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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, 2023
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 every Interactive Data File required to be submitted 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 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.
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 7, 2023, 35,374,823 shares of the registrant's Class A common stock were outstanding, and 6,162,615 shares of the registrant's Class B common stock were outstanding.



Table of Contents
Page
1


Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including without limitation, statements regarding our business model and strategic plans, including the introduction of new brands or products, and our implementation thereof; statements regarding our expectations, beliefs, plans, objectives, prospects, assumptions, future events or expected performance, including our ability to compete in our industry; the sufficiency of our cash, cash equivalents and investments; and the plans and objectives of management for future operations and capital expenditures are forward-looking statements.
Without limiting the generality of the foregoing, 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. Such forward-looking statements are neither promises nor guarantees, but involve a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to:
our ability to retain and grow our users and sustain their engagement with our products;
competition in the online language learning industry;
our limited operating history;
our ability to maintain profitability;
our ability to manage our growth and operate at such scale;
the success of our investments;
our reliance on third-party platforms to store and distribute our products and collect revenue;
our reliance on third-party hosting and cloud computing providers;
our ability to compete for advertisements;
acceptance by educational organizations of technology-based education;
changes in business and macroeconomic conditions; and
those identified in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, and in Part II, Item 7. ““Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report on Form 10-K”).
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.
2


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. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q and, although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, 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. 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. 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 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 materially from those described in the forward-looking statements. You should not place undue reliance on our forward-looking 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. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q 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.
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “Duolingo,” the “Company”, “we,” “our,” “us,” or similar terms refer to Duolingo, Inc. and its subsidiaries.

3


Special Note Regarding Key Operating Metrics
We manage our business by tracking several operating metrics, including monthly active users (MAUs), daily active users (DAUs), paid subscribers, subscription bookings, and total 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 Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Operating Metrics and Non-GAAP Financial Measures.”
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 negatively affect our reputation and our business”. Other companies, including companies in our industry, may calculate these metrics differently.
Risk Factors Summary
The following is a summary of the principal risks that could materially adversely affect our business, results of operations, and financial condition, all of which are more fully described in Part II, Item 1A. “Risk Factors.” This summary should be read in conjunction with Part II, Item 1A. “Risk Factors” and should not be relied upon as an exhaustive summary of the material risks facing our business.
If we fail to keep existing users or add new users, or if our users decrease their level of engagement with our products or do not convert to paying users, our revenue, financial results and business may be significantly harmed.
The online language learning industry is highly competitive, with low switching costs and a consistent stream of new products and entrants and innovation by our competitors may disrupt our business.
Changes to our existing brand and products, or the introduction of a new brand or products, could fail to attract or keep users or generate revenue and profits.
We have a limited operating history and, as a result, our past results may not be indicative of future operating performance.
Our costs are continuing to grow, and some of our investments have the effect of reducing our operating margin and profitability. If our investments are not successful, our business and financial performance could be harmed.
Our quarterly and annual operating results and other operating metrics may fluctuate from period to period, which makes these metrics difficult to predict.
Our operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may negatively affect our reputation and our business.
4


We rely on third-party platforms such as the Apple App Store and the Google Play Store to distribute our products and collect payments. If we are unable to maintain a good relationship with such platform providers, if their terms and conditions or pricing changed to our detriment, if we violate, or if a platform provider believes that we have violated, the terms and conditions of its platform, or if any of these platforms loses market share or falls out of favor or is unavailable for a prolonged period of time, our business will suffer.
We rely on third-party hosting and cloud computing providers, like Amazon Web Services (“AWS”) and Google Cloud, to operate certain aspects of our business. A significant portion of our product traffic is hosted by a limited number of vendors, and any failure, disruption or significant interruption in our network or hosting and cloud services could adversely impact our operations and harm our business.
Our business is subject to complex and evolving US and international laws and regulations. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
Our success depends, in part, on our ability to access, collect, protect, and use personal data about our users and payers, and to comply with applicable data privacy laws.
The varying and rapidly-evolving regulatory framework on privacy and data protection across jurisdictions could result in claims, changes to our business practices, monetary penalties, increased cost of operations, brand damage, or declines in user growth or engagement, or otherwise harm our business.
Regulatory and legislative developments on the use of artificial intelligence and machine learning could adversely affect our use of such technologies in our products and services.
From time to time, we may be party to intellectual property-related litigation and proceedings that are expensive and time consuming to defend, and, if resolved adversely, could materially adversely impact our business, financial condition and results of operations.
We may fail to adequately obtain, protect and maintain our intellectual property rights or prevent third parties from making unauthorized use of such rights.
The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the listing of our Class A common stock on the Nasdaq Global Select Market, including our directors, executive officers, and 5% stockholders and their respective affiliates, who held in the aggregate 79.8% of the voting power of our outstanding capital stock as of June 30, 2023. This ownership will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.
5


Part I Financial Information
Item 1. Financial Statements (Unaudited)

DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value amounts)
June 30,
2023
December 31, 2022
ASSETS
Current assets
Cash and cash equivalents$678,665 $608,180 
Accounts receivable53,406 46,728 
Deferred cost of revenues42,720 35,041 
Income tax receivable2,363  
Prepaid expenses and other current assets7,787 7,234 
Total current assets784,941 697,183 
Property and equipment, net12,571 12,969 
Goodwill4,050 4,050 
Intangible assets, net10,396 8,497 
Operating lease right-of-use assets20,976 22,508 
Deferred tax assets633 633 
Other assets1,236 1,507 
Total assets$834,803 $747,347 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$2,305 $1,177 
Deferred revenues192,753 157,550 
Income tax payable62 1,069 
Accrued expenses and other current liabilities21,986 21,970 
Total current liabilities217,106 181,766 
Long-term obligation under operating leases21,292 23,503 
Total liabilities238,398 205,269 
Commitments and contingencies (Note 8)
Stockholders’ equity
Class A common stock, $0.0001 par value; 2,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 35,368 and 31,899 issued and outstanding at June 30, 2023 and December 31, 2022, respectively
Class B common stock, $0.0001 par value; 30,000 shares authorized as of June 30, 2023 and December 31, 2022; 6,163 and 8,462 issued and outstanding at June 30, 2023 and December 31, 2022, respectively
4 4 
Additional paid-in capital825,746 772,562 
Accumulated deficit(229,345)(230,488)
Total stockholders’ equity596,405 542,078 
Total liabilities and stockholders' equity$834,803 $747,347 
See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
6


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

(Amounts in thousands, except per share amounts)
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Revenues$126,839 $88,386 $242,500 $169,606 
Cost of revenues33,788 23,869 65,280 45,359 
Gross profit93,051 64,517 177,220 124,247 
Operating expenses:
Research and development47,947 34,217 93,791 63,998 
Sales and marketing17,734 15,277 34,335 30,217 
General and administrative32,235 30,057 62,478 56,913 
Total operating expenses97,916 79,551 190,604 151,128 
Loss from operations(4,865)(15,034)(13,384)(26,881)
Other expense, net of other income(268)(539)(86)(851)
Loss before interest income and income taxes(5,133)(15,573)(13,470)(27,732)
Interest income7,543 669 13,182 702 
Income (loss) before income taxes2,410 (14,904)(288)(27,030)
(Benefit) provision for income taxes(1,315)141 (1,431)169 
Net income (loss) and comprehensive income (loss)$3,725 $(15,045)$1,143 $(27,199)
Net income (loss) per share attributable to Class A and Class B common stockholders, basic$0.09 $(0.38)$0.03 $(0.70)
Net income (loss) per share attributable to Class A and Class B common stockholders, diluted$0.08 $(0.38)$0.02 $(0.70)
See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
7


DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED JUNE 30, 2023 AND 2022

(Amounts in thousands)
Common
Stock
SharesAmountAdditional Paid-In
Capital
Accumulated
Deficit
Total
BALANCE—BALANCE—April 1, 202239,077 $4 $703,778 $(183,068)$520,714 
Stock-based compensation expense— — 18,114 — 18,114 
Stock options exercised450 — 4,436 — 4,436 
Release of restricted stock units60 — — —  
Net loss— — — (15,045)(15,045)
BALANCE—June 30, 202239,587 $4 $726,328 $(198,113)$528,219 
BALANCE—April 1, 202341,018 $4 $798,254 $(233,070)$565,188 
Stock-based compensation expense— — 23,714 — 23,714 
Stock options exercised374 — 3,778 — 3,778 
Release of restricted stock units139 — — —  
Net income— — — 3,725 3,725 
BALANCE—June 30, 202341,531 $4 $825,746 $(229,345)$596,405 
See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.



8


DUOLINGO, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Amounts in thousands)
Common Stock
SharesAmountAdditional Paid-In
Capital
Accumulated
Deficit
Total
BALANCE—January 1, 202238,272 $4 $683,966 $(170,914)$513,056 
Stock-based compensation expense— — 32,700 — 32,700 
Stock options exercised1,206 — 9,662 — 9,662 
Release of restricted stock units109 — — —  
Net loss— — — (27,199)(27,199)
BALANCE—June 30, 202239,587 $4 $726,328 $(198,113)$528,219 
BALANCE—January 1, 202340,361 $4 $772,562 $(230,488)$542,078 
Stock-based compensation expense— — 44,787 — 44,787 
Stock options exercised916 — 8,397 — 8,397 
Release of restricted stock units254 — — —  
Net income— — — 1,143 1,143 
BALANCE—June 30, 202341,531 $4 $825,746 $(229,345)$596,405 
See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

9


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

(Amounts in thousands)
Six Months Ended June 30,
20232022
Cash flows from operating activities:
Net income (loss)$1,143 $(27,199)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization3,396 1,944 
Stock-based compensation expense44,787 32,700 
Gain on sale of capitalized software(100) 
Changes in assets and liabilities:
Deferred revenue35,203 29,927 
Accounts receivable(6,678)4,954 
Deferred cost of revenues(7,679)(4,999)
Prepaid expenses and other current assets(2,916)(738)
Accounts payable1,059 (6,314)
Accrued expenses and other current liabilities(1,036)3,505 
Noncurrent assets and liabilities(408)(491)
Net cash provided by operating activities66,771 33,289 
Cash flows from investing activities:
Capitalized software expense and purchases of intangible assets(3,275)(2,522)
Purchase of property and equipment(1,508)(3,191)
Proceeds from sale of capitalized software100  
Net cash used for investing activities(4,683)(5,713)
Cash flows from financing activities:
Proceeds from exercise of stock options8,397 9,662 
Net cash provided by financing activities8,397 9,662 
Net increase in cash and cash equivalents70,485 37,238 
Cash and cash equivalents - Beginning of period608,180 553,922 
Cash and cash equivalents - End of period$678,665 $591,160 
See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
10


DUOLINGO, INC. AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

(Amounts in thousands)
Six Months Ended June 30,
20232022
Supplemental disclosure of cash flow information:
Cash paid for interest$ $ 
Cash paid for income taxes$1,939 $608 
Supplemental disclosure of noncash operating activities:
Implementation costs for cloud computing included in Current liabilities$ $7 
Supplemental disclosure of noncash investing activities:
Capitalized software and purchases of intangible assets included in Current liabilities$ $12 
Property and equipment included in Current liabilities$114 $1,058 
Landlord incentive included in Prepaid expenses and other current assets$ $2,148 
See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.
11


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 mobile learning platform, 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 premium services for a subscription fee. As of the date of this filing, Duolingo offers courses in over 40 different languages, including Spanish, English, French, German, Italian, Portuguese, Japanese and Chinese. We have locations in the United States, China and Germany.
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 six months ended June 30, 2023 and 2022. Unless otherwise specified, all dollar amounts (other than per share 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 Unaudited Condensed Consolidated Financial Statements elsewhere in this Quarterly Report on Form 10-Q, in preparing these Unaudited Condensed Consolidated Financial Statements. 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, 2022 included in the Annual Report on Form 10-K and filed with the SEC.
2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles—The Unaudited Condensed Consolidated Financial Statements and accompanying notes are prepared in accordance with 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 Unaudited Condensed Consolidated Financial Statements and accompanying notes. Significant estimates and assumptions reflected in the Unaudited Condensed 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
12


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 Unaudited Condensed Consolidated Financial Statements will be affected.
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.
(In thousands)June 30,
2023
December 31,
2022
Cash$23,541 $91,189 
Money market funds655,124 516,991 
Total$678,665 $608,180 
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 $12,206 and $23,299 for the three and six months ended June 30, 2023, respectively, and $10,593 and $21,547 for the three and six months ended June 30, 2022, respectively, and are included within Sales and marketing in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (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.
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 service providers, Apple and Google, accounted for 68.0% and 18.4% of total Accounts receivable as of June 30, 2023, respectively. The top two service providers, Apple and Google, accounted for 56.2% and 27.5% of total Accounts receivable as of December 31, 2022, respectively.
Three service providers, Apple, Google and Stripe, processed 58.2%, 26.1%, and 11.9%, and 57.7%, 26.2% and 11.9% of total Revenues for the three and six months ended June 30, 2023, respectively. Two services providers, Apple and Google, processed 53.5% and 28.4%, and 52.3% and 28.8% of total Revenues for the three and six months ended June 30, 2022, respectively.
Impairment of long-lived assets— 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
13


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, 2023 and 2022.
Recently Issued Pronouncements Not Yet Adopted
There are no recently issued accounting pronouncements that the Company has not yet adopted that they believe are applicable or would have a material impact on the financial statements of the Company.
Recently Adopted Accounting Pronouncements
There are no recently adopted accounting pronouncements.
3.      REVENUE
The Company has three predominant sources of revenues; 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. The family plan includes up to six users on one subscription. 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 21 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 have neither 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.
The Company also recognizes revenue from Duo’s Taquería, a restaurant that opened during 2022, in the space adjacent to our headquarters in Pittsburgh. Revenue from Duo’s Taquería is recognized at a point in time when the sales are made.
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
14


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 revenue stream, which most closely depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Revenues:
Subscription$95,158 $65,194 $181,343 $123,204 
Advertising13,061 11,218 24,696 22,966 
Duolingo English Test9,809 8,036 19,781 16,116 
Other (1)8,811 3,938 16,680 7,320 
Total revenues$126,839 $88,386 $242,500 $169,606 
________________
(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,
(In thousands)20232022
Beginning balance—January 1$157,550 $98,267 
Amount from beginning balance recognized into revenue(112,514)(69,597)
Recognition of deferred revenue(88,507)(63,821)
Deferral of revenue236,224 163,345 
Ending balance—June 30$192,753 $128,194 

15


4.    PROPERTY and EQUIPMENT, net
Property and equipment consists of the following as of June 30, 2023 and December 31, 2022:
(In thousands)June 30,
2023
December 31, 2022
Leasehold improvements$17,134 $15,983 
Furniture, fixtures and equipment5,675 5,204 
Total property and equipment22,809 21,187 
Less: accumulated depreciation(10,238)(8,218)
Total property and equipment, net$12,571 $12,969 
Depreciation expense is included within the following financial statement line items within the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Research and development$409 $463 $816 $597 
Sales and marketing45 59 93 78 
General and administrative557 166 1,111 578 
Total$1,011 $688 $2,020 $1,253 

5.    INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist mostly of capitalized software, with $117 and $18 of other intangible assets as of June 30, 2023 and December 31, 2022, respectively.
(In thousands)June 30,
2023
December 31, 2022
Intangible assets$19,794 $16,827 
Less: accumulated amortization(9,398)(8,330)
Intangible assets, net$10,396 $8,497 
The Company capitalized $3,176 and $2,534 of software development costs during the six months ended June 30, 2023 and 2022, respectively. Amortization expense is included within the following financial statement line items within the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Cost of revenues$402 $273 $805 $273 
Sales and marketing
221 209 571 418 
Total
$623 $482 $1,376 $691 

Goodwill was $4,050 at June 30, 2023 and December 31, 2022. As of June 30, 2023 and December 31, 2022, $3,848 and $3,983 of goodwill is deductible for tax purposes, respectively.
6.    INCOME TAXES
Year-to-date income tax expense or benefit is the product of the most current projected annual effective tax rate (“PAETR”) and the actual year-to-date pretax income (loss) adjusted for any discrete items. The income tax expense or benefit for a particular quarter, is the difference between the year-to-date calculation of income tax expense or benefit and the year-to-date calculation for the prior quarter. Items
16


unrelated to current period ordinary income or (loss) are recognized entirely in the period identified as a discrete item of tax.
The Company’s PAETR differs from the US federal statutory rate of 21.0% during the three and six months ended June 30, 2023 and 2022 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 June 30, 2023 as a result of pre-tax losses incurred since the Company’s inception in early 2012. The Company is projecting pre-tax loss in 2023.
The Company’s income before taxes, income tax provision or benefit and effective tax rates were as follows:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands, except percentages)2023202220232022
Income (loss) before income taxes$2,410 $(14,904)$(288)$(27,030)
(Benefit) provision for income taxes(1,315)141 $(1,431)$169 
Effective tax rate(54.6)%(0.9)%496.9 %(0.6)%
The Company recognized a discrete tax benefit attributable to the excess tax benefits of stock-based compensation. This discrete benefit was the primary driver of the tax benefit recorded for the current period as well as changes to the effective tax rate versus the prior year.
7.    STOCK-BASED COMPENSATION
Prior to the IPO, the Company granted options to purchase shares of the Company’s common stock and restricted stock units (“RSU”) in respect of shares of the Company’s common stock to employees, directors and consultants 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. On each January 1, the number of shares of the Company’s Class A common stock available for issuance under the 2021 Plan have been, and through January 1, 2031, will be, increased by the lesser of (i) 5% of the shares outstanding on the preceding December 31 (calculated on an as-converted basis) and (B) such smaller number of shares of common stock as determined by the Board or the Committee (as defined in the 2021 Plan). On January 1, 2023, the shares available under the 2021 Plan and ESPP were increased by 2,018 shares and 319 shares, respectively.
The Company’s stock options vest based on terms in the stock option agreements, which generally provide for vesting over four years based on continued service to the Company and its subsidiaries. Each option has a term of ten years. Stock options granted under the 2021 Plan must generally have an exercise price of not less than the estimated fair market value of the underlying Class A common stock at the date of the grant. No options have been granted under the 2021 Plan.
17


A summary of stock option activity under the Plans was as follows:
(In thousands, except prices and years)Number of
options
Weighted-
average
exercise
price
Weighted- average remaining contractual life (years)Aggregate intrinsic value
Options outstanding at January 1, 20234,410 $14.04 6.25$251,832 
Granted (1) 
Exercised(916)9.23 
Forfeited and expired(26)13.63 
Options outstanding at June 30, 2023
3,468 $15.31 6.03$443,657 
Options exercisable at June 30, 20233,076 $14.63 5.90$394,674 
________________
(1) There were no stock options granted during the six months ended June 30, 2023.


The total intrinsic value of options exercised was approximately $106,750 and $95,677 for the periods ended June 30, 2023 and 2022, respectively. 
A summary of RSU activity under the Plans was as follows:
(In thousands, except prices)Restricted stock unitsWeighted-
average
grant date fair value per share
Outstanding at January 1, 2023
2,036 $85.74 
Granted708 131.32 
Released(254)84.91 
Forfeited(117)93.00 
Outstanding at June 30, 2023
2,373 $99.07 
As of June 30, 2023, there was approximately $3,308 of unrecognized compensation cost related to stock options granted under the plans with a weighted-average period of approximately one year. The amount of unrecognized compensation expense for RSUs as of June 30, 2023 was $217,528 with a weighted-average period of approximately three years. Total unrecognized compensation expense as of June 30, 2023 was $220,836.
There were 9,570 shares available for grant at June 30, 2023.
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 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 on July 27, 2021, 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.
Any RSUs associated with stock-prices hurdle not achieved by the tenth anniversary of the date of grant will terminate and be canceled for no additional consideration to the founders. The stock-price hurdles
18


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 stock-price hurdles for the first two tranches were met during 2021. With respect to these two tranches in combination, the service-based condition has been satisfied. As of the date of this Quarterly Report on Form 10-Q, no additional stock-price hurdles have been met. The Company recognized $7,094 and $14,234 of stock-based compensation expense related to these awards for the three and six months ended June 30, 2023, respectively, and $8,108 and $16,127 for the three and six months ended June 30, 2022, respectively, which is included within General and administrative in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). As of June 30, 2023, there is $49,123 of unrecognized compensation expense related to these awards.
Total stock-based compensation expense was $23,714 and $44,787 for the three and six months ended June 30, 2023, respectively, and $18,114 and $32,700 for the three and six months ended June 30, 2022, respectively.
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Stock based compensation expense is included in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) as shown in the following table:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Cost of revenues$14 $10 $25 $16 
Research and development10,978 5,773 20,324 9,405 
Sales and marketing969 595 1,748 943 
General and administrative11,753 11,736 22,690 22,336 
Total$23,714 $18,114 $44,787 $32,700 
Nominal amounts of stock based compensation expense is capitalized into intangible assets for the three and six months ended June 30, 2023 and 2022.
8.    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. The outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. The Company is not currently party to any material legal proceedings.
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, 2023 and 2022.
9.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
(In thousands)June 30,
2023
December 31, 2022
Obligations under current leases$6,053 $4,903 
Marketing related accruals3,993 3,464 
Employee-related costs2,726 4,233 
Sales and VAT tax accrual2,476 2,396 
Other6,738 6,974 
Total$21,986 $21,970 
10.    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 Company also has the option to make discretionary matching or profit sharing contributions. The Company made safe harbor matching contributions of approximately $1,473 and $2,870 for the three and six months ended June 30, 2023, respectively, and $1,059 and $2,042 for the three and six months ended June 30, 2022, respectively. The Company did not make any discretionary matching or profit sharing contributions during the three and six months ended June 30, 2023 and 2022.
11.    EARNINGS (LOSS) PER SHARE
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Basic and diluted net income (loss) per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities.
Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. The diluted net income per share attributable to common stockholders is calculated by giving effect to all potential dilutive common stock equivalents outstanding for the period. The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 20 votes per share. Each share of Class B common stock is convertible into a share of Class A common stock voluntarily at any time by the holder, and automatically upon certain events. The Class A common stock has no conversion rights. As the liquidation and dividend rights are identical for Class A and Class B common stock, the undistributed earnings are allocated on a proportional basis and the resulting net income (loss) per share attributable to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis.
Three Months Ended June 30,Six Months Ended June 30,
(In thousands, except per share data)2023202220232022
Numerator:
Net income (loss) attributable to Class A and Class B common stockholders$3,725 $(15,045)$1,143 $(27,199)
Denominator:
Weighted-average shares in computing net income (loss) per share attributable to Class A and Class B common stockholders, basic and diluted41,222 39,274 40,921 38,934 
Effect of dilutive securities
Founder awards where performance has been met180  180  
Dilutive effect of stock options outstanding (1)3,097  3,097  
RSUs outstanding2,373  2,373  
Denominator for dilutive net income per common share - weighted-average shares46,872 39,274 46,571 38,934 
Basic income (loss) per common share$0.09 $(0.38)$0.03 $(0.70)
Diluted income (loss) per common share$0.08 $(0.38)$0.02 $(0.70)
________________
(1) The Company had 3.5 million options outstanding as of June 30, 2023. The estimated dilutive effect is calculated as the number of shares expected to be issued upon vesting or exercise, adjusted for the strike price proceeds that are received by the Company and assumed to be used to repurchase shares of Duolingo common stock.

Since the Company was in a net loss position for the three and six months ended June 30, 2022 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:
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(In thousands)June 30, 2022
Founder awards where performance has been met180 
Stock options outstanding (1)4,967 
RSUs outstanding (1)1,822 
Total6,969 
________________
(1) Prior year amounts were adjusted in the current year table to include unvested options and RSUs.

Founder awards of 1,620, where the performance criteria has not been satisfied, are excluded from the above table because the stock-price hurdles for those awards had not been met as of June 30, 2023.

12.    SUBSEQUENT EVENTS
None.
Item 2. 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 included elsewhere in this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K and in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K. The following discussion contains forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, that involve risks, uncertainties and assumptions. Our actual results could differ materially from these forward-looking statements as a result of many factors, including those discussed in Part II, Item 1A. “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” included elsewhere in this Quarterly Report on Form 10-Q, and in in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any periods in the future.
Amounts reported in millions are rounded based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. In addition, percentages presented are calculated from the underlying numbers in thousands and may not add to their respective totals due to rounding.
Overview
Our flagship app has organically become the world’s most popular way to learn languages and the top-grossing Education app in the App Stores, offering courses in over 40 languages to over 70 million monthly active users for the three months ended June 30, 2023. We believe that we have become the preeminent online destination for language learning due to our beautifully designed products, exceptional user engagement, and demonstrated learning efficacy.
Key Operating Metrics and Non-GAAP Financial Measures
We regularly review a number of key operating metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends, prepare financial projections and make business decisions. The measures set forth below should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP. Monthly active users (MAUs) and
22


daily active users (DAUs), along with paid subscribers, are operating metrics that help inform management about the underlying growth in users of our platform, and are a measure of our monetization efforts. To calculate the year-over-year change in MAUs and DAUs for a given period, we subtract the average for the same period in the previous year from the average for the same period in the current year and divide the result by the average for the same period in the previous year. Other companies, including companies in our industry, may calculate these measures differently or not at all, which reduces their usefulness as comparative measures.
Three Months Ended June 30,
(Operating metrics are in millions)20232022
Operating Metrics
Monthly active users (MAUs)74.1 49.5 
Daily active users (DAUs)21.4 13.2 
Paid subscribers (at period end)5.2 3.3 
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Operating Metrics
Subscription bookings$106,254 $74,123 $216,376 $152,662 
Total bookings$137,539 $97,467 $277,593 $199,521 
Non-GAAP Financial Measures
Net income (loss) (GAAP)$3,725 $(15,045)$1,143 $(27,199)
Adjusted EBITDA$20,871 $4,198 $35,982 $8,144 
Net cash provided by operating activities (GAAP)$37,167 $12,662 $66,771 $33,289 
Free cash flow$34,340 $9,880 $63,132 $28,808 
Operating Metrics
Monthly active users (MAUs). MAUs are defined as unique Duolingo users who engage with our mobile language learning application or the language learning section of our website each month. MAUs are reported for a measurement period by taking the average of the MAUs for each calendar month in that measurement period. The measurement period for MAUs is the three months ended June 30, 2023 and the same period in the prior year where applicable, and the analysis of results is based on those periods. MAUs are a measure of the size of our global active user community on Duolingo.
We had approximately 74.1 million and 49.5 million MAUs for the three months ended June 30, 2023 and 2022, respectively, representing an increase of 50% from the prior year period. We grew MAUs through product initiatives designed to make the app more social and engaging, through marketing, and through improving our courses, all of which we believe helped us attract new users, retain existing users, and reengage the millions of former users who return to our language learning app.
Daily active users (DAUs). DAUs are defined as unique Duolingo users who engage with our mobile language learning application or the language learning section of our website each calendar day. DAUs are reported for a measurement period by taking the average of the DAUs for each day in that measurement period. The measurement period for DAUs is the three months ended June 30, 2023 and
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the same period in the prior year where applicable, and the analysis of results is based on those periods. DAUs are a measure of the consistent engagement of our global user community on Duolingo.
We had approximately 21.4 million and 13.2 million DAUs for the three months ended June 30, 2023 and 2022, respectively, representing an increase of 62% from the prior year period. The DAU / MAU ratio, which we believe is an indicator of user engagement, increased to 28.9% from 26.6% a year ago. We grew DAUs through many of the same product initiatives as we grew MAUs, such as making the product more fun and engaging.
Paid Subscribers. Paid subscribers are defined as users who pay for access to any Duolingo subscription offering and had an active subscription as of the end of the measurement period. Each unique user account is treated as a single paid subscriber regardless of whether such user purchases multiple subscriptions, and the count of paid subscribers does not include users who are currently on a free trial or who are non-paying members of a family plan.
As of June 30, 2023 and 2022, we had approximately 5.2 million and 3.3 million paid subscribers, respectively, representing an increase of 59% from the prior year period. We grew paid subscribers through product improvements that led to higher subscriber conversion and steady subscriber retention.
Subscription Bookings and Total Bookings. Subscription bookings represent the amounts we receive from a purchase of any Duolingo subscription offering. Total bookings represent the amounts we receive from a purchase of any Duolingo subscription offering, a purchase of a Duolingo English Test, an in-app purchase of a virtual good, and from advertising networks for advertisements served to our users. We believe bookings provide an indication of trends in our operating results, including cash flows, that are not necessarily reflected in our revenues because we recognize subscription revenues ratably over the lifetime of a subscription, which is generally from one to twelve months.
For the three months ended June 30, 2023 and 2022, we generated $106.3 million and $74.1 million of subscription bookings, respectively, representing an increase of 43% from the prior year period. For the six months ended June 30, 2023 and 2022, we generated $216.4 million and $152.7 million of subscription bookings, respectively, representing an increase of 42% from the prior year period. We grew subscription bookings by selling more first-time and renewal subscriptions.
For the three months ended June 30, 2023 and 2022, we generated $137.5 million and $97.5 million of total bookings, respectively, representing an increase of 41% from the prior year period. For the six months ended June 30, 2023 and 2022, we generated $277.6 million and $199.5 million total bookings, respectively, representing an increase of 39% from the prior year period. We grew total bookings through growth in subscription bookings noted above, in addition to growth in the Duolingo English Test and other bookings, primarily related to in-app purchases.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures to supplement our Unaudited Condensed Consolidated Financial Statements, which are presented in accordance with GAAP. These non-GAAP financial measures include Adjusted EBITDA and free cash flow. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. By excluding certain items that may not be indicative of our recurring core operating results, we believe that Adjusted EBITDA and free cash flow provide meaningful supplemental information regarding our performance. Accordingly, we believe these non-GAAP financial measures are useful to investors and others because they allow for additional information with respect to financial measures used by management in its financial and operational decision-making and they may be used by our institutional investors and the analyst community to help them analyze the health of our business. However, there are a number of limitations related to the use of non-GAAP financial measures, and these non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, our financial
24


results prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.
The effect of currency exchange rates on our business is an important factor in understanding period to period comparisons. We use non-GAAP percentage change in constant currency revenues, which exclude the impact of fluctuations in foreign currency exchange rates, for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe this information is useful to investors to facilitate comparisons and better identify trends in our business.The impact of changes in foreign currency may vary significantly from period to period, and such changes generally are outside of the control of our management. We calculate constant currency revenues by using current period foreign currency revenues and translating them to constant currency using prior year comparable period exchange rates. Constant currency revenue percentage change is calculated by determining the change in current period revenues over prior year comparable period revenues where current period foreign currency revenues are translated using prior year comparable period exchange rates.
Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) excluding interest income, income taxes, depreciation and amortization, stock-based compensation expenses related to equity awards, IPO and public company costs, acquisition earn-out costs, and gain on sale of capitalized software. Adjusted EBITDA is used by management to evaluate the financial performance of our business and we present Adjusted EBITDA because we believe it is helpful in highlighting trends in our operating results and that it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The following table presents a reconciliation of our net income (loss), the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA.
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)
2023202220232022
Net income (loss)$3,725 $(15,045)$1,143 $(27,199)
Interest income(7,543)(669)(13,182)(702)
(Benefit) provision for income taxes(1,315)141 (1,431)169 
Depreciation and amortization1,634 1,170 3,396 1,944 
Stock-based compensation expenses related to equity awards (1)24,258 18,494 45,931 33,594 
IPO and public company costs (2)
— 107 — 338 
Acquisition earn-out costs (3)112 — 225 — 
Gain on sale of capitalized software (4)— — (100)— 
Adjusted EBITDA$20,871 $4,198 $35,982 $8,144 
________________
(1)In addition to stock-based compensation expense of $23.7 million and $18.1 million for the three months ended June 30, 2023 and 2022, respectively, and $44.8 million and $32.7 million for the six months ended June 30, 2023 and 2022, this includes costs incurred related to taxes paid on equity transactions as follows:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Research and development
$341 $147 $581 $373 
Sales and marketing
26 40 24 
General and administrative
177 224 523 497 
Total
$544 $380 $1,144 $894 

(2)IPO and public company costs include costs associated with the establishment of our public company structure and processes, including consultant costs, a one-time fee associated with the set-up of our initial proxy statement, and fees paid to consultants
25


and Deloitte for work in connection with remediation of the material weakness disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. These costs are included in General and administration expense within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

(3)Represent costs incurred related to the earn-out payment on an acquisition, which is included within General and administrative within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

(4)Represents proceeds from a sale of capitalized software, which is included within Other expense, net of other income within our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).


For the three months ended June 30, 2023 and 2022, we generated net income of $3.7 million and net loss of $15.0 million, respectively. For the six months ended June 30, 2023 and 2022, we generated net income of $1.1 million and net loss of $27.2 million, respectively. Net income was generated compared to a net loss in both comparative periods due to a combination of our growth in revenue and reduction in operating expenses as a percentage of revenue as compared to the prior year periods.
For the three months ended June 30, 2023 and 2022, we generated Adjusted EBITDA of $20.9 million and $4.2 million, respectively. For the six months ended June 30, 2023 and 2022, we generated Adjusted EBITDA of $36.0 million and $8.1 million, respectively. Adjusted EBITDA increased due to the same reasons as net income discussed above.
Free Cash Flow: Free cash flow represents net cash provided by operating activities, reduced by capitalized software development costs and purchases of property and equipment and increased by IPO and public company costs and taxes paid related to stock-based compensation equity awards, as we believe they are not indicative of future liquidity. We believe that free cash flow is a measure of liquidity that provides useful information to our management, investors, and others in understanding and evaluating the strength of our liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business. Free cash flow has certain limitations in that it does not represent our residual cash flow for discretionary expenditures and our non-discretionary commitments. The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)
2023202220232022
Net cash provided by operating activities$37,167 $12,662 $66,771 $33,289 
Less: Capitalized software development costs and purchases of intangible assets(2,544)(1,405)(3,275)(2,522)
Less: Purchases of property and equipment(827)(1,864)(1,508)(3,191)
Plus: IPO and public company costs (1)
— 107 — 338 
Plus: Taxes paid related to stock-based compensation equity awards544 380 1,144 894 
Free cash flow$34,340 $9,880 $63,132 $28,808 
________________
(1)IPO and public company costs include costs associated with the establishment of our public company structure and processes, including consultant costs, a one-time fee associated with the set-up of our initial proxy statement, and fees paid to consultants and Deloitte for work in connection with remediation of the material weakness disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
For the three months ended June 30, 2023 and 2022, we generated $37.2 million and $12.7 million of net cash provided by operating activities, respectively. For the six months ended June 30, 2023 and 2022, we
26


generated $66.8 million and $33.3 million of net cash provided by operating activities, respectively. The increase in net cash provided by operating activities in both periods was mainly due to net income generation in both current periods, in comparison to net loss in both prior periods. Additionally there was an increase in stock-based compensation expense.
For the three months ended June 30, 2023 and 2022, we generated $34.3 million and $9.9 million of free cash flow, respectively. For the six months ended June 30, 2023 and 2022, we generated $63.1 million and $28.8 million of free cash flow, respectively. The increase in free cash flow in both periods was mainly attributable to the increase in net cash provided by operating activities.
Constant Currency: The effect of currency exchange rates on our business is an important factor in understanding period to period comparisons. We use non-GAAP constant currency revenues and non-GAAP percentage change in constant currency revenues for financial and operational decision-making and as a means to evaluate period-to-period comparisons.
Total revenues were $126.8 million for the three months ended June 30, 2023, an increase of 44% over the three months ended June 30, 2022 on a reported basis, and 46% on a constant currency basis. Subscription revenues totaled $95.2 million for the three months ended June 30, 2023, an increase of 46% over the three months ended June 30, 2022 on a reported basis, and 48% on a constant currency basis.
Total revenues were $242.5 million for the six months ended June 30, 2023, an increase of 43% over the six months ended June 30, 2022 on a reported basis, and 46% on a constant currency basis. Subscription revenues totaled $181.3 million for the six months ended June 30, 2023, an increase of 47% over the six months ended June 30, 2022 on a reported basis, and 51% on a constant currency basis.
Results of Operations
Comparison for the three and six months ended June 30, 2023 and 2022
Revenue
We generate revenues primarily from the sale of subscriptions. The term-length of our subscription agreements are primarily monthly or annual, with the family plan offered for annual subscriptions. We have historically had a six-month subscription plan, but during the fourth quarter of 2020, we began to phase it out. We also generate revenue from advertising, the in-app sale of virtual goods, and the Duolingo English Test.
Cost of Revenues
Cost of revenues predominantly consists of third-party payment processing fees charged by various distribution channels, and also includes hosting fees. To a much lesser extent, cost of revenues includes costs for contractors, wages and stock-based compensation for certain employees in the capacity of customer support, amortization of revenue generating capitalized software, and depreciation of certain property and equipment.
We intend to continue to invest additional resources in our infrastructure and our customer support and success organization to expand the capabilities of our platform and ensure that our users are realizing the full benefit of our products. The level, timing, and relative investment in these areas could affect our cost of revenues in the future.
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Gross Profit and Gross Margin
Gross profit represents revenues less cost of revenues. Gross margin is gross profit expressed as a percentage of revenues. Our gross profit may fluctuate from period to period as our revenues fluctuate, and also as a result of the timing and amount of investments we make in items related to cost of revenues.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, and stock-based compensation expense. Operating expenses also include overhead costs for facilities, including depreciation expense.
Research and Development. We invest heavily in research and development to create new product features that help us grow and engage our users, monetize our users, and teach our users. This, in turn, drives additional growth in, and better lifetime value of, our paid subscribers, as well as increased advertising revenue from impressions from our free users. Expenses are primarily made up of costs incurred for the development of new and improved products and features in our applications. Such expenses include employee-related compensation, including stock-based compensation, of engineers, designers, and product managers, in addition to materials, travel and direct costs associated with the design and required testing of our platform. We expect engineers, designers, and product managers to represent a significant portion of our employees for the foreseeable future. We regularly test product improvements with our users. Many of these tests start by making small changes in the product that affect small numbers of users. As the tests evolve, they can require increasing investment and can impact more users. This process of constant testing is how we implement many of our new products and improvements to our platform and, in total, require large investments and involve substantial time and risks to develop and launch. Some of these products and product improvements may not be well received or may take a long time for users to adopt. As a result, the benefits of our research and development investments may be difficult to forecast. We expect to continue to spend a significant portion of our revenues on research and development in the future.
Sales and Marketing. Sales and marketing expenses are expensed as incurred and consists primarily of brand advertising, marketing, digital and social media spend, field marketing, travel, trade show sponsorships and events, conferences, and employee-related compensation, including stock-based compensation for personnel engaged in sales and marketing functions, and amortization of non-revenue generating capitalized software used to promote Duolingo. We expect our sales and marketing expenses will decline as a percentage of revenues over the long-term.
General and Administrative. General and administrative expenses primarily consist of employee-related compensation, including stock-based compensation, for management and administrative functions, including our finance and accounting, legal, and people teams. General and administrative expenses also include certain professional services fees, general corporate and director and officer insurance, our facilities costs, public company costs to comply with the rules and regulations of the SEC and the Listing Rules of the Nasdaq Global Select Market, and other general overhead costs that support our operations. We expect that our general and administrative expenses will increase in absolute dollars as our business grows. However, we expect that our general and administrative expenses will remain steady or decrease as a percentage of our revenues as our revenues grow faster than these expenses over the long-term.
Interest Income
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Interest income consists of income earned on our money market funds included in cash and cash equivalents and on our marketable securities.
Other expense, net of other income
Other expense, net of other income consists primarily of foreign currency exchange gains and losses.
(Benefit) provision for income taxes
The provision for income taxes represents the income tax (benefit) provision associated with our operations based on the tax laws of the jurisdictions in which we operate. In addition to the United States, we also operate in foreign jurisdictions that have different statutory rates. Our effective tax rates will vary depending on the relative proportion of foreign to domestic income, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.
The following table sets forth our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) data, including year-over-year change, for the periods indicated:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)20232022% Change20232022% Change
Revenues$126,839 $88,386 44%$242,500 $169,606 43%
Cost of revenues (1) (2)33,788 23,869 4265,280 45,359 44
Gross profit93,051 64,517 44177,220 124,247 43
Operating expenses:
Research and development (1) (2)47,947 34,217 4093,791 63,998 47
Sales and marketing (1) (2)17,734 15,277 1634,335 30,217 14
General and administrative (1) (2)32,235 30,057 762,478 56,913 10
Total operating expenses97,916 79,551 23190,604 151,128 26
Loss from operations(4,865)(15,034)(68)(13,384)(26,881)(50)
Other expense, net of other income(268)(539)(50)(86)(851)(90)
Loss before interest income and income taxes(5,133)(15,573)(67)(13,470)(27,732)(51)
Interest income7,543 669 >10013,182 702 >100
Income (loss) before income taxes2,410 (14,904)<100(288)(27,030)(99)
(Benefit) provision for income taxes(1,315)141 <100(1,431)169 <100
Net income (loss) and comprehensive income (loss)$3,725 $(15,045)<100$1,143 $(27,199)<100
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________________
(1)Includes stock-based compensation expenses as follows:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Cost of revenues
$14 $10 $25 $16 
Research and development
10,978 5,773 20,324 9,405 
Sales and marketing
969 595 1,748 943 
General and administrative
11,753 11,736 22,690 22,336 
Total
$23,714 $18,114 $44,787 $32,700 

(2)Includes amortization of capitalized software and depreciation of property and equipment as follows:
Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2023202220232022
Cost of revenues (a)
$402 $273 $805 $273 
Research and development409 463 816 597 
Sales and marketing (a)
266 268 664 496 
General and administrative
557 166 1,111 578 
Total
$1,634 $1,170 $3,396 $1,944 
________________
(a) Amortization of capitalized software is recorded to Cost of revenue and Sales and marketing for revenue and non-revenue generating capitalized software, respectively.

The following table sets forth the components of our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the periods presented as a percentage of revenue.
Three Months Ended June 30,Six Months Ended June 30,
 2023202220232022
Revenues100 %100 %100 %100 %
Cost of revenues27 27 27 27 
Gross profit73 73 73 73 
Operating expenses:
Research and development38 39 39 38 
Sales and marketing14 17 14 18 
General and administrative25 34 26 34 
Total operating expenses77 90 79 89 
Loss from operations(4)(17)(6)(16)
Other expense, net of other income— (1)— (1)
Loss before interest income and income taxes(4)(18)(6)(16)
Interest income— 
Income (loss) before income taxes(17)— (16)
(Benefit) provision for income taxes(1)— (1)— 
Net income (loss) and comprehensive income (loss)%(17)%— %(16)%
Revenues
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Revenues increased $38.5 million, or 44%, to $126.8 million during the three months ended June 30, 2023, from revenues of $88.4 million during the three months ended June 30, 2022. Revenues increased $72.9 million, or 43%, to $242.5 million during the six months ended June 30, 2023, from revenues of $169.6 million during the six months ended June 30, 2022. The main drivers of the increase were:
Subscription revenue increased $30.0 million during the three months ended June 30, 2023 and $58.1 million during the six months ended June 30, 2023, primarily due to an increase in the average number of paid subscribers during the periods presented;
Advertising revenue increased $1.8 million during the three months ended June 30, 2023 and $1.7 million during the six months ended June 30, 2023. This increase was driven by the increase in DAUs, which resulted in increased advertisements served, partially offset by the decline in advertising pricing;
Duolingo English Test revenue increased by $1.8 million during the three months ended June 30, 2023 and $3.7 million during the six months ended June 30, 2023. The increase for the three months ended June 30, 2023 was driven by an increase in the average test price, partially offset by a decline in test volume. The increase during the six months ended June 30, 2023 was driven by an increase in the average test price along with an increase in test volume; and
Other revenue increased $4.9 million during the three months ended June 30, 2023 and $9.4 million during the six months ended June 30, 2023, primarily due to the increase in DAUs and average in-app purchase revenue per user.
The following table provides the changes in revenues by product type:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)20232022Change% Change20232022Change% Change
Subscription$95,158 $65,194 $29,964 46%$181,343 $123,204 $58,139 47%
Advertising13,061 11,218 1,843 1624,696 22,966 1,730 8
Duolingo English Test9,809 8,036 1,773 2219,781 16,116 3,665 23
Other8,811 3,938 4,873 >10016,680 7,320 9,360 >100
Total revenues$126,839 $88,386 $38,453 44%$242,500 $169,606 $72,894 43%
Cost of Revenues and Gross Margin. Total gross margin increased to 73.4% from 73.0% during the three months ended June 30, 2023 and 2022, respectively, primarily due to increased subscription margins as a result of a reduction in third-party payment processing fees per subscriber, as well as higher margins on the Duolingo English Test as a result of an increase in the average test price. Offsetting this increase was a decline in Advertising margins, which was due to decreases in average revenue per DAU.
Total gross margin decreased to 73.1% from 73.3% during the six months ended June 30, 2023 and 2022. This is primarily due to lower advertising margin driven by lower average revenue per DAU. This was partially offset by higher subscription margins as a result of a reduction in third-party payment processing fees per subscriber.
The following table provides the change in cost of revenues, along with related gross margins:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands, except gross margin)CostsGross MarginCostsGross MarginCostsGross MarginCostsGross Margin
Total cost of revenues$33,788 73.4 %$23,869 73.0 %$65,280 73.1 %$45,359 73.3 %
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Operating Expenses
Research and Development. Research and development expense increased $13.7 million, or 40%, to $47.9 million during the three months ended June 30, 2023 from $34.2 million during the three months ended June 30, 2022. The increase was mainly due to:
Increased employee costs from headcount growth of $12.4 million, including stock-based compensation expense of $5.4 million;
Increased web services and technology costs of $1.1 million;
Increased travel and meal costs of $0.5 million; and
These increases were partially offset by a decrease in other costs, including contractor costs, of $0.3 million
Research and development expense increased $29.8 million, or 47%, to $93.8 million during the six months ended June 30, 2023 from $64.0 million during the six months ended June 30, 2022. The increase was mainly due to:
Increased employee costs from headcount growth of $26.7 million, including stock-based compensation expense of $11.1 million;
Increased web services and technology costs of $2.5 million;
Increased travel and meal costs of $1.1 million; and
These increases were partially offset by decreased contractor costs of $0.5 million.
Research and development continues to be our largest operating expense as we invest in it to create new product features that help us grow and engage our users, monetize our users, and teach our users. This engagement and satisfaction, we believe, helps to drive organic growth in MAUs and DAUs, growth in, and better retention of, paid subscribers, as well as increased advertising opportunities with free users.
Sales and Marketing. Sales and marketing expense increased $2.5 million, or 16%, to $17.7 million during the three months ended June 30, 2023 from $15.3 million during the three months ended June 30, 2022. This increase was mainly due to increased direct marketing and other expenses of $1.7 million, in addition to an increase in employee costs of $0.8 million due to the growth in headcount, including stock-based compensation expense of $0.4 million.
Sales and marketing expense increased $4.1 million, or 14%, to $34.3 million during the six months ended June 30, 2023 from $30.2 million during the six months ended June 30, 2022. This increase was mainly due to an increase in employee costs of $1.8 million due to the growth in headcount, including stock-based compensation expense of $0.8 million, in addition to increased direct marketing and other expenses of $2.3 million.
Direct marketing spend and other marketing expenses as a percentage of revenue decreased for both periods as a result of applying learnings from past years, which enabled us to spend marketing expenses more efficiently.
General and Administrative. General and administrative expense increased $2.2 million, or 7%, to $32.2 million during the three months ended June 30, 2023 from $30.1 million during the three months ended June 30, 2022. The main drivers of this increase were related to the following:
Increased professional fees of $0.5 million;
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Increased rent related costs incurred to expand to our facilities footprint of $0.6 million;
Increased travel and meals expenses of $0.3 million; and
Other increases of $0.7 million, mainly due to increases in technology costs and sales and VAT taxes.
General and administrative expense increased $5.6 million, or 10%, to $62.5 million during the six months ended June 30, 2023 from $56.9 million during the six months ended June 30, 2022. The main drivers of this increase were related to the following:
Increased net employee related costs of $1.5 million, including stock-based compensation expense of $0.4 million;
Increased travel and meals expenses of $1.2 million;
Increased rent related costs incurred to expand to our facilities footprint of $0.9 million;
Increased professional fees of $0.6 million; and
Other net increases of $1.3 million, mainly due to increases of $1.6 million in technology costs and sales and VAT taxes, which were partially offset by a decline of $0.3 million in insurance costs.
Interest Income
Interest income increased $6.9 million and $12.5 million during the three and six months ended June 30, 2023, respectively, due to an increase in interest rates earned on our money market funds and higher average balances.
Other expense, net of other income
Other expense, net of other income increased $0.3 million and $0.8 million, during the three and six months ended June 30, 2023, respectively, mainly from the impact from changes in foreign currency rates, partially offset by proceeds from the sale of capitalized software during the six months ended June 30, 2023.
(Benefit) provision for income taxes
For the three and six months ended June 30, 2023, the Company recorded an income tax benefit of $1.3 million and $1.4 million, respectively. The income tax benefit recorded in the current period is primarily attributable to the excess tax benefits of stock-based compensation activity which occurred during the period.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through revenues and the net proceeds we have received from the issuance of equity.
As of June 30, 2023, we had $678.7 million in cash and cash equivalents. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our marketable securities consist of US government treasury and agency securities.
We believe that our existing cash and cash equivalents, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate and renewal
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activity, the timing of cash received from our payment processing platforms, the expansion of our sales and marketing activities, the introduction of new products and the enhancements to existing products, and the current uncertainty in the global markets. We may be required to seek additional equity. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
A substantial source of our cash from operations comes from deferred revenue, which is included in the liabilities section of our Unaudited Condensed Consolidated Balance Sheet. Deferred revenues consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As of June 30, 2023, we had deferred revenues of $192.8 million, which is recorded as a current liability and expected to be recognized as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
The following table summarizes our cash flows for the periods presented:
Six Months Ended June 30,
(In thousands)20232022
Net cash provided by operating activities$66,771 $33,289 
Net cash used for investing activities(4,683)(5,713)
Net cash provided by financing activities8,397 9,662 
Net increase in cash and cash equivalents$70,485 $37,238 
Operating Activities
Cash flows from operating activities can fluctuate significantly from period to period due to timing of payments and cash collections. Our largest source of operating cash is cash collection from sales of subscriptions to our users. Our primary uses of cash from operating activities are for personnel expenses, marketing expenses, hosting expenses, and overhead expenses.
Cash provided by operating activities for the six months ended June 30, 2023 increased $33.5 million, or 101%, to $66.8 million. This increase was mainly due to generation of net income during the current period in addition to an increase in non-cash stock-based compensation expense.
Investing Activities
Cash used in investing activities decreased $1.0 million, or 18%, to $4.7 million for the six months ended June 30, 2023, from $5.7 million for the six months ended June 30, 2022. The decrease was due to decreased capital expenditures to purchase property and equipment compared to the prior period, partially offset by increased costs from capitalization of software development. Additionally, proceeds from the sale of capitalized software was included in the current period, but there was no such gain in the prior period.
Financing Activities
Cash provided by financing activities for the six months ended June 30, 2023 and 2022 was $8.4 million and $9.7 million, respectively, related to proceeds from exercises of stock options.
Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of Unaudited Condensed Consolidated Financial Statements also requires us to make estimates and
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assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Note 2, Summary of Significant Accounting Policies in the notes to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for a discussion of Recent Accounting Pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
As of June 30, 2023, we had $655.1 million of cash equivalents invested in money market funds. Our cash and cash equivalents are held for working capital purposes in addition to future investments in our product. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. As of June 30, 2023, a hypothetical 10% relative change in interest rates would not have a material impact on our Unaudited Condensed Consolidated Financial Statements.
Foreign Currency Exchange Risk
Our reporting currency and the functional currency of our wholly owned foreign subsidiaries is the US dollar. Certain of our payment providers translate our payments from local currency into USD at time of settlement, which means that during periods of a strengthening US dollar, our international receipts could be reduced. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States and China. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. In addition, as foreign currency exchange rates fluctuate, the translation of our international receipts into US dollars affects the period-over-period comparability of our operating results and can result in foreign currency exchange gains and losses. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. A hypothetical 10% increase or decrease in the relative value of the US dollar to other currencies would not have a material effect on our operating results.
Inflation Risk
Inflationary factors such as increases in costs may adversely affect our results of operations. We do not believe that inflation has had a material effect on our business, financial condition or results of operations to date. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition or results of operations.
Item 4. Controls and Procedures
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Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
Item 1. Legal Proceedings
From time to time we may be involved in claims and proceedings arising in the course of our business. The outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. We are not currently party to any material legal proceedings.
Item 1A. Risk Factors
Our business, operations and financial results are subject to various risks and uncertainties, including those described below, that could materially adversely affect our business, results of operations, financial condition, and the trading price of our Class A common stock. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes. If any of the following risks actually occur, it could harm our business, prospects, operating results, and financial condition and future prospects. In such event, the market price of our Class A common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Quarterly Report.
Risks Related to Our Business and Ind