# Nerdy Inc. (NRDY) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Nerdy Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1819404/000181940425000009/nrdy-20241231.htm
Accession: 0001819404-25-000009
Filing date: 2025-02-27
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NRDY/
All MD&A years: /company/NRDY/mda/
Previous year: /company/NRDY/mda/fy2023/ (FY 2023)
Next year: /company/NRDY/mda/fy2025/ (FY 2025)

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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023 filed with the SEC on February 27, 2024.

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 Learning Memberships, one-on-one instruction, small group tutoring, large format classes, tutor chat, essay review, adaptive assessments, and self-study tools. 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 (“Consumer(s)”), as well as through education systems (“Institution(s)”). 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 high-dosage tutoring and our online learning solutions to Institutions. We have built a diversified business across the following audiences: K-8, High School, College, Graduate School, and Professional.

Seasonality of our Business

We have experienced in the past, and expect to continue to experience seasonal fluctuations in our revenue and earnings due to Learner and Institutional spending and consumption habits, and the timing of the academic year. Historically, we experience lower than normal revenue 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.

KEY FINANCIAL AND OPERATING METRICS

We monitor the following key operating metrics, among others, to evaluate the performance of our business.

“Active Member(s)” is defined as the number of Learners with an active paid Learning Membership as of the date presented. Variations in the number of Active Members are due to changes in demand for our solutions, seasonality, testing schedules, the extension of Learning Memberships to additional Consumer audiences, and the launch of new membership options. As a result, we believe Active Members is a key indicator of our ability to attract, engage, and retain Learners. Active Members exclude EduNation Limited, a company incorporated in England and Wales (“First Tutors UK”), as well as our Institutional business. Our Active Member count as of December 31, 2024 was lower when compared to December 31, 2023 due to a higher mix of lower frequency Learning Memberships during 2024.

[[GREPCENT_TABLE]]
[["Active Members in thousands","December 31, 2024","","September 30, 2024","","June 30, 2024","","March 31, 2024","","December 31, 2023","","September 30, 2023"],["Active Members","37.5","","","39.7","","","35.5","","","46.1","","","40.7","","","39.5"],["YoY change","(8)%","","1%","","15%","","40%","","101%","","250%"]]
[[/GREPCENT_TABLE]]

“Active Experts” is defined as the number of Experts who have instructed one or more sessions in a given period. Active Experts also includes our Institutional business, but excludes First Tutors UK. The following table summarizes Active Experts for the periods presented. Our Active Expert count during the year ended December 31, 2024 was primarily driven by higher Institutional active Experts when compared to the prior year period, which reflects the continued scaling of our Institutional business.

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["Active Experts in thousands","2024","","2023","","%"],["Active Experts","20.2","","","17.2","","","17%"]]
[[/GREPCENT_TABLE]]

RESULTS OF OPERATIONS

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["dollars in thousands","2024","","%","","2023","","%"],["Revenue","$","190,231","","","100","%","","$","193,399","","","100","%"],["Cost of revenue","61,837","","","33","%","","56,952","","","29","%"],["Gross Profit","128,394","","","67","%","","136,447","","","71","%"],["Sales and marketing expenses","71,623","","","37","%","","68,448","","","36","%"],["General and administrative expenses","126,879","","","67","%","","125,570","","","65","%"],["Operating Loss","(70,108)","","","(37)","%","","(57,571)","","","(30)","%"],["Unrealized loss on derivatives, net","\u2014","","","\u2014","%","","13,385","","","7","%"],["Interest income","(3,104)","","","(2)","%","","(3,377)","","","(2)","%"],["Other expense (income), net","23","","","\u2014","%","","(19)","","","\u2014","%"],["Loss before Income Taxes","(67,027)","","","(35)","%","","(67,560)","","","(35)","%"],["Income tax expense","115","","","\u2014","%","","109","","","\u2014","%"],["Net Loss","(67,142)","","","(35)","%","","(67,669)","","","(35)","%"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue for the year ended December 31, 2024 declined primarily due to lower average revenue per member per month (“ARPM”) in our Consumer business, partially offset by higher revenues in our Institutional business. Revenue for the year ended December 31, 2023 included legacy Package revenue of $15,850 thousand that did not recur in the current year period due to the completion of the transition to Learning Memberships in our Consumer business.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["dollars in thousands","2024","","%","","2023","","%","","$","","%"],["Consumer","$","154,230","","","81","%","","$","158,654","","","82","%","","(4,424)","","","(3)","%"],["Institutional","35,277","","","18","%","","33,815","","","17","%","","1,462","","","4","%"],["Other (a)","724","","","1","%","","930","","","1","%","","(206)","","","(22)","%"],["Revenue","$","190,231","","","100","%","","$","193,399","","","100","%","","$","(3,168)","","","(2)","%"]]
[[/GREPCENT_TABLE]]

(a)Other consists of EduNation Limited, a company incorporated in England and Wales (“First Tutors UK”) 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.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["dollars in thousands","2024","","2023","","$","","%"],["Revenue","$","190,231","","$","193,399","","$","(3,168)","","","(2)","%"],["Cost of revenue","61,837","","56,952","","4,885","","","9","%"],["Gross Profit","$","128,394","","$","136,447","","$","(8,053)","","","(6)","%"],["% Margin","67","%","","71","%"]]
[[/GREPCENT_TABLE]]

Cost of revenue for the year ended December 31, 2024 increased due to higher Expert costs of $4,096 thousand, primarily related to higher utilization of tutoring sessions across Learning Memberships in our Consumer business and the continued scaling of our Institutional business.

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Gross margin for the year ended December 31, 2024 decreased primarily due to lower ARPM coupled with higher utilization of tutoring sessions across Learning Memberships in our Consumer business and higher substitution costs during the first half of the year in our Institutional business. We have introduced improvements to our marketplace infrastructure systems, including session scheduling enhancements, invoice automation improvements, and changes to the tutor placement and substitution program logic. We believe these enhancements will improve the customer experience due to the higher reliability level of our marketplace infrastructure systems and improve gross margins by lowering costs.

Operating Expenses

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["dollars in thousands","2024","","2023","","$","","%"],["Sales and marketing expenses","$","71,623","","","$","68,448","","","$","3,175","","","5","%"],["General and administrative expenses","126,879","","","125,570","","","1,309","","","1","%"],["Total operating expenses","$","198,502","","","$","194,018","","","$","4,484","","","2","%"]]
[[/GREPCENT_TABLE]]

Sales and Marketing

Sales and marketing expenses for the year ended December 31, 2024 and 2023 included non-cash stock-based compensation of $2,345 thousand and $2,795 thousand, respectively. Excluding these impacts in both periods, sales and marketing expenses increased $3,625 thousand, or 5%.

Sales and marketing increases were driven by investments in our Institutional sales organization which were made to drive customer acquisition, brand awareness, and reach, including through signing up school districts with access to the Varsity Tutors platform, which is a strategy to introduce school districts to the platform and ultimately convert them to our fee-based offerings. These investments were partially offset by Consumer marketing efficiency gains.

General and Administrative

General and administrative expenses include compensation for certain employees, support services, product and development expenses intended to support continued innovation, and other operating expenses. Product and development costs were $43,928 thousand and $40,859 thousand for the years ended December 31, 2024 and 2023, respectively, an increase of $3,069 thousand. Product and development costs include compensation for employees on our product, engineering, and design teams who are responsible for developing new and improving existing offerings, maintaining our website, improving efficiencies across our organization, and third-party expenses.

General and administrative expenses for the year ended December 31, 2024 included non-cash stock-based compensation, of $38,744 thousand. General and administrative expenses for the year ended December 31, 2023 included non-cash stock-based compensation, costs related to the warrant and earnout transactions, a provision for legal settlement, and restructuring costs of $41,474 thousand, $1,940 thousand, $1,250 thousand, and $841 thousand, respectively. Excluding these impacts in both periods, general and administrative expenses increased $8,070 thousand, or 10%.

We believe our investments in product development and our platform-oriented approach to growth have allowed us to launch and continuously improve our suite of ‘always on’ subscription products, including Learning Memberships for Consumers, and our high-dosage tutoring offerings for Institutional customers. We believe these subscription and access-based offerings simplify our operating model needed to support the organization, which allows us to maximize our investment in our unified platform.

Unrealized Loss on Derivatives, Net

During the year ended December 31, 2023, we recognized a net loss of $13,385 thousand related to non-cash mark-to-market adjustments on our warrants and earnouts contracts prior to the settlement in 2023 of all of our warrants and earnouts. We did not have any mark-to-market adjustments on our warrants and earnouts contracts during the year ended December 31, 2024 as we did not have any warrants or earnouts outstanding. For additional information on the warrant and earnout transactions, refer to Notes 1, 4, and 13 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

Interest Income

Interest income was $3,104 thousand for the year ended December 31, 2024, compared to $3,377 thousand for the year ended December 31, 2023. This decrease was driven by lower interest income on our cash balances during the year ended December 31, 2024.

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Income Tax Expense

Our effective income tax rate was (0.17)% and (0.16)% for the years ended December 31, 2024 and 2023, respectively. Income tax expense recorded during the years ended December 31, 2024 and 2023 represents amounts owed to state authorities. The following table presents a reconciliation of income tax expense with amounts computed at the federal statutory tax rate for the periods presented.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["dollars in thousands","2024","","2023"],["Computed tax (21%)","$","(14,076)","","","$","(14,188)"],["Partnership outside basis adjustments","47","","","2,266"],["Income tax benefit attributable to NCI","6,180","","","6,979"],["Income tax credit","(630)","","","(1,121)"],["Change in valuation allowance charged to expense","11,019","","","11,907"],["State income tax benefit, net of effect on federal tax","(2,699)","","","(2,888)"],["Other, net","274","","","(2,846)"],["Income tax expense","$","115","","","$","109"]]
[[/GREPCENT_TABLE]]

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

As of December 31, 2024 and 2023, we had cash and cash equivalents totaling $52,541 thousand and $74,824 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 cash on hand and capital contributions. To the extent we generate negative operating cash flows, it is possible that we may have to finance future operations primarily or in part from cash on hand.

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.

Our cash requirements under our contractual obligations and commitments consist primarily of lease arrangements. See Note 15 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, 2024, we had no debt obligations.

The following table sets forth our cash flows.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["dollars in thousands","2024","","2023"],["Cash used in:"],["Operating activities","$","(15,603)","","","$","(7,560)"],["Investing activities","(6,863)","","","(6,887)"],["Financing activities","\u2014","","","(1,940)"],["Effect of Exchange Rate Change on Cash, Cash Equivalents, and Restricted Cash","(1)","","","(20)"],["Net Decrease in Cash, Cash Equivalents, and Restricted Cash","$","(22,467)","","","$","(16,407)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Cash used in operating activities for the year ended December 31, 2024 increased $8,043 thousand when compared to the same period in 2023 as lower revenue and gross margin coupled with investments in our Institutional sales organization and product development to drive innovation and support our continued growth were partially offset by favorable changes in working capital primarily related to fluctuations in the timing of sales and collections of receivables.

Investing Activities

Cash used in investing activities was $6,863 thousand and $6,887 thousand for the years ended December 31, 2024 and 2023, respectively. Cash used in investing activities related to capital expenditures primarily for the development of internal use software and information technology (“IT”) equipment.

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Financing Activities

Cash used in financing activities for the year ended December 31, 2023 was $1,940 thousand, which related to transaction costs paid in connection with the warrant and earnout transactions. We did not have any financing activities during the year ended December 31, 2024. For additional information on the warrant and earnout transactions, refer to Notes 1, 4, and 13 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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 revenue 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 tutoring services to Learners and Institutions that are fulfilled by Experts, who deliver instruction on our behalf through our proprietary Live Learning Platform.

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 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.

Learners

Our revenue from contracts with Learners, which are generally short-term in duration (one year or less), is 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.

Revenue earned through Learning Memberships is recognized from one-on-one instruction and small group tutoring 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 each one-on-one or small group tutoring 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 is generally collected monthly in advance and recorded to deferred revenue until the services are used by the Learner. We recognize revenue for unredeemed payments for services over the period in which the performance obligation is satisfied (unredeemed payments expire each month for 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.

Institutions

Our revenue from contracts with Institutions, which are generally short-term in duration (one year or less), is recognized from services as performance obligations are satisfied. Contracts with Institutions are generally sold through access-based subscriptions, whereby Institutions pay a fixed rate over the contract term. We have also sold prepaid high-dosage contracts,

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which consist of payments for services that can be redeemed following the date of first payment or payments after services are completed.

Revenue is recognized from one-on-one instruction and small group tutoring as performance obligations are satisfied. Given the Institutions receive benefit from the completion of each session (as Institutions are not obligated to meet with the same Expert for a minimum number of sessions), we concluded each one-on-one or small group tutoring 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 the Institutions in an amount that reflects the consideration we are contractually entitled to receive in exchange for those services. 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 credit losses.

Per the terms of our access-based, subscription contracts, purchased services can be redeemed for a set period of time from the date of payment. Per the terms of our prepaid high-dosage contracts, services purchased by Institutions are generally redeemed following the date of the first payment. We recognize revenue for unredeemed payments for services over the period in which the performance obligation is satisfied (unredeemed payments expire after a stated usage period) with the Institution based on historical 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.

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 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 and 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.

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 our 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 the Founder’s Award was determined using the Monte Carlo Option Pricing Method.

For additional discussion on stock-based compensation, see Note 18 in “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.

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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 (such anniversary date is October 6th, 2025), (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) 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, 2024, we remained an emerging growth company for our Annual Report on Form 10-K for the year ended December 31, 2024 and will continue to be for our quarterly reports in the 2025 interim periods. However, due to the fifth anniversary of the closing date of the TPG Pace’s initial public offering occurring in 2025, we will no longer be an emerging growth company starting with our Annual Report on Form 10-K for the year ended December 31, 2025, and as a result, will no longer be able to take advantage of the exemptions listed above.

SMALLER REPORTING COMPANY STATUS

As of December 31, 2023, we were no longer 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. An entity is a “smaller reporting company” based upon the following criteria: (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.

According to 5120.1b of the SEC Financial Reporting Manual, once we failed to qualify for smaller reporting company status, we remained unqualified until making a subsequent determination either: (i) our public float fell below $200,000 thousand as of the last business day of our most recently completed second fiscal quarter or (ii) our public float and annual revenues met certain other requirements for subsequent qualification as of the last business day of our most recently completed second fiscal quarter. Based upon our subsequent determination that occurred as of December 31, 2024, we have re-entered smaller reporting company status and will use scaled disclosures in annual and quarterly reports, as applicable, permitted for a smaller reporting company.