Nerdy Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statement amounts below are in millions of dollars unless noted. Nerdy operates a live online learning platform, including consumer tutoring and classes and its Varsity Tutors for Schools offerings.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $31.8 | $31.3 | $120.9 | $98.6 |
| Gross profit / margin | $21.9 / 69% | $20.7 / 66% | $83.4 / 69% | $65.3 / 66% |
| Operating loss | $(27.7) | $(58.0) | $(70.4) | $(69.9) |
| Consolidated net loss | $(32.3) | $(57.7) | $(48.8) | $(63.8) |
| Net loss attributable to Class A common stockholders | $(18.5) | $(21.3) | $(26.7) | $(21.3) |
| Basic and diluted loss per Class A share | $(0.21) | $(0.27) | $(0.32) | $(0.27) |
- Q3 revenue increased about 1%; nine-month revenue increased about 23%. Nine-month growth reflected consumer business strength and institutional revenue growth.
- Institutional revenue was $2.4 million in Q3 and $14.7 million for the first nine months, compared with $1.0 million and $1.3 million, respectively, in 2021. Consumer revenue was nearly flat in Q3 and rose to $103.6 million for the nine-month period.
- Gross margin improved by about three percentage points in both comparisons. Q3 cost of revenue declined, while nine-month cost of revenue rose with higher session volumes and school-related delivery costs.
- Q3 operating loss narrowed substantially, partly because 2021 included reverse-recapitalization costs and unusually high stock-based compensation. Excluding stock compensation and those transaction costs, Q3 general and administrative expense increased 25%; nine-month expense increased 52% on the same basis, reflecting product development and public-company costs.
- Reported results include noncash derivative fair-value changes: a $4.5 million loss in Q3 and a $21.8 million gain for the nine months. These movements affect net loss but are not operating cash flows.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $106.4 million; cash, cash equivalents, and restricted cash totaled $107.2 million. Current assets were $114.2 million and current liabilities $36.5 million.
- Operating cash use was $33.5 million for the first nine months, versus $19.9 million in the prior-year period. Investing cash use was $4.3 million, primarily for internal-use software and IT equipment. Cash declined $38.7 million from year-end 2021.
- The company reported no debt obligations at quarter-end. The prior loan and security agreement had been repaid in 2021.
- Management said cash on hand, operating cash flows, and potential future financing would be sufficient for anticipated needs, and that it was using remaining recapitalization proceeds to fund operations, investment, and its path to profitability.
Business developments, outlook, and risks
- Nerdy is shifting from prepaid packages toward Learning Memberships, with tutoring, group classes, lessons, assessments, and self-study. Membership revenue is recognized over the contract term, which management said reduces near-term revenue recognition versus packages. Management expects the model to improve customer economics and support longer-term growth and profitability, but cautions that successful adoption and profitability are not assured.
- Management stated it was targeting profitability by the end of 2023. This is an objective, not a quantified earnings or cash-flow forecast in the filing.
- Q3 Active Learners rose 3% to 53,214, while sessions fell 18% to 371,000. Revenue per Active Learner declined 2% to $597. Management attributed lower session growth to its strategy shift toward higher-value, longer-duration membership customers and the inclusion of classes in memberships rather than stand-alone sales.
- Cash use reflects product and marketing investment, hiring, public-company costs, and working-capital effects during the membership rollout. The company also cited wage and other inflationary pressures.
- The tax receivable agreement could require substantial future payments to legacy holders. No liability was recorded for an estimated $108.1 million of potential payments because management concluded payment was not probable based on expected taxable income. A hypothetical termination at quarter-end would imply an estimated $61.3 million liability under stated assumptions.
- Disclosure controls and procedures were deemed ineffective at September 30, 2022 because of continuing material weaknesses in financial-reporting controls, including staffing, risk assessment, and IT general controls. Management reported remediation work but said the weaknesses would not be considered remediated until controls operated effectively for a sufficient period and were tested.
- Other stated risks include failure to scale Learning Memberships, ongoing losses, competition and economic conditions, cybersecurity, regulatory and litigation exposure involving minor learners, and potential tax receivable agreement payments. The filing reports no qualifying environmental proceedings with expected monetary sanctions of $1 million or more.
Most important facts for investors to verify
- Whether Learning Membership adoption improves retention, customer economics, revenue growth, and ultimately profitability without prolonging cash burn.
- Progress toward management’s end-of-2023 profitability objective, alongside quarterly operating cash use and available cash.
- Underlying expense trends after separating stock-based compensation, derivative remeasurement, and prior-year recapitalization costs.
- Whether the material weaknesses in financial reporting controls are remediated and controls are shown to operate effectively.
- The potential size, timing, and assumptions behind tax receivable agreement payments, and the dilution or cash consequences of legacy-holder redemptions and outstanding equity awards, warrants, and earnouts.
- Comparability of reported year-over-year per-share results: 2021 Class A loss-per-share data covers only September 21–30 following the September 2021 reverse recapitalization, unlike the full 2022 periods.