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May 16, 2022, 4:45 p.m. EDT

10-Q: NERDY INC.

(EDGAR Online via COMTEX) -- ITEM 2. 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. and its consolidated subsidiaries. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein and our audited consolidated financial statements and notes thereto found in our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report"). In addition, the following discussion and analysis of Nerdy Inc.'s financial condition and results of operations also contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth in the section entitled "Item1A. Risk Factors" in the 2021 Annual Report and under the section "Cautionary Note On Forward-Looking Statements" below. Unless otherwise stated or the context otherwise indicates, all references in the succeeding paragraphs to "Nerdy," "the Company," "us," "our" or "we" mean Nerdy Inc. and its consolidated subsidiaries.

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 tutoring, 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:

On September 20, 2021 (the "Closing Date"), TPG Pace Tech Opportunities Corp., an exempted company incorporated in the Cayman Islands ("TPG Pace"), and Live Learning Technologies LLC, a Delaware limited liability company (along with its wholly-owned subsidiaries, "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. Immediately prior to the Closing, TPG Pace became a Delaware corporation and was renamed Nerdy Inc.

As a result of the business combination and related transactions (the "Reverse Recapitalization"), Nerdy LLC merged with a wholly-owned subsidiary of Nerdy Inc., with Nerdy LLC surviving such merger. 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. Members of Nerdy LLC are the legacy holders of Nerdy LLC historical common and preferred equity (the "Legacy Nerdy Holders") and Nerdy Inc.

The 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"). For the three months ended March 31, 2021, $5,726 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 prior to the Reverse Recapitalization.

For additional information on the Reverse Recapitalization, see Note 1 within "Notes to Condensed Consolidated Financial Statements" in Part I, Item I of this report.

Lease Accounting

On January 1, 2022, we adopted Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" and ASU 2018-11, "Leases (Topic 842): Targeted Improvements." At adoption, we recognized right-of-use assets and lease liabilities of $4,154

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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.

The education system in the U.S. is under tremendous stress, creating an environment with immense opportunity for transformation. While COVID-19 accelerated and amplified some of the acute challenges that existed before the pandemic, adding incremental headwinds in the process, it also created an environment where new solutions to these challenges are both welcome and actively being pursued. In addition, with recent advancements in technology, like the learning solutions Nerdy offers, transforming the way people learn has never been more possible. We believe we are at the beginning of a long-term and durable shift in the way supplemental learning will be delivered - a shift that we believe will persist for years to come.

Inflation

Our financial results have been impacted by wage inflation and other inflationary pressures that have occurred in connection with (i) the economic recovery from the COVID-19 pandemic and (ii) the conflict in Ukraine and the subsequent economic sanctions. We continuously explore the best pricing of our services and will consider future pricing actions to offset these inflationary pressures.

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. The below metrics exclude the legacy Veritas LLC business and EduNation Limited, a company incorporated in England and Wales ("First Tutors UK") (collectively, the "Legacy Businesses") and our subscription service, VT+.

"Active Learner(s)" is defined as the unique number of Learners attending a paid one-on-one instruction, a paid group 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. The following table summarizes the number of Active Learners for the periods presented.







                                                    Three Months Ended March 31,             Change
        Active Learners in ones;
        favorable/(unfavorable)                                                2022           2021          %
        Active Learners                                                       73,578        47,231          56%
        


"Revenue per Active Learner" is calculated as revenue divided by the number of Active Learners in a given year or period. The following table summarizes Revenue per Active Learner for the periods presented:

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                                                     Three Months Ended March 31,         Change
        dollars in ones;
        favorable/(unfavorable)                                                2022        2021         %
        Revenue per Active Learner                                            $ 638      $  732        (13)%
        


"Sessions" is defined as the total number of one-on-one sessions, the number of paid group class registrants in a given period, and the number of paid group tutoring session attendees. The following table summarizes total Sessions for the periods presented.







                                                   Three Months Ended March 31,         Change
        Sessions in thousands;
        favorable/(unfavorable)                                               2022       2021        %
        Sessions                                                              748       477          57%
        "Sessions Taught per Active Expert" is calculated as the number of one-on-one
        sessions, the number of paid 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 periods presented.
                                                                                        Three Months Ended March 31,                    Change
        Sessions Taught per Active Expert in ones:
        favorable/(unfavorable)                                                                                    2022                  2021                   %
        Sessions Taught per Active Expert                                                                               42                   43                    (2)%
        "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 a
        one-on-one setting. The following table summarizes total One-on-One Average
        Session Length for the periods presented.
                                                            Three Months Ended March 31,          Change
        in hours;
        favorable/(unfavorable)                                                        2022        2021         %
        One-on-One Average Session Length                                              1.28       1.30          (2)%
        








                                     RESULTS OF OPERATIONS
                                                                      Three Months Ended March 31,
        dollars in thousands                                                               2022               %               2021               %
        Revenue                                                                        $  46,925              100  %       $ 34,565              100  %
        Cost of revenue                                                                   14,152               30  %         11,192               32  %
        Gross Profit                                                                      32,773               70  %         23,373               68  %
        Sales and marketing expenses                                                      22,946               49  %         14,582               42  %
        General and administrative expenses                                               30,509               65  %         13,245               38  %
        Operating Loss                                                                   (20,682)             (44) %         (4,454)             (13) %
        Unrealized loss on derivatives                                                    11,042              (24) %              -                -  %
        Interest (income) expense, net                                                        (7)               -  %          1,237                4  %
        Other expense, net                                                                    17                -  %             35                -  %
        Loss before Income Taxes                                                         (31,734)             (68) %         (5,726)             (17) %
        Income tax expense                                                                    13                -  %              -                -  %
        Net Loss                                                                         (31,747)             (68) %         (5,726)             (17) %
        Net loss attributable to legacy Nerdy holders prior to
        the reverse recapitalization                                                           -                -  %         (5,726)             (17) %
        Net loss attributable to noncontrolling interests                                (14,902)             (32) %              -                -  %
        Net Loss Attributable to Class A Common Stockholders                           $ (16,845)             (36) %       $      -                -  %
        


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Revenue for the three months ended March 31, 2022 was $46,925, an increase of 36% from $34,565 thousand during the same period in 2021. We continue to innovate and bring new products to market to deepen relationships with Learners, further extend our ability to reach new audiences, such as Professional and Learning Differences, and introduce new products including Varsity Tutors for Schools, all while increasing engagement among our Experts to drive meaningful top line revenue growth.

The following table sets forth our revenue by service category for the periods presented.







                                                Three Months Ended March 31,
        dollars in thousands                                                   2022          %          2021          %
        One-on-one                                                          $ 39,039        83  %    $ 30,860        90  %
        Class and group                                                        6,354        14  %       1,850         5  %
        Other (a)                                                              1,532         3  %       1,855         5  %
        Revenue                                                             $ 46,925       100  %    $ 34,565       100  %
        (a)Other consists of the Legacy Businesses and other services.
        








        Cost of Revenue and Gross Profit
        The following table sets forth our cost of revenue and gross profit for the
        periods presented.
                                                                                  Three Months Ended March 31,                   Change
        dollars in thousands;
        favorable/(unfavorable)                                                                                          2022              2021                $                  %
        Revenue                                                                                                       $    46,925       $    34,565       $    12,360                 36%
        Cost of revenue                                                                                                    14,152            11,192           (2,960)               (26)%
        Gross Profit                                                                                                  $    32,773       $    23,373       $     9,400                 40%
        % Margin                                                                                                           70   %            68   %
        Cost of revenue includes the cost of Experts performing instruction,
        amortization of capitalized technology costs, and other costs required to
        deliver instruction to Learners.
        For the three months ended March 31, 2022, Cost of revenue increased $2,960
        thousand to $14,152 thousand, or 26%, compared to the corresponding prior year
        period, primarily due to higher expert costs of $2,929 thousand due to higher
        session volume and incremental tutor costs related to Varsity Tutors for
        Schools.
        Gross profit for the three months ended March 31, 2022 of $32,773 thousand
        increased by $9,400 thousand, or 40%, compared to the same period in 2021. Gross
        margin of 70% for three months ended March 31, 2022 was 220 bps higher than
        gross margin of 68% for the three months ended March 31, 2021. Gross profit
        increases were driven by growth across consumer one-on-one audiences, growth in
        our small group class and tutoring formats, and the introduction of new
        products, including Varsity Tutors for Schools.
        Operating Expenses
        The following table sets forth our operating expenses for the periods presented.
                                                                                         Three Months Ended March 31,                   Change
        dollars in thousands;
        favorable/(unfavorable)                                                                                                 2022              2021                $                   %
        Sales and marketing expenses                                                                                         $ 22,946          $ 14,582          $    (8,364)                (57)%
        General and administrative expenses                                                                                    30,509            13,245              (17,264)               (130)%
        Total operating expenses                                                                                             $ 53,455          $ 27,827          $   (25,628)                (92)%
        Sales and Marketing
        Sales and marketing expenses for the three months ended March 31, 2022 were
        $22,946 thousand, an increase of $8,364 thousand from $14,582 thousand in the
        same period in 2021. Sales and marketing expenses for the three months ended
        March 31, 2022 included stock-based compensation of $1,075 thousand. Excluding
        this impact, sales and marketing expenses increased $7,289, or 50%, as we
        continue to make investments in marketing, targeting new audiences and
        advertising in new formats, including television, to drive customer acquisition,
        brand awareness, and reach. We also made investments in
                                               20
        --------------------------------------------------------------------------------
        


General and Administrative

General and administrative expenses for the three months ended March 31, 2022 were $30,509 thousand, an increase of $17,264 thousand from $13,245 thousand in the same period in 2021. General and administrative expenses for the three months ended March 31, 2022 included non-cash stock based compensation of $11,415 thousand. General and administrative expenses for the three months ended March 31, 2021 included non-cash stock based compensation and transaction costs related to the Reverse Recapitalization of $502 thousand and $2,046 thousand, respectively. Excluding these impacts in both periods, general and administrative expenses increased $8,397 thousand, or 78%, as we accelerated investments in new product development which resulted in higher expenses. We are moving quickly to bring in new talent across engineering and product to drive new product innovation and growth. We are pleased with the progress filling key roles and have found that employees are attracted to our remote-first, mission-driven culture and orientation toward innovation. We have also continued to build and scale the institutional team and launch a new suite of product capabilities in the first quarter. In addition, our general and administrative expenses now reflect the increased finance, accounting, and legal costs of being a newly public company.

Unrealized Loss on Derivatives

Unrealized loss on derivatives was $11,042 thousand for the three months ended March 31, 2022 and related to non-cash mark-to-market adjustments on our warrants and earnouts that were issued in connection with the Reverse Recapitalization. Of the loss recognized in the current year period, $5,163 thousand and $5,879 thousand related to warrants and earnouts, respectively. For additional information on our warrants and earnouts. see Note 10 within "Notes to Condensed Consolidated Financial Statements" in Part I, Item 1 of this report.

Interest (Income) Expense, Net

Interest income was $7 thousand for the three months ended March 31, 2022, compared to interest expense of $1,237 thousand for the three months ended March 31, 2021. This decrease in interest expense, net was driven by the repayment in full of our previously outstanding principal balance under our loan and security agreement in connection with the Closing of the Reverse Recapitalization on September 20, 2021.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents totaling $141,715 thousand and $143,964 thousand, respectively. We have incurred cumulative losses from our operations, and we expect to incur additional losses in the future. Our operations have historically been financed primarily through capital contributions and debt financings. To the extent we continue to generate negative operating cash flows, we expect that operations will continue to be financed primarily by cash on hand and possible equity issuances and debt financings, as necessary. We are using the proceeds received from the Reverse Recapitalization to fund our operating cash needs, for continued investments in our growth strategies, and to achieve expected profitability by the end of 2023.

Cash Requirements

Our cash requirements within the next twelve months include working capital requirements, sales and marketing activities, and capital expenditures. We believe our cash on hand, cash flows from operations, and possible future equity issuances and debt financings will be sufficient to satisfy these future requirements.

Our cash requirements under our contractual obligations and commitments consist primarily of lease arrangements. For information on our lease obligations and the amount and timing of future payments, see Note 12 within "Notes to Condensed Consolidated Financial Statements" in Part I, Item 1 of this report As of March 31, 2022, we had no debt obligations.

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Three Months Ended March 31, dollars in thousands 2022 2021 Cash used in:

Operating Activities

Cash used in operating activities for the three months ended March 31, 2022 decreased $1,484 thousand compared to the same period in 2021, driven by increased bookings and collections, lower interest paid of $1,056 thousand, and favorable changes in the timing of payments in accounts payable. These impacts were partially offset by targeted investments in new products and solutions, including Varsity Tutors for Schools, marketing, and new talent hires across engineering and product to drive new product innovation and growth. In addition, cash used in operating activities for the current year period reflects the increased finance, accounting, and legal costs of being a newly public company.

Investing Activities

Cash used in investing activities was $1,264 thousand and $848 thousand for the three months ended March 31, 2022 and 2021, respectively. Cash used in investing activities relate to capital expenditures primarily for the development of internal use software and IT equipment.

Financing Activities

Three months ended March 31, 2022

Cash used in financing activities for the three months ended March 31, 2022 was $816 thousand, which primarily related to payments made to Legacy Nerdy Holders in connection with the Reverse Recapitalization.

Three months ended March 31, 2021

Cash used in financing activities for the three months ended March 31, 2021 was $444 thousand, which related to the payment of Reverse Recapitalization costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies and estimates are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the United States Securities and Exchange Commission (the "SEC") on February 28, 2022. There have been no significant changes to our critical accounting policies and estimates since December 31, 2021.

. . .

May 16, 2022

COMTEX_407287605/2041/2022-05-16T16:45:17

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