matter experts, educators, and other professionals ("Expert(s)"), delivering superior value on both sides of the network. Our comprehensive learning destination provides learning experiences across numerous subjects and multiple formats, including one-on-one instruction, small group classes, large format group classes, and adaptive self-study. Our flagship business, Varsity Tutors LLC ("Varsity Tutors"), is one of the nation's largest platforms for live online tutoring and classes. Its solutions are available directly to Learners, as well as through schools and other institutions. Our platform offers Experts the opportunity to generate income from the convenience of home, while also increasing access for Learners by removing barriers to high-quality live online learning. Our offerings include Varsity Tutors for Schools, a product suite that leverages our platform capabilities to offer our online learning solutions directly to education systems, and StarCourses, our free celebrity-led, live large group classes.

Our platform delivers value to both Learners, who are our customers, and Experts. We have built a diversified business across the following audiences:

Reverse Recapitalization

On September 20, 2021 (the "Closing Date"), TPG Pace Tech Opportunities Corp., a publicly traded, exempted company incorporated in the Cayman Islands ("TPG Pace"), and Nerdy LLC, consummated a business combination (the "Closing") pursuant to the business combination agreement, dated as of January 28, 2021 (as amended, the "Business Combination Agreement"). Nerdy LLC is a holding company that is the sole owner of several operating companies, including its flagship business Varsity Tutors.

At the Closing Date, TPG Pace and Nerdy LLC completed the following transactions (the "Reverse Recapitalization"):

Immediately prior to the Closing, TPG Pace became a Delaware corporation and was renamed Nerdy Inc.;

TPG Pace's outstanding Class A ordinary shares and Class F ordinary shares were converted into corresponding shares of Nerdy Inc.'s Class A common stock, par value $0.0001 per share (the "Class A Common Stock") and Class F common stock, par value $0.0001 per share (the "Class F Common Stock") and its outstanding private placement warrants and public warrants to purchase Class A ordinary shares were converted into corresponding private placement warrants to purchase Class A Common Stock (the "Private Placement Warrant(s)") and public warrants to purchase Class A Common Stock (the "Public Warrant(s)"), respectively, (collectively, the "Domestication"). Each Private Placement Warrant and Public Warrant allows for the purchase of one share of Class A Common Stock at an exercise price of $11.50 per share. The shares of Class F Common Stock were subsequently converted to shares of Class A Common Stock;

Following the Domestication, Nerdy LLC merged with a wholly-owned subsidiary of Nerdy Inc. (the "Merger"), with Nerdy LLC surviving such merger;

In accordance with Nerdy LLC's amended and restated limited liability company agreement (the "Nerdy LLC Agreement"), existing ownership interests in Nerdy LLC (including redeemable preferred units) were converted into Nerdy LLC units (the "OpCo Units"). Additionally, the Nerdy LLC Agreement provided that Nerdy LLC will be managed by a five person board of managers;

Holders of Nerdy LLC common and preferred units (the "Legacy Nerdy Holders") exchanged their historical Nerdy LLC equity for: (i) cash consideration of $336,846 thousand, of which $767 thousand was accrued and reported as

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Nerdy Inc. contributed all of its assets (other than the OpCo Units it then held) to Nerdy LLC in exchange for additional OpCo Units and OpCo Warrants, such that the Company will hold a number of OpCo Units equal to the total number of shares of Class A Common Stock and OpCo Warrants equal to the total number of Public Warrants;

Nerdy Inc. issued and sold 15,000 thousand shares of Class A Common Stock for aggregate consideration of $150,000 thousand in connection with the PIPE Financing; and

Nerdy Inc. issued and sold 16,117 thousand shares of Class A Common Stock and 3,000 thousand warrants to purchase Class A Common Stock (the "FPA Warrant(s)") for aggregate consideration of $150,000 thousand in connection with the FPA Financing. Each FPA Warrant allows for the purchase of one share of Class A Common Stock at an exercise price of $11.50 per share.

The Reverse Recapitalization was accomplished through an umbrella partnership corporation ("Up-C") structure, which is often used by partnerships and limited liability companies (operating as partnerships) undertaking an initial public offering. The Up-C structure allowed Legacy Nerdy Holders to retain their equity ownership in Nerdy LLC, an entity that is classified as a partnership for U.S. federal income tax purposes, and provides potential future tax benefits for Nerdy Inc. when the Legacy Nerdy Holders ultimately redeem their pass-through interests for shares of Class A Common Stock in Nerdy Inc. as a result of a tax receivable agreement (the "Tax Receivable Agreement"). Under the terms of the Tax Receivable Agreement, 85% of these potential future tax benefits realized by Nerdy Inc. as a result of such redemptions will be paid to certain Legacy Nerdy Holders.

As a result of and immediately following the Reverse Recapitalization:

Nerdy Inc. is a holding company that has no material assets other than its ownership interests in Nerdy LLC and its indirect interests in the subsidiaries of Nerdy LLC, and has no independent means of generating revenue or cash flow;

Nerdy Inc. had the following securities outstanding: (i) 83,875 thousand shares of Class A Common Stock, including Earnouts (as defined below), (ii) 73,971 thousand shares of Class B Common Stock, including Earnouts, held by certain of the Legacy Nerdy Holders, and (iii) 17,281 thousand warrants, each exercisable to purchase one share of Class A Common Stock at a price of $11.50 per share;

Members of Nerdy LLC are the Legacy Nerdy Holders and Nerdy Inc.;

Nerdy LLC had the following OpCo Units and OpCo Warrants outstanding: (i) 157,846 thousand OpCo Units, including Earnouts, and (ii) 2,052 thousand OpCo Warrants;

Legacy Nerdy Holders owned 70,613 thousand OpCo Units, excluding Earnouts, equal to 47.1% of the economic interest in Nerdy LLC, and 70,613 thousand shares of Class B Common Stock, excluding Earnouts, which, together (the "Combined Interests"), are redeemable beginning six months after the Closing Date at the option of the Legacy Nerdy Holders on a one-for-one basis for shares of Class A Common Stock or the cash equivalent thereof (based on the market price of the shares of Class A Common Stock at the time of redemption) as determined by Nerdy Inc. If Nerdy Inc. elects the redemption to be settled in cash, the cash used to settle the redemption must be funded through a private or public offering of Class A Common Stock no later than five business days after the redemption notice date. Upon the redemption of the OpCo Units and Class B Common Stock for shares of Class A Common Stock or the equivalent thereof, all redeemed shares of Class B Common Stock will be cancelled. The Class B Common Stock has voting rights only and has no dividend or economic rights. The shares of Class B Common Stock are owned by the Legacy Nerdy Holders and cannot be transferred except to us. We do not intend to list our Class B Common Stock on any stock exchange. Additionally, certain Legacy Nerdy Holders owned 11,550 thousand shares of Class A Common Stock, excluding Earnouts;

Public stockholders of Nerdy Inc., including certain Legacy Nerdy Holders, (i) owned 79,233 thousand shares of Class A Common Stock, excluding Earnouts, which represented 52.9% of the combined voting power of Nerdy Inc. and 100% of the economic interest in Nerdy Inc., and (ii) through Nerdy Inc.'s ownership of 79,233 thousand OpCo Units, indirectly held 52.9% of the economic interest in Nerdy LLC;

Nerdy LLC is managed by a five person board of managers, composed of three persons that were designated by Nerdy Inc. and two persons that were designated by holders of a majority of the OpCo Units held by members of Nerdy LLC other than Nerdy Inc. Nerdy LLC's management will continue to manage Nerdy LLC and all of its related and

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Financial results of Nerdy LLC and its wholly-owned subsidiaries are consolidated with and into Nerdy Inc., and following the Reverse Recapitalization on September 20, 2021, a portion of the consolidated net earnings (loss) of Nerdy LLC, which the Legacy Nerdy Holders are entitled to or are required to absorb, are allocated to the noncontrolling interests (the "NCI"). The Company has excluded Earnouts in the calculation of the ownership interests in Nerdy LLC as the Earnouts are subject to forfeiture if the achievement of certain stock price thresholds are not met within five years of the Reverse Recapitalization. To the extent these price thresholds are met, the Earnouts will no longer be subject to forfeiture and the units will then be included in the calculation of the ownership interests in Nerdy LLC.

Nerdy LLC, as a result of the contribution by Nerdy Inc., received proceeds of $557,574 thousand, which included (i) cash of $287,673 thousand that was held in TPG Pace's trust account from its initial public offering and TPG Pace's operating cash account, after giving effect to redemptions of TPG Pace's Class A Ordinary Shares held by TPG Pace's public shareholders prior to the Reverse Recapitalization, (ii) proceeds of $150,000 thousand from the PIPE Financing,

Warrants

The Private Placement Warrants, the Public Warrants, the FPA Warrants, and the OpCo Warrants are collectively referred to herein as the "Warrant(s)." For other terms and conditions regarding each tranche of Warrants held by the Company, see the above discussion.

Earnouts

Of the total shares and units issued as a result of the Reverse Recapitalization, we had 8,000 thousand shares or units of (i) Class A Common Stock or (ii) OpCo Units (and a corresponding number of Class B Common Stock), as applicable, that will be subject to forfeiture if the achievement of certain stock price thresholds of the Class A Common Stock are not met within five years of the Reverse Recapitalization (assuming there is no change in control event) (the "Earnout(s)").

Basis of Presentation

For the year ended December 31, 2021, the consolidated financial statements reflect the consolidated results of operations, comprehensive income (loss), cash flows, and changes in equity of Nerdy LLC and its wholly-owned subsidiaries for the period of January 1, 2021 through September 20, 2021, the Closing Date of the Reverse Recapitalization, and the consolidated results of operations, comprehensive income (loss), cash flows and changes in stockholders' equity of Nerdy Inc. and its consolidated subsidiaries, including Nerdy LLC, for the period of September 21, 2021 through December 31, 2021. The consolidated balance sheet at December 31, 2021 presents the financial condition of Nerdy Inc. and its consolidated subsidiaries, including Nerdy LLC, and reflects the initial recording of the assets and liabilities of Nerdy Inc. at their historical cost (see Note 4 within "Notes to Consolidated Financial Statements" in Part II, Item 8 of this report).

For the years ended December 31, 2020 and 2019, the consolidated financial statements present the consolidated results of operations, comprehensive income

For the year ended December 31, 2021, $3,779 thousand of the consolidated net losses of Nerdy LLC were attributable to the Class A Common Stockholders, and reflects the Class A Common Stockholders' absorption of a portion of the consolidated net losses of Nerdy LLC for the period of September 21, 2021 through December 31, 2021. For the year ended December 31, 2021, $3,354 thousand of the consolidated net losses of Nerdy LLC were attributable to the NCI, and reflects the Legacy Nerdy Holders' absorption of a portion of the consolidated net losses of Nerdy LLC for the period of September 21, 2021 through December 31, 2021. For the year ended December 31, 2021, $23,546 thousand of the consolidated net losses of Nerdy LLC were attributable to the Legacy Nerdy Holders to reflect their absorption of 100% of the consolidated net losses of Nerdy LLC pertaining to the period of January 1, 2021 through September 20, 2021, the Closing Date of the Reverse Recapitalization. For the years ended December 31, 2020 and 2019, net losses of $24,663 thousand and $22,439 thousand, respectively, were attributable to the Legacy Nerdy Holders to reflect their absorption of 100% of Nerdy LLC's net losses pertaining to the periods prior to the Reverse Recapitalization.

For additional information on the Reverse Recapitalization, the Tax Receivable Agreement, Warrants, Earnouts, and our basis of presentation, refer to "Critical Accounting Policies and Estimates" within this section, as well as Notes 1, 2, 4, and 16, within "Notes to Consolidated Financial Statements" in Part II, Item 8 of this report.

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On January 1, 2019, we adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," using the modified retrospective method applied to those contracts which were not completed as of the date of adoption. We recorded an adjustment to accumulated deficit as of January 1, 2019, to reflect the application of our updated revenue recognition policy, primarily related to the accounting for unredeemed payments for services, which are now recognized over the expected customer usage period rather than at the end of the contract period. The cumulative adjustment resulted in a decrease of $16,767 thousand to"Accumulated deficit" and "Deferred revenue" on the consolidated balance sheet. Revenue for reporting periods beginning January 1, 2019 are presented under ASC Topic 606, resulting in a decrease in "Deferred revenue" of $3,911 thousand and a corresponding increase in "Revenue," as of and for the year ended December 31, 2019, due to revenue from unredeemed payments for services being recognized in accordance with ASC Topic 606.

Seasonality of our Business

We have experienced in the past, and expect to continue to experience seasonal fluctuations in our revenues and earnings due to Learner and institutional spending and consumption habits, and the timing of the academic year. Historically, we experience lower than normal revenues during the summer when schools and universities are out of session in the U.S. and when people travel for vacations and holidays. Due to seasonality, comparisons of our historical quarterly results of operations on a sequential basis may not provide meaningful insight into our overall financial performance.

COVID-19 Pandemic

The COVID-19 pandemic has caused and continues to cause global economic disruption and uncertainty, including in our business. We are closely monitoring the impact of the COVID-19 pandemic and developments related thereto and are taking necessary actions to ensure our ability to safeguard the health of our employees, maintain our operations to serve Learners and institutions and Experts, and preserve financial liquidity to navigate the uncertainty caused by the pandemic.

In the first half of 2020, the COVID-19 pandemic and the resulting closure of schools and testing centers created short-term challenges for our business. Many schools went to optional grading, and standardized and professional exams were suspended, which reduced demand for supplemental learning. We leaned into product evolution and completed our long-term transition to delivering live instruction 100% online in April 2020, a goal we had been working toward since first launching our online platform in 2014. We invested in our product capabilities to innovate our way through the short-term challenges, including bringing together what had been multiple disparate learning formats we were building into a single cohesive destination that allowed us to extend and strengthen the extent to which we can help Learners beyond what was capable solely in a one-on-one environment.

Our investments in innovation during COVID-19 enabled us to hit key financial milestones we had established for the Company, including improving our unit-level economics and demonstrating we could be self-sustaining. We believe these trends will continue as the COVID-19 impact diminishes. While we closed our in-person business in 2020, the momentum in our one-on-one online business combined with the successful release of several new learning formats and investments in brand awareness have delivered strong improvements in Active Learner (as defined below) growth, customer engagement, retention, lifetime value expansion, and revenue growth.

The loss of in-person one-on-one instruction has been more than offset by increases in the Company's online offerings. Our online revenues increased $43,224 thousand to $140,664 thousand in the year ended December 31, 2021 compared to the year ended December 31, 2020, an increase of 44% year over year with a corresponding decrease in in-person learning from $6,528 thousand for the year ended December 31, 2020 to zero for the year ended December 31, 2021. Total revenue for the year ended December 31, 2021 increased $36,696 thousand or 35% year-over-year to $140,664 thousand.

For additional discussion, refer to "Cautionary Statement on Forward-Looking Statements" on page 1 of this report and "Risk Factors" in Part I, Item 1A of this report.

Closing of Veritas

In December 2021, management made a strategic decision to abandon the Veritas LLC ("Veritas") legacy business as the Company will no longer sell new services under the Veritas Prep trade name, while retaining certain operational know-how and capabilities that we are actively applying to the larger Varsity Tutors brand offerings. In connection with the abandonment of the Veritas legacy business, we recorded a write-off of the Veritas Prep trade name, as well as write-offs of other immaterial assets.

Table of Contents KEY FINANCIAL AND OPERATING METRICS

We monitor the following key financial and operating metrics to evaluate the growth of our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

"Active Learner(s)" is defined as the unique number of Learners attending a paid online one-on-one instruction, a paid online class, or a paid group tutoring session in a given period. Variations in the number of Active Learners are due to changes in demand for our solutions, seasonality, testing schedules, and the launch of new products and learning formats, and therefore, is a key indicator of our ability to attract and engage Learners. During the year ended December 31, 2020, the Company transitioned to 100% online learning. The following table summarizes the number of Active Learners for the years ended December 31, 2021, 2020, and 2019:







                                                         Year Ended December 31,                    Change                   Year Ended December 31,                    Change
        Active Learners in ones;
        favorable/(unfavorable)                      2021                         2020                %                  2020                         2019                %
        








        Active Learners                             126,519                       86,614                 46%             86,614                       63,060                 37%
        "Revenue per Active Learner" is calculated as online revenue divided by the
        number of Active Learners in a given year or period. The following table
        summarizes Revenue per Active Learner for the years ended December 31, 2021,
        2020, and 2019:
                                                    Year Ended December 31,              Change              Year Ended December 31,              Change
        dollars in ones;
        favorable/(unfavorable)                     2021                2020               %                 2020                2019               %
        Revenue per Active Learner             $      1,112          $  1,125                (1)%       $      1,125          $  1,021                 10%
        


"Online Sessions" is defined as the total number of online one-on-one sessions, the number of paid online group classes attendees, and the number of paid group tutoring session attendees in a given period (excluding Legacy Businesses and our subscription service, VT+). The following table summarizes total Online Sessions for for the years ended December 31, 2021, 2020, and 2019:







                                                       Year Ended December 31,                   Change                  Year Ended December 31,                   Change
        sessions in thousands;
        favorable/(unfavorable)                     2021                       2020                %                  2020                       2019                %
        Online Sessions                             1,921                       1,113                 73%             1,113                            549             103%
        


"Sessions Taught per Active Expert" is calculated as the number of one-on-one sessions, the number of paid online group classes, and the number of paid group tutoring sessions per active Expert in a given period. The following table summarizes sessions taught per active Expert for the years ended December 31, 2021, 2020, and 2019:







                                                             Year Ended December 31,                  Change                  Year Ended December 31,                  Change
        sessions in ones:
        favorable/(unfavorable)                          2021                       2020                %                 2020                       2019                %
        


"One-on-One Average Session Length" is defined as a session (e.g., an instructional meeting) between a single Learner and a single Expert in an online, one-on-one setting (excluding Veritas and EduNation Limited, a company incorporated in England and Wales ("First Tutors UK") (collectively, the "Legacy Businesses") and our subscription service, VT+). The following table summarizes total One-on-One Average Session Length or the years ended December 31, 2021, 2020, and 2019:







                                                             Year Ended December 31,                   Change                  Year Ended December 31,                   Change
        in hours:
        favorable/(unfavorable)                           2021                       2020                %                  2020                       2019                %
        One-on-One Average Session Length                  1.32                        1.39                (5)%              1.39                        1.49                (7)%
        


Table of Contents RESULTS OF OPERATIONS







                                                                                       Year Ended December 31,
        dollars in thousands                          2021               %               2020               %              2019               %
        Revenue                                   $ 140,664             100  %       $ 103,968             100  %       $ 90,452             100  %
        Cost of revenue                              46,700              33  %          34,834              34  %         30,830              34  %
        Gross Profit                                 93,964              67  %          69,134              66  %         59,622              66  %
        . . .
        


Feb 28, 2022

COMTEX_403253944/2041/2022-02-28T17:49:26

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