DUOLINGO, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year endedDecember 31, 2020 included in the final prospectus dated as ofJuly 27, 2021 and filed with theSEC , pursuant to Rule 424(b)(4) onJuly 28, 2021 (our Final Prospectus). This discussion and analysis and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, such as those relating to our plans, objectives, expectations, intentions, and beliefs, that involve risks, uncertainties and assumptions. Our actual results could differ materially from these forward-looking statements as a result of many factors, including those discussed in the section titled "Risk Factors," "Special Note Regarding Forward-Looking Statements", and "Special Note Regarding Operating Metrics" included elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any periods in the future. Unless the context otherwise requires, all references in this report to "Duolingo ," the "Company", "we," "our," "us," or similar terms refer toDuolingo, Inc. and its subsidiaries. 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. OverviewDuolingo is the leading global mobile learning platform, offering courses in 40 languages to approximately 40 million monthly active users. Our flagship app has organically become the world's most popular way to learn languages and the top-grossing app in the Education category on bothApple App Store . 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. Our mission is to develop the best education in the world and make it universally available. Education has the ability to transform lives and create opportunities for social and economic advancement. However, access to high quality education is out of reach for too many people worldwide. We startedDuolingo to 23 -------------------------------------------------------------------------------- provide access to quality education to everyone, and we started with a focus on language learning because of its potential to power both economic advancement and deep human connection. 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 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 with respect to Duolingo Plus. 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 September 30, Nine Months Ended September 30, (In millions, except dollar amounts in thousands) 2021 2020 2021 2020 Operating Metrics Monthly active users (MAUs) 41.7 37.0 39.8 36.6 Daily active users (DAUs) 9.8 8.4 9.5 8.1 Paid subscribers (at period end) 2.2 1.5 2.2 1.5 Subscription bookings$ 55,362 $ 33,778 $ 154,768 $ 101,095 Total bookings$ 73,058 $ 46,667 $ 203,426 $ 133,117 Non-GAAP Financial Measures Net loss (GAAP)$ (28,970) $ (3,176) $ (42,618) $ (5,369) Adjusted EBITDA$ (5,968) $ (724) $ (1,395)$ 739 Net cash provided by operating activities (GAAP)$ 4,511 $ 847 $ 8,738$ 14,027 Free cash flow$ 5,184 $ 610 $ 11,113$ 11,474 Operating Metrics Monthly Active Users (MAUs). MAUs are defined as uniqueDuolingo 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. MAUs are a measure of the size of our global active user community onDuolingo . For the three months endedSeptember 30, 2021 and 2020, we had approximately 41.7 million and 37.0 million MAUs, respectively, representing an increase of 13%. For the nine months endedSeptember 30, 2021 and 2020, we had approximately 39.8 million and 36.6 million MAUs, respectively, representing an increase of 9%. We grow MAUs by attracting new users, retaining existing users, and by reengaging the millions of former users who return to our language learning app because of our product initiatives and brand marketing. Daily Active Users (DAUs). DAUs are defined as uniqueDuolingo 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 24 -------------------------------------------------------------------------------- measurement period. DAUs are a measure of the consistent engagement of our global user community onDuolingo . For the three months endedSeptember 30, 2021 and 2020, we had approximately 9.8 million and 8.4 million DAUs, respectively, representing an increase of 16%. For the nine months endedSeptember 30, 2021 and 2020, we had approximately 9.5 million and 8.1 million DAUs, respectively, representing an increase of 17%. For the three months endedSeptember 30, 2021 , the DAU / MAU ratio, which we believe is an indicator of user engagement, increased to 23.5% from 22.8% a year ago. We grow DAUs by making the product more fun and engaging, as well as through our marketing efforts. Paid Subscribers. Paid subscribers are defined as users who pay for access to Duolingo Plus 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. As ofSeptember 30, 2021 and 2020, we had approximately 2.2 million and 1.5 million Paid subscribers, respectively, representing an increase of 49%. We grow paid subscribers by growing our free user base, converting a greater number of users to paid subscribers, and retaining subscribers. Subscription Bookings and Total Bookings. Subscription bookings represent the amounts we receive from a purchase of a subscription to Duolingo Plus. Total bookings represent the amounts we receive from a purchase of a subscription to Duolingo Plus, a registration for a Duolingo English Test, an in-app purchase for 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 revenue because we recognize subscription revenue ratably over the lifetime of a subscription, which is generally from one to twelve months. For the three months endedSeptember 30, 2021 and 2020, we generated$55.4 million and$33.8 million of subscription bookings, respectively, representing an increase of 64%. This increase was driven by the increase in average subscribers over the period and by a mix shift toward more annual subscriptions. For the nine months endedSeptember 30, 2021 and 2020, we generated$154.8 million and$101.1 million of subscription bookings, respectively, representing an increase of 53%. We generate subscription bookings by selling first time and renewal subscriptions as well as subscriptions to subscribers who previously had a subscription and return. As we grow our user base, convert a greater proportion of users to first time subscribers, increase renewal rates, and increase the proportion of re-subscribers, we increase subscription bookings. For the three months endedSeptember 30, 2021 and 2020, we generated$73.1 million and$46.7 million total bookings, respectively, representing an increase of 57%. The growth in total bookings was driven by the growth in subscription bookings noted above and growth in Advertising, Duolingo English Test, and other bookings. For the nine months endedSeptember 30, 2021 and 2020, we generated$203.4 million and$133.1 million total bookings, respectively, representing an increase of 53%. 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 25 -------------------------------------------------------------------------------- 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 measures should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these non-GAAP financials measures differently or not at all, which reduces their usefulness as comparative measures. Adjusted EBITDA: Adjusted EBITDA is defined as net loss excluding interest (income) expense, net, income tax provision, depreciation and amortization, Initial Public Offering ("IPO") and public company readiness costs, stock-based compensation expense, tender offer-related costs and other expenses. 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 loss, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA. Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Net loss$ (28,970) $ (3,176) $ (42,618)$ (5,369) Interest (income) expense, net (4) (7) (7) (230) Provision for income taxes 51 23 69 45 Depreciation and amortization 733 627 1,969 1,649 IPO and public company readiness costs(1) 1,560 127 3,253 127 Stock-based compensation expense 20,662 1,682 26,120 4,517 Tender offer-related costs(2) - - 5,599 - Other expenses(3) - - 4,220 - Adjusted EBITDA$ (5,968) $ (724) $ (1,395)$ 739 ________________
(1)IPO and public company readiness costs include costs associated with IPO readiness and establishment of our public company structure and processes, including consultant costs. These costs are included within our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2021 2020 2021 2020
Research and development $ 46 $ - $ 46 $ -
Sales and marketing 139 - 459 -
General and administrative 1,375 127 2,748 127
Total $ 1,560 $ 127 $ 3,253 $ 127
(2)Includes costs related to our tender offer initiated in February 2021 (see
Note 8 to our unaudited condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q), including fees incurred, as
follows:
Research and Sales and General and
(In thousands) Cost of revenues development marketing administrative Total
Tender offer $ 10 $ 3,302 $ 173 $ 1,790 $ 5,275
Fees and taxes paid on
tender offer $ - $ - $ - $ 324 $ 324
Total $ 10 $ 3,302 $ 173 $ 2,114 $ 5,599 (3)Represents one-time cash awards to
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Adjusted EBITDA increases as we grow revenue, improve gross margin, and reduce
operating expenses as a percentage of revenue, or through a combination of those
drivers. For the three months ended September 30, 2021 and 2020, we generated
losses of $6.0 million and $0.7 million of Adjusted EBITDA, respectively. For
the nine months ended September 30, 2021 and 2020, we generated a loss of $1.4
million and income of $0.7 million of Adjusted EBITDA, respectively. The
decrease in Adjusted EBITDA occurred because of growth in operating expenses,
adjusted for costs incurred related to IPO and public company readiness and
other costs which did not occur in the prior year, grew at a higher rate than
revenue growth and gross profit.
Free Cash Flow: Free cash flow represents net cash provided by operating
activities, reduced by purchases of property and equipment, capitalized software
development costs, and increased by IPO and public company readiness costs and
other costs, 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. 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 September 30, Nine Months Ended September 30,
(In thousands) 2021 2020 2021 2020
Net cash provided by operating
activities $ 4,511 $ 847 $ 8,738 $ 14,027
Less: Capitalized software
development costs (379) - (2,035) (123)
Less: Purchases of property and
equipment (1,085) (364) (3,063) (2,557)
Plus: IPO and public company
readiness costs(1) 1,560 127 3,253 127
Plus: Other(2) 577 - 4,220 -
Free cash flow $ 5,184 $ 610 $ 11,113 $ 11,474
________________
(1)IPO and public company readiness costs include costs associated with IPO
readiness and establishment of our public company structure and processes,
including consultant costs.
(2)Represents payment of one-time cash awards to Duolingo contributors under our
non-employee volunteer program included within Sales and marketing expenses
within our unaudited condensed consolidated statement of operations and
comprehensive loss. See Note 2 to our unaudited condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
For the three months ended September 30, 2021 and 2020, we generated $5.2 and
$0.6 of free cash flow, respectively. The increase in free cash flow was mainly
attributable to the increase in net cash provided by operating activities which
was partially offset by higher capital expenditures and capitalized software
development costs. For the nine months ended September 30, 2021 and 2020, we
generated $11.1 and $11.5 of free cash flow, respectively.
Impact of COVID-19
To date, the COVID-19 pandemic has not had a significant negative impact on our
operations or financial performance. We believe that COVID-19 increased our
operating metrics and financial metrics for a period of time in 2020 due, in
part, to stay at home and other social distancing measures, most notably in the
second quarter. The pandemic also increased adoption of the Duolingo English
Test. Because this increase was driven in part by increased acceptance of the
test, and because we believe universities are
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unlikely to stop accepting the test when the pandemic ends, we do not expect the
Duolingo English Test to revert to pre-pandemic levels.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance, however, depends on certain developments, including
ongoing social distancing measures, and future prevention and mitigation
measures, as well as the potential for some of these measures to be reinstituted
in the event of repeat waves of the virus. Any such developments may have
adverse impacts on global economic conditions and consumer confidence and
spending, and could materially adversely affect demand, or subscribers' ability
to pay, for our products and services. For additional information, see "Risk
Factors-General Risk Factors-Our business and results of operations may be
materially adversely affected by the recent COVID-19 outbreak or other similar
outbreaks."
Results of Operations
Revenue
We generate revenue primarily from the sale of subscriptions. The term-length of
our subscription agreements are primarily monthly or annual, which allows for a
single or family plan. We began to roll out a family plan during the nine months
ended September 30, 2021 . 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 our
English assessment test, 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 hosting fees. To a much lesser
extent, cost of revenues includes 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.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenues. Gross margin is gross
profit expressed as a percentage of revenue. Our gross profit may fluctuate from
period to period as our revenue fluctuates, 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 in order
to drive user engagement and customer satisfaction on our platform, which we
believe helps to drive organic growth of new 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.
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Such expenses include compensation of engineers, designers, product managers,
including stock-based compensation, 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. Many of our new products and
improvements to our platform require large investments and involve substantial
time and risks to develop and launch. Some of these products 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 revenue 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 other 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 revenue as our
revenue grows faster than these expenses 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, and other general overhead costs that
support our operations. We expect to incur additional general and administrative
expenses as a result of operating as a public company, including expenses to
comply with the rules and regulations of the SEC and the Listing Rules of the
Nasdaq Global Select Market, as well as higher expenses for corporate insurance,
director and officer insurance, investor relations, and professional services.
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 decrease as a percentage of our revenue as our
revenue grows faster than these expenses over the long-term.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of foreign currency exchange
gains and losses in addition to interest expense, partially offset by income
earned on our money market funds included in cash and cash equivalents and on
our marketable securities.
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Three Months Ended September
30, Nine Months Ended September 30,
(in thousands) 2021 2020 % Change 2021 2020 % Change
Revenues $ 63,595 $ 45,305 40 % $ 177,758 $ 113,428 57 %
Cost of revenues (1) (2) 18,078 13,101 38 49,234 33,124 49
Gross profit 45,517 32,204 41 128,524 80,304 60
Operating expenses:
Research and development (1) 29,345 15,894 85 73,814 37,581 96
Sales and marketing (1) (2) 15,267 11,142 37 44,659 25,278 77
General and administrative (1) 29,605 8,235 260 52,643 22,885 130
Total operating expenses 74,217 35,271 110 171,116 85,744 100
Operating loss (28,700) (3,067) 836 (42,592) (5,440) 683
Other (expense) income, net (219) (86) 155 43 116 (63)
Loss before provision for income
taxes (28,919) (3,153) 817 (42,549) (5,324) 699
Provision for income taxes 51 23 122 69 45 53
Net loss and comprehensive loss $ (28,970) $ (3,176) 812 % $ (42,618) $ (5,369) 694 %
________________
(1)Includes stock-based compensation expenses as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2021 2020 2021 2020
Cost of revenues $ 6 $ 3 $ 8 $ 4
Research and development 3,533 526 5,749 1,505
Sales and marketing 408 116 548 296
General and administrative 16,715 1,037 19,815 2,712
Total $ 20,662 $ 1,682 $ 26,120 $ 4,517 (2)Includes amortization of capitalized software as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2021 2020 2021 2020
Cost of revenues(a) $ - $ 26 $ - $ 77
Sales and marketing(a) 188 148 484 399
Total $ 188 $ 174 $ 484 $ 476
________________(a)Amortization of capitalized software is recorded to cost of revenues and selling and marketing for revenue and non-revenue generating capitalized software, respectively.
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--------------------------------------------------------------------------------The following table sets forth the components of our consolidated statements of operations for each of the periods presented as a percentage of revenue.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenues 100 % 100 % 100 % 100 %
Cost of revenues 28 29 28 29
Gross profit 72 71 72 71
Operating expenses:
Research and development 46 35 42 33
Sales and marketing 24 25 25 22
General and administrative(1) 47 18 30 20
Total operating expenses 117 78 97 76
Operating loss (45) (7) (24) (5)
Other (expense) income, net - - - -
Loss before provision for income
taxes (45) - (24) (5)
Provision for income taxes - - - -
Net loss and comprehensive loss (46) % (7) % (24) % (5) %
________________
(1)Includes a charge incurred during the three months endedSeptember 30, 2021 of$14.3 million related to certain stock based compensation expenses, described below, which increased the percentage of revenue from 24% to 47% for the three months endedSeptember 30, 2021 and from 22% to 30% for the nine months endedSeptember 30, 2021 . Revenues. Revenues increased$18.3 million , or 40%, to$63.6 million during the three months endedSeptember 30, 2021 , from revenue of$45.3 million during the three months endedSeptember 30, 2020 . The main driver was an increase in subscription revenue of$13.7 million , primarily due to an increase in the average number of paid subscribers during the three months endedSeptember 30, 2021 as compared to same period in the prior year. We also saw an increase in advertising revenues, due to an increase in DAUs, which resulted in increased advertisements served, and a year-over-year increase in average revenue per DAU for our ads. Duolingo English Test revenue continues to grow due to the growth initiatives we implemented during 2020 in addition to the durability of the growth that began during the COVID-19 pandemic. Finally, other revenue increased$1.2 million , or 262%, to$1.8 million during the three months endedSeptember 30, 2021 , from revenue of$0.7 million during the three months endedSeptember 30, 2020 , due to growth in in-app purchases. Revenues increased$64.3 million , or 57%, to$177.8 million during the nine months endedSeptember 30, 2021 , from revenue of$113.4 million during the nine months endedSeptember 30, 2020 . The main driver was an increase in subscription revenue of$46.8 million , primarily due to an increase in the average number of paid subscribers during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . In addition, advertising revenues increased$8.8 million . The increase was driven by the increase in DAUs during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 , which resulted in increased advertisements served. Average revenue per DAU for our ads also increased period over period. Duolingo English Test revenue also increased by$5.6 million and other revenue increased$3.1 million , due to the same reasons mentioned above. 31 --------------------------------------------------------------------------------
The below table provides the changes in revenue by product type:
Three Months Ended September
30, Nine Months Ended September 30,
(in thousands) 2021 2020 Change % Change 2021 2020 Change % Change
Subscription $ 46,030 $ 32,317 $ 13,713 42 % $ 129,587 $ 82,762 $ 46,825 57 %
Advertising 9,029 6,720 2,309 34 % 27,360 18,536 8,824 48 %
Duolingo English Test 6,695 5,607 1,088 19 % 16,563 10,958 5,605 51 %
Other 1,841 661 1,180 179 % 4,248 1,172 3,076 262 %
Total revenues $ 63,595 $ 45,305 $ 18,290 40 % $ 177,758 $ 113,428 $ 64,330 57 %
Cost of Revenues and Gross Margin - Total gross margin increased during the
three and nine months ended September 30, 2021 , as compared to the same periods
in the previous year. This increase is mainly due to increased average revenue
per DAU for ads served to free users which positively impacted advertising
margins, and reduced payment processing fees for subscription revenue due to
improved retention and mix.
The following table provides the change in cost of revenues, along with related
gross margins:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) Costs Gross Margin Costs Gross Margin Costs Gross Margin Costs Gross Margin
Total cost of revenues $ 18,078 71.6 % $ 13,101 71.1 % $ 49,234 72.3 % $ 33,124 70.8 %
Operating Expenses
Research and Development. Research and development increased $13.5 million , or
85%, to $29.3 million during the three months ended September 30, 2021 from
$15.9 million during the three months ended September 30, 2020 . The majority of
this is due to increase in employee costs of $10.6 million , $1.3 million of
which relates to RSU compensation expense recorded upon the IPO, and contractor
costs of $0.7 million . Research and development also increased $36.2 million , or
96%, to $73.8 million during the nine months ended September 30, 2021 from
$37.6 million during the nine months ended September 30, 2020 . The increase is
mainly attributable to an increase in employee costs of $30.0 million , of which
$3.3 million was related to the tender offer and $1.3 million of it related to
RSU expense recorded upon the IPO, and contractor costs of $2.8 million .
Research and development continues to be our highest operating expense as we
invest heavily in it in order to drive user engagement with and customer
satisfaction in our platform, which we believe helps to drive organic growth in
MAUs and DAUs; this in turn drives additional growth in, and better retention
of, paid subscribers, as well as increased advertising opportunities with free
users.
Sales and Marketing. Sales and marketing increased $4.1 million , or 37%, to
$15.3 million during the three months ended September 30, 2021 from
$11.1 million during the three months ended September 30, 2020 . While we
incurred $0.6 million of additional expenses related to employee costs, of which
$0.2 million related to RSU compensation expense recorded upon the IPO, the
majority of the increase is due to increased spending on media and brand to
support both our revenue growth during the back-to-school timeframe as well as
IPO readiness.
Sales and marketing increased $19.4 million , or 77%, to $44.7 million during the
nine months ended September 30, 2021 from $25.3 million during the nine months
ended September 30, 2020 . While we incurred $4.2 million of costs related to
one-time cash awards we granted to Duolingo contributors under
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our non-employee volunteer program, which we refer to as contributor awards, and
$1.5 million of additional expenses related to employee costs, of which
$0.2 million was related to the tender offer and $0.2 million of it related to
RSU expense recorded upon the IPO, the majority of the increase is from spending
on performance media and influencer advertising as we expand our presence in new
global markets such as Japan , India and Southeast Asia . See Note 2 to our
unaudited condensed consolidated financial statements included elsewhere in this
this Quarterly Report on Form 10-Q for further discussion of the contributor
awards.
General and Administrative. General and administrative increased $21.4 million ,
or 260%, to $29.6 million during the three months ended September 30, 2021 from
$8.2 million during the three months ended September 30, 2020 . The main drivers
of this increase were related to the following:
•Increased employee-related costs of $17.4 million , including $14.3 million of
stock compensation costs which were recognized upon the IPO for the following:
•$8.3 million of costs related to the performance-based RSUs issued to our
founders,
•$5.6 million of costs related to the acceleration of founder stock options, and
•$0.5 million of costs related to RSUs granted in prior periods, where the
performance based vesting condition was satisfied upon the IPO
•Increased insurance costs associated with being a public company of $0.8
million ,
•Increased costs incurred to expand to our facilities footprint of $0.6 million ,
•Professional fees of $1.3 million , mainly related to IPO and public readiness
costs, and
•Other increases of $1.3 million , due to increased headcount, contractor
expense, travel, and sales and VAT taxes.
General and administrative increased $29.8 million , or 130%, to $52.6 million
during the nine months ended September 30, 2021 from $22.9 million during the
nine months ended September 30, 2020 . The main drivers of this increase were
related to the following:
•Increased employee-related costs of $22.2 million , of which $1.8 million was
related to the tender offer and $14.3 million was related to stock compensation
costs recognized upon the IPO as described above,
•Professional fees of $4.4 million , of which $2.6 million was related to IPO and
public readiness costs and $0.3 million was related to the tender offer,
•Increased costs incurred to expand to our facilities footprint of $1.0 million ,
of which $0.2 million is related to increased depreciation,
•Increased insurance costs associated with being a public company of $0.8
million , and
•Other increases of $1.4 million , due to increased headcount, contractor
expense, travel, and sales and VAT taxes.
Other (Expense) Income, Net
Other (expense) income, net increased $0.1 million during the three months ended
September 30, 2021 mainly due to the sale of an R&D tax credit during the
current year. Other (expense) income, net
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decreased $0.1 million , during the nine months ended September 30, 2021 due to
change in foreign currency rates, partially offset by the sale of an R&D tax
credit.
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 and debt securities.
We have raised a total of $183.3 million in capital financing, less issuance
costs of $0.7 million . Additionally, we received aggregate net proceeds of
$431.1 million from the IPO on July 30, 2021 , after deducting underwriting
discounts and fees of $24.5 million . The Company paid an additional $4.9 million
related to offering costs.
As of September 30, 2021 , we had $549.4 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 commercial debt, certificates
of deposit, US government treasury and agency securities, and commercial paper.
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
activity, the timing of cash received from 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 resulting
from the ongoing COVID-19 pandemic on our operations. 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 condensed consolidated
balance sheet. Deferred revenue consists of the unearned portion of customer
billings, which is recognized as revenue in accordance with our revenue
recognition policy. As of September 30, 2021 , we had deferred revenue of $80.5
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:
Nine Months Ended September 30,
(in thousands) 2021 2020
Net cash provided by operating activities $ 8,738 $ 14,027
Net cash used for investing activities $ (5,098) $ (2,680)
Net cash provided by financing activities $ 425,310 $ 11,106
Net increase in cash and cash equivalents $
428,950
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. We have generated
positive cash flows and have supplemented working capital requirements through
net proceeds from the sale of equity.
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Cash provided by operating activities for the nine months ended September 30,
2021 decreased $5.3 million , or 38%, to $8.7 million . This decrease was due
mainly to an increase in net loss for the periods presented, partially offset by
increases from changes in working capital.
Investing Activities
Cash used in investing activities increased $2.4 million , or 90%, to $5.1
million for the nine months ended September 30, 2021 , from investing activities
for the nine months ended September 30, 2020 of $2.7 million . The increase is
due to increased costs from capitalization of software development and capital
expenditures to purchase property and equipment to support office space and site
operations.
Financing Activities
Cash used for financing activities for the nine months ended September 30, 2021
was $425.3 million , and was driven by the net proceeds from the IPO of $431.1
million , less costs of $4.9 million , and exercise of stock options of $7.3
million , partially offset by payments made as a result of the tender offer of
$8.2 million . Cash provided by financing activities for the nine months ended
September 30, 2020 was $11.1 million and primarily relates to the issuance of
convertible preferred stock, net of issuance costs, of $10.0 million , in
addition to proceeds from exercises of stock options of $1.1 million .
Contractual Obligations
As of September 30, 2021 , there were no material changes outside the ordinary
course of business to the contractual obligations, as disclosed in our Final
Prospectus.
Off-Balance Sheet Obligations
We did not have during the periods presented, and we do not currently have, any
off-balance sheet financing arrangements or any relationships with
unconsolidated entities or financial partnerships, including entities sometimes
referred to as structured finance or special purpose entities, that were
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Critical Accounting Policies
Our 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 condensed consolidated financial
statements also requires us to make estimates and 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
Final Prospectus, with the exception of the following:
Performance-based RSUs
In June 2021 , we granted an aggregate of 1.8 million performance-based RSUs
("Founder Awards") to our 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,
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subject to the continuous service of the founders through the applicable date.
The performance-based condition will be satisfied with respect to each of ten
equal tranches only upon the achievement of the specified stock-price hurdles
for each such tranche over a period of ten years from the date of grant. The
fair value of the Founder Awards is determined 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 associated stock-based compensation is recorded over the
derived service period, using the accelerated attribution method. If the
stock-price hurdles are met sooner than the requisite service period, the
stock-based compensation expense will be adjusted to prospectively recognize the
remaining expense over the remaining derived service period. Provided that the
founders continue to provide services to us, stock-based compensation expense is
recognized over the derived service period, regardless of whether the
stock-price hurdles are achieved.
Recent Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies
in the notes to our 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.
Emerging Growth Company Status
We are an "emerging growth company" as defined under the JOBS Act. Under the
JOBS Act, emerging growth companies can delay adopting new or revised accounting
standards until such time as those standards would otherwise apply to private
companies. While we have not historically delayed the adoption of new or revised
accounting standards until such time as those standards would apply to private
companies, we have elected to take advantage of this extended transition period
and, as a result, our operating results and financial statements in the future
may not be comparable to the operating results and financial statements of
companies who have adopted the new or revised accounting standards.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
As of September 30, 2021 , we had $510 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
September 30, 2021 , a hypothetical 10% relative change in interest rates would
not have a material impact on our 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
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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.
Item 4. Controls and Procedures
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.
Material Weakness in Internal Control over Financial Reporting
As disclosed in the "Risk Factors" section of the final prospectus, we
previously identified a material weakness with our internal control over
financial reporting as we had not designed or maintained an effective control
environment and associated control activities to meet our accounting and
reporting requirements. Specifically we did not have a sufficient complement of
personnel with an appropriate degree of internal controls and accounting
knowledge, we did not have a sufficiently documented risk assessment process to
identify and analyze risks of misstatement due to error and/or fraud and in
certain cases we did not have appropriate reviews over journal entries and third
party reported information to allow for reliable and timely financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of a company's annual or interim
financial statements will not be prevented or detected on a timely basis.
Management's Remediation Efforts
During 2020, we established a remediation plan to address our material weakness
and we have been actively engaged in the implementation of remediation efforts
to address the material weakness. As part of our commitment we have hired a
complement of personnel, have established a risk assessment process, established
reviews over journal entries and third party reported information, and continue
to evaluate the additional internal controls we have designed in 2020 and 2021.
While we believe that these efforts will improve our internal control over
financial reporting, our remediation is ongoing and will require validation and
testing of the design and operating effectiveness of internal controls over a
sustained period of financial reporting cycles. There can be no assurance that
the measures we have taken to date, and are continuing to implement, will be
sufficient to remediate the material weaknesses described above or prevent
future material weaknesses or other deficiencies from occurring. There is no
assurance that we will not identify additional material weaknesses in our
internal control over financial reporting in the future.
We believe we are making progress toward achieving effectiveness of our internal
controls and disclosure controls. The actions that we are taking are subject to
ongoing senior management review, as well as audit committee oversight. We will
not be able to conclude whether the steps we are taking will fully remediate the
material weaknesses in our internal control over financial reporting until we
have completed
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our subsequent evaluation of their effectiveness. We may also conclude that
additional measures may be required to remediate the material weaknesses in our
internal control over financial reporting, which may necessitate additional
implementation and evaluation time. We will continue to assess the effectiveness
of our internal control over financial reporting and take steps to remediate the
known material weaknesses expeditiously.
Changes in Internal Control Over Financial Reporting
Except as otherwise described herein, 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 quarter ended September 30, 2021 that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations on Controls
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.
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