Nerdy Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Nerdy operates a live online learning platform, including Varsity Tutors and Varsity Tutors for Schools. The reverse recapitalization with TPG Pace closed on September 20, 2021; accordingly, 2021 results combine Nerdy LLC results before closing with Nerdy Inc. consolidated results after closing, while 2020 results are Nerdy LLC results. The periods are therefore not fully comparable, and Class A earnings per share reflects only September 21–30, 2021.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $31.3 | $26.4 | $98.6 | $71.0 |
| Gross profit / margin | $20.7 / 66% | $18.0 / 68% | $65.3 / 66% | $46.6 / 66% |
| Operating expenses | $78.7 | $23.1 | $135.2 | $61.4 |
| Operating loss | $(58.0) | $(5.1) | $(69.9) | $(14.8) |
| Net loss | $(57.7) | $(7.5) | $(63.8) | $(19.6) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(19.9) | $(4.4) |
- Revenue grew 19% in Q3 and 39% year to date. Online revenue was $31.3 million for Q3 and $98.6 million year to date; in-person revenue was zero in 2021, versus $6.5 million in the first nine months of 2020.
- Q3 gross margin declined to 66% from 68%, which management attributed primarily to investment in class and subscription offerings. Year-to-date gross margin was unchanged at 66%.
- Operating expenses rose sharply, particularly general and administrative expense. Q3 G&A included $34.9 million of stock-based compensation and $7.2 million of recapitalization costs. For the first nine months, G&A included $35.9 million of stock-based compensation and $9.6 million of transaction costs. The UAR award modification drove $32.1 million of stock-based compensation expense.
- Q3 net loss included an $8.4 million charge related to repayment of the CARES Act promissory note and a $1.3 million loss on extinguishment of the loan and security agreement. Year-to-date results included an $8.4 million gain from forgiveness of the promissory note, offset by the repayment charge; the reported net gain on debt extinguishment was $7.1 million.
- A noncash $11.3 million mark-to-market gain on warrants and earnouts reduced reported loss. Related derivative liabilities were $98.4 million at quarter-end.
Liquidity, debt and capital structure
- At September 30, cash and cash equivalents were $170.0 million; cash, cash equivalents and restricted cash totaled $208.7 million. Restricted cash included $37.5 million associated with amounts due to legacy holders.
- Current assets were $213.4 million and current liabilities were $91.8 million. Current liabilities included $37.9 million due to legacy holders. The company reported $99.8 million of other liabilities, including derivative liabilities.
- No long-term debt was reported at September 30. The $50.0 million loan and security agreement was repaid in connection with the recapitalization. The $8.4 million promissory note and accrued interest were shown in other current liabilities and repaid on October 14, 2021.
- The recapitalization provided $558.3 million in proceeds before uses, including $150.0 million each from PIPE and forward-purchase financing. Cash consideration paid to legacy holders was $299.3 million; the company also paid transaction expenses and debt-related amounts.
- Financing activities provided $201.7 million net during the first nine months, while operating and investing activities used $19.9 million and $3.8 million, respectively. Management stated existing liquidity should fund operations and working capital for at least 12 months.
Operating trends, outlook and risks
- Active learners increased 36% to 51,572 in Q3 and 51% to 99,287 for the nine-month period. Online sessions grew 45% in Q3 and 99% year to date. Q3 revenue per active learner declined 13% to $607; the nine-month figure rose 1% to $994.
- Management cited stronger learner and engagement growth, back-to-school bookings, and accelerating adoption of the K–12 institutional strategy. It expects continued investment in products, marketing, institutional sales and public-company costs; no numerical revenue or earnings guidance was provided.
- Management described summer 2021 as more seasonally typical than summer 2020, when pandemic restrictions and fewer vacations supported unusually high demand. It said demand increased as students returned to school and continued into October and early November.
- The company expects seasonal fluctuations tied to academic calendars and testing. It also highlighted uncertainty around the lasting effects of COVID-19 on online-learning demand, competition, learner retention, growth investment and its ability to reach profitability.
- Authorities have inquired into the classification of experts as independent contractors. Management considers a loss reasonably possible but not probable and said the amount cannot be reasonably estimated. Other ordinary-course proceedings were not expected to be material, according to management.
- The company reported ineffective disclosure controls and material weaknesses in its accounting control environment, risk assessment and IT controls. Remediation is underway, but full remediation was expected to extend beyond December 31, 2021; costs were not estimable and were expected to be significant.
- The Up-C structure gives legacy holders a 47.1% economic interest in Nerdy LLC, with their combined interests redeemable for Class A shares or cash. Under the tax receivable agreement, Nerdy may owe holders 85% of qualifying realized tax savings. No liability was recorded at September 30 because payment was not considered probable; early termination or a change of control could create substantial accelerated obligations.
Important facts for investors to verify
- Separate underlying operating performance from recapitalization-related compensation, transaction charges and warrant/earnout fair-value movements.
- Reconcile reported liquidity to restricted cash, the amount due to legacy holders and the October 14 promissory-note repayment.
- Track remediation of the disclosed material weaknesses and whether future filings report effective controls.
- Monitor expert worker-classification inquiries, seasonality and post-pandemic learner demand, alongside learner growth and revenue per learner.
- Review dilution and potential cash obligations from redeemable OpCo interests, warrants, earnouts and the tax receivable agreement.