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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 September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
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)

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 November 11, 2021, 15,796,838 shares of the registrant's Class A common stock were outstanding, 21,675,473 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)
September 30,
2021
December 31,
2020
ASSETS
Current assets
Cash and cash equivalents$549,440 $120,490 
Accounts receivable20,737 20,450 
Deferred cost of revenues19,726 13,585 
Prepaid expenses and other current assets6,441 3,855 
Total current assets596,344 158,380 
Property and equipment, net8,010 6,428 
Capitalized software, net4,184 2,296 
Operating lease right-of-use assets8,231 8,073 
Other assets1,008 562 
Total assets$617,777 $175,739 
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable$8,708 $2,196 
Deferred revenues80,460 54,792 
Income tax payable25 68 
Accrued expenses and other current liabilities9,452 8,634 
Total current liabilities98,645 65,690 
Long term obligation under operating leases8,401 8,131 
Total liabilities107,046 73,821 
Commitments and contingencies (Note 9)
Convertible preferred stock, $0.0001 par value, shares issued and outstanding at September 30, 2021 and 19,074 shares issued and outstanding at December 31, 2020.
 182,609 
Stockholders’ equity (deficit)
Common stock, $0.0001 par value; 2,000,000 shares of Class A common stock authorized and 12,847 issued and outstanding at September 30, 2021; 30,000 shares of Class B common stock authorized and 24,598 issued and outstanding at September 30, 2021; 42,800 authorized shares of common stock; 12,794 issued and outstanding at December 31, 2020.
4 1 
Additional paid-in capital664,124 30,087 
Accumulated deficit(153,397)(110,779)
Total stockholders’ equity (deficit)510,731 (80,691)
Total liabilities, convertible preferred stock and stockholders' equity (deficit)$617,777 $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 September 30,Nine Months Ended September 30,
2021202020212020
Revenues$63,595 $45,305 $177,758 $113,428 
Cost of revenues18,078 13,101 49,234 33,124 
Gross profit45,517 32,204 128,524 80,304 
Operating expenses:
Research and development29,345 15,894 73,814 37,581 
Sales and marketing15,267 11,142 44,659 25,278 
General and administrative29,605 8,235 52,643 22,885 
Total operating expenses74,217 35,271 171,116 85,744 
Loss from operations(28,700)(3,067)(42,592)(5,440)
Other (expense) income, net(219)(86)43 116 
Loss before provision for income taxes(28,919)(3,153)(42,549)(5,324)
Provision for income taxes51 23 69 45 
Net loss and comprehensive loss$(28,970)$(3,176)$(42,618)$(5,369)
Net loss per share attributable to Class A and Class B common stockholders, basic$(0.98)$(0.25)$(2.29)$(0.43)
Net loss per share attributable to Class A and Class B common stockholders, diluted$(0.98)$(0.25)$(2.29)$(0.43)
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’ EQUITY (DEFICIT)
THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2021

(Amounts in thousands)
Convertible Preferred StockCommon
Stock
SharesAmountSharesAmountAdditional
Paid-In
Capital
Accumulated
Deficit
Total
BALANCE—Balance—July 1, 202018,488 $147,662 12,482 $1 $14,311 $(97,196)$(82,884)
Stock-based compensation— — — — 1,682 — 1,682 
Stock options exercised— — 116 — 680 — 680 
Net loss— — — — — (3,176)(3,176)
BALANCE—September 30, 202018,488 $147,662 12,598 $1 $16,673 $(100,372)$(83,698)
Balance—July 1, 202119,074 $182,609 13,271 $1 $30,649 $(124,427)$(93,777)
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs— $— 4,466 $1 $426,191 $— $426,192 
Conversion of redeemable convertible preferred stock to common stock in connection with initial public offering(19,074)(182,609)19,074 2 182,607 — 182,609 
Stock-based compensation— — — — 20,662 — 20,662 
Stock options exercised— — 634 — 4,015 — 4,015 
Net loss— — — — — (28,970)(28,970)
BALANCE—September 30, 2021 $ 37,445 $4 $664,124 $(153,397)$510,731 
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’ EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2021

(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— — — — 4,517 — 4,517 
Stock options exercised— — 192 — 1,130 — 1,130 
Net loss— — — — — (5,369)(5,369)
BALANCE—September 30, 202018,488 $147,662 12,598 $1 $16,673 $(100,372)$(83,698)
Balance—January 1, 202119,074 $182,609 12,794 $1 $30,087 $(110,779)$(80,691)
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs— — 4,466 1 426,191 — 426,192 
Conversion of redeemable convertible preferred stock to common stock in connection with initial public offering(19,074)(182,609)19,074 2 182,607 — 182,609 
Stock-based compensation— — — — 26,120 — 26,120 
Stock options exercised— — 1,134 — 7,322 — 7,322 
Common stock repurchased and retired— — (23)— (868)— (868)
Options repurchased— — — — (7,335)— (7,335)
Net loss— — — — — (42,618)(42,618)
BALANCE—September 30, 2021 $ 37,445 $4 $664,124 $(153,397)$510,731 
See accompanying notes to the unaudited condensed consolidated financial statements.
8


DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)
Nine Months Ended September 30,
20212020
Cash flows from operating activities:
Net loss(42,618)(5,369)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization1,969 1,649 
Stock-based compensation26,120 4,517 
Changes in assets and liabilities
Deferred revenue25,668 19,689 
Accounts receivable(287)(7,907)
Deferred cost of revenues(6,141)(4,830)
Prepaid expenses and other current assets(2,559)451 
Accounts payable6,512 837 
Accrued expenses and other current liabilities409 4,138 
Noncurrent assets and liabilities(335)852 
Net cash provided by operating activities8,738 14,027 
Cash flows from investing activities:
Capitalized software(2,035)(123)
Purchase of property and equipment(3,063)(2,557)
Net cash used for investing activities(5,098)(2,680)
Cash flows from financing activities:
Issuance of common stock in connection with the initial public offering, net of underwriting discounts and issuance costs426,191  
Net proceeds from issuance of convertible preferred stock 9,976 
Proceeds from exercise of stock options7,322 1,130 
Repurchases of stock options(7,335) 
Repurchase of common stock(868) 
Net cash provided by financing activities425,310 11,106 
Net increase in cash and cash equivalents428,950 22,453 
Cash and cash equivalents - Beginning of period120,490 59,843 
Cash and cash equivalents - End of period$549,440 $82,296 
Supplemental disclosure of cash flow information:
Cash paid for interest$ $ 
Cash paid for income taxes94 $11 
Supplemental disclosure of noncash operating activities:
Implementation costs for cloud computing included in accrued expenses$27 $ 
Supplemental disclosure of noncash investing activities:
Capitalized software included in accrued expenses$337 $ 
Property and equipment included in accrued expenses$2 $55 
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.
On July 30, 2021, Duolingo completed its Initial Public Offering (“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 IPO were $455,532, before deducting underwriting discounts and commissions and 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 (deficit). Additionally, on July 15, 2021, 6,930 shares held by our founders were exchanged from Class A common stock into Class B common stock.
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 three and nine months ended September 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
10


dated as of July 27, 2021 and filed with the SEC, pursuant to Rule 424(b)(4) on July 28, 2021 (“Final Prospectus”).
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.
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 IPO, are capitalized. Deferred offering costs of $4,865 were offset against IPO proceeds upon the consummation of the IPO, of which $1,123 are expected to be paid in the fourth quarter of 2021. This amount was included in the unaudited condensed consolidated balance sheets within Accrued expenses and other current liabilities at September 30, 2021.
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.
September 30,
2021
December 31,
2020
Cash$39,694 $20,428 
Money market funds509,746 100,062 
Total$549,440 $120,490 
The Money market funds are considered Level 1 financial assets. Level 1 financial assets use inputs that are the unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Advertising Costs— Advertising costs were approximately $12,013 and $31,764 for the three and nine months ended September 30, 2021 and $8,843 and $19,338 for the three and nine months ended
11


September 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 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 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. 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 three, Apple, Google, and Stripe, accounted for 49.8%, 29.0%, and 14.4% of total accounts receivable as of September 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.
Three service providers, Apple, Google, and Stripe, processed 51.6%, 29.3% and 12.1% and 51.2%, 29.0%, and 11.0% of total revenue for the three and nine months ended September 30, 2021, respectively. Three service providers, Apple, Google, and Stripe, processed 50.7%, 25.6%, and 11.0% of total revenue for the three months ended September 30, 2020, respectively. Two services providers, Apple and Google, processed 51.5% and 26.8% for the nine months ended September 30, 2020.
Stock-Based Compensation—The Company accounts for equity-based compensation using the fair value method as set forth in the ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards based on estimated fair values. This method requires companies to estimate the fair value of stock-based compensation on the date of grant using an option pricing model. The Company estimates the fair value of each equity-based payment award on the date of grant using the Black-Scholes pricing model.
The Black-Scholes model determines the fair value of equity-based payment awards based on the fair value of the underlying common stock on the date of grant and requires the use of estimates and assumptions, including the fair value of the Company’s common stock, exercise price of the stock option,
12


expected volatility, expected life, risk-free interest rate and dividend rate. The Company estimates the expected volatility of its stock options by taking the average historical volatility of a group of comparable publicly traded companies over a period equal to the expected life of the options; it is not practical for the Company to estimate its own volatility due to the lack of historical prices. The expected term of the options is determined in accordance with existing equity agreements as the underlying options are assumed to be exercised upon the passage of time. The risk-free interest rate is the estimated average interest rate based on US Treasury zero-coupon notes with terms consistent with the expected life of the awards. The expected dividend yield is zero as the Company does not anticipate paying any recurring cash dividends in the foreseeable future. The Company accounts for forfeitures as they occur.
Restricted Stock Units (RSUs)
The Company began to grant RSUs in November 2020. The fair value of RSUs is estimated based on the fair value of the Company’s common stock on the date of grant. Each RSU award granted prior to the IPO 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. The service-based vesting condition for the majority of these awards is satisfied over four years. The liquidity-based vesting condition is satisfied upon the occurrence of a qualifying liquidity event. The Company measures and recognizes compensation expense for all stock-based awards based on the estimated fair value of the award. Prior to July 30, 2021, no stock-based compensation expense had been recognized for RSUs because the liquidity-based vesting condition had not been probable of being satisfied. Upon the IPO, the liquidity-based vesting condition was satisfied and $2,035 of stock-based compensation expense was recognized related to these awards during the three months ended September 30, 2021. Of that amount, $1,332, $210 and $493 was included within Research and development, Sales and marketing and General and administrative, respectively, in the unaudited condensed consolidated statement of operations and comprehensive loss.
Performance-based RSUs
In June 2021, the Company granted 1,800 (one million eight-hundred thousand) performance-based RSUs to the Company’s founders (“Founder Awards”). 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 Founder Awards vest upon the satisfaction of both a service-based condition and a performance-based condition and generally are settled one 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 fair value of the Founder Awards is determined using a Monte Carlo simulation model. The associated stock-based compensation is recorded over the derived service period, using the accelerated attribution method. If the stock-price hurdles are met sooner than the requisite service period, the stock-based compensation expense will be adjusted to prospectively recognize the remaining expense over the remaining derived service period. Provided that the founders continue to provide services to us, stock-based compensation expense is recognized over the derived service period, regardless of whether the stock-price hurdles are achieved. The first tranche was met during the three months ended September 30, 2021. The Company recognized $8,267 of stock-based compensation expense related to these awards, which is included within General and administrative in the unaudited condensed consolidated statement of operations and comprehensive loss.
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
13


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.
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. Under the year-long subscription, users can also purchase a single plan or a family plan, which allows up to six users to be on one subscription. 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.
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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 (recognized over 12 months or less). Additionally, the 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
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 September 30,Nine Months Ended September 30,
2021202020212020
Over time$46,030 $32,317 $129,587 $82,762 
Point in time17,565 12,988 48,171 30,666 
Total revenue$63,595 $45,305 $177,758 $113,428 
Information regarding revenue by stream:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenues:
Subscription$46,030 $32,317 $129,587 $82,762 
Advertising9,029 6,720 27,360 18,536 
Duolingo English Test6,695 5,607 16,563 10,958 
Other (1)1,841 661 4,248 1,172 
Total revenues$63,595 $45,305 $177,758 $113,428 
________________
(1) Other revenue is mainly comprised of in-app purchases of virtual goods.
Changes in deferred revenues were as follows:
Nine Months Ended September 30,
20212020
Beginning balance—January 1$54,792 $26,307 
Amount from beginning balance recognized into revenue(51,254)(24,848)
Recognition of deferred revenue(83,088)(59,495)
Deferral of revenue160,010 104,032 
Ending balance—September 30$80,460 $45,996 
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4.    PROPERTY and EQUIPMENT, net
Property and equipment consists of the following as of September 30, 2021 and December 31, 2020:
September 30,
2021
December 31,
2020
Leasehold improvements$9,862 $7,536 
Furniture, fixtures and equipment2,699 1,959 
Total property and equipment12,561 9,495 
Less: accumulated depreciation(4,551)(3,067)
Total property and equipment, net$8,010 $6,428 
Depreciation expense was $545 and $1,485 for the three and nine months ended September 30, 2021 and $453 and $1,173 for the three and nine months ended September 30, 2020, respectively, and is predominately included within General and administrative, with nominal amounts in Cost of revenues, Research and development 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 September 30, 2021 and December 31, 2020:
September 30,
2021
December 31,
2020
Capitalized software$10,553 $8,181 
Less: accumulated amortization(6,369)(5,885)
Capitalized software, net$4,184 $2,296 
Amortization expense of $188 and $484 for the three and nine months ended September 30, 2021, and $174 and $476 for the three and nine months ended September 30, 2020 is recorded in the Company’s consolidated statement of operations and comprehensive loss, respectively.
Amortization expense is included within the following financial statement line items within the Company’s consolidated statement of operations and comprehensive loss:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Cost of revenues$ $26 $ $77 
Sales and marketing188 148 484 399 
Total$188 $174 $484 $476 
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 nine months ended September 30, 2021 and 2020.
6.    INCOME TAXES
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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 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 for a particular quarter, except for the first quarter, is the difference between the year-to-date calculation of income tax expense and the year-to-date calculation for the prior quarter. Items unrelated to current period ordinary income or (loss) are recognized entirely in the 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 was (0.2)% and (0.7)% as of the three months ended September 30, 2021 and 2020, respectively. The PAETR for the nine months ended September 30, 2021 and 2020, was (0.2)% and (0.8)%, respectively. The tax expense for the current year quarter includes the impact of a discrete tax expense related to state income tax expense obligations for the 2017-2019 tax years. 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 US federal and state net deferred tax assets for the period ending September 30, 2021 as a result of pre-tax 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 nine months ended September 30, 2021, the Company recognized income tax expense of $51 and $69 on pretax loss of $28,919 and $42,549, respectively.
For the three and nine months ended September 30, 2020, the Company recognized income tax expense of $23 and $45 on pretax loss of $3,153 and $5,324, respectively.
7.    CONVERTIBLE PREFERRED STOCK
Immediately prior to the completion of the IPO on July 30, 2021, all convertible preferred stock outstanding, totaling approximately 19,074 shares, was automatically converted into an equivalent
17


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 (deficit).
The following table summarizes the convertible preferred stock outstanding immediately prior to the conversion into common stock and as of 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 

8.    STOCK-BASED COMPENSATION
Prior to the IPO, the Company granted options to purchase shares of the Company’s common stock and restricted stock units in respect of shares of the Company’s common stock to employees, directors and consultants to purchase shares of the Company’s common stock under the Company’s 2011 Equity Incentive Plan. In July 2021, Duolingo adopted the 2021 Incentive Award Plan (2021 Plan) and the 2021 Employee Stock Purchase Plan (ESPP), each of which became effective on July 26, 2021 in connection with the IPO. An aggregate of 7,946 shares and 1,119 shares of Class A common stock were made available for future issuance under the 2021 Plan and ESPP, respectively. The 2021 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 underlying Class A common stock at the date of the grant.
Stock option activity as of September 30, 2021 is set forth below:
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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(1,134)6.45 
Repurchased(220)4.81 
Forfeited and expired(59)13.43 
Options outstanding at September 30, 20217,024 $11.94 7.01$1,084,464 
Options exercisable at September 30, 20214,830 $9.79 6.42$756,259 
The total intrinsic value of options exercised was approximately $102,628 for the period ending September 30, 2021. 
RSU activity for the nine months ended September 30, 2021 is set forth below:
Restricted stock unitsWeighted-
average
grant date fair value per share
Outstanding at January 1, 202134 $38.08 
Granted671 66.43 
Vested  
Forfeited(5)106.59 
Outstanding at September 30, 2021
700 $64.77 
Prior to July 30, 2021, no stock-based compensation expense had been recognized for RSUs because the liquidity-based vesting condition had not been probable of being satisfied. Upon the IPO, the liquidity-based vesting condition was met and $2,035 of stock-based compensation expense was recognized related to these awards.
As of September 30, 2021, there was approximately $15,857 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 September 30, 2021 was $40,392 with a weighted average remaining contractual life of four years, for a total unrecognized compensation expense of $56,249.
There were 7,842 shares available for grant at September 30, 2021.
Performance-based RSUs
In June 2021, the Company granted an aggregate of 1,800 performance-based RSUs (the “Founder Awards”) to the Company’s founders. 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 with respect to each of 10 equal tranches only if the trailing 60-calendar day volume-weighted average closing trading price of the Company’s Class A common stock reaches certain stock-price hurdles for each such tranche, as set forth below, over a period of 10 years from the date of grant.
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If stock-price hurdles fail to be reached prior to the tenth anniversary of the date of grant, no portion of the Founder Awards will vest. Further, any RSUs associated with stock-prices hurdle not achieved by the tenth anniversary of the date of grant will terminate and be cancelled for no additional consideration to the founders. The stock-price hurdles and number of RSUs eligible to vest will be adjusted to reflect any stock splits, stock dividends, combinations, reorganizations, reclassifications, or similar events under the 2021 Plan. The Founder Awards will be settled in shares of the Company’s Class B common stock.
TrancheCompany Stock Price HurdleNumber of RSUs Eligible to Vest
1$127.50 90 
2$153.00 90 
3$178.50 90 
4$204.00 180 
5$255.00 180 
6$306.00 180 
7$357.00 180 
8$408.00 180 
9$612.00 270 
10$816.00 360 
The Company estimated the grant date fair value of the Founder Awards using a model based on multiple stock-price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the stock-price hurdles may not be satisfied. The weighted-average grant date fair value of the Founder Awards was estimated to be $61.56 per share, and the Company estimates that it will recognize total stock-based compensation expense of approximately $110,817 over the derived service period of each of the ten separate tranches which is between 3.585.92 years. If the stock-price hurdles are met sooner than the requisite service period, the stock-based compensation expense will be adjusted to prospectively recognize the remaining expense over the remaining derived service period. Provided that the founders continue to provide services to the Company, stock-based compensation expense is recognized over the derived service period, regardless of whether the stock-price hurdles are achieved. The first tranche was met during the three months ended September 30, 2021. The Company recognized $8,267 of stock-based compensation expense related to these awards, which is included within General and administrative in the unaudited condensed consolidated statement of operations and comprehensive loss.
In February 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.
Upon the IPO, vesting of stock option grants to executive officers were accelerated, which resulted in an additional $5,574 of compensation expense during the three months ended September 30, 2021. This is
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included within General and administrative in the unaudited condensed consolidated statement of operations and comprehensive loss.
Total stock-based compensation expense was $20,662 and $26,120 for the three and nine months ended September 30, 2021, respectively and $1,682 and $4,517 or the three and nine months ended September 30, 2020, respectively.
Stock based compensation expense is included in the consolidated statements of operations as shown in the following table:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Cost of revenues$6 $3 $8 $4 
Research and development3,533 526 5,749 1,505 
Sales and marketing408 116 548 296 
General and administrative16,715 1,037 19,815 2,712 
Total$20,662 $1,682 $26,120 $4,517 
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 nine months ended September 30, 2021 and 2020.
10.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
September 30,
2021
December 31,
2020
Sales and VAT tax accrual$2,289 $2,301 
Obligations under current leases1,542 1,111 
Employee related benefits1,143 889 
Marketing related accruals1,086 1,513 
Other3,392 2,820 
Total$9,452 $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
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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 $877 and $2,360 for the three and nine months ended September 30, 2021, respectively and $495 and $1,308 for the three and nine months ended September 30, 2020, respectively. The Company did not make any discretionary matching or profit sharing contributions during the nine months ended September 30, 2021 or 2020.
12.    EARNINGS PER SHARE
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Prior to the automatic conversion of all of its convertible preferred stock outstanding into Class B common stock upon the IPO, the Company considered all series of its convertible preferred stock to be participating securities.
Under the two-class method, the net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holders of the convertible preferred stock do not have a contractual obligation to share in the Company’s losses. Basic net loss per share attributable to common stockholders is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. The diluted net loss per share attributable to common stockholders is calculated by giving effect to all potential dilutive common stock equivalents outstanding for the period.
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands, except per share data)2021202020212020
Numerator:
Net loss attributable to Class A and Class B common shareholders$(28,970)$(3,176)$(42,618)$(5,369)
Denominator:
Weighted-average shares in computing net loss per share attributable to Class A and Class B common stockholders, basic and diluted29,531 12,530