Nerdy Inc. (NRDY)

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.

“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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RESULTS OF OPERATIONS

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.

(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.

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:

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.

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.

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.

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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 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, 2022 filed with the SEC on February 28, 2023.

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.

The Public and FPA Warrant Exchange, the Private Warrant Transaction, and the Earnout Transaction

Public and FPA Warrant Exchange

On September 25, 2023, we concluded an offer to holders of our then-outstanding publicly traded warrants, each exercisable to purchase one share of Nerdy Inc.’s Class A Common Stock at a price of $11.50 per share (the “Public Warrant(s)”) and warrants to purchase one share of Nerdy Inc.’s Class A Common Stock at a price of $11.50 per share issued in connection with a forward purchase agreement (the “FPA Warrant(s)”), which provided such holders the opportunity to receive 0.25 shares of Nerdy Inc.’s Class A Common Stock (the “Public Offer exchange rate”) in exchange for each Public Warrant and FPA Warrant tendered by such holders (the “Offer”). This Offer included a solicitation of consents from holders of the Public Warrants and FPA Warrants to amend the warrant agreement with respect to certain terms of the Public Warrants and the FPA Warrants (the “Public and FPA Warrant Amendment”, together with the Offer, the “Public and FPA Warrant Exchange”). At the closing of the Offer, all remaining outstanding Public and FPA warrants that were not exchanged at the election of the holder were converted into 0.225 shares of Class A Common Stock, pursuant to the Public and FPA Warrant Amendment. As a result of the Public and FPA Warrant Exchange, 12,000 thousand Public Warrants and FPA Warrants were exchanged for 2,992 thousand shares of Nerdy Inc.’s Class A Common Stock, with a nominal cash settlement in lieu of fractional shares. No Public Warrants and FPA Warrants remained outstanding after the Public and FPA Warrant Exchange.

Private Warrant Transaction

Concurrently with the Offer, holders of our then-outstanding warrants to purchase one share of Nerdy Inc.’s Class A Common Stock at a price of $11.50 per share issued in connection with a private placement (the “Private Placement Warrant(s)”) and warrants to purchase one unit of Nerdy LLC (the “OpCo Unit(s)”) at an exercise price of $11.50 (the exercise of which would also result in the issuance of one corresponding share of Class B common stock (together with the Class A Common Stock, the “Common Stock”)) (the “OpCo Warrant(s)”) agreed to amend the warrant agreement with respect to certain terms of the Private Placement Warrants and OpCo Warrants (the “Private Placement Warrant Amendment”, together with the Public and FPA Warrant Amendment, the “Warrant Amendment”). The Warrant Amendment, among other provisions, required that upon the closing of the Offer that (a) each Private Placement Warrant be automatically exchanged or exercised on a cashless basis into shares of Class A Common Stock and (b) each OpCo Warrant that is outstanding be automatically exercised on a cashless basis into OpCo Units with an equivalent number of shares of Class B Common Stock being issued, in each case, at the same ratio as the Public Offer exchange rate (the “Private Warrant Transaction”, together with the Public and FPA Warrant Exchange, the “Warrant Transactions”). As a result of the Private Warrant Transaction, 5,281 thousand Private Placement Warrants were exchanged or exercised on a cashless basis for 1,314 thousand shares of the Company’s Class A Common Stock, with a nominal cash settlement in lieu of fractional shares and 2,052 thousand OpCo Warrants were exchanged

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or exercised on a cashless basis for 513 thousand OpCo Units (with an equivalent number of shares of Class B Common Stock), with a nominal cash settlement in lieu of fractional shares. No Private Placement Warrants and OpCo Warrants remained outstanding after the Private Warrant Transaction.

The Private Placement Warrants, the Public Warrants, the FPA Warrants, and the OpCo Warrants are collectively referred to herein as the “Warrant(s).”

Earnout Transaction

Concurrently with the Offer, holders of our then-outstanding shares or units of (i) Class A Common Stock or (ii) OpCo Units (and a corresponding number of Class B Common Stock), as applicable, that were subject to forfeiture if the achievement of certain stock price thresholds of the Class A Common Stock were not met within five years of the reverse recapitalization (assuming there was no change in control event) (the “Earnout(s)”) agreed to forfeit (and thus surrender for cancellation) 60% of the Earnouts they held and agreed that the remaining 40% of the Earnouts will no longer be subject to potential forfeiture and will be either regular shares of Class A Common Stock or regular OpCo Units (with an equivalent number of regular shares of Class B Common Stock) (the “Earnout Transaction”). As a result of the Earnout Transaction, 2,764 thousand shares of Class A Common Stock and 2,015 thousand OpCo Units (with an equivalent number of shares of Class B Common Stock) were cancelled and 1,842 thousand shares of Class A Common Stock and 1,343 thousand OpCo Units (with an equivalent number of shares of Class B Common Stock) remain outstanding after the Earnout Transaction and are no longer subject to forfeiture. The 36 thousand Earnouts held by the Company are now regular shares of Class A Common Stock and are no longer subject to forfeiture.

The collective net effect of the Public and FPA Warrant Exchange, the Private Warrant Transaction, and the Earnout Transaction resulted in a net increase of 37 thousand shares of our Common Stock, or less than 0.1%, in the amount of our Common Stock outstanding at the closing of these transactions. For additional information on the Public and FPA Warrant Exchange, the Private Warrant Transaction, and the Earnout Transaction, refer to Notes 1, 5, and 14 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 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.

Macroeconomic Trends

Adverse macroeconomic conditions, including inflation, slower growth or a recession, tighter credit, higher interest rates, and higher unemployment rates, had negative impacts on consumer confidence and spending in 2023 and 2022, and some of these conditions are expected to continue into 2024. 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.

KEY FINANCIAL AND OPERATING METRICS

We monitor the following key operating metrics to evaluate the growth of our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

During the second quarter of 2023, we completed the transition from our Package model to Learning Memberships within our Consumer business for all new customers. As a result of this transition, we are presenting Active Members (as defined below) as a key operating metric.

“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.

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“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 at December 31, 2023 reflects our evolution to Learning Memberships, which has allowed the highest quality Experts the ability to develop deeper relationships that allow for more consistent revenue-generating opportunities.

RESULTS OF OPERATIONS

Revenue

Revenue growth in the current year was driven by the completion of our evolution towards ‘always on’ recurring revenue products, strong adoption of Learning Memberships, and lifetime value expansion in our Consumer business coupled with the continued scaling of our Institutional business.

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, 2023 increased primarily due to higher Expert costs of $6,816 thousand related to higher tutoring volumes in both our Consumer and Institutional business.

Gross profit for the year ended December 31, 2023 of $136,447 thousand increased by $23,514 thousand, or 21%, compared to the same period in 2022. Gross margin was 71% during the year ended December 31, 2023, an increase of 113 basis points when compared to the prior year period. These increases in the current year period were primarily driven by growth in our Consumer business as a result of the strong adoption of Learning Memberships, which has led to lifetime value expansion and higher gross margin.

Operating Expenses

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

Sales and Marketing

Sales expenses consist of compensation for our employees engaged in our sales process. Marketing expenses primarily include third-party costs related to media costs, including television, radio, podcasts, paid-social, paid-search, and other paid channels. Sales and marketing expenses also include costs associated with the delivery of our large format classes, including StarCourses, and expenditures across new marketing channels to drive brand awareness and reach.

Sales and marketing expenses for the year ended December 31, 2023 included non-cash stock-based compensation of $2,795 thousand. 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. Excluding these impacts in both periods, sales and marketing expenses decreased $4,099 thousand, or 6%. Additionally, excluding these impacts in both periods, sales and marketing expenses for the year ended December 31, 2023 were 34% of revenue compared to 43% of revenue during the same period in 2022, a 893 basis point improvement year-over-year.

Sales and marketing spend and efficiency improvements were driven by the transition to Learning Memberships, including the continued expansion of lifetime value, our focus on optimizing the level of marketing spend, and a more efficient operating model in our Consumer business. We also delivered substantial Varsity Tutors for School revenue growth, yielding efficiencies from prior investments in the Institutional sales and go-to-market organization. Our more efficient operating model in our Consumer business and the continued scaling of our Institutional business continue to lead to sales and marketing efficiency improvements as the business delivers revenue growth.

General and Administrative

General and administrative expenses include compensation for certain employees, support services, product development expenses intended to support continued innovation, and other operating expenses. Product development costs were $40,859 thousand and $36,097 thousand for the years ended December 31, 2023 and 2022, respectively, an increase of $4,762 thousand. Product development costs include compensation for employees on our product, engineering, and design teams who are

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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, 2023 included non-cash stock-based compensation, transaction costs, a provision for legal settlement, and restructuring costs of $41,474 thousand, $1,940 thousand, $1,250 thousand, and $841 thousand, respectively. 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. Excluding these impacts in both periods, general and administrative expenses decreased $5,202 thousand, or 6%. Additionally, excluding these impacts in both periods, general and administrative expenses for the year ended December 31, 2023 were 41% of revenue compared to 52% of revenue during the same period in 2022, a 1,102 basis point improvement year-over-year.

Our investments in product development and our platform-oriented approach to growth have allowed us to launch a suite of ‘always on’ subscription products including Learning Memberships for consumers, and our District, Teacher, and Parent Assigned offerings for Institutional customers. Subscription and access-based offerings simplify the operating model needed to support customers and grow the business. Combined with our ongoing automation efforts involving self-service capabilities, the application of AI, and other efficiency efforts, we have been able to generate operating efficiencies and remove significant costs from the business.

Unrealized Loss (Gain) on Derivatives, Net

During the years ended December 31, 2023 and 2022, we recognized a net loss (gain) of $13,385 thousand and $(26,620) thousand, respectively, related to non-cash mark-to-market adjustments on our Warrants and Earnouts contracts to non-employees.

Of the net loss recognized in 2023, $11,091 thousand and $2,294 thousand related to warrants and earnouts, respectively. The net loss recognized for the year ended December 31, 2023 related to our Warrants was due to a higher average trading price of our Public Warrants, including in the period after the Offer and prior to the completion of the Warrant Transactions. The net loss recognized for the year ended December 31, 2023 related to our Earnouts was primarily due to a higher average trading price of our Class A common stock at the time of the Earnout Transaction, partially offset by the cancellation of a portion of the Earnouts in connection with the Earnout Transaction.

Of the net gain recognized in 2022, $12,812 thousand and $13,808 thousand related to warrants and earnouts, respectively. The net gain recognized for the year ended December 31, 2022 related to our Warrants was due to a lower average trading price of our Public Warrants during the period. The net gain recognized in the year ended December 31, 2022 related to our Earnouts was primarily due to a lower average trading price of our Class A Common Stock during the period.

For additional information regarding our the Public and FPA Warrant Exchange, the Private Warrant Transaction, and the Earnout Transaction, refer to “Overview” within Part I, Item 2 of this report and Notes 1, 5, and 14 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

Interest Income

Interest income was $3,377 thousand for the year ended December 31, 2023, compared to $483 thousand for the year ended December 31, 2022. This increase was driven by higher interest income on our cash balances during the year ended December 31, 2023.

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Income Tax Expense

Our effective income tax rate was (0.16)% and (0.03)% for the years ended December 31, 2023 and 2022, respectively. Income tax expense recorded during the years ended December 31, 2023 and 2022 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.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

As of December 31, 2023 and 2022, we had cash and cash equivalents totaling $74,824 thousand and $90,715 thousand, respectively. We have incurred cumulative losses from our operations, and we may incur additional losses in the future. Our operations since we became a public company have been financed primarily by the cash proceeds we received from the reverse recapitalization. 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 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, 2023, 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, 2023 decreased $40,442 thousand compared to the same period in 2022. The improvement in operating cash flow was driven by higher revenue, sales and marketing efficiency gains, business model changes that allowed us to streamline operations through automation and workforce reductions, and diligent cost oversight. Additionally, cash used in operating activities in the current year period was positively impacted by favorable changes in working capital, primarily related to fluctuations in the timing of sales and collections of receivables and the payments of other current liabilities.

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Investing Activities

Cash used in investing activities was $6,887 thousand and $5,317 thousand for the years ended December 31, 2023 and 2022, 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

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 Transactions and Earnout Transaction. 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.

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 services to Learners and Institutions for one-on-one instruction and small group tutoring 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.

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Institutions

Our revenue from contracts with Institutions, which are generally short-term in duration of (one year or less), is recognized from services as performance obligations are satisfied. Contracts with Institutions are sold through subscriptions (District Assigned, Teacher Assigned, and Parent Assigned), whereby Institutions pay a fixed monthly rate over the contract term, and our legacy high-dosage contracts, 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 doubtful accounts.

Per the terms of our subscription contracts, purchased services can be redeemed for a set period of time from the date of payment. Per the terms of our legacy 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 20 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, (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, 2023, we remained an emerging growth company for our Annual Report on Form 10-K for the year ended December 31, 2023 and will continue to be for our quarterly reports in the 2024 interim periods.

SMALLER REPORTING COMPANY STATUS

As of December 31, 2022, we were 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 its shares of common stock held by non-affiliates is less than $250,000 thousand as of the prior June 30, or (ii) its annual revenue is less than $100,000 thousand during the prior fiscal year and the market value of its 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, 2023, we are no longer a smaller reporting company. Pursuant to 5120.1c of the SEC Financial Reporting Manual, we may continue to use the scaled disclosures permitted for a smaller reporting company through our annual report on Form 10-K for the year ended December 31, 2023, and will begin providing non-scaled larger company disclosure in our first quarterly report of 2024.

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.

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 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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 Registration Statement on Form S-1 filed with the SEC on October 15, 2021, which became effective as of October 25, 2021.

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, 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. Its 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 that leverages our platform capabilities to offer our online learning solutions directly to education systems, and StarCourses, our free celebrity-led, live large group classes.

Our platform delivers value to both Learners, who are our customers, and Experts. We have built a diversified business across the following audiences: K-8, High School, College, Graduate School, and Professional. Learners and Experts come to us for convenience, value, and a superior learning experience. We believe we have built a scalable platform that allows us to drive growth, satisfaction for Learners, and retention across audiences and subjects, as well as allowing Experts to generate income from the convenience of home.

Reverse Recapitalization

On September 20, 2021 (the “Closing Date”), TPG Pace Tech Opportunities Corp., a publicly traded, exempted company incorporated in the Cayman Islands (“TPG Pace”), and 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.

At the Closing Date, TPG Pace and Nerdy LLC completed the following transactions (the “Reverse Recapitalization”):

•Immediately prior to the Closing, TPG Pace became a Delaware corporation and was renamed Nerdy Inc.;

•TPG Pace’s outstanding Class A ordinary shares and Class F ordinary shares were converted into corresponding shares of Nerdy Inc.’s Class A common stock, par value $0.0001 per share (the “Class A Common Stock”) and Class F common stock, par value $0.0001 per share (the “Class F Common Stock”) and its outstanding private placement warrants and public warrants to purchase Class A ordinary shares were converted into corresponding private placement warrants to purchase Class A Common Stock (the “Private Placement Warrant(s)”) and public warrants to purchase Class A Common Stock (the “Public Warrant(s)”), respectively, (collectively, the “Domestication”). Each Private Placement Warrant and Public Warrant allows for the purchase of one share of Class A Common Stock at an exercise price of $11.50 per share. The shares of Class F Common Stock were subsequently converted to shares of Class A Common Stock;

•Following the Domestication, Nerdy LLC merged with a wholly-owned subsidiary of Nerdy Inc. (the “Merger”), with Nerdy LLC surviving such merger;

•In accordance with Nerdy LLC’s amended and restated limited liability company agreement (the “Nerdy LLC Agreement”), existing ownership interests in Nerdy LLC (including redeemable preferred units) were converted into Nerdy LLC units (the “OpCo Units”). Additionally, the Nerdy LLC Agreement provided that Nerdy LLC will be managed by a five person board of managers;

•Holders of Nerdy LLC common and preferred units (the “Legacy Nerdy Holders”) exchanged their historical Nerdy LLC equity for: (i) cash consideration of $336,846 thousand, of which $767 thousand was accrued and reported as

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“Due to legacy Nerdy holders” on the Consolidated Balance Sheet at December 31, 2021, (ii) either OpCo Units and an equivalent number of shares of Nerdy Inc.’s Class B common stock, $0.0001 par value per share (the “Class B Common Stock”) or shares of Class A Common Stock, and (iii) warrants to purchase OpCo Units at an exercise price of $11.50 (the exercise of which would also result in the issuance of one corresponding share of Class B Common Stock) (the “OpCo Warrant(s)”) or Private Placement Warrants at an exercise price of $11.50;

•Nerdy Inc. contributed all of its assets (other than the OpCo Units it then held) to Nerdy LLC in exchange for additional OpCo Units and OpCo Warrants, such that the Company will hold a number of OpCo Units equal to the total number of shares of Class A Common Stock and OpCo Warrants equal to the total number of Public Warrants;

•Nerdy Inc. issued and sold 15,000 thousand shares of Class A Common Stock for aggregate consideration of $150,000 thousand in connection with the PIPE Financing; and

•Nerdy Inc. issued and sold 16,117 thousand shares of Class A Common Stock and 3,000 thousand warrants to purchase Class A Common Stock (the “FPA Warrant(s)”) for aggregate consideration of $150,000 thousand in connection with the FPA Financing. Each FPA Warrant allows for the purchase of one share of Class A Common Stock at an exercise price of $11.50 per share.

The Reverse Recapitalization was accomplished through an umbrella partnership corporation (“Up-C”) structure, which is often used by partnerships and limited liability companies (operating as partnerships) undertaking an initial public offering. The Up-C structure allowed Legacy Nerdy Holders to retain their equity ownership in Nerdy LLC, an entity that is classified as a partnership for U.S. federal income tax purposes, and provides potential future tax benefits for Nerdy Inc. when the Legacy Nerdy Holders ultimately redeem their pass-through interests for shares of Class A Common Stock in Nerdy Inc. as a result of a tax receivable agreement (the “Tax Receivable Agreement”). Under the terms of the Tax Receivable Agreement, 85% of these potential future tax benefits realized by Nerdy Inc. as a result of such redemptions will be paid to certain Legacy Nerdy Holders.

As a result of and immediately following the Reverse Recapitalization:

•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;

•Nerdy Inc. had the following securities outstanding: (i) 83,875 thousand shares of Class A Common Stock, including Earnouts (as defined below), (ii) 73,971 thousand shares of Class B Common Stock, including Earnouts, held by certain of the Legacy Nerdy Holders, and (iii) 17,281 thousand warrants, each exercisable to purchase one share of Class A Common Stock at a price of $11.50 per share;

•Members of Nerdy LLC are the Legacy Nerdy Holders and Nerdy Inc.;

•Nerdy LLC had the following OpCo Units and OpCo Warrants outstanding: (i) 157,846 thousand OpCo Units, including Earnouts, and (ii) 2,052 thousand OpCo Warrants;

•Legacy Nerdy Holders owned 70,613 thousand OpCo Units, excluding Earnouts, equal to 47.1% of the economic interest in Nerdy LLC, and 70,613 thousand shares of Class B Common Stock, excluding Earnouts, which, together (the “Combined Interests”), are redeemable beginning six months after the Closing Date at the option of the Legacy Nerdy Holders on a one-for-one basis for shares of Class A Common Stock or the cash equivalent thereof (based on the market price of the shares of Class A Common Stock at the time of redemption) as determined by Nerdy Inc. If Nerdy Inc. elects the redemption to be settled in cash, the cash used to settle the redemption must be funded through a private or public offering of Class A Common Stock no later than five business days after the redemption notice date. Upon the redemption of the OpCo Units and Class B Common Stock for shares of Class A Common Stock or the equivalent thereof, all redeemed shares of Class B Common Stock will be cancelled. The Class B Common Stock has voting rights only and has no dividend or economic rights. The shares of Class B Common Stock are owned by the Legacy Nerdy Holders and cannot be transferred except to us. We do not intend to list our Class B Common Stock on any stock exchange. Additionally, certain Legacy Nerdy Holders owned 11,550 thousand shares of Class A Common Stock, excluding Earnouts;

•Public stockholders of Nerdy Inc., including certain Legacy Nerdy Holders, (i) owned 79,233 thousand shares of Class A Common Stock, excluding Earnouts, which represented 52.9% of the combined voting power of Nerdy Inc. and 100% of the economic interest in Nerdy Inc., and (ii) through Nerdy Inc.’s ownership of 79,233 thousand OpCo Units, indirectly held 52.9% of the economic interest in Nerdy LLC;

•Nerdy LLC is managed by a five person board of managers, composed of three persons that were designated by Nerdy Inc. and two persons that were designated by holders of a majority of the OpCo Units held by members of Nerdy LLC other than Nerdy Inc. Nerdy LLC’s management will continue to manage Nerdy LLC and all of its related and

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affiliated entities (subject to the approval of Nerdy Inc.’s Board of Directors) and Nerdy Inc.’s executive officers serve as the executive officers for all of its related and affiliated entities; and

•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”). The Company has excluded Earnouts in the calculation of the ownership interests in Nerdy LLC as the Earnouts are subject to forfeiture if the achievement of certain stock price thresholds are not met within five years of the Reverse Recapitalization. To the extent these price thresholds are met, the Earnouts will no longer be subject to forfeiture and the units will then be included in the calculation of the ownership interests in Nerdy LLC.

Nerdy LLC, as a result of the contribution by Nerdy Inc., received 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 the PIPE Financing, (iii) proceeds of $150,000 thousand from the FPA Financing, and (iv) the payment of transaction expenses of $30,099 thousand. Nerdy LLC used these proceeds to (i) pay cash consideration of $336,079 thousand to Legacy Nerdy Holders, (ii) pay transaction fees and expenses of $29,636 thousand, and (iii) repay $52,343 thousand of outstanding principal, interest and other charges under its loan and security agreement (the “LSA”). The remaining funds were contributed to Nerdy LLC’s balance sheet.

Warrants

The Private Placement Warrants, the Public Warrants, the FPA Warrants, and the OpCo Warrants are collectively referred to herein as the “Warrant(s).” For other terms and conditions regarding each tranche of Warrants held by the Company, see the above discussion.

Earnouts

Of the total shares and units issued as a result of the Reverse Recapitalization, we had 8,000 thousand shares or units of (i) Class A Common Stock or (ii) OpCo Units (and a corresponding number of Class B Common Stock), as applicable, that will be subject to forfeiture if the achievement of certain stock price thresholds of the Class A Common Stock are not met within five years of the Reverse Recapitalization (assuming there is no change in control event) (the “Earnout(s)”).

Basis of Presentation

For the year ended December 31, 2021, the consolidated financial statements reflect the consolidated results of operations, comprehensive income (loss), cash flows, and changes in equity of Nerdy LLC and its wholly-owned subsidiaries for the period of January 1, 2021 through September 20, 2021, the Closing Date of the Reverse Recapitalization, and the consolidated results of operations, comprehensive income (loss), cash flows and changes in stockholders’ equity of Nerdy Inc. and its consolidated subsidiaries, including Nerdy LLC, for the period of September 21, 2021 through December 31, 2021. The consolidated balance sheet at December 31, 2021 presents the financial condition of Nerdy Inc. and its consolidated subsidiaries, including Nerdy LLC, and reflects the initial recording of the assets and liabilities of Nerdy Inc. at their historical cost (see Note 4 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report).

For the years ended December 31, 2020 and 2019, the consolidated financial statements present the consolidated results of operations, comprehensive income (loss), cash flows and changes in equity of Nerdy LLC. The consolidated balance sheet as of December 31, 2020 presents the financial condition of Nerdy LLC and its wholly-owned subsidiaries.

For the year ended December 31, 2021, $3,779 thousand of the consolidated net losses of Nerdy LLC were attributable to the Class A Common Stockholders, and reflects the Class A Common Stockholders’ absorption of a portion of the consolidated net losses of Nerdy LLC for the period of September 21, 2021 through December 31, 2021. For the year ended December 31, 2021, $3,354 thousand of the consolidated net losses of Nerdy LLC were attributable to the NCI, and reflects the Legacy Nerdy Holders’ absorption of a portion of the consolidated net losses of Nerdy LLC for the period of September 21, 2021 through December 31, 2021. For the year ended December 31, 2021, $23,546 thousand of the consolidated net losses of Nerdy LLC were attributable to the Legacy Nerdy Holders to reflect their absorption of 100% of the consolidated net losses of Nerdy LLC pertaining to the period of January 1, 2021 through September 20, 2021, the Closing Date of the Reverse Recapitalization. For the years ended December 31, 2020 and 2019, net losses of $24,663 thousand and $22,439 thousand, respectively, were attributable to the Legacy Nerdy Holders to reflect their absorption of 100% of Nerdy LLC’s net losses pertaining to the periods prior to the Reverse Recapitalization.

For additional information on the Reverse Recapitalization, the Tax Receivable Agreement, Warrants, Earnouts, and our basis of presentation, refer to “Critical Accounting Policies and Estimates” within this section, as well as Notes 1, 2, 4, and 16, within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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Revenue from Contracts with Customers

On January 1, 2019, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” using the modified retrospective method applied to those contracts which were not completed as of the date of adoption. We recorded an adjustment to accumulated deficit as of January 1, 2019, to reflect the application of our updated revenue recognition policy, primarily related to the accounting for unredeemed payments for services, which are now recognized over the expected customer usage period rather than at the end of the contract period. The cumulative adjustment resulted in a decrease of $16,767 thousand to“Accumulated deficit” and “Deferred revenue” on the consolidated balance sheet. Revenue for reporting periods beginning January 1, 2019 are presented under ASC Topic 606, resulting in a decrease in “Deferred revenue” of $3,911 thousand and a corresponding increase in “Revenue,” as of and for the year ended December 31, 2019, due to revenue from unredeemed payments for services being recognized in accordance with ASC Topic 606.

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 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

The COVID-19 pandemic has caused and continues to cause global economic disruption and uncertainty, including in our business. We are closely monitoring the impact of the COVID-19 pandemic and developments related thereto and are taking necessary actions to ensure our ability to safeguard the health of our employees, maintain our operations to serve Learners and institutions and Experts, and preserve financial liquidity to navigate the uncertainty caused by the pandemic.

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. We invested in our product capabilities to innovate our way through the short-term challenges, including bringing together what had been multiple disparate learning formats we were building into a single cohesive destination that allowed us to extend and strengthen the extent to which we can help Learners beyond what was capable solely in a one-on-one environment.

Our investments in innovation during COVID-19 enabled us to hit key financial milestones we had established for the Company, including improving our unit-level economics and demonstrating we could be self-sustaining. We believe these trends will continue as the COVID-19 impact diminishes. While we closed our in-person business in 2020, the momentum in our one-on-one online business combined with the successful release of several new learning formats and investments in brand awareness have delivered strong improvements in Active Learner (as defined below) growth, customer engagement, retention, lifetime value expansion, and revenue growth.

The loss of in-person one-on-one instruction has been more than offset by increases in the Company’s online offerings. Our online revenues increased $43,224 thousand to $140,664 thousand in the year ended December 31, 2021 compared to the year ended December 31, 2020, an increase of 44% year over year with a corresponding decrease in in-person learning from $6,528 thousand for the year ended December 31, 2020 to zero for the year ended December 31, 2021. Total revenue for the year ended December 31, 2021 increased $36,696 thousand or 35% year-over-year to $140,664 thousand.

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.

Closing of Veritas

In December 2021, management made a strategic decision to abandon the Veritas LLC (“Veritas”) legacy business as the Company will no longer sell new services under the Veritas Prep trade name, while retaining certain operational know-how and capabilities that we are actively applying to the larger Varsity Tutors brand offerings. In connection with the abandonment of the Veritas legacy business, we recorded a write-off of the Veritas Prep trade name, as well as write-offs of other immaterial assets.

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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.

“Active Learner(s)” is defined as the unique number of Learners attending a paid online one-on-one instruction, a paid online class, or a paid group tutoring session in a given period. 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. During the year ended December 31, 2020, the Company transitioned to 100% online learning. The following table summarizes the number of Active Learners for the years ended December 31, 2021, 2020, and 2019:

“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 years ended December 31, 2021, 2020, and 2019:

“Online Sessions” is defined as the total number of online one-on-one sessions, the number of paid online group classes attendees, and the number of paid group tutoring session attendees in a given period (excluding Legacy Businesses and our subscription service, VT+). The following table summarizes total Online Sessions for for the years ended December 31, 2021, 2020, and 2019:

“Sessions Taught per Active Expert” is calculated as the number of one-on-one sessions, the number of paid online 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 years ended December 31, 2021, 2020, and 2019:

“One-on-One Average Session Length” is defined as a session (e.g., an instructional meeting) between a single Learner and a single Expert in an online, one-on-one setting (excluding Veritas and EduNation Limited, a company incorporated in England and Wales (“First Tutors UK”) (collectively, the “Legacy Businesses”) and our subscription service, VT+). The following table summarizes total One-on-One Average Session Length or the years ended December 31, 2021, 2020, and 2019:

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RESULTS OF OPERATIONS

Revenue

Revenue for the year ended December 31, 2021 was $140,664 thousand, an increase of 35% from $103,968 thousand during the same period in 2020. This increase was driven by increased online revenue, which was partially offset by a decline in in-person revenues. We completed the transition to delivering live instruction 100% online in April 2020. We scaled and integrated several new services, including one-on-one instruction and small group classes, as well as free services including large format group classes, and adaptive self-study together into a single comprehensive learning destination. These initiatives drove revenue growth throughout the second half of 2020 which continued through 2021.

The following table sets forth our total revenue for the periods shown for our online and in-person revenue:

For the year ended December 31, 2021, online revenue increased $43,224 thousand to $140,664 thousand, or 44%, compared to the same period in the prior year; in-person revenue decreased 6,528 thousand to zero, or 100%, from the same period in the prior year as a result of the transition to deliver live learning 100% online in April 2020. Going forward, we are focused entirely on our online products and revenue streams.

Cost of Revenue and Gross Profit

The following table sets forth our Cost of revenue for the periods shown:

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

For the year ended December 31, 2021, cost of revenue increased $11,866 thousand to $46,700 thousand, or 34%, compared to the prior year period, primarily due to higher Expert costs of $11,461 thousand due to higher session volume.

Gross profit for the year ended December 31, 2021 of $93,964 thousand increased by $24,830 thousand, or 36%, compared to the same period in 2020. Gross margin was 67% during the year ended December 31, 2021, an increase of 30 basis points when compared to the prior year period. The increase in gross profit was driven by the adoption of one-on-one online learning, expansion across more subjects and more audiences (driven by Professional and Learning Differences), and growth in our small group class format.

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, 2021 were $65,441 thousand, an increase of $21,603 thousand from $43,838 thousand in the same period in 2020. Sales and marketing expenses for the year ended December 31, 2021 included stock-based compensation of $3,378 thousand. Excluding this impact in the current year period, sales and marketing expenses increased $18,225 thousand, or 42%. In 2021, we continued to make investments in marketing, targeting new audiences and advertising new products, including StarCourses, our free, celebrity-led, live, large group classes to drive customer acquisition, brand awareness, and reach. We also made investments in establishing and growing our sales organization to support our institutional offering, Varsity Tutors for Schools. These investments were partially offset by operating leverage we realized from automation and AI to streamline our consultative sales organization. Marketing expenses as a percentage of revenue may fluctuate from period to period based on bookings, consumption patterns that drive revenue levels, seasonality, and the timing of our investments in marketing activities.

General and Administrative

General and administrative expenses for the year ended December 31, 2021 were $121,968 thousand, an increase of $78,737 thousand from $43,231 thousand in the same period in 2020. General and administrative expenses for the year ended December 31, 2021 included stock-based compensation and transaction costs of $51,039 thousand and $9,602 thousand, respectively. General and administrative expenses for the year ended December 31, 2020 included stock-based compensation and transaction costs of $1,730 thousand and $1,288 thousand, respectively. Excluding these impacts in both periods, general and administrative expenses increased $21,114 thousand, or 53%, as we made targeted investments in new product development. We moved quickly to bring in new talent across engineering, product, data science, product design, marketing, and sales to drive new product innovation and growth. We were pleased with the progress filling key roles and have found that employees are attracted to our remote-first, mission-driven culture and orientation toward innovation. These investments allowed us to launch our institutional strategy, Varsity Tutors for Schools, build and scale the institutional team, as well as launch a new suite of product capabilities in support of the initiative. We also increased Expert capacity during the period to support strong back-to-school demand and ensure strong execution against the launch of Varsity Tutors for Schools. Partially offsetting these investments, were improvements to support-related leverage resulting from the transition to delivering live learning 100% online in April 2020, and through the use of automation and AI across the curation and matching layers of our platform. We were also able to drive operating leverage across office expenses, as we became a remote-first company. We expect that our general and administrative expenses will increase for the foreseeable future as we grow our business, as well as cover the additional costs and expenses associated with being a publicly listed company.

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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, 2020 or 2019.

Unrealized Gain on Derivatives

Unrealized gain on derivatives was $71,041 thousand for the year ended December 31, 2021 and related to non-cash mark-to-market adjustments on our Warrants and Earnouts that were issued in connection with the Reverse Recapitalization. Of the gains 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, 13 and 14 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

Interest Expense

Interest expense decreased $1,113 thousand during the year ended December 31, 2021 to $3,791 thousand, compared to the prior year period. This decrease was primarily driven by the repayment in full of our previously outstanding principal balance under our LSA in connection with the Closing of the Reverse Recapitalization on September 20, 2021.

Other Expense (Income), net

Other expense, net was $8,552 thousand during 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, and notified the Small Business Administration (the “SBA”) of their intent to do so. Accordingly, we recognized a loss on repayment of the Promissory Note of $8,395 thousand for the year ended December 31, 2021.

Other expense, net was $1,824 thousand during the year ended December 31, 2020, and was driven by losses recognized in connection with entering into a sublease agreement in 2020 for our Tempe, Arizona office, a space we no longer occupy.

Gain on Extinguishment of Debt, net

Gain on extinguishment of debt, net was $7,117 thousand during 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 on April 16, 2020. In the second quarter of 2021, we applied for forgiveness of the Promissory Note and on June 30, 2021, the Company received notice from the SBA that the 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. On October 14, 2021, Nerdy LLC repaid the previously forgiven Promissory Note principal balance and accrued interest.

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 15 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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Income Tax Expense

Our effective tax rate was (0.6)% for the year ended December 31, 2021. Income tax expense and the effective tax rate for the year ended December 31, 2021 represents the period beginning September 21, 2021 and ending December 31, 2021, as well as amounts owed to state authorities due to the change in corporate taxpayer status following the Reverse Recapitalization. A reconciliation of income tax expense with amounts computed at the federal statutory tax rate is as follows:

For days and periods 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 7 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the Reverse Recapitalization, 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 the PIPE Financing, (iii) proceeds of $150,000 thousand from 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 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, 2021 and 2020, we had cash and cash equivalents totaling $143,964 thousand and $29,265 thousand, respectively. We have incurred cumulative losses from our operations, and we expect to 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 equity issuances, debt financings, and cash on hand. We intend to use the net proceeds received from the Reverse Recapitalization to fund our operating 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, cash flows from operations, and possible future equity issuances and debt financings will be sufficient to satisfy these future requirements.

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, 2021, we had no debt obligations.

The following table sets forth our cash flows:

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Operating Activities

Cash used in operating activities for the year ended December 31, 2021 increased $32,237 thousand compared to the same period in 2020. The Company’s increased cash use was driven by targeted investments in new products and solutions, including Varsity Tutors for Schools, marketing, and new talent hires across executive management, engineering, product, and design to drive new product innovation and growth. Additionally, we expanded and enhanced our finance, accounting, and legal functions in connection with being a newly public company. Cash used in operating activities for the year ended December 31, 2021 also included transaction costs paid of $9,602 thousand in connection with the Reverse Recapitalization, the repayment of the previously forgiven Promissory Note and related accrued interest of $8,395 thousand, and directors and officers insurance paid of $3,016 thousand in connection with being a newly public company.

Investing Activities

Cash used in investing activities was $5,163 thousand and $2,874 thousand for the years ended December 31, 2021 and 2020, respectively, related to capital expenditures primarily for the development of internal use software and IT equipment.

Financing Activities

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 related to the LSA and paid $21,638 thousand of transaction costs. As result of the repayment and extinguishment of the LSA, Nerdy LLC paid debt extinguishment costs of $1,607 thousand.

Cash provided by financing activities for the year ended ended December 31, 2020 was $12,293 thousand. Nerdy LLC received proceeds of $8,293 thousand and $4,000 thousand related to borrowings in connection with the previously outstanding Promissory Note and the LSA, respectively.

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 its 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 and classes that are fulfilled by Experts, who deliver instruction on our behalf through our proprietary Live Learning Platform.

Our revenues from contracts with Learners, which are short-term duration of generally one year or less, are recognized from one-on-one and class 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 have 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 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 contract, purchased services can be redeemed up to one year from the date of the first payment. We recognize revenue for unredeemed payments for

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services over the life of the agreement 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 short-term duration of generally one year or less, are recognized from one-on-one and class 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. 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 can be 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 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.

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 would 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 2021 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, 2021, 2020, or 2019.

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As of December 31, 2021 and 2020, “Goodwill” reported on the Consolidated Balance Sheets was $5,717 thousand.

Intangible Assets

Intangible assets consist solely of definite-lived trade names. Intangible assets acquired are recorded at fair market value under the acquisition method of accounting as of the acquisition date. Amortization of the definite-lived intangible assets is provided on a straight-line basis over 10 years.

We review definite-lived intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset group may not be fully recoverable. Recoverability of definite-lived intangible assets is measured by a comparison of the carrying amount of an asset group with its undiscounted cash flows. Estimating the fair value of definite-lived intangible assets and the associated cash flows requires significant judgments, estimates, and assumptions.

At December 31, 2021, we recorded a write-off of other intangible assets of $3,009 thousand for the Veritas Prep definite-lived trade name to adjust its carrying value to zero. The write-off of the Veritas Prep trade name was the result of a strategic decision made by management in December 2021 to abandon the Veritas legacy business as the Company will no longer sell new services under the Veritas Prep trade name. No impairments or write-offs were recorded during the years ended December 31, 2020 or 2019.

As of December 31, 2021 and 2020, “Intangible assets, net” reported on the Consolidated Balance Sheets of $4,428 thousand and $8,534 thousand, respectively.

Stock-based Compensation Expense

For periods prior to the Reverse Recapitalization, Nerdy LLC’s employees had participated in the Nerdy 2016 U.S. Unit Appreciation Rights Plan, the 2016 Canadian Unit Appreciation Rights Plan and the Varsity Tutors, LLC Incentive Unit Plan (collectively, the “Legacy Plans”). The Legacy Plans consisted of unit appreciation rights (“UARs”) and profit interest units (“PIUs”), which were exchanged for Nerdy Inc. equity awards in connection with the Reverse Recapitalization. Nerdy LLC’s UARs were converted into stock appreciation rights of Nerdy Inc. (“SARs”) and Nerdy LLC’s PIUs were converted into either Class B Common Stock and OpCo Units or restricted stock awards of Nerdy Inc. (“RSAs”). Holders of UARs received SARs or a combination of cash and SARs. Holders of Vested PIUs received a combination of Class B Common Shares of Nerdy Inc. (and an equivalent number of OpCo Units in Nerdy LLC) and cash. Unvested PIUs were converted into RSAs with the underlying equity being Class B Common Stock (and an equivalent number of OpCo Units in Nerdy LLC).

In connection with the Reverse Recapitalization (see Note 1), UARs and PIUs were exchanged for Nerdy Inc. equity awards and cash. Nerdy LLC’s UARs were converted into SARs of Nerdy Inc. and Nerdy LLC’s PIUs were converted into either shares of Class B Common Stock, OpCo Units and cash, or RSAs. Holders of UARs received cash, SARs, or a combination of both. Holders of vested PIUs received a combination of shares of Class B Common Stock (and an equivalent number of OpCo Units in Nerdy LLC) and cash. Unvested PIUs were converted into RSAs with the underlying equity being Class B Common Stock (and an equivalent number of OpCo Units in Nerdy LLC).

The UARs of current and former employees were modified in connection with the exchange discussed above. These modifications of the UARs of current and former employees were classified as Type III: Improbable to Probable, pursuant to ASC Topic 718, “Compensation - Stock Compensation (Topic 718).” UARs of 437 current employees were modified and the Company recorded a step-up in the grant date fair value of the awards as of September 20, 2021, which was principally due to the difference between the UAR grant-date hurdle rates and the Company’s stock price as of the modification date. During the year ended December 31, 2021, the Company recognized stock-based compensation expense of $32,066 thousand related to this modification of the UARs, of which $2,457 thousand and $29,609 thousand was included in “Sales and marketing expenses” and “General and administrative expenses,” respectively, in the Consolidated Statement of Operations. UARs of 362 former employees were modified and the Company recorded a step-up in the grant date fair value of the awards as of October 15, 2021, which was principally due to the difference between the UAR grant-date hurdle rates and the Company’s stock price as of the modification date. During the year ended December 31, 2021, the Company recognized stock-based compensation expense of $3,697 thousand related to this modification of the UARs, of which $124 thousand and $3,573 thousand was included in “Sales and marketing expenses” and “General and administrative expenses,” respectively, in the Consolidated Statement of Operations.

The PIUs were also modified in connection with the exchange discussed above; however, as the modification was classified as Type 1: Probable-to-probable, pursuant to ASC Topic 718, no modification expense was recognized during the year ended December 31, 2021.

Subsequent to the Reverse Recapitalization, our employees and our Board of Directors began to participate in the 2021 Equity Incentive Plan (the “2021 Equity Plan”), which permitted the issuance of various stock-based compensation awards, including SARs, restricted stock units (“RSUs”), and non-qualified stock options. Under the 2021 Equity plan, Nerdy Inc. granted RSUs, in lieu of any cash compensation, to the legacy Nerdy LLC founder in consideration of the participant’s future

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continued employment with the Company (the “Founder’s Award”). Each restricted stock unit represents the right to receive one share of Class A Common Stock. The RSUs will vest based on the achievement of stock price hurdles. If the stock price hurdles are not met by September 20, 2028 (“Performance Period End Date”), the unvested RSUs will be forfeited. The stock price hurdle will be deemed achieved upon the first date prior to the Performance Period End Date on which the average closing market price on the NYSE of one share of Nerdy Inc.’s Class A Common Stock over a consecutive 90 calendar-day period, equals or exceeds the applicable dollar amount set forth in the vesting table.

As a result of the Reverse Recapitalization, we had issued and outstanding Warrants and Earnouts. The Warrants and Earnouts issued to current employees as of September 20, 2021 (the “Employee Warrants” and the “Employee Earnouts,” respectively) were classified as stock-based compensation under ASC Topic 718 as these warrants and earnouts were granted conditionally based upon employment. Former employees were not granted Warrants and Earnouts. The Company recorded the fair value of the Employee Warrants and Employee Earnouts as stock-based compensation expense of $408 thousand and $2,763 thousand, respectively, at the Closing Date as there was no required service period after that date. Of the total Employee Warrant expense, $79 thousand and $329 thousand was included in “Sales and marketing expenses” and “General and administrative expenses,” respectively, in the Consolidated Statement of Operations for the year ended December 31, 2021. Of the total Employee Earnout expense, $46 thousand and $2,717 thousand was included in “Sales and marketing expenses” and “General and administrative expenses,” respectively, in the Consolidated Statement of Operations for the year ended December 31, 2021.

For additional discussion on stock-based compensation, see Note 18 in “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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 RSUs were 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 SARs, RSAs, and Stock Options were determined using the Black-Scholes Model. The grant date fair value of Employee Warrants were determined using the market approach based upon the quoted market price of Nerdy Inc.’s warrants. The grant date fair value of Employee Earnouts and the Founder’s Award were determined using the Monte Carlo Option Pricing Method.

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 Earnouts 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” and 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 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. Private Placement Warrants, FPA Warrants, and OpCo Warrants issued to non-employees are measured at fair value on a recurring basis based upon the quoted price for similar liabilities (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 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, 13, and 14 within “Notes to Consolidated Financial Statements” in Part II, Item 8 of this report.

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RECENTLY ISSUED 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 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 and the actions we have taken to remedy such weaknesses.

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 $1,070,000 thousand or (c) in which we are deemed to be a large accelerated filer, which means the Market Value of our Class A 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.

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. The Company expects to remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of Class A Common Stock held by non-affiliates exceeds $250,000 thousand as of the prior June 30, or (ii) the Company’s annual revenues exceeded $100,000 thousand during such completed fiscal year and the market value of Class A Common Stock held by non-affiliates exceeds $700,000 thousand as of the prior June 30.