Nerdy : A Note to Our Shareholders - Form 8-K

First Quarter in Review

Consumer Business

Our Learning Membership model continues to lead to more attractive unit-level economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin, and a more scalable and efficient operating model relative to our old package model.

Our focus on enhancing the Learning Membership experience, including streamlining the onboarding experience, enhancing self-service tools that make it easier for customers to manage their tutoring relationships, and driving non-tutoring engagement, is yielding positive results. Improved discovery stemming from the recently introduced My Learning Hub and Subject Portals which enrich the experience, encourage achievement, reinforce personal accountability to learning, and improve the discoverability of learning formats and subjects are leading to a 64%² year-over-year improvement during the first quarter in non-tutoring engagement amongst new customer cohorts. Based on our experience, when customers engage more deeply with our products, it is highly predictive of stronger long-term retention and higher lifetime value of those customers. We also began to deliver improvements to our scheduling and invoicing systems, two large projects started last Fall that are oriented around overhauling our marketplace infrastructure. We expect these projects to drive material improvements to our tutoring customer experience and ultimately drive retention improvements by enabling more recurring sessions and less user friction.

During the first quarter, we continued to attract users from multiple sources into a freemium experience to accelerate learning, test additional product offering tiers by bundling product capabilities, and test multiple price points in an effort to identify a pricing model that delivers the right customer experience and Learning support to every Learner. These tests, which often involve lower Average Revenue per Member per Month ("ARPM") products, decreased ending ARPM in the quarter, but are providing our teams with multiple signals into consumer intent, preferences, and behavior that are informing our approach to a Consumer freemium model.

During the first quarter:

Freemium Model

Varsity Tutors for Schools

Varsity Tutors for Schools

In Closing

A growing awareness that tutoring is the most effective way to accelerate learning by parents, educators and policymakers, presents a significant opportunity for our Company to transform the way people learn through technology. By converging subscription business models and access-based products across Consumer and Institutional, we are simplifying our business and focusing our efforts. We expect these changes will allow us to fully leverage product and consumer experience improvements across both Consumer and Institutional, innovate faster, lead to higher levels of customer engagement with our products, and drive higher levels of growth and profitability over time.

We appreciate your continued interest in our Company, and look forward to meeting the evolving needs of Learners in any subject, anywhere, and at any time.

CHUCK COHN

Founder, Chairman & CEO

Financial Highlights

See page 16 for reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure.

Second Quarter and Full Year 2024 Outlook

Today, we are introducing guidance for the second quarter of the year, and reaffirming previously provided full year revenue and adjusted EBITDA guidance.

We expect year-over-year revenue growth will be driven by the continued growth of Learning Memberships in our Consumer business, the corresponding increase in the number of Learning Membership subscribers coupled with LTV extension; and higher Institutional revenues as we continue to rapidly scale Varsity Tutors for Schools.

New Learning Member acquisition of customers joining the platform remains healthy, and a growing awareness that tutoring is the most effective way to accelerate learning by parents, educators and policymakers, provides us with confidence in the demand for our offerings in the year ahead.

Second quarter revenue growth is impacted by legacy Package revenue of $4.9 million in the comparable period last year, that does not recur in 2024 due to the completion of our transition to subscription-based Learning Memberships in our Consumer business. Once we reach the second half of the year, when Package revenues are no longer included in prior year comparable quarterly revenues, we expect growth to accelerate consistent with the sequential quarterly acceleration we delivered in 2023.

Second quarter and full year non-GAAP adjusted EBITDA guidance reflects the continuing benefits from our recurring revenue products which focus on long-term relationships with higher value customers and operating leverage stemming from the completion of our evolution to access-based subscription revenue business models, partially offset by investments in the Varsity Tutors for Schools go-to-market organization, and product development to drive continued innovation and support our continued growth.

Revenue Guidance

Non-GAAP Adjusted EBITDA Guidance

Financial Discussion

Revenue

Revenue for the three months ended March 31, 2024 was $53.7 million, an increase of 9% from $49.2 million during the same period in 2023. Revenue growth in the current year period was driven by the continued scaling of our Consumer and Institutional businesses, partially offset by lower ARPM in our Consumer business.

Gross Profit and Gross Margin

Gross profit of $36.5 million for the three months ended March 31, 2024 increased by $2.6 million or 8% compared to the same period in 2023. Gross margin was 68.0% and 68.9% for the three months ended March 31, 2024 and 2023, respectively. The increase in gross profit was primarily driven by the continued scaling of our Consumer and Institutional businesses. The decrease in gross margin was primarily due to higher utilization of tutoring sessions across our new access-based products within our Institutional business in a seasonally high period in the school year.

Sales and Marketing

Sales and marketing expenses for the three months ended March 31, 2024 on a GAAP basis were $17.4 million, an increase of $1.8 million from $15.6 million in the same period in 2023. Excluding non-cash stock compensation, sales and marketing expenses for the three months ended March 31, 2024 were $16.9 million, or 31% of revenue, compared to $14.7 million, or 30% of revenue in the same period in 2023.

These increases were driven by investments in our Institutional sales organization in order to drive customer acquisition, brand awareness, and reach, including through signing up school districts with free access to the Varsity Tutors platform. These impacts were partially offset by marketing efficiencies driven by the transition to Learning Memberships, which allows for a more efficient operating model in our Consumer business.

Sales and marketing expenses as a percentage of revenue may fluctuate from quarter to quarter based on Learning Membership sales, the size and volume of Institutional contracts, bookings, seasonality, and the timing of our investments in marketing activities.

General and Administrative

General and administrative expenses include compensation for certain employees, support services, product development expenses intended to support innovation, and other operating expenses. Product development costs were $10.6 million and $8.4 million during the first quarter of 2024 and 2023, respectively. Product development costs include compensation for employees on our product and engineering 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 three months ended March 31, 2024 on a GAAP basis were $32.0 million, an increase of $2.3 million from $29.7 million in the same period in 2023. Excluding non-cash stock compensation expenses, general and administrative expenses for the three months ended March 31, 2024 were $21.4 million, or 40% of revenue, compared to $19.5 million, or 40% of revenue in the same period in 2023.

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 District, Teacher, and Parent Assigned offerings for Institutional customers. These subscription and access-based offerings simplify our operating model needed to support the organization, which allows us to maximize our investment in our common platform.

Net Loss, Non-GAAP Adjusted Net (Loss) Earnings, and Non-GAAP Adjusted EBITDA

Net loss on a GAAP basis was $12.0 million for the three months ended March 31, 2024, an improvement of $20.2 million from a net loss of $32.2 million in the same period in 2023. Excluding non-cash stock compensation expenses and mark-to-market derivative adjustments, non-GAAP adjusted net loss was $0.9 million for the three months ended March 31, 2024, compared to a non-GAAP adjusted net earnings of $0.5 million in the same period in 2023.

Non-GAAP adjusted EBITDA was $24 thousand for the three months ended March 31, 2024, slightly above the top end of our guidance of negative $3 million to breakeven, and compared to a non-GAAP adjusted EBITDA of $1.4 million in the same period in 2023.

Non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin improvements relative to guidance were primarily driven by higher revenues and continued operating efficiency gains. Compared to last year, Non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin were lower primarily due to investments in the Varsity Tutors for Schools go-to-market organization and product development to drive innovation and support our continued growth.

See page 16 for reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure.

Liquidity and Capital Resources

As of March 31, 2024, the Company's principal sources of liquidity were cash and cash equivalents of $77.0 million. We believe our strong balance sheet provides us with ample liquidity to operate against our plan and pursue growth initiatives.

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS (Unaudited)

(in thousands, except per share data)

REVENUE (Unaudited)

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CONDENSED CONSOLIDATED

BALANCE SHEETS (Unaudited)

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CONDENSED CONSOLIDATED STATEMENTS

OF CASH FLOWS (Unaudited)

(in thousands)

RECONCILIATION OF GAAP TO

NON-GAAP SALES AND MARKETING EXPENSES (Unaudited)

(in thousands)

RECONCILIATION OF GAAP TO

NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES (Unaudited)

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RECONCILIATION OF GAAP NET LOSS TO

NON-GAAP ADJUSTED EBITDA (Unaudited)

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RECONCILIATION OF GAAP NET LOSS TO

NON-GAAP ADJUSTED NET (LOSS) EARNINGS (Unaudited)

(in thousands)

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.

Active Members is defined as the number of Learners with a paid active 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 Learning Membership options. As a result, 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") and our Institutional business. Active Experts include our Institutional offerings, but excludes First Tutors UK.

Active Experts is defined as the number of Experts who have instructed one or more sessions in a given period. Our Active Expert count for the three months ended March 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.

KEY OPERATING METRICS

Key Performance Metrics and Non-GAAP Financial Measures

This earnings release includes non-GAAP financial measures for non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP adjusted net earnings (loss) and non-GAAP adjusted EBITDA (loss).

Non-GAAP sales and marketing expenses exclude non-cash stock compensation expenses.

Non-GAAP general and administrative expenses exclude non-cash stock compensation expenses.

Non-GAAP adjusted net earnings (loss) is defined as net income or net loss, as applicable, excluding non-cash stock-based compensation expenses and unrealized (loss) gain on mark-to-market derivative financial instruments.

Non-GAAP adjusted EBITDA (loss) is defined as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, non-cash stock-based compensation expenses, and unrealized (loss) gain on mark-to-market derivative financial instruments.

Sales and marketing expenses consist of salaries and benefits for our employees engaged in our consultative sales process. General and administrative expenses are recorded in the period in which they are incurred and include salaries, benefits, and non-cash stock-based compensation expense for certain employees as well as support services, product development, finance, legal, human resources, other administrative employees, information technology expenses, outside services, legal and accounting services, depreciation expense, and other costs required to support our operations.

Net loss per share is computed by dividing net loss by the weighted average number of shares outstanding during the period as calculated using the treasury stock method.

Non-GAAP measures are in addition, and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP and should not be considered as an alternative to sales, net income, operating income, cash flows from operations, or any other performance measures derived in accordance with GAAP. Other companies may calculate these non-GAAP financial measures differently, and therefore such financial measures may not be directly comparable to similarly titled measures of other companies. The Company believes that these non-GAAP measures of financial results provide useful supplemental information. The Company's management uses these non-GAAP measures to evaluate the Company's operating performance, trends, and to compare it against the performance of other companies. There are, however, a number of limitations related to the use of these non-GAAP measures and their nearest GAAP equivalents. See the tables above regarding reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Active Members 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 Learning Membership options. As a result, 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") and our Institutional offerings. Active Experts include our Institutional offerings, but exclude First Tutors UK.

Annualized run-rate is defined as the number of Active Members at the end of the period multiplied by average revenue per Learning Membership per month multiplied by twelve months. This recurring revenue customer base provides us with increased forecasting visibility into future periods.

Active Experts is defined as the number of Experts who have instructed one or more sessions in a given period.

Bookings represent contracted amounts during the period for Varsity Tutors for Schools.

Management and our board of directors use these metrics as supplemental measures of our performance that are not required by or presented in accordance with GAAP because they assist us in comparing our operating performance on a consistent basis, as they remove the impact of items not directly resulting from our core operations. We also use these metrics for planning purposes, including the preparation of our internal annual operating budget and financial projections, to evaluate the performance and effectiveness of our strategic initiatives and to evaluate our capacity to expand our business and the capital expenditures required for that expansion.

Non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP adjusted EBITDA (loss), and non-GAAP adjusted net income or loss should not be considered in isolation, as an alternative to, or superior to net earnings (loss), revenue, cash flows or other performance measure derived in accordance with GAAP. We believe these metrics are frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. Management believes that the presentation of non-GAAP metrics is an appropriate measure of operating performance because they eliminate the impact of expenses that do not relate directly to the performance of our underlying business. These non-GAAP metrics should not be construed as an implication that our future results will be unaffected by unusual or other items. We are not able to provide a reconciliation of non-GAAP adjusted EBITDA (loss) guidance for future periods to net loss, the comparable GAAP measure, because certain items that are excluded from non-GAAP adjusted EBITDA (loss) cannot be reasonably predicted or are not in our control. In particular, we are unable to forecast the timing or magnitude for gains or losses on mark-to-market derivative financial instruments, or stock-based compensation without unreasonable efforts, and these items could significantly impact, either individually or in the aggregate, net income or loss in the future. See the tables above regarding reconciliations of these non-GAAP measures to the most directly comparable GAAP measures for historical periods.

Forward-Looking Statements

All statements contained herein that do not relate to matters of historical fact should be considered forward-looking statements, including, without limitation, statements regarding our strategic priorities, including those related to enhancing the Learning Membership experience and on our expansion of freemium strategies; and our anticipated second quarter and full year 2024 outlook; as well as statements that include the words "expect," "plan," "believe," "project," and "may," and similar statements of a future or forward-looking nature.

The forward-looking statements made herein relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements.

There are a significant number of factors that could cause actual results to differ materially from statements made herein or in connection herewith, including but not limited to, our limited operating history, which makes it difficult to predict our future financial and operating results; our history of net losses; risks associated with our ability to acquire and retain customers in our Consumer business; risks associated with scaling up our Institutional business; risks associated with our intellectual property, including claims that we infringe on a third-party's intellectual property rights; risks associated with our classification of some individuals and entities we contract with as independent contractors; risks associated with the liquidity and trading of our securities; risks associated with payments that we may be required to make under the tax receivable agreement; litigation, regulatory and reputational risks arising from the fact that many of our Learners are minors; changes in applicable law or regulation; the possibility of cyber-related incidents and their related impacts on our business and results of operations; the possibility that we may be adversely affected by other economic, business, and/or competitive factors; and risks associated with managing our rapid growth.

Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in our filings with the SEC, including our Annual Report on Form 10-K filed on February 27, 2024, as well as other filings that we may make from time to time with the SEC.