Nerdy Inc. (NRDY) FY 2022 MD&A

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 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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 Annual Report on Form 10-K for the year ended December 31, 2021 filed with the United States Securities and Exchange Commission (the “SEC”) on February 28, 2022.

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, coding, tutor chat, essay review, 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. Our 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 (including High Dosage, Teacher Assigned, and On Demand Tutoring) that leverages our platform capabilities to offer our online learning solutions directly to education systems. We have built a diversified business across the following audiences: K-8, High School, College, Graduate School, and Professional.

We continue to evolve our product offerings to better meet the needs of Learners by launching Learning Memberships, a monthly membership program that includes access to one-on-one instruction, unlimited live group classes, live and on-demand lessons, coding, tutor chat, essay review, adaptive assessments, and self-study modules. Learning Memberships are for Learners of all ages, ranging from kindergarten to college and adult learners. We’re continuing to invest to expand and broaden the product depth of Learning Memberships with even more learning solutions for our members to deliver unparalleled and enhanced value.

We believe the transition to a recurring, ‘always on’ relationship, will lead to longer-term and more consistent engagement with the platform, while also allowing us to serve our customers’ ongoing learning needs across the entirety of their education lifecycle. We also believe that over time Learning Memberships will have a significant impact on Expert engagement and retention, as Experts are seeking longer-term and more consistent earning opportunities.

Reverse Recapitalization

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 additional information on the Reverse Recapitalization, our basis of presentation, and the NCI, refer to Notes 1, 2, 4, and 5 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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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 thousand and $4,870 thousand, respectively, on the consolidated balance sheet at January 1, 2022. For additional information regarding the adoption of these ASUs, refer to Notes 3 and 17 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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 United States (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

We continue to monitor the impact of the COVID-19 pandemic on our business. 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.

In addition, while COVID-19 accelerated and amplified some of the acute challenges within the U.S. education system that existed before the pandemic, adding incremental headwinds in the process, it also created an environment where new solutions to these challenges were both welcome and actively being pursued. Furthermore, with recent advancements in technology, like the learning solutions that we offer, 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.

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.

Macroeconomic Trends

Adverse macroeconomic conditions, including inflation, slower growth or a recession, tighter credit, higher interest rates, and higher unemployment rates have had negative impacts on consumer confidence and spending in 2022. Specifically, our financial results have been impacted by wage inflation among our employees and other inflationary pressures. We continuously explore the best pricing of our services and will consider future pricing actions to offset these inflationary pressures.

Restructuring

On December 8, 2022, we announced the completion of workforce reductions of approximately 17% of our total workforce. The reductions primarily affected variable hourly roles and included a limited number of corporate fixed personnel roles. The new products and go-to-market strategies in both our Consumer and Institutional businesses, which focus on recurring revenue relationships with higher value customers, allow for a simplified sales model and generate operating efficiencies, including in the headcount needed to operate certain areas of the business. These decisions, in combination with other cost-reduction measures, are intended to reduce operating expenses in future periods. For additional information on this restructuring event, refer to Note 7 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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 (“Veritas”) business and EduNation Limited, a company incorporated in England and Wales (“First Tutors UK”) (collectively, the “Legacy Businesses”), as well as our Teacher Assigned and On Demand solutions.

Consistent with our previously discussed expectations, Active Learner (as defined below) and Sessions (as defined below) growth rates decreased during 2022 and reflect our decisions to shift our go-to-market strategy and products to focus on higher value and longer duration Learning Membership customers. Both metrics were primarily affected by the shift to Learning Memberships (and the related inclusion of classes in our Learning Membership offering versus selling academic and enrichment classes on a stand-alone basis) as we evolve our focus toward higher lifetime value recurring relationships with Learners. Additionally, Revenue per Active Learner (as defined below) decreased during 2022 due to a customer mix shift from Consumer to Institutional, which was launched in August 2021.

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“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, as well as the number of unique Learning Membership customers. 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.

“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 periods presented.

“Sessions” is defined as the total number of one-on-one sessions, the number of paid group class enrollees, the number of paid group tutoring session attendees, and the number of sessions enrolled in by Learning Membership customers in a given period. The following table summarizes total Sessions for the periods presented.

“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.

“One-on-One Average Session Length” is defined as a session (e.g., an instructional meeting) between a 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.

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RESULTS OF OPERATIONS

Revenue

Revenue for the year ended December 31, 2022 was $162,665 thousand, an increase of $22,001 thousand, or 16%, from $140,664 thousand during the same period in 2021. Revenue growth was driven by continued strength in our Consumer business, including the evolution towards ‘always on’ Learning Memberships, as well as the growth we experienced in our Institutional business.

During this year’s back-to-school season and fall semester, we leaned into Learning Memberships as the primary option presented to consumers. Under our Learning Membership model, revenue is recognized on a linear basis over the term of the contract versus being front weighted (typically over the first three to six months) as is the case in our Package model. This results in lower revenue recognition in the near-term for Learning Membership clients, as compared to Package clients. While this evolution toward subscription offerings results in lower, near-term revenue, the evolution toward an ‘always on’ Learning Membership model will allow us to better support Learners across multiple learning modalities, subjects, and time periods, and we expect that it will ultimately allow us to generate superior customer unit level economics, and drive superior levels of growth and profitability. This phenomenon was reflected in our revenue growth rate for the year ended December 31, 2022, which was below historical trends when we only sold the Package model. In the fourth quarter of 2022, we began to earn more revenue from Learning Memberships than from Packages, and we expect this trend to continue and increase in 2023.

The following table presents the Company’s revenue by business category for the periods presented.

(a)Other consists of the Legacy Businesses and other services.

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Cost of Revenue and Gross Profit

The following table sets forth our cost of revenue and gross profit for the periods presented.

Cost of revenue includes the cost of Experts performing instruction, amortization of capitalized technology costs, and other costs required to deliver instruction to Learners.

Cost of revenue for the year ended December 31, 2022 increased $3,032 thousand to $49,732 thousand, or 6%, compared to the prior year period, primarily due to higher Expert costs of $2,652 thousand as a result of higher consumer, one-on-one session volume and incremental session volume and tutor costs related to Varsity Tutors for Schools.

Gross profit for the year ended December 31, 2022 of $112,933 thousand increased by $18,969 thousand, or 20%, compared to the same period in 2021. Gross margin was 69% during the year ended December 31, 2022, an approximate increase of 260 basis points when compared to the prior year period. These increases in the current year period were driven by growth across Consumer audiences, including Learning Memberships, and growth in our Institutional business.

Operating Expenses

The following table sets forth our operating expenses for the periods shown:

Sales and Marketing

Sales and marketing expenses for the year ended December 31, 2022 were $74,183 thousand, an increase of $8,742 thousand from $65,441 thousand in the same period in 2021. Sales and marketing expenses for the year ended December 31, 2022 included non-cash stock-based compensation and restructuring costs of $4,086 thousand and $345 thousand, respectively. Sales and marketing expenses for the year ended December 31, 2021 included non-cash stock-based compensation of $3,378 thousand. Excluding these impacts in both periods, sales and marketing expenses increased $7,689 thousand, or 12%. Additionally, excluding these impacts in both periods, sales and marketing expenses for the year ended December 31, 2022 were 43% of revenue compared to 44% of revenue during the same period in 2021, an approximate 100 basis point improvement year-over-year.

In the current year period, we made investments early in 2022 in marketing, targeting new audiences and advertising in new formats to drive customer acquisition, brand awareness, and reach. We also continued to make investments in our Institutional sales and go-to-market organization in support of Varsity Tutors for Schools, and expect to grow into these investments as we expect revenue to grow faster than expenses. These impacts were partially offset by the moderation of marketing spend beginning in the second quarter of 2022, which yielded efficiencies in our Consumer business. We also expect to achieve efficiencies in future periods as Learning Memberships become a greater percentage of total Active Learners, leading to a more efficient sales process.

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General and Administrative

General and administrative expenses for the year ended December 31, 2022 were $129,559 thousand, an increase of $7,591 thousand from $121,968 thousand in the same period in 2021. General and administrative expenses for the year ended December 31, 2022 included non-cash stock-based compensation and restructuring costs of $43,158 thousand and $1,134 thousand, respectively. General and administrative expenses for the year ended December 31, 2021 included non-cash stock-based compensation and transaction costs of $51,039 thousand and $9,602 thousand, respectively. Excluding these impacts in both periods, general and administrative expenses increased $23,940 thousand, or 39%. Additionally, excluding these impacts in both periods, general and administrative expenses for the year ended December 31, 2022 were 52% of revenue compared to 44% of revenue during the same period in 2021.

This increase in the current year period was a result of investments in new product development and administrative expenses related to being a public company. Our investments in product development have allowed us to launch a suite of new products including Learning Memberships for consumers, and our Teacher Assigned and On Demand Institutional offerings for institutional customers. These subscription offerings simplify both the sales process and the operating model needed to support customers. Combined with our ongoing efforts in automation, self-service capabilities and the application of artificial intelligence and machine learning in our business, we have been able to generate operating efficiencies and remove significant costs from the business. We also moderated the pace of corporate hiring and third party vendor spend starting in the third quarter of 2022. In the fourth quarter of 2022, we announced the completion of workforce reductions of approximately 17% of our total workforce driven by the operating efficiencies enabled by our new ‘always on’ strategy and product offerings. As Learning Membership mix continues to increase as a percentage of total Active Learners, we believe we will be able to further simplify our operating model throughout the course of 2023 as the cumulative build of Learning Memberships accelerates, and and we return to growth in our Consumer business.

Write-off of Other Intangible Assets

During the year ended December 31, 2021, we recorded a write-off of other intangibles assets of $3,009 thousand for the Veritas Prep definite-lived trade name to adjust its net carrying value to zero. The write-off of Veritas Prep trade name was the result of a strategic decision made by management in December 2021 to abandon the Veritas legacy business as we will no longer sell new services under the Veritas Prep trade name. We did not record any impairments or write-offs of other intangible assets during the years ended December 31, 2022 or 2020.

Unrealized Gain on Derivatives, Net

During the years ended December 31, 2022 and 2021, we recognized net gains of $26,620 thousand and $71,041 thousand, respectively, related to non-cash mark-to-market adjustments on our warrants and earnouts that were issued in connection with the Reverse Recapitalization. Of the net gain recognized in 2022, $12,812 thousand and $13,808 thousand related to warrants and earnouts, respectively. Of the net gain recognized in 2021, $24,095 thousand and $46,946 thousand related to warrants and earnouts, respectively.

For additional information on our warrants and earnouts, see “Critical Accounting Policies and Estimates” within this section, as well as Notes 1, 2, 14, and 15 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

Interest (Income) Expense, Net

Interest income was $483 thousand for the year ended December 31, 2022, compared to interest expense, net of $3,772 thousand for the year ended December 31, 2021. This decrease in interest expense was driven by the repayment in full of our previously outstanding principal balance under the loan and security agreement (the “LSA”) in connection with the Closing of the Reverse Recapitalization on September 20, 2021 and higher interest income on our cash balances during the year ended December 31, 2022.

Other Expense, Net

Other expense, net was $8,571 thousand for the year ended December 31, 2021. In connection with the Reverse Recapitalization, Nerdy Inc.’s Board of Directors approved repayment in full by Nerdy LLC of the principal balance and accrued interest of its promissory note (the “Promissory Note”) that was previously forgiven, which totaled $8,395 thousand. Accordingly, we recognized a loss on repayment of the Promissory Note of $8,395 thousand for the year ended December 31, 2021.

Gain on Extinguishment of Debt, net

Gain on extinguishment of debt, net was $7,117 thousand for the year ended December 31, 2021.

We applied for and received the Promissory Note under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the amount of $8,293 thousand in 2020. In 2021, we received notice that the full principal amount of the

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Promissory Note and accrued interest of $102 thousand was forgiven in full. Accordingly, the Company recognized a gain on the Promissory Note forgiveness of $8,395 thousand in the year ended December 31, 2021. The loss recognized on the Promissory Note repayment (discussed in the “Other Expense, net” section) and the gain recognized on the forgiveness of the Promissory Note fully offset each other, resulting in a net zero impact to the Consolidated Statement of Operations for the year ended December 31, 2021.

With a portion of the proceeds received from the Reverse Recapitalization, Nerdy LLC fully repaid the outstanding principal balance and accrued interest of the LSA. In connection with these repayments, Nerdy LLC recorded a loss of $1,278 thousand during the year ended December 31, 2021.

For additional information on our previously held debt and their repayments, see Notes 1 and 16 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

Income Tax Expense

Our effective income tax rate was (0.03)% and (0.56)% for the years ended December 31, 2022 and 2021, respectively. Income tax expense and our effective income tax rate for the year ended December 31, 2021 represents the period beginning September 21, 2021 and ending December 31, 2021. Income tax expense recorded during the years ended December 31, 2022 and 2021 represents amounts owed to state authorities due to the change in corporate taxpayer status following the Reverse Recapitalization. The following table presents a reconciliation of income tax expense with amounts computed at the federal statutory tax rate for the periods presented.

Prior to the Reverse Recapitalization, Nerdy LLC was a partnership. As such, its net taxable loss and any related tax credits were allocated to its members. For additional information on income taxes, see Note 8 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the Reverse Recapitalization in 2021, Nerdy LLC received net 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 a private placement financing (the “PIPE Financing”), (iii) proceeds of $150,000 thousand from a forward purchase agreement (the “FPA Financing”), and (iv) the payment of TPG Pace transaction expenses of $30,099 thousand. Nerdy LLC used these proceeds to (i) pay cash consideration of $336,079 thousand to the Legacy Nerdy Holders, (ii) pay transaction fees and expenses of $29,636 thousand, and (iii) repay $52,343 thousand of outstanding principal and interest under the LSA held by Nerdy LLC. The remaining funds were contributed to Nerdy LLC’s balance sheet.

Sources and Uses of Cash

As of December 31, 2022 and 2021, we had cash and cash equivalents totaling $90,715 thousand and $143,964 thousand, respectively. We have incurred cumulative losses from our operations, and we may 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. We are using the proceeds received from the Reverse Recapitalization to fund our operating and investing cash needs and for continued investments in our growth strategies.

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 will be sufficient to satisfy these future requirements.

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Our cash requirements under our contractual obligations and commitments consist primarily of lease arrangements. See Note 17 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report for information on our lease obligations and the amount and timing of future payments. As of December 31, 2022, we had no debt obligations.

The following table sets forth our cash flows:

Operating Activities

Cash used in operating activities for the year ended December 31, 2022 increased $9,111 thousand compared to the same period in 2021, primarily driven by targeted investments in new products and solutions, including Learning Memberships and Varsity Tutors for Schools, and marketing; new talent hires across engineering and product to drive new product innovation and growth; and unfavorable changes in working capital as we rollout Learning Memberships. Additionally, cash used in operating activities for the current year period reflects increased finance, accounting, and legal costs of being a public company, as well as payments of $1,366 thousand related to employee-related costs that were incurred in connection with the restructuring event discussed above. These negative impacts were partially offset by lower interest paid of $4,069 thousand as a result of the prior year repayment of the LSA, which occurred in connection with the Closing of the Reverse Recapitalization in September 2021. Cash used in operating activities for the year ended December 31, 2021 included transaction costs paid of $7,998 thousand in connection with the Reverse Recapitalization and the repayment of the previously forgiven Promissory Note and related accrued interest of $8,395 thousand.

Investing Activities

Cash used in investing activities was $5,317 thousand and $5,163 thousand for the years ended December 31, 2022 and 2021, respectively. Cash used in investing activities related to capital expenditures primarily for the development of internal use software and information technology (“IT”) equipment.

Financing Activities

Year Ended 2022

Cash used in financing activities for the year ended December 31, 2022 was $1,000 thousand, which primarily related to payments made to Legacy Nerdy Holders in connection with the Reverse Recapitalization.

Year Ended 2021

Cash provided by financing activities for the year ended December 31, 2021 was $159,250 thousand. Nerdy LLC received proceeds of $557,574 thousand related to the Reverse Recapitalization. Additionally, Nerdy LLC received proceeds of $11,000 thousand related to borrowings under the LSA. In connection with the Reverse Recapitalization, Nerdy LLC paid $336,079 thousand to Legacy Nerdy Holders; repaid the outstanding principal of $50,000 thousand and paid debt extinguishment costs of $1,607 thousand related to the LSA; and paid $21,638 thousand of transaction costs.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make judgments, estimates, and assumptions. We make these subjective determinations after considering our historical performance, management’s experience, current economic trends, and events and information from outside sources. Inherent in this process is the possibility that actual results could differ from these estimates and assumptions for any particular period. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 within the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report. Our critical accounting policies and estimates are those that have a meaningful impact on the reporting of our financial condition and results of operations.

Revenue Recognition and Deferred Revenue

We recognize revenues from our services as performance obligations are satisfied. Performance obligations are satisfied throughout the term of contracts with Learners and institutions, who are our customers, when they are provided services. Revenue is recognized in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We generate revenue by selling services to Learners and institutions for one-on-one instruction, classes, and other services that are fulfilled by Experts, who deliver instruction on our behalf through our proprietary Live Learning Platform. Our contracts with Learners consist of Learning Memberships and Packages.

Our revenues from contracts with Learners, which are generally short-term duration (one year or less), are recognized as performance obligations are satisfied. Contracts with Learners are sold through Learning Memberships, whereby Learners pay a fixed monthly rate over the contract term, and Packages, which primarily consist of upfront payments that can be redeemed up to one year from the date of first payment.

Revenues earned through Learning Memberships are recognized based upon its two distinct performance obligations: (i) one-on-one instruction and (ii) unlimited access to live classes (and other content). Revenues are recognized from one-on-one instruction and unlimited live classes (and other content) as performance obligations are satisfied and in an amount that reflects the consideration we are contractually entitled to receive in exchange for those services. For one-on-one instruction, revenue recognition is consistent with one-on-one instruction sold through Packages. The customer receives benefit from the completion of each session (as Learners are not obligated to meet with the same Expert for a minimum number of sessions), and therefore, each one-on-one session is a separate performance obligation. Revenue is recognized and deferred revenue is relieved on the date services are delivered to Learners. For unlimited access to live classes (and other content), revenues are recognized ratably as the performance obligation is satisfied over time as we are required to provide access to live classes and other content during the contract period.

Revenues earned through Packages are recognized from services as performance obligations are satisfied. Given the customer receives benefit from the completion of each session (as Learners are not obligated to meet with the same Expert for a minimum number of sessions), we concluded that each session is a separate performance obligation. Revenue is recognized and deferred revenue is relieved on the date services are delivered to Learners in an amount that reflects the consideration we are contractually entitled to receive in exchange for those services.

Cash for the purchase of services by Learners (Learning Memberships and Packages) is generally collected in advance (at one time or in installments) and recorded to deferred revenue until the services are used by the Learner. With respect to installment sales, the first installment payment is collected at the time of sale with the subsequent payment typically due thirty days later. Per the terms of the Learning Memberships contract, purchased services can be redeemed up to one month from the date of payment. Per the terms of the Packages contract, purchased services can be redeemed up to one year from the date of the first payment. We recognize revenue for unredeemed payments for services over the life of the agreement (unredeemed payments expire each month in the case of Learning Memberships) with the customer based on historical customer usage patterns. We estimate the amount in which and the period of time over which payments for services are not redeemed using historical usage and redemption patterns. These estimates are reassessed each reporting period.

Our revenues from contracts with institutions, which are generally short-term in duration (one year or less), are recognized from services as performance obligations are satisfied. Given the institutions receive benefit from the completion of each session (institutions are not obligated to meet with the same Expert for a minimum number of sessions), we have concluded that each session is a separate performance obligation. Revenue is recognized, and to the extent cash for the purchase of services by institutions is collected in advance (at one time or in installments) deferred revenue is relieved on the date services are delivered to institutions in an amount that reflects the consideration we are contractually entitled to receive in exchange for those services.

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For institutions that do not pay in advance, we typically invoice these institutions on a monthly basis for each session provided, with amounts recorded to accounts receivable, net of any related allowance for doubtful accounts.

Per the terms of the contract, services purchased by institutions are generally redeemed up to one year from the date of the first payment. To the extent cash for the purchase of services by institutions is collected in advance, we recognize revenue for unredeemed payments for services over the life of the agreement with institutions based on usage.

We provide a significant service of integrating instruction services, which are provided by Experts on our behalf through our platform, using our curation and matching technologies and features in order to deliver a combined output to meet our performance obligation to Learners. We are primarily responsible for the services provided and set pricing. We have determined that collectively, these factors reflect that we are the principal in transactions with Learners and institutions.

We do not have any incremental costs to obtain or fulfill a contract that require capitalization. We elected as a practical expedient, not to disclose additional information about unsatisfied performance obligations for contracts with customers that have an expected duration of one year or less.

Fixed Assets, Net

Expenditures for fixed assets are capitalized and primarily include costs related to software developed or acquired for internal use and purchases of furniture and IT equipment. Maintenance, repairs, and minor renewals are expensed as incurred. Depreciation of fixed assets other than capitalized internal use software is calculated on a straight-line basis over estimated useful lives of one to seven years and is included in “General and administrative expenses.” When fixed assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the statements of operations.

We capitalize certain costs, including stock-based compensation, associated with software developed or obtained for internal use and website and application development. We capitalize development stage internal and external costs. These costs are capitalized when management has authorized and committed project funding and it is probable that the project will be completed, and the software will be used as intended. Once the software is ready for its intended use it is placed into service, such costs are amortized on a straight-line basis within “Cost of revenue” in the Consolidated Statements of Operations, generally over a four year estimated useful life of the related asset. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred. Costs incurred for enhancements that are expected to result in additional material functionality are capitalized and amortized over the estimated useful life of the upgrades.

Goodwill

Goodwill recorded by us relates to the assets of a previously acquired business. Goodwill represents the excess of the fair value of purchase consideration paid over the estimated fair value of assets acquired and liabilities assumed in a business combination.

We conduct a goodwill impairment qualitative assessment during the fourth quarter of each year, or more frequently if facts and circumstances indicate that goodwill may be impaired. The goodwill impairment qualitative assessment requires us to perform an assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The qualitative assessment considers factors including economic conditions, industry and market conditions and developments, overall financial performance, and other relevant entity-specific events in determining whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount. If adverse qualitative trends are identified that could negatively impact the fair value of the reporting unit, we perform a quantitative goodwill impairment test. We performed a qualitative impairment test for the Company’s single reporting unit in the fourth quarter of 2022 and determined there were no adverse trends that could negatively impact the fair value of the reporting unit. No impairment charges were recorded during the years ended December 31, 2022, 2021, or 2020.

As of December 31, 2022 and 2021, “Goodwill” reported on the Consolidated Balance Sheets was $5,717 thousand.

Stock-based Compensation

We recognize the cost of services received in exchange for awards of equity instruments based on the grant-date fair value of equity awards. That cost is recognized straight-line or graded (when applicable) over the period during which the employee is required to provide service in exchange for the award - the requisite service period. Any forfeitures of stock-based compensation are recorded as they occur. The grant date fair value of the restricted stock units was determined based upon the closing price of the Company’s Class A Common Stock on the date of grant. The grant date fair value of the stock appreciation rights, restricted stock awards, and stock options was determined using the Black-Scholes Model. The grant date fair value of warrants issued to employees was determined using the market approach based upon the quoted market price of Nerdy Inc.’s warrants. The grant date fair value of earnouts issued to employees and the Founder’s Award was determined using the Monte Carlo Option Pricing Method.

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For additional discussion on stock-based compensation, see Note 20 in “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We do not hold or issue financial instruments for speculative or trading purposes.

As a result of the Reverse Recapitalization, we have issued and outstanding warrants and earnout contracts. We evaluate warrants and earnouts, to determine if such instruments should be considered stock-based compensation, pursuant to ASC Topic 718, and if not in the scope of ASC 718, if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC Topic 480, “Distinguishing Liabilities from Equity” or ASC Topic 815, “Derivatives and Hedging.” The classification of whether the instrument should be classified stock-based compensation or a derivative instrument, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

The warrants and earnouts issued to non-employees (the “Non-employee Warrants” and the “Non-employee Earnouts,” respectively) were not classified as stock-based compensation as there was no condition of employment such that the granting of the shares and warrants does not represent compensation. The Non-employee Warrants and Non-employee Earnouts are classified as derivative liabilities under ASC Topic 480 or ASC Topic 815. Derivative warrant and earnout liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities. Public warrants issued to non-employees are measured at fair value on a recurring basis, using the market approach based upon the quoted market price of Nerdy Inc.’s public warrants at the end of each reporting period. Warrants that are not publicly traded and issued to non-employees are measured at fair value on a recurring basis based upon the quoted price for similar liabilities (the public warrants issued to non-employees) in active markets as of the end of each period. Non-employee Earnouts are classified as derivative liabilities and are measured on a recurring basis, using the Monte Carlo Option Pricing Method.

The Company does not offset derivative assets and liabilities within the Consolidated Balance Sheets.

For additional information on our financial instruments, refer to Notes 1, 2, 14, and 15 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS

See Note 3 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report for a discussion regarding recently issued and adopted accounting standards.

MATERIAL WEAKNESSES

See “Controls and Procedures” in Part II, Item 9A of this report for a discussion regarding material weaknesses identified in a prior reporting period, the actions we have taken to remedy such weaknesses, and the status of the remediation as of December 31, 2022.

EMERGING GROWTH COMPANY STATUS

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Additionally, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period.

We expect to remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing date of the TPG Pace’s initial public offering, (b) in which we have total annual gross revenue of at least $1,235,000 thousand or (c) in which we are deemed to be a large accelerated filer, which means the market value of our shares of common stock that are held by non-affiliates equals or exceeds $700,000 thousand as of the prior June 30th, or (2)

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the date on which we have issued more than $1,000,000 thousand in non-convertible debt securities during the prior three-year period. Based upon the facts and circumstances that existed as of December 31, 2022, we remained an emerging growth company for our Annual Report on Form 10-K for the year ended December 31, 2022 and will continue to be for our quarterly reports in the 2023 interim periods.

SMALLER REPORTING COMPANY STATUS

We are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We expect to remain a smaller reporting company at the last day of the fiscal year as long as (i) the market value of our shares of common stock held by non-affiliates is less than $250,000 thousand as of the prior June 30, or (ii) our annual revenues are less than $100,000 thousand during the prior fiscal year and the market value of our shares of common stock held by non-affiliates is less than $700,000 thousand as of the prior June 30. Based upon the facts and circumstances that existed as of December 31, 2022, we remained a smaller reporting company for our Annual Report on Form 10-K for the year ended December 31, 2022 and will continue to be for our quarterly reports in the 2023 interim periods.