Nerdy (NRDY) - 2022 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents unaudited financial statements and management's discussion of financial condition and operations Financial Statements (Unaudited) This section presents Nerdy Inc.'s unaudited condensed consolidated financial statements and notes for Q3 and YTD 2022 Condensed Consolidated Statements of Operations Nerdy Inc. reported Q3 2022 revenue of $31.8 million, with reduced operating loss and improved net loss per share Consolidated Statements of Operations (in thousands) | | Three Months Ended September 30, | Nine Months Ended September 30, | | :--- | :--- | :--- | | | 2022 | 2021 | 2022 | 2021 | | Revenue | $31,752 | $31,298 | $120,863 | $98,649 | | Gross Profit | $21,917 | $20,659 | $83,445 | $65,305 | | Operating Loss | $(27,687) | $(58,016) | $(70,376) | $(69,889) | | Net Loss | $(32,298) | $(57,719) | $(48,768) | $(63,781) | | Net Loss Attributable to Class A Common Stockholders | $(18,516) | $(21,275) | $(26,666) | $(21,275) | | Basic and Diluted Loss per share | $(0.21) | $(0.27) | $(0.32) | $(0.27) | Condensed Consolidated Balance Sheets As of September 30, 2022, total assets decreased to $139.6 million, primarily due to reduced cash and equivalents Consolidated Balance Sheet Highlights (in thousands) | | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $114,200 | $155,450 | | Total Assets | $139,619 | $177,145 | | Total Current Liabilities | $36,455 | $41,909 | | Total Liabilities | $55,702 | $81,340 | | Total Stockholders' Equity | $83,917 | $95,805 | - Cash and cash equivalents decreased from $144.0 million at the end of 2021 to $106.4 million as of September 30, 2022[13] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities increased to $33.5 million for the nine months ended September 30, 2022 Cash Flow Summary (in thousands) | | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | $(33,470) | $(19,949) | | Net Cash Used In Investing Activities | $(4,339) | $(3,769) | | Net Cash (Used In) Provided By Financing Activities | $(863) | $201,688 | | Net (Decrease) Increase in Cash | $(38,665) | $177,972 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, including Reverse Recapitalization, revenue recognition, noncontrolling interests, and lease accounting - The financial statements are prepared following the Reverse Recapitalization that occurred on September 20, 2021, where Nerdy Inc. became the public holding company for Nerdy LLC[20][21] Revenue by Business Category (in thousands) | | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Consumer | $103,640 (86%) | $92,930 (94%) | | Institutional | $14,693 (12%) | $1,340 (1%) | | Other | $2,530 (2%) | $4,379 (5%) | | Total Revenue | $120,863 (100%) | $98,649 (100%) | - As of September 30, 2022, Legacy Nerdy Holders held a 42.6% economic interest in Nerdy LLC, accounted for as a noncontrolling interest[42] - The company adopted the new lease accounting standard (ASC 842) on January 1, 2022, recognizing right-of-use assets of $4.2 million and lease liabilities of $4.9 million[41] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the strategic shift to a 'Learning Membership' model, key operating metrics, revenue, and liquidity Overview Nerdy operates a live online learning platform, shifting to a 'Learning Membership' model for recurring customer relationships - The company's mission is to transform learning through its proprietary technology platform that connects learners with experts for live online instruction[113] - A key strategic initiative is the launch and expansion of Learning Memberships, designed to move from a package model to a recurring, 'always on' relationship with learners, expected to improve customer lifetime value and expert retention[114][115] Key Financial and Operating Metrics Key metrics reflect the strategic shift, with Active Learners growing while Sessions decreased due to the new membership model - The company notes that the decrease in Session growth rates is an expected result of shifting its go-to-market strategy to focus on higher-value Learning Membership customers[129][131] Key Operating Metrics | Metric | Q3 2022 | Q3 2021 | % Change | YTD 2022 | YTD 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Active Learners | 53,214 | 51,572 | 3% | 104,231 | 99,287 | 5% | | Revenue per Active Learner | $597 | $607 | (2)% | $1,160 | $994 | 17% | | Sessions (thousands) | 371 | 451 | (18)% | 1,378 | 1,396 | (1)% | Results of Operations Q3 2022 revenue grew 1% to $31.8 million, with improved gross margin and reduced operating expenses - Revenue growth was muted in the near-term due to the shift to the Learning Membership model, where revenue is recognized linearly over the contract term[141] - Gross margin improved to 69% for the three and nine months ended September 30, 2022, up from 66% in the prior year periods[148] - Sales and marketing expenses for Q3 2022 decreased by $2.6 million (14%) YoY, reflecting moderated marketing spend and increased efficiency[151] - General and administrative expenses for Q3 2022 decreased by $26.5 million (44%) YoY, primarily due to the absence of $34.9 million in stock-based compensation and $7.2 million in transaction costs related to the 2021 Reverse Recapitalization[154] Liquidity and Capital Resources As of September 30, 2022, Nerdy held $106.4 million in cash, with $33.5 million used in operations, targeting profitability by 2023 - The company held cash and cash equivalents of $106.4 million as of September 30, 2022[166] - Net cash used in operating activities increased to $33.5 million for the nine months ended September 30, 2022, compared to $19.9 million in the prior year[170] - The company is using proceeds from the Reverse Recapitalization to fund operations and investments, and expects to achieve profitability by the end of 2023[166] Quantitative and Qualitative Disclosures About Market Risk The company's market risk primarily stems from the fair value sensitivity of its warrant and earnout liabilities - The company is exposed to market risk from changes in the fair value of its warrant and earnout contracts. As of September 30, 2022, a hypothetical 10% adverse change in public warrant prices would increase related liabilities by about $765 thousand, and a similar change in earnout fair value would increase liabilities by about $925 thousand[192] Controls and Procedures Management concluded disclosure controls were ineffective as of September 30, 2022, due to material weaknesses, and is implementing a remediation plan - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in internal control over financial reporting[194] - Material weaknesses identified include an ineffective control environment, insufficient personnel with appropriate accounting knowledge, and deficiencies in risk assessment and IT general controls[197][198] - The company is undergoing a remediation plan, which includes hiring key finance and IT personnel, implementing an internal audit function, and designing and implementing a formal suite of internal controls, policies, and procedures[201][203] PART II OTHER INFORMATION This section covers legal proceedings, updated risk factors, and a list of exhibits filed with the Form 10-Q Legal Proceedings The company reports no material legal proceedings to disclose for the three months ended September 30, 2022 - There are no environmental or other material legal proceedings to disclose as of and for the three months ended September 30, 2022[202] Risk Factors This section updates risk factors, specifically highlighting risks associated with the new Learning Membership model's successful launch - A key risk factor is the success of the new Learning Membership model. The company warns that if it is not successful in launching and scaling this new business model, it may suffer losses and adverse operational results[205] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and required CEO/CFO certifications - The exhibits filed with this report include corporate governance documents and required CEO/CFO certifications under the Sarbanes-Oxley Act[207]