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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-40653
Duolingo, Inc.
(Exact name of registrant as specified in its charter)
Delaware45-3055872
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
5900 Penn Avenue
Pittsburgh, Pennsylvania 15206
(412) 567-6602
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant’s Principal Executive Offices)
Luis von Ahn
Chief Executive Officer
Duolingo, Inc.
5900 Penn Avenue
Pittsburgh, Pennsylvania 15206
(412) 567-6602
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, $0.0001 per shareDUOL
 The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    
Yes ☐ No ☒ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes    No  ☒
As of August 11, 2021, 12,819,870 shares of the registrant's Class A common stock were outstanding, 24,598,497 shares of the registrant's Class B common stock were outstanding.




Table of Contents
Page
Special Note Regarding Forward-Looking Statements
Special Note Regarding Operating Metrics
Item 1. Financial Statements (Unaudited)

1


Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “shall,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “goal,” “objective,” “seeks,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our expectations regarding our financial performance;
our expectations regarding future operating performance;
the sufficiency of our cash and cash equivalents to meet our liquidity needs;
our ability to compete in our industry;
the size of our addressable markets, market share, and market trends, including our ability to grow our business in the countries we have identified as near-term priorities;
anticipated trends, developments, and challenges in our industry, business, and the highly competitive markets in which we operate;
our ability to anticipate market needs or develop new or enhanced offerings and services to meet those needs;
our ability to manage expansion into international markets and new industries;
our ability to stay in compliance with laws and regulations that currently apply or may become applicable to our business both in the United States and internationally and our expectations regarding various laws and restrictions that relate to our business;
our ability to effectively manage our growth and expand our infrastructure and maintain our corporate culture;
our ability to identify, recruit, and retain skilled personnel, including key members of senior management;
our ability to maintain, protect, and enhance our intellectual property.
We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations, estimates, forecasts, and projections about future events and trends that we believe may affect our business, results of operations, financial condition, and prospects. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ
2


materially from those described in the forward-looking statements. You should not place undue reliance on our forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to the registration statement, of which this Quarterly Report on Form 10-Q is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements.

3


SPECIAL NOTE REGARDING OPERATING METRICS
We manage our business by tracking several operating metrics, including monthly active users (MAUs), daily active users (DAUs), paid subscribers, and bookings. We believe each of these operating metrics provides useful information to investors and others. For information concerning these metrics as measured by us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
While these metrics are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our platform is used. These metrics are determined by using internal data gathered on an analytics platform that we developed and operate and have not been validated by an independent third party. This platform tracks user account and session activity. If we fail to maintain an effective analytics platform, our metrics calculations may be inaccurate.
We believe that these metrics are reasonable estimates of our user base for the applicable period of measurement, and that the methodologies we employ and update from time-to-time to create these metrics are reasonable bases to identify trends in user behavior. Because we update the methodologies we employ to create metrics, our operating metrics may not be comparable to those in prior periods. See the section titled “Risk Factors—Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may significantly harm and negatively affect our reputation and our business”. Other companies, including companies in our industry, may calculate these metrics differently.









4


Part I Financial Information
Item 1. Financial Statements

DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value amounts)
June 30,
2021
December 31,
2020
ASSETS
Current assets
Cash and cash equivalents$114,636 $120,490 
Accounts receivable25,129 20,450 
Deferred cost of revenues17,168 13,585 
Prepaid expenses and other current assets5,635 3,855 
Total current assets162,568 158,380 
Property and equipment, net7,692 6,428 
Capitalized software, net3,731 2,296 
Operating lease right-of-use assets6,805 8,073 
Other assets897 562 
Total assets$181,693 $175,739 
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable$4,266 $2,196 
Deferred revenues70,997 54,792 
Income tax payable9 68 
Accrued expenses and other current liabilities9,779 8,634 
Total current liabilities85,051 65,690 
Long term obligation under operating leases7,810 8,131 
Total liabilities92,861 73,821 
Commitments and contingencies (Note 9)
Convertible preferred stock, $0.0001 par value, 19,074 shares issued and outstanding at December 31, 2020 and June 30, 2021
182,609 182,609 
Stockholders’ deficit
Common stock, $0.0001 par value; 42,800 authorized shares; 13,271 issued and outstanding at June 30, 2021 and 12,794 issued and outstanding at December 31, 2020.
1 1 
Additional paid-in capital30,649 30,087 
Accumulated deficit(124,427)(110,779)
Total stockholders’ deficit(93,777)(80,691)
Total liabilities, convertible preferred stock and stockholders' deficit$181,693 $175,739 
See accompanying notes to the unaudited condensed consolidated financial statements.
5


DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Amounts in thousands, except per share amounts)
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenues$58,803 $40,011 $114,163 $68,123 
Cost of revenues16,137 11,809 31,156 20,023 
Gross profit42,666 28,202 83,007 48,100 
Operating expenses:
Research and development21,940 12,111 44,469 21,687 
Sales and marketing9,619 8,625 29,392 14,136 
General and administrative11,585 7,384 23,038 14,650 
Total operating expenses43,144 28,120 96,899 50,473 
Loss from operations(478)82 (13,892)(2,373)
Other income (expense), net303 (31)262 202 
(Loss) income before provision for income taxes(175)51 (13,630)(2,171)
Provision for income taxes1 11 18 22 
Net (loss) income and comprehensive (loss) income$(176)$40 $(13,648)$(2,193)
Basic loss per common share$(0.01)$ $(1.05)$(0.18)
Diluted loss per common share$(0.01)$ $(1.05)$(0.18)
See accompanying notes to the unaudited condensed consolidated financial statements.
6


DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(Amounts in thousands)
Convertible Preferred StockCommon
Stock
SharesAmountSharesAmountAdditional
Paid-In
Capital
Accumulated
Deficit
Total
BALANCE—Balance—March 31, 202018,247 $137,686 12,456 $1 $12,462 $(97,236)$(84,773)
Issuance of Series G convertible preferred stock, net $24 of fees
2419,976 — — — — — 
Stock-based compensation— — — — 1,681 — 1,681 
Stock options exercised— — 26 — 168 — 168 
Net income— — — — — 40 40 
BALANCE—June 30, 202018,488 $147,662 12,482 $1 $14,311 $(97,196)$(82,884)
Balance—March 31, 202119,074 $182,609 13,118 $1 $26,465 $(124,251)$(97,785)
Stock-based compensation— — — — 2,907 — 2,907 
Stock options exercised— — 153 — 1,277 — 1,277 
Net loss— — — — — (176)(176)
BALANCE—June 30, 202119,074 $182,609 13,271 $1 $30,649 $(124,427)$(93,777)
See accompanying notes to the unaudited condensed consolidated financial statements.







7


DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(Amounts in thousands)
Convertible Preferred StockCommon
Stock
SharesAmountSharesAmountAdditional
Paid-In
Capital
Accumulated
Deficit
Total
BALANCE—Balance—January 1, 202018,247 $137,686 12,406 $1 $11,026 $(95,003)$(83,976)
Issuance of Series G convertible preferred stock, net $24 of fees
241 9,976 — — — — — 
Stock-based compensation— — — — 2,835 — 2,835 
Stock options exercised— — 76 — 450 — 450 
Net loss— — — — — (2,193)(2,193)
BALANCE—June 30, 202018,488 $147,662 12,482 $1 $14,311 $(97,196)$(82,884)
Balance—January 1, 202119,074 $182,609 12,794 $1 $30,087 $(110,779)$(80,691)
Stock-based compensation— — — — 5,458 — 5,458 
Stock options exercised— — 500 — 3,307 — 3,307 
Common stock repurchased and retired— — (23)— (868)— (868)
Options repurchased— — — — (7,335)— (7,335)
Net loss— — — — — (13,648)(13,648)
BALANCE—June 30, 202119,074 $182,609 13,271 $1 $30,649 $(124,427)$(93,777)
See accompanying notes to the unaudited condensed consolidated financial statements.
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DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)
Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net loss(13,648)(2,193)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization1,236 1,022 
Stock-based compensation5,458 2,835 
Changes in assets and liabilities
Deferred revenue16,205 18,327 
Accounts receivable(4,679)(7,460)
Deferred cost of revenue(3,583)(4,606)
Prepaid expenses and other current assets847 (199)
Accounts payable2,070 2,283 
Accrued expenses and other current liabilities(291)2,412 
Noncurrent assets and liabilities612 759 
Net cash provided by operating activities4,227 13,180 
Cash flows from investing activities:
Capitalized software(1,656)(123)
Purchase of property and equipment(1,978)(2,193)
Net cash used for investing activities(3,634)(2,316)
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock 9,976 
Proceeds from exercise of stock options3,307 450 
Repurchases of stock options(7,335) 
Repurchase of common stock(868) 
Payments of deferred offering costs(1,551) 
Net cash (used for) provided by financing activities(6,447)10,426 
Net (decrease) increase in cash and cash equivalents(5,854)21,290 
Cash and cash equivalents - Beginning of period120,490 59,843 
Cash and cash equivalents - End of period$114,636 $81,133 
Supplemental disclosure of cash flow information:
Cash paid for interest$ $ 
Cash paid for income taxes$58 $ 
Supplemental disclosure of noncash investing activities:
Capitalized software included in accrued expenses$75 $ 
Property and equipment included in accrued expenses$226 $ 
Supplemental disclosure of noncash financing activities:
Deferred offering costs included in accrued expenses$1,076 $ 
See accompanying notes to the unaudited condensed consolidated financial statements.
9


DUOLINGO, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.     DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Duolingo, Inc. (the “Company” or “Duolingo”) was formed on August 18, 2011 and the Duolingo app was launched to the general public on June 19, 2012. The Company’s headquarters are located in Pittsburgh, Pennsylvania.
Duolingo is a US-based language-learning website and mobile app, as well as a digital language proficiency assessment exam. The Company has a freemium business model: the app and the website are accessible free of charge, although Duolingo also offers a premium service, Duolingo Plus, for a subscription fee. As of the date of this filing, Duolingo offers courses in 40 different languages, including Spanish, English, French, German, Italian, Portuguese, Japanese and Chinese. We have locations in the United States and China.
Principles of Consolidation—The unaudited condensed consolidated financial statements include the accounts of the Company and subsidiaries over which the Company has control. All intercompany transactions and balances have been eliminated.
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) from the Company’s accounting records and reflect the consolidated financial position and results of operations for the six months ended June 30, 2021 and 2020. Unless otherwise specified, all dollar amounts are referred to in thousands.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. In our opinion, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. We consistently applied the accounting policies consistent with the annual consolidated financial statements elsewhere in this this Quarterly Report on Form 10-Q, in preparing these unaudited condensed consolidated financial statements, with the exception of accounting standard updates described in Note 2, “Recently Adopted Accounting Pronouncements.” These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes for the fiscal year ended December 31, 2020 included in the final prospectus dated as of July 27, 2021 and filed with the SEC, pursuant to Rule 424(b)(4) on July 28, 2021 (“Final Prospectus”). Certain prior period amounts have been reclassified to conform to the current period presentation
2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards would otherwise apply to private companies. While we have not historically delayed the adoption of new or revised accounting standards until such time as those standards would apply to private companies, we have elected to take advantage of this extended transition period and, as a result, our operating results and financial statements in the future may not be comparable to the operating results and financial statements of companies who have adopted the new or revised accounting standards.
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Accounting Principles—The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP).
Use of Estimates—The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions reflected in the consolidated financial statements include, but are not limited to, useful lives of property and equipment, valuation of deferred tax assets and liabilities, stock-based compensation, common stock valuation, operating lease right-of-use assets and liabilities, capitalization of internally developed software and associated useful lives and contingent liabilities. Actual results may differ materially from such estimates. Management believes that the estimates, and judgments upon which they rely, are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent that there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.
Deferred Offering Costs—Deferred offering costs, which consist of direct incremental legal, accounting, and consulting fees relating to the Initial Public Offering (“IPO”), will be capitalized. The deferred offering costs will be offset against IPO proceeds upon the consummation of the IPO. In the event the planned IPO is terminated, the deferred offering costs will be expensed. There were no deferred offering costs recorded as of December 31, 2020. As of June 30, 2021, there was $2,627 of deferred offering costs recorded in the unaudited condensed consolidated balance sheet, of which $1,076 had not been paid.
Cash and Cash Equivalents—Cash consists primarily of cash on hand and bank deposits. Cash equivalents consist primarily of money market accounts with maturities of three months or less at the date of acquisition and are stated at cost, which approximates fair value. The Company maintains cash deposits with financial institutions that may exceed federally insured limits at times. The following table shows the breakout between cash and money market funds.
June 30,
2021
December 31,
2020
Cash$10,571 $20,428 
Money market funds104,065 100,062 
Total$114,636 $120,490 
The Money market funds are considered Level 1 financial assets. Level 1 financial assets use inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Advertising Costs— Advertising costs were approximately $7,685 and $19,751 for the three and six months ended June 30, 2021 and $6,460 and $10,495 for the three and six months ended June 30, 2020, respectively, and are included within Sales and marketing in the unaudited condensed consolidated statement of operations and comprehensive loss.
Income Taxes—The Company’s period provision for income taxes is computed by using an estimate of the annual effective tax rate, adjusted for discrete items taken into account in the relevant period, if any. Each quarter, the annual effective income tax rate is recomputed and if there are material changes in the estimate, a cumulative adjustment is made.
Contributors—On March 10, 2021, the Company announced that it was ending its non-employee volunteer program, which began in 2013 to build and improve language courses. As part of this change, those contributors who participated in the program became eligible to receive a one-time award, up to an aggregate amount of approximately $5,098, including fees paid to process payments of approximately $526. The Company accounted for this under Financial Accounting Standards Board (“FASB”) Accounting
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Standards Codifications (“ASC”) 958-720, Not-For-Profit Entities - Other Expenses and ASC 720-25, Contributions Made, based on the nature of this contribution, which is an unconditional promise. The Company recorded the initial charge during the three months ended March 31, 2021, which is when the Company made the unconditional promise to pay. During the three months ended June 30, 2021 the amount previously reserved was reduced by $878 to reflect those awards that were not claimed, resulting in a reduction of the expense, bringing the total amount to $4,220. Of that amount, $577 is expected to be paid out in the three months ended September 30, 2021. This amount is included within Sales and marketing in the unaudited condensed consolidated statement of operations and comprehensive loss.
Concentration of Credit Risk—The Company’s concentration of credit risk relates to financial institutions holding the Company’s cash and cash equivalents and platforms with significant accounts receivable balances and revenue transactions.
The Company maintains cash deposits with financial institutions that may exceed federally insured limits at times. Management believes that the financial institutions that hold the Company’s deposits are financially credit worthy and, accordingly, minimal credit risk exists with respect to those balances.
The majority of our revenue comes through our subscriptions and advertising streams and payments are made to Duolingo through service providers. The top two, Apple and Google, accounted for 66.4% and 18.3% of total accounts receivable as of June 30, 2021, respectively. The top three service providers, Apple, Google and Stripe, accounted for 47.8%, 28.9% and 13.8% of total accounts receivable as of December 31, 2020, respectively.
Apple, Google, and Stripe, processed 51.6%, 29.3% and 10.3% and 50.9%, 28.8%, and 10.3% of total revenue for the three and six months ended June 30, 2021, respectively. Three service providers, Apple, Google, and Stripe, processed 50.0%, 26.5%, and 10.1% of total revenue for the three months ended June 30, 2020, respectively. Two services providers, Apple and Google, processed 52.1% and 27.6% for the six months ended June 30, 2020.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued Accounting Standard Update (“ASU”) No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted this guidance on January 1, 2021 and it did not have a material impact on its unaudited condensed consolidated financial statements and related disclosures upon adoption.
Recently Issued Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance in order to improve consistent application of and simplify GAAP for other areas of Topic 740. The guidance will be effective for the Company beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2019-12 will have on its unaudited condensed consolidated financial statements and related disclosures.
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3.      REVENUE
The Company has three predominant sources of revenue; time-based subscriptions, in-app advertising placement by third parties and the Duolingo English Test. Revenue is recognized upon transfer of control of promised products or services to users in an amount that reflects the consideration the Company expects to receive in exchange for those services. The Company does not enter into contracts with a customer that contain multiple promises that result in multiple performance obligations. Revenue is recorded net of taxes, assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our users.
Revenue from time-based subscriptions includes a stand-ready obligation to provide hosting services that are consumed by the customer over the subscription period. Users can purchase Duolingo monthly or they can purchase a six-month or year-long subscription and pay for the subscription at the time of purchase. Therefore, such payments are initially recorded to deferred revenue. The user has the ability to download limited content offline. However, as there is a significant level of integration and interdependency with the online functionality, the Company considers the service to be a single performance obligation for the online and offline content.
The Company enters into arrangements with advertising networks to monetize the in-app advertising inventory. Revenue from in-app advertising placement is recognized at a point in time when the advertisement is placed and is based upon the amount received.
Duolingo English Test revenue is generally recognized once the tests have gone through the proctoring process and a certification decision has been made. This process usually takes less than 48 hours after the test has been completed and uploaded. Customers have 90 days from the date of purchase to take the exam or their purchase will expire and revenue will be recognized. Virtually all customers complete their exams prior to expiration. Sometimes organizations may purchase tests in bulk via coupons with a one year expiration date. The company will defer revenue from all tests that haven’t been proctored nor expired.
The Company’s users have the option to purchase consumable in-app virtual goods. The Company recognizes revenue over the period in which the user consumes the virtual good, which is generally within a month.
Principal Agent Considerations—The Company makes its application available to be downloaded through third-party digital distribution service providers. Users who purchase subscriptions also pay through the respective app stores. The Company evaluates the purchases via third-party payment processors to determine whether its revenues should be reported gross or net of fees retained by the payment processor. The Company is the principal in the transaction with the end user as a result of controlling, hosting, and integrating the delivery of the virtual items to the end user. The Company records revenue gross as a principal and records fees paid to third-party payment processors as Cost of revenues.
Contract Balances—Deferred revenue mostly consists of payments we receive in advance of revenue recognition, and is mostly related to time-based subscriptions, which will be recognized into revenue over the course of the upcoming year, which is 12 months or less. Additionally, Duolingo English Test has deferred revenue related to tests that have been purchased, but will not be recognized until the tests have been proctored.
Disaggregation of Revenue
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In accordance with ASC 606, Revenue from Contracts with Customers, the Company disaggregates revenue from contracts with customers into source of revenue, which most closely depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Information regarding source of revenues:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Over time$43,502 $28,274 $83,557 $50,445 
Point in time15,301 11,737 30,606 17,678 
Total revenue$58,803 $40,011 $114,163 $68,123 
Information regarding revenue by stream:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenues:
Subscription$43,502 $28,274 $83,557 $50,445 
Advertising9,056 6,808 18,331 11,816 
Duolingo English Test4,833 4,598 9,868 5,351 
Other (1)1,412 331 2,407 511 
Total revenues$58,803 $40,011 $114,163 $68,123 
________________
(1) Other revenue is mainly comprised of in app purchases of virtual goods.
Changes in deferred revenues were as follows:
Six Months Ended June 30,
20212020
Beginning balance—January 1$54,792 $26,307 
Amount from beginning balance recognized into revenue(41,498)(19,833)
Recognition of deferred revenue(45,378)(30,737)
Deferral of revenue103,081 68,897 
Ending balance—June 30$70,997 $44,634 
4.    PROPERTY and EQUIPMENT, net
Property and equipment consists of the following as of June 30, 2021 and December 31, 2020:
June 30,
2021
December 31,
2020
Leasehold improvements$9,336 $7,536 
Furniture, fixtures and equipment2,364 1,959 
Total property and equipment11,700 9,495 
Less: accumulated depreciation(4,008)(3,067)
Total property and equipment, net$7,692 $6,428 
Depreciation expense was $488 and $940 for the three and six months ended June 30, 2021 and $378 and $720 for the three and six months ended June 30, 2020, respectively, and is predominately included within General and administrative, with nominal amounts in Cost of revenues, Research and development
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and Sales and marketing in the Company’s consolidated statement of operations and comprehensive loss.
5.    CAPITALIZED SOFTWARE, net
Capitalized software consists of the following as of June 30, 2021 and December 31, 2020:
June 30,
2021
December 31,
2020
Capitalized software$9,912 $8,181 
Less: accumulated amortization(6,181)(5,885)
Capitalized software, net$3,731 $2,296 
Amortization expense of $148 and $296 for the three and six months ended June 30, 2021, and $243 and $302 for the three and six months ended June 30, 2020 is recorded in the Company’s consolidated statement of operations, respectively.
Amortization expense is included within the following financial statement line items within the Company’s consolidated statement of operations:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Cost of revenue$ $25 $ $51 
Sales and marketing148 218 296 251 
Total$148 $243 $296 $302 
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the estimated undiscounted future cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. No assets were impaired during the three and six months ended June 30, 2021 and 2020.
6.    INCOME TAXES
The income tax provision for interim periods is comprised of tax on ordinary income (loss) provided at the most recent projected annual effective tax rate (“PAETR”), adjusted for the tax effect of discrete items. Management estimates the PAETR each quarter based on the forecasted annual pretax income or (loss). The Company is required to reduce deferred tax assets by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the benefit of the deferred tax assets will not be realized in future periods. The Company also records the income tax impact of certain discrete, unusual or infrequently occurring items including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
The actual year-to-date income tax expense (benefit) is the product of the most current PAETR and the actual year-to-date pretax income (loss) adjusted for any discrete tax items. Items unrelated to current period ordinary income or (loss) are recognized entirely in the period identified as a discrete item of tax. The income tax expense (benefit) for a particular quarter, except for the first quarter, is the difference between the year-to-date calculation of income tax expense (benefit) and the year-to-date calculation for the prior quarter. Items unrelated to current period ordinary income or (loss) are recognized entirely in the
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period identified as a discrete item of tax. The inclusion of discrete items in a particular quarter can cause the actual effective rate for that quarter to vary significantly from the PAETR.
Therefore, the actual effective income tax rate for a particular quarter can vary significantly based upon the jurisdictional mix and timing of actual earnings compared to projected annual earnings, permanent items, earnings for those jurisdictions that maintain a valuation allowance, tax associated with jurisdictions excluded from the PAETR calculation and discrete items.
Annual Effective Tax Rate
The PAETR, which excludes the impact of discrete items, was (0.6)% and 21.6% as of the three months ended June 30, 2021 and 2020, respectively. The PAETR for the six months ended June 30, 2021 and 2020, was (0.1)% and (1.0)%, respectively. The PAETR was lower than the US federal statutory rate of 21.0% primarily due to the impact of maintaining a US valuation allowance provided on US deferred tax assets.
The Company continues to maintain a full valuation allowance on U.S. federal and state net deferred tax assets (excluding the tax effects of deferred tax liabilities associated with indefinite lived intangibles) for the period ending June 30, 2021 as a result of pretax losses incurred since the Company’s inception in early 2012. The Company is projecting pre-tax loss in 2021.
Current and Prior Period Tax Expense
For the three and six months ended June 30, 2021, the Company recognized income tax expense of $1 and $18 on pretax loss of $175 and $13,630, respectively.
For the three and six months ended June 30, 2020, the Company recognized income tax expense of $11 and $22 on pretax income of $51 and loss of $2,171, respectively.
7.    CONVERTIBLE PREFERRED STOCK
Convertible preferred stock is comprised of the following as of June 30, 2021 and December 31, 2020:
Shares
SeriesAuthorizedOutstandingPer share price
at issuance
Aggregate liquidation preferenceFunds receivedFees incurredCarrying value of convertible preferred stock
A3,865 3,865 $0.85 $3,300 $3,300 $52 $3,248 
B6,298 6,298 2.38 15,000 15,000 60 14,940 
C2,948 2,948 6.78 20,000 20,000 112 19,888 
D3,154 3,154 14.27 45,000 45,000 146 44,853 
E1,224 1,224 20.43 25,000 25,000 92 24,909 
F758 758 39.57 30,000 30,000 153 29,848 
G241 241 41.38 10,000 10,000 24 9,976 
H586 586 59.77 35,000 35,000 52 34,947 
Total19,074 19,074 $183,300 $183,300 $691 $182,609 
Each share of convertible preferred stock has a liquidation preference over common stock equal to the original issue price of the preferred stock plus any declared but unpaid dividends. No single class of preferred stock has liquidation preference that is senior in payment to other classes of preferred stock. The preferred stock does not accumulate undeclared and unpaid dividends.
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Each share of convertible preferred stock is convertible into shares of common stock at the option of the stockholder based upon a conversion rate that is 1:1 and may be adjusted under certain circumstances as defined in the Company’s Amended and Restated Certificate of Incorporation. If the Company consummates a public offering from which the Company receives gross proceeds of at least $50,000, the conversion becomes mandatory for the convertible preferred stockholders. Also, the conversion becomes mandatory for a preferred stock class, if the holders of at least 65% of the then outstanding shares of preferred stock elect to convert. The Company has reserved an equal number of shares of common stock for the potential conversion of each series of convertible preferred stock. The convertible preferred stockholders have voting rights equal to common stockholders. The preferred stockholders are entitled to the number of votes equal to the number of shares of common stock into which the preferred shares could be converted.
All classes of convertible preferred stock are being classified as outside of stockholders’ deficit as the preferred stock has redemption features that are outside of the Company’s control upon certain triggering events, such as a “Deemed Liquidation Event.” In the case of a Deemed Liquidation Event, the holders of Preferred Stock are entitled to be paid out of the assets of the Company, prior and in preference to any distribution to the holders of the common stock. Because the Company’s common stockholders do not control the Company’s Board of Directors, a potential Deemed Liquidation Event is considered to be outside of the control of the Company, resulting in classification outside of stockholders’ deficit.
8.    STOCK-BASED COMPENSATION
The Company has a stock incentive plan whereby the Board of Directors may grant stock options or restricted stock units to employees, directors and consultants to purchase shares of the Company’s common stock under the 2011 Equity Incentive Plan (Plan). The Company has authorized 10,113 common shares to be issued under the Plan. The Plan permits the granting of incentive stock options and nonqualified stock options. The Company’s stock options vest based on terms in the stock option agreements and generally vest over four years and have a term of ten years subject to the continuous service to the Company by the optionee. Incentive stock options may be granted at an exercise price of not less than 100% of the estimated fair value of the stock at the date of the grant as determined by the Company’s Board of Directors. If incentive stock options are granted to a stockholder who owns more than 10% of the voting power of all classes of stock of the Company, the exercise price of the incentive stock options must be at least 110% of the estimated fair value of the common stock at the date of the grant.
In November of 2020, the Board approved the amended and restated Plan, which provides for, among other things, the ability of the Company to grant restricted stock units (RSUs). Each RSU award vests based upon the satisfaction, during the term of the RSUs, of two requirements: length of service and a liquidity event defined as a change in control or a qualified IPO. No compensation expense has been included for RSUs as the vesting conditions are not probable.
In June of 2021, the Company granted 1,800 performance-based RSUs to the Company’s founders (the Founder Awards). The Founder Awards vest upon the satisfaction of both a service-based condition and a performance-based condition and generally are settled 1 year after vesting. The service-based condition is satisfied as to 25% of the Founder Awards on each anniversary of the completion of the IPO, subject to the continuous service of the founders through the applicable date. The performance-based condition will be satisfied only if the closing price of the Company’s Class A common stock reaches certain stock-price hurdles that are significantly in excess of the Company’s current valuation over a period of 10 years. The Founder Awards are divided into ten equal tranches with each tranche becoming eligible to vest upon achievement of the specified stock-price hurdles. The estimated amount of unrecognized compensation expense for the Founder Awards as of June 30, 2021 was approximately $100,543, which the Company
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expects to recognize over a period of 1 year to 7 years, depending upon the achievement of the stock-price hurdles. No compensation expense was recorded as of June 30, 2021 as the performance-based vesting conditions were deemed not probable.
Stock option activity as of June 30, 2021 is set forth below:
Number of
options
Weighted-
average
exercise
price
Weighted- average remaining contractual life (years)Aggregate intrinsic value
Options outstanding at January 1, 20218,365 $10.68 7.47$230,596 
Granted72 52.80 
Exercised(500)6.62 
Repurchased(220)4.81 
Forfeited and expired(51)13.12 
Options outstanding at June 30, 20217,666 $11.49 7.12$596,343 
Options exercisable at June 30, 20214,431 $7.21 6.09$363,687 
The total intrinsic value of options exercised was approximately $17,970 for the period ending June 30, 2021.  There were 114 options available for grant at June 30, 2021.
RSU activity for the six months ended June 30, 2021 is set forth below:
Share unitsWeighted-
average
grant date fair value per share
Outstanding at January 1, 202134 $38.08 
Granted561 52.58 
Vested  
Forfeited  
Outstanding at June 30, 2021
595 $51.76 
As of June 30, 2021, there was approximately $23,972 of unrecognized compensation cost related to stock options granted under the plan. That cost is expected to be recognized over a weighted-average period of approximately two years. The amount of unrecognized compensation expense for RSUs as of June 30, 2021 was $30,783 with a weighted average remaining contractual life of four years, for a total unrecognized compensation expense of $54,755.
In February of 2021, the Company initiated a tender offer which allowed employees to sell up to 10% of their vested options or shares back to the Company at selling price of $59.77, which was above fair market value of $38.08. The Company paid $13,479 and incurred $5,275 of additional compensation expense related to this tender representing the difference between the aggregate selling price and fair market value of the options and shares sold, and a $7,335 increase to Additional paid-in capital. As a result of this tender, 220 options were put back into the option pool and 23 shares were retired with an $868 increase to Additional paid in capital.
Compensation expense is recognized over the service period, which approximates the vesting period. Total compensation expense was $2,907 and $5,458 for the three and six months ended June 30, 2021, respectively and $1,681 and $2,835 or the three and six months ended June 30, 2020, respectively.
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Stock based compensation expense is included in the consolidated statements of operations as shown in the following table:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Cost of Revenue$ $ $2 $1 
Research and development1,105 532 2,216 979 
Sales and marketing72 107 140 180 
General and administrative1,730 1,042 3,100 1,675 
Total$2,907 $1,681 $5,458 $2,835 
Nominal amounts of stock based compensation expense is capitalized into capitalized software.
9.    COMMITMENTS AND CONTINGENCIES
Legal Proceedings— From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business and may be subject to third-party infringement claims.
Sales and use and value-added tax (VAT)— The Company determined that it was required to pay sales and use and VAT taxes in various jurisdictions. The Company is in the process of filing voluntary disclosure agreements with certain jurisdictions and remitting the estimated taxes. If these jurisdictions determine that additional amounts are necessary, the Company will be required to pay accordingly.
Related Parties - The Company has determined that there were no transactions with related parties as of or during the three and six months ended June 30, 2021 and 2020.
10.    ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
June 30,
2021
December 31,
2020
Sales and VAT tax accrual$2,597 $2,301 
Deferred offering costs1,076  
Marketing related accruals839 1,513 
Employee related benefits694 889
Obligations under current leases630 1,111 
Contributor awards577  
Other3,366 2,820 
Total$9,779 $8,634 
11.    EMPLOYEE BENEFIT PLAN
The Company sponsors a profit sharing plan with a 401(k) feature, the Duolingo Retirement Plan, (the “Plan”) for eligible employees. The current Plan, effective January 1, 2021, provides for Company safe harbor matching contributions of 100% of the first 4% of the employees’ elective deferrals and 50% of the next 2%, with vesting starting upon the first day of employment. The prior year Plan provided for Company safe harbor matching contributions of 100% of the first 3% of the employees’ elective deferrals and 50% of the next 2%, with vesting starting upon the first day of employment. The Company also has the option to make discretionary matching or profit sharing contributions. The Company made safe harbor matching contributions of approximately $781 and $1,483 for the three and six months ended June 30, 2021, respectively and $472 and $813 for the three and six months ended June 30, 2020, respectively.
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The Company did not make any discretionary matching or profit sharing contributions during the six months ended June 30, 2021 or 2020.
12.    EARNINGS PER SHARE
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company considers all series of the convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holders of the convertible preferred stock do not have a contractual obligation to share in the Company’s losses. Basic net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period.
The Company uses the more dilutive method of calculating the diluted income per share by applying the more dilutive of either (a) the treasury stock method, if-converted method, or (b) the two-class method in its diluted income (loss) per common share calculation. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of restricted stock. Potentially dilutive shares issuable upon conversion of the Convertible preferred stock are calculated using the if-converted method.
Three Months Ended June 30,Six Months Ended June 30,
(In thousands, except per share data)2021202020212020
Numerator:
Net (loss) income$(176)$40 $(13,648)$(2,193)
Less: allocation to preferred stockholders (24)  
Net (loss) income allocated to common stockholders$(176)$16 $(13,648)$(2,193)
Denominator:
Denominator for basic net income per common share - weighted-average shares13,172 12,439 13,045 12,441 
Effect of dilutive securities
Convertible preferred stock    
Stock options 3,764   
Denominator for dilutive net income per common share - weighted-average shares13,172 16,203 13,045 12,441 
Basic loss per common share$(0.01)$ $(1.05)$(0.18)
Diluted loss per common share$(0.01)$ $(1.05)$(0.18)
Since the Company was in a net loss position for the three and six months ended June 30, 2021 and the six months ended June 30, 2020, there is no difference between the number of shares used to calculate basic and diluted loss per share. The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the period presented because including them would have been antidilutive are as follows:
20


Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Convertible preferred stock19,074  19,074 18,488 
Stock options4,431  4,431 3,764 
Total23,505  23,505 22,252 
Dilutive shares under the as-converted method(1) 18,488   
________________
(1)    The dilutive shares under the as-converted method assume conversion of the Convertible preferred stock and are presented here merely for reference. In a net income position, diluted earnings per share is determined by the more dilutive of the two-class method or the as-converted method.

13.    SUBSEQUENT EVENTS
Subsequent events were evaluated events through August 12, 2021, the date that these unaudited condensed consolidated financial statements were available to be issued.
Equity Plans— In July 2021, Duolingo adopted the 2021 Incentive Award Plan (2021 Plan) and the Employee Stock Purchase Plan (ESPP), each of which became effective on July 26, 2021 in connection with the IPO. An aggregate of 7,832 shares and 1,119 shares of Class A common have been reserved for future issuance under the 2021 Plan and ESPP, respectively.
Initial Public Offering— On July 30, 2021, Duolingo completed its IPO of 5,872 shares of its Class A common stock at a price to the public of $102.00 per share, 4,466 of which were sold by the Company and 1,406 of which were sold by certain selling stockholders, which includes the exercise in full by the underwriters of their option to purchase from the Company an additional 766 shares of the Company’s Class A common stock. The gross proceeds to the Company from the initial public offering were $455,523, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company did not receive any proceeds from the sale of shares of Class A common stock in the offering by the selling stockholders. Immediately prior to the completion of the IPO, all convertible preferred stock outstanding, totaling approximately 19,074 shares, was automatically converted into an equivalent number of shares of Class B common stock on a one-to-one basis and their carrying value of $182,609 was reclassified to stockholders’ equity.
Prior to the IPO, deferred offering costs, which consisted primarily of accounting, legal and other fees related to the IPO, were capitalized within other assets, current in the unaudited condensed consolidated balance sheets. Upon the consummation of the IPO, approximately $4,000 of deferred offering costs were reclassified into stockholders’ equity as an offset to IPO proceeds. As of June 30, 2021, there was $2,627 of deferred offering costs recorded in the unaudited condensed consolidated balance sheet, of which $1,076 had not been paid.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended December 31, 2020 included in the final prospectus dated as of July 27, 2021 and filed with the SEC, pursuant to Rule
21


424(b)(4) on July 28, 2021 (our Final Prospectus). This discussion and analysis and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, that involve risks, uncertainties and assumptions.