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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________________
FORM 10-Q
_____________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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: 001-38678
________________________________________________
UPWORK INC.
(Exact Name of Registrant as Specified in its Charter)
________________________________________________

Delaware46-4337682
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2625 Augustine Drive, Suite 601
Santa Clara,California95054
(Address of principal executive offices)(Zip Code)
(650) 316-7500
(Registrant’s telephone number, including area code)
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, $0.0001 par value per shareUPWKThe 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 Exchange Act).    Yes      No ☒
As of October 31, 2020, there were 122,073,553 shares of the registrant’s common stock outstanding.



TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
PART I—FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019
Notes to Condensed Consolidated Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II—OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.Exhibits
Signatures

Unless otherwise expressly stated or the context otherwise requires, references in this Quarterly Report on Form 10-Q (this “Quarterly Report” or “report”) to “Upwork,” “Company,” “our,” “us,” and “we” and similar references refer to Upwork Inc. and its wholly-owned subsidiaries.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Quarterly Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, potential growth or growth prospects, future research and development, sales and marketing and general and administrative expenses, our objectives for future operations, and potential impacts of the COVID-19 pandemic, or expectations regarding actions we may take in response to the pandemic, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections as of the date of this filing about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report and the impact of the COVID-19 pandemic. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Quarterly Report are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Quarterly Report or to conform statements to actual results or revised expectations, except as required by law.
You should read this Quarterly Report and the documents that we reference herein and have filed with the SEC as exhibits to this Quarterly Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.


1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
UPWORK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
September 30, 2020December 31, 2019
ASSETS
Current assets
Cash and cash equivalents$88,436 $48,392 
Marketable securities67,051 85,481 
Funds held in escrow, including funds in transit128,131 108,721 
Trade and client receivables – net of allowance of $1,648 and $2,215 as of September 30, 2020 and December 31, 2019, respectively
39,853 30,156 
Prepaid expenses and other current assets8,487 7,885 
Total current assets331,958 280,635 
Property and equipment, net27,680 21,454 
Goodwill118,219 118,219 
Intangible assets, net1,334 3,335 
Operating lease asset20,662 21,908 
Other assets, noncurrent1,784 829 
Total assets$501,637 $446,380 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$5,708 $652 
Escrow funds payable128,131 108,721 
Debt, current7,576 7,584 
Accrued expenses and other current liabilities28,766 18,342 
Deferred revenue15,892 13,799 
Total current liabilities186,073 149,098 
Debt, noncurrent5,021 10,699 
Operating lease liability, noncurrent21,693 21,186 
Other liabilities, noncurrent7,276 5,973 
Total liabilities220,063 186,956 
Commitments and contingencies (Note 6)
Stockholders’ equity
Common stock, $0.0001 par value; 490,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 121,775,309 and 113,604,398 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
12 11 
Additional paid-in capital477,311 431,370 
Accumulated deficit(195,749)(171,957)
Total stockholders’ equity281,574 259,424 
Total liabilities and stockholders’ equity$501,637 $446,380 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2


UPWORK INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue$96,748 $78,015 $267,475 $220,274 
Cost of revenue26,596 22,494 75,489 65,207 
Gross profit70,152 55,521 191,986 155,067 
Operating expenses
Research and development20,833 16,209 60,728 47,705 
Sales and marketing33,577 25,322 98,695 70,319 
General and administrative18,047 16,468 52,973 46,193 
Provision for transaction losses724 1,214 2,654 2,706 
Total operating expenses73,181 59,213 215,050 166,923 
Loss from operations(3,029)(3,692)(23,064)(11,856)
Interest expense152 317 640 1,047 
Other (income) expense, net(452)(462)31 (1,773)
Loss before income taxes(2,729)(3,547)(23,735)(11,130)
Income tax provision(18) (57)(28)
Net loss$(2,747)$(3,547)$(23,792)$(11,158)
Net loss per share, basic and diluted$(0.02)$(0.03)$(0.20)$(0.10)
Weighted-average shares used to compute net loss per share, basic and diluted120,681 111,163 117,121 108,844 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


UPWORK INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)

Three Months Ended September 30, 2020Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balances as of June 30, 2020119,267,694 $12 $463,133 $(193,002)$270,143 
Issuance of common stock upon exercise of stock options2,096,934  7,333 — 7,333 
Stock-based compensation expense— — 6,734 — 6,734 
Issuance of common stock for settlement of RSUs410,681 — — —  
Tides Foundation common stock warrant expense and other— — 111 — 111 
Net loss— — — (2,747)(2,747)
Balances as of September 30, 2020121,775,309 $12 $477,311 $(195,749)$281,574 


Three Months Ended September 30, 2019Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balances as of June 30, 2019110,708,530 $11 $407,876 $(162,909)$244,978 
Issuance of common stock upon exercise of stock options1,122,763 — 3,795 — 3,795 
Stock-based compensation expense— — 3,998 — 3,998 
Issuance of common stock for settlement of RSUs68,200 — — —  
Net loss— — — (3,547)(3,547)
Balances as of September 30, 2019111,899,493 $11 $415,669 $(166,456)$249,224 


4



Nine Months Ended September 30, 2020Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balances as of December 31, 2019113,604,398 $11 $431,370 $(171,957)$259,424 
Issuance of common stock upon exercise of stock options6,744,484 1 23,342 — 23,343 
Stock-based compensation expense— — 18,927 — 18,927 
Issuance of common stock for settlement of RSUs1,162,183 — — —  
Tides Foundation common stock warrant expense and other— — 1,011 — 1,011 
Issuance of common stock in connection with employee stock purchase plan264,244 — 2,661 — 2,661 
Net loss— — — (23,792)(23,792)
Balances as of September 30, 2020121,775,309 $12 $477,311 $(195,749)$281,574 


Nine Months Ended September 30, 2019Common StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balances as of December 31, 2018106,454,321 $11 $387,233 $(143,499)$243,745 
Cumulative effect adjustment from adoption of new accounting pronouncement— — — (11,799)(11,799)
Issuance of common stock upon exercise of stock options and common stock warrants5,041,302 — 14,145 — 14,145 
Stock-based compensation expense— — 10,714 — 10,714 
Issuance of common stock for settlement of RSUs123,562 — — —  
Issuance of common stock in connection with employee stock purchase plan280,308 — 3,577 — 3,577 
Net loss— — — (11,158)(11,158)
Balances as of September 30, 2019111,899,493 $11 $415,669 $(166,456)$249,224 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


UPWORK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss$(23,792)$(11,158)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for transaction losses2,654 2,078 
Depreciation and amortization7,444 4,498 
Amortization of debt issuance costs43 39 
Amortization of discount on purchases of marketable securities(311)(948)
Amortization of operating lease asset2,927 3,059 
Tides Foundation common stock warrant expense564 439 
Stock-based compensation expense19,527 10,858 
Changes in operating assets and liabilities:
Trade and client receivables(12,490)(7,103)
Prepaid expenses and other assets(284)(1,407)
Operating lease liability(1,420)(979)
Accounts payable5,087 697 
Accrued expenses and other liabilities10,448 (799)
Deferred revenue3,015 2,727 
Net cash provided by operating activities13,412 2,001 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities(70,215)(131,950)
Proceeds from maturities of marketable securities89,000 72,500 
Purchases of property and equipment(6,210)(10,230)
Internal-use software and platform development costs(5,567)(4,054)
Net cash provided by (used in) investing activities7,008 (73,734)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in escrow funds payable19,409 16,407 
Proceeds from exercises of stock options and common stock warrants23,343 13,974 
Proceeds from borrowings on debt18,000 50,000 
Repayment of debt(23,729)(53,786)
Proceeds from employee stock purchase plan2,661 3,577 
Net cash provided by financing activities39,684 30,172 
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH60,104 (41,561)
Cash, cash equivalents, and restricted cash—beginning of period159,603 230,067 
Cash, cash equivalents, and restricted cash—end of period$219,707 $188,506 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest$640 $1,027 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Property and equipment purchased but not yet paid$395 $905 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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UPWORK INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1—Description of Business
Upwork Inc. (the “Company” or “Upwork”) operates a work marketplace that connects businesses (“clients”) with independent talent (“freelancers,” and, together with clients, “users”). The Company was originally incorporated in the state of Delaware in December 2013 prior to and in connection with the combination (the “Elance-oDesk Combination”) of Elance, Inc. (“Elance”) and oDesk Corporation (“oDesk”). The Company changed its name to Elance-oDesk, Inc. shortly before the Elance-oDesk Combination in March 2014, and later to Upwork Inc. in May 2015. In 2015, the Company relaunched as Upwork and commenced consolidation of its two operating platforms. In 2016, following completion of the platform consolidation, the Company began operating under a single platform. The Company is currently headquartered in Santa Clara, California.
Unless otherwise expressly stated or the context otherwise requires, the terms “Upwork” and the “Company” in these notes to the condensed consolidated financial statements refer to Upwork and its wholly-owned subsidiaries.

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Note 2—Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”), filed with the SEC on March 2, 2020.
The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP.
The condensed consolidated financial statements include the accounts of Upwork Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, changes in stockholders’ equity and cash flows for the interim periods, but do not purport to be indicative of the results of operations or financial condition to be anticipated for the full year ending December 31, 2020.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Such estimates include, but are not limited to: the useful lives of assets; assessment of the recoverability of long-lived assets; goodwill impairment; standalone selling price of material rights and the period of time over which to defer and recognize the consideration allocated to the material rights; allowance for doubtful accounts; liabilities relating to transaction losses; the valuation of warrants; stock-based compensation; and accounting for income taxes. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The Company evaluates its estimates, assumptions, and judgments on an ongoing basis using historical experience and other factors and revises them when facts and circumstances dictate.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Impacts of Recently Adopted Accounting Pronouncements on 2019 Interim Reporting
On December 31, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), ASU No. 2016-02, Leases (“Topic 842”), and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“Topic 230”) effective as of January 1, 2019. As a result, interim results for reporting periods beginning on or after January 1, 2019 will differ from amounts previously reported on the Company’s quarterly reports on Form 10-Q. The following table summarizes the impacts of adopting these standards on the Company’s previously issued condensed consolidated statements of operations for

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the three and nine months ended September 30, 2019 and condensed consolidated statement of cash flows for the nine months ended September 30, 2019 (in thousands):
Balances,
Previously Issued
Topic
606
Topic
842 (1)
Topic
230
Balances,
as Reported
Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2019
Revenue$78,786 $(771)$ $ $78,015 
Operating expense—General and administrative16,519  (51) 16,468 
Net loss(2,827)(771)51  (3,547)
Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2019
Revenue$221,966 $(1,692)$ $ $220,274 
Operating expense—General and administrative46,309  (116) 46,193 
Net loss(9,582)(1,692)116  (11,158)
Net loss per share, basic and diluted(0.09)(0.01)  (0.10)
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2019
Operating activities
Net loss$(9,582)$(1,692)$116 $ $(11,158)
Amortization of operating lease asset  3,059  3,059 
Trade and client receivables(11,885)4,782   (7,103)
Prepaid expenses and other assets(1,439) 32  (1,407)
Operating lease liability  (979) (979)
Accrued expenses and other liabilities5,814 (4,385)(2,228) (799)
Deferred revenue1,432 1,295   2,727 
Financing activities—changes in funds held in escrow, including funds in transit(16,407)  16,407  
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH(57,968)  16,407 (41,561)
Cash, cash equivalents, and restricted cash—beginning of period129,128   100,939 230,067 
Cash, cash equivalents, and restricted cash—end of period71,160   117,346 188,506 
(1) Amounts include other adjustments made in conjunction with the adoption of Topic 842.
Recently Adopted Accounting Pronouncements
The significant accounting policies applied in the Company’s audited consolidated financial statements, as disclosed in the Annual Report, are applied consistently in these unaudited interim condensed consolidated financial statements, except as noted below.
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses

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are recorded. The Company adopted ASU No. 2016-13 and related updates on January 1, 2020. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment. ASU No. 2017-04 eliminates Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The Company adopted ASU No. 2017-04 on January 1, 2020. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The Company adopted ASU No. 2018-13 on January 1, 2020. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The Company adopted ASU No. 2018-15 on January 1, 2020 using the prospective adoption method. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
The Company has reviewed all other accounting pronouncements issued during the nine months ended September 30, 2020 and concluded they were either not applicable or not expected to have a material impact on the Company’s condensed consolidated financial statements.


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Note 3—Revenue
Disaggregation of Revenue
See “Note 9—Segment and Geographical Information” for the Company’s revenue disaggregated by type of service and geographic area.
Remaining Performance Obligations
As of September 30, 2020, the Company had approximately $20.0 million of remaining performance obligations. The Company’s remaining performance obligations consist of transaction price that has been allocated to unexercised material rights related to the Company’s arrangements with freelancers subject to tiered service fees, subscriptions, memberships, “Connects” (virtual tokens that allow freelancers to bid on projects on the Company’s platform), and certain incentive payments made to the Company by payment processors. As of September 30, 2020, the Company expects to recognize approximately $15.9 million over the next 12 months, with the remaining balance recognized thereafter.
The Company has applied the practical expedients and exemptions and does not disclose the value of remaining performance obligations for: (i) contracts with an original expected length of one year or less; and (ii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation under the series guidance.
Contract Balances
The following table provides information about the balances of the Company’s trade and client receivables, net of allowance and contract liabilities included in deferred revenue and other liabilities, noncurrent (in thousands):
September 30, 2020
December 31, 2019
Trade and client receivables, net of allowance$39,853 $30,156 
Contract liabilities
Deferred revenue15,892 13,799 
Deferred revenue (component of other liabilities, noncurrent)4,074 3,153 
During the three and nine months ended September 30, 2020, changes in the contract liabilities balances were a result of normal business activity, deferral of revenue related to arrangements with freelancers subject to tiered service fees and related allocation of transaction price to material rights, and a change in estimate related to the period of time over which to recognize the consideration allocated to the material rights.
Revenue recognized during the three and nine months ended September 30, 2020 that was included in deferred revenue as of June 30, 2020 and December 31, 2019 was $5.2 million and $10.9 million, respectively. Revenue recognized during the three and nine months ended September 30, 2019 that was included in deferred revenue as of June 30, 2019 and January 1, 2019 was $3.9 million and $9.3 million, respectively.

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Note 4—Fair Value Measurements
The Company defines fair value as the exchange price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance describes three levels of inputs that may be used to measure fair value:
Level I—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets;
Level II—Observable inputs other than Level I prices, such as unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on the Company’s own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.
The categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to its fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the assets or liabilities.
The Company’s financial instruments that are carried at fair value consist of Level I and Level II assets as of September 30, 2020 and December 31, 2019. The following tables set forth the fair value of the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):

September 30, 2020
Level ILevel IILevel IIITotal
Cash equivalents—money market funds$73,457 $ $ $73,457 
Marketable securities
Commercial paper 47,947  47,947 
Treasury bills4,497   4,497 
U.S. government securities14,607   14,607 
Total financial assets$92,561 $47,947 $ $140,508 

December 31, 2019
Level ILevel IILevel IIITotal
Cash equivalents—money market funds$35,286 $ $ $35,286 
Marketable securities
Commercial paper 50,794  50,794 
U.S. government securities34,687   34,687 
Total financial assets$69,973 $50,794 $ $120,767 
For each of the three and nine months ended September 30, 2020 and 2019, the gross unrealized gains and losses on the Company’s marketable securities were immaterial. As of September 30, 2020 and 2019, the Company considered any decreases in market value to be temporary in nature and did not consider any of the Company’s marketable securities to be other-than-temporarily impaired. As such, the Company did not record any impairment charges with respect to its marketable securities during each of the three and nine months ended September 30, 2020 and 2019.

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As of September 30, 2020 and December 31, 2019, the Company had debt obligations outstanding of $12.6 million and $18.3 million, respectively, under the Company’s Loan and Security Agreement, as amended (the “Loan Agreement”). As of September 30, 2020, the carrying value approximated fair value as borrowings under the Loan Agreement bore interest at variable rates, and the Company believes its credit risk quality is consistent with when the debt was originated. The Company considered the balances outstanding under the Loan Agreement to be Level II liabilities as of September 30, 2020 and December 31, 2019. See “Note 7—Debt.”

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Note 5—Balance Sheet Components
Cash and Cash Equivalents, Restricted Cash, and Funds Held In Escrow, Including Funds In Transit
The following table reconciles cash and cash equivalents, restricted cash, and funds held in escrow that are restricted as reported in the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows as of September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020December 31, 2019
Cash and cash equivalents$88,436 $48,392 
Restricted cash3,140 2,490 
Funds held in escrow, including funds in transit128,131 108,721 
Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statement of cash flows$219,707 $159,603 
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
September 30, 2020December 31, 2019
Computer equipment and software$4,780 $3,613 
Internal-use software and platform development18,282 12,726 
Leasehold improvements14,612 10,576 
Office furniture and fixtures3,354 2,454 
Total property and equipment41,028 29,369 
Less: accumulated depreciation(13,348)(7,915)
Property and equipment, net$27,680 $21,454 
For the three months ended September 30, 2020 and 2019, depreciation expense related to property and equipment was $1.0 million and $0.7 million, respectively. For the nine months ended September 30, 2020 and 2019, depreciation expense related to property and equipment was $2.5 million and $2.1 million, respectively.
For the three months ended September 30, 2020 and 2019, the Company capitalized $2.3 million and $2.0 million of internal-use software and platform development costs, respectively. For the nine months ended September 30, 2020 and 2019, the Company capitalized $5.6 million and $4.5 million of internal-use software and platform development costs, respectively.
For the three months ended September 30, 2020 and 2019, amortization expense related to the capitalized internal-use software and platform development costs was $1.0 million and $0.3 million, respectively. For the nine months ended September 30, 2020 and 2019, amortization expense related to capitalized internal-use software and platform development costs was $3.0 million and $0.4 million, respectively.
Intangible Assets, Net
All of the Company’s identifiable intangible assets were acquired in March 2014 from the Elance-oDesk Combination. For each of the three months ended September 30, 2020 and 2019, amortization expense of intangible assets was $0.7 million. For each of the nine months ended September 30, 2020 and 2019, amortization expense of intangible assets was $2.0 million.


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Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 September 30, 2020December 31, 2019
Accrued compensation and related benefits$11,804 $5,344 
Accrued freelancer costs967 622 
Accrued indirect taxes2,670 2,401 
Accrued vendor expenses8,826 5,485 
Accrued payment processing fees961 832 
Operating lease liability, current2,969 3,214 
Other569 444 
Total accrued expenses and other current liabilities$28,766 $18,342 
Operating Leases
On January 1, 2020, the Company commenced an operating lease of one additional floor in its Chicago, Illinois office. As a result, the Company recognized a $1.7 million operating lease asset and $1.7 million operating lease liability on January 1, 2020, which are included in operating lease asset and operating lease liability, noncurrent, respectively, on the condensed consolidated balance sheet as of September 30, 2020. The lease has an initial term of five years with the option to renew for an additional five years at the end of the initial lease term. Total minimum lease payments under the initial term are $2.1 million. For the initial measurement of the present value of the lease payments associated with this lease, the Company used its incremental borrowing rate, which is a collateralized rate and approximates the rate at which the Company could borrow, on a secured basis for a similar term, an amount equal to its lease payments in a similar economic environment.
The Company includes lease payments associated with renewal options in its operating lease asset and liability only when it becomes reasonably certain that the Company will exercise the renewal option. The Company has not included renewal options for any of its operating leases in its determination of lease liabilities as of September 30, 2020.

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Note 6—Commitments and Contingencies
Letters of Credit
In conjunction with the operating lease agreements, as of September 30, 2020 and December 31, 2019, the Company had three irrevocable letters of credit outstanding in the aggregate amounts of $1.0 million and $0.8 million, respectively. No amounts had been drawn against these letters of credit as of September 30, 2020 and December 31, 2019.
Contingencies
The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. From time to time in the normal course of business, various claims and litigation have been asserted or commenced. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability or damages. Any claims or litigation could have an adverse effect on the Company’s business, financial position, results of operations, or cash flows in or following the period that claims or litigation are resolved.
As of September 30, 2020 and December 31, 2019, the Company was not a party to any material legal proceedings or claims, nor is the Company aware of any pending or threatened litigation or claims that could reasonably be expected to have a material adverse effect on its business, operating results, cash flows, or financial condition. Accordingly, the Company has determined that the existence of a material loss as of these dates is neither probable nor reasonably possible.
Indemnification
The Company has indemnification agreements with its officers, directors, and certain key employees to indemnify them while they are serving in good faith in their respective positions. In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to clients, business partners, vendors, and other parties, including, but not limited to, losses arising out of the Company’s breach of such agreements, claims related to potential data or information security breaches, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from the Company’s products and services or its acts or omissions. In addition, subject to the terms of the applicable agreement, as part of the Company’s Upwork Enterprise offering, the Company indemnifies clients that subscribe to worker classification services for losses arising from worker misclassification. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the facts and circumstances involved in each particular provision.

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Note 7—Debt
The following table presents the carrying value of the Company’s debt obligations as of September 30, 2020 and December 31, 2019 (in thousands):
 September 30, 2020December 31, 2019
First Term Loan—18 months of interest-only payments ended in March 2019 followed by 36 equal monthly installments of principal plus interest, maturing March 2022; interest at prime plus 0.25% per annum
$7,500 $11,250 
Second Term Loan—17 months of interest-only payments ended in March 2019 followed by 42 equal monthly installments of principal plus interest, maturing September 2022; interest at prime plus 0.25% per annum
5,142 7,071 
Total debt12,642 18,321 
Less: unamortized debt discount issuance costs(45)(38)
Balance12,597 18,283 
Debt, current(7,576)(7,584)
Debt, noncurrent$5,021 $10,699 
Weighted-average interest rate5.20 %6.93 %
Under the Loan Agreement, the aggregate amount of the facility is up to $49.0 million, consisting of a term loan in the original principal amount of $15.0 million (the “First Term Loan”), a term loan in the original principal amount of $9.0 million (the “Second Term Loan” and, together with the First Term Loan, the “Term Loans”), and a revolving line of credit, which permits borrowings of up to $25.0 million subject to customary conditions. In August 2020, the Company entered into an amendment to the Loan Agreement that, among other things, extended the maturity date of the revolving line of credit from September 2020 to September 2022 and eliminated a formula-based restriction that prohibited the Company from borrowing funds under the revolving line of credit in an amount that exceeded a specified percentage of eligible trade and client accounts receivable. The Company has granted its lender first-priority liens against substantially all of its assets, as collateral, excluding the Company’s intellectual property (but including proceeds therefrom) and the funds and assets held by the Company’s subsidiary, Upwork Escrow Inc. The Company has also agreed to a negative pledge on its intellectual property. The Loan Agreement also requires that the Company maintain an adjusted quick ratio of 1.75. The Loan Agreement also includes a restrictive covenant on dividend payments other than dividends paid solely in common stock. The Company was in compliance with its covenants under the Loan Agreement as of September 30, 2020 and December 31, 2019.
Pursuant to the terms of the Loan Agreement, the Company commenced repayment on the Term Loans in April 2019. During the three and nine months ended September 30, 2020, the Company repaid $1.3 million and $3.8 million related to the First Term Loan, respectively, and $0.6 million and $1.9 million related to the Second Term Loan, respectively. During the three and nine months ended September 30, 2019, the Company repaid $1.3 million and $2.5 million related to the First Term Loan, respectively, and $0.6 million and $1.3 million related to the Second Term Loan, respectively.

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Note 8—Net Loss per Share
The following table sets forth the computation of the Company’s basic and diluted net loss per share for the periods presented (in thousands, except share and per share data):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Numerator:    
Net loss$(2,747)$(3,547)$(23,792)$(11,158)
Denominator:
Weighted-average shares used to compute net loss per share, basic and diluted120,680,797 111,163,396 117,120,815 108,844,495 
Net loss per share, basic and diluted$(0.02)$(0.03)$(0.20)$(0.10)

The following potentially dilutive shares were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive:
 As of September 30,
 20202019
Options to purchase common stock7,744,337 16,596,305 
Common stock issuable upon exercise of common stock warrants450,000 500,000 
Common stock issuable upon vesting of restricted stock units5,983,872 1,471,876 
Common stock issuable in connection with employee stock purchase plan898,426 730,217 
Total15,076,635 19,298,398 


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Note 9—Segment and Geographical Information
The Company operates as one operating and reportable segment for purposes of allocating resources and evaluating financial performance.
The following table sets forth total revenue by type of service for the periods presented (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Marketplace$88,040 $69,912 $241,286 $196,095 
Managed services8,708 8,103 26,189 24,179 
Total revenue$96,748 $78,015 $267,475 $220,274 

The Company generates its revenue from freelancers and clients. The following table sets forth total revenue by geographic area based on the billing address of its freelancers and clients for the periods presented (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Freelancers
United States$15,832 $12,870 $44,129 $36,999 
India8,796 7,046 24,148 20,444 
Philippines5,995 5,077 16,436 14,488 
Rest of world28,120 22,876 78,308 66,714 
Total freelancers58,743 47,869 163,021 138,645 
Clients
United States28,861 23,502 76,174 62,607 
Rest of world9,144 6,644 28,280 19,022 
Total clients38,005 30,146 104,454 81,629 
Total revenue$96,748 $78,015 $267,475 $220,274 

Substantially all of the Company’s long-lived assets were located in the United States as of September 30, 2020 and December 31, 2019.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Risk Factors” and the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, as well as assumptions that may never materialize or that may be proven incorrect. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors,” and in other parts of this Quarterly Report.
Overview
We operate the world’s largest work marketplace that connects businesses with independent talent, as measured by gross services volume (“GSV”). GSV represents the total amount that clients spend on our marketplace offerings and our managed services offering as well as additional fees we charge to both clients and freelancers for other services. Freelancers are an increasingly sought-after, critical, and expanding segment of the global workforce. We define freelancers as users of our platform that advertise and provide services to clients through our platform, and we define clients as users of our platform that work with freelancers through our platform. The freelancers on our platform include independent professionals and agencies of varying sizes. The clients on our platform range in size from small businesses to Fortune 100 companies. With users in over 180 countries, our platform enabled $0.7 billion and $0.5 billion of GSV for the three months ended September 30, 2020 and 2019, respectively, and $1.8 billion and $1.5 billion of GSV for the nine months ended September 30, 2020 and 2019, respectively. For purposes of determining countries where we enable GSV, we include both the countries in which the clients that paid for the applicable services are located, as well as the countries in which the freelancers that provided those services are located.
We generate a majority of our revenue from fees charged to freelancers. We also generate revenue through fees charged to clients for transacting payments through our platform and fees for premium offerings, foreign currency exchange fees, purchases of “Connects” (virtual tokens that allow freelancers to bid on projects on our platform), and Upwork Payroll service fees. In addition, we provide a managed services offering where we engage freelancers to complete projects, directly invoice the client, and assume responsibility for work performed.
With our unique, remote-based business model, the COVID-19 pandemic has not impacted our clients’ access to highly-skilled independent professionals on our platform to complete short- and long-term projects. In the third quarter, we continued to identify opportunities to prioritize our advertising and marketing efforts in order to reach those new and existing clients seeking to engage with remote freelancers due to the COVID-19 pandemic and as companies shift to a remote work model. As a result, for the three months ended September 30, 2020 and 2019, we generated total revenue of $96.7 million and $78.0 million, respectively, representing a period-over-period increase of 24%. For the nine months ended September 30, 2020 and 2019, we generated total revenue of $267.5 million and $220.3 million, respectively, representing a period-over-period increase of 21%.
For the three months ended September 30, 2020, we generated a net loss of $2.7 million and adjusted EBITDA of $6.7 million, compared to a net loss of $3.5 million and adjusted EBITDA of $2.0 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, we generated a net loss of $23.8 million and adjusted EBITDA of $4.5 million, compared to a net loss of $11.2 million and adjusted EBITDA of $3.9 million for the nine months ended September 30, 2019. Our adjusted EBITDA of $4.5 million during the nine months ended September 30, 2020 was impacted by a $1.6 million expense that we incurred related to our changes in organizational structure to better align with our business strategies and streamline the delivery of our end-to-end user experiences, as well as marketing expense of $4.4 million related to brand awareness and performance marketing. Adjusted EBITDA is a financial measure that is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). See the section titled “Key Financial and Operational Metrics—Non-GAAP Financial Measures” below for a definition of adjusted EBITDA and information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure prepared under U.S. GAAP.

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Impact of the COVID-19 Pandemic on Our Business
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to spread throughout the United States and the world, and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, shelter-in-place orders, and business limitations and shutdowns. To support the health and well-being of our employees, clients, partners, and communities, nearly all of our employees are currently working remotely. With our unique, remote-based business model, the COVID-19 pandemic has not impacted our clients’ access to highly-skilled independent professionals on our platform to complete short- and long-term projects.
Although the COVID-19 pandemic did not have a material adverse impact on our financial results for the three and nine months ended September 30, 2020, the rapidly changing market and macroeconomic conditions caused by the COVID-19 pandemic has impacted the businesses of many of our clients. We derive a substantial portion of our GSV and revenue from small- and medium-sized businesses, and the pandemic and related effects have altered, and continue to alter, demand for our products and services from these clients, although we expect that macroeconomic conditions have and may continue to affect spend from clients of all sizes.
We began seeing the impact of the pandemic on our results at the end of the first quarter, when we experienced a reduction in the growth rates of GSV and revenue. This trend continued into the beginning of the second quarter, driven by spend contraction by many of our clients, as the COVID-19 pandemic continued to disrupt their businesses. These trends stabilized in the second half of the second quarter, and then improved in the third quarter, contributing to an increase in the growth rates of GSV and revenue in the third quarter. Beginning in the second half of the second quarter, we also began to see an increase in client acquisition driven by an acceleration in the shift toward remote work, due in part to the COVID-19 pandemic and the execution of our strategic initiatives. This increase in client acquisition continued to accelerate in the third quarter and drove an increase in freelancer billings, which, in turn, drove an increase in marketplace revenue.
In light of the COVID-19 pandemic and the global macroeconomic downturn and their effect on client spend on our platform, we continue to identify opportunities to prioritize our advertising and marketing efforts in order to reach those new and existing clients seeking to engage with remote freelancers due to the COVID-19 pandemic and as companies shift to a remote work model. We are continuously evaluating the nature and extent to which the ongoing COVID-19 pandemic will continue to have on our business, operating results, and financial condition.
While we have not incurred significant disruptions to our business thus far from the COVID-19 pandemic, at this time, we are unable to fully assess the aggregate impact it will have on our business due to various uncertainties, which include, but are not limited to, the duration of the pandemic, its affect on the economy, its impact to the businesses of our clients, actions that may be taken by governmental authorities related to the pandemic, and other factors identified in Part II, Item 1A “Risk Factors” in this Quarterly Report, including the risk factor titled “Our business has experienced, and may continue to experience, an adverse impact from the ongoing COVID-19 pandemic.”

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Key Financial and Operational Metrics
We monitor the following key financial and operational metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Our key metrics were as follows as of or for the periods presented:
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
(in thousands)
GSV$654,538 $532,812 $1,795,982 $1,538,191 
Marketplace revenue$88,040 $69,912 $241,286 $196,095 
Marketplace take rate13.6 %13.3 %13.6 %13.0 %
Net loss$(2,747)$(3,547)$(23,792)$(11,158)
Adjusted EBITDA (1)
$6,673 $1,973 $4,471 $3,939 
(1)Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. See “Key Financial and Operational Metrics—Non-GAAP Financial Measures” below for a definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure prepared under U.S. GAAP.
 
As of September 30,
 20202019
(in thousands, except percentages)
Core clients138.9 120.5 
Client spend retention100 %104 %

As discussed below with respect to each key metric, we believe these key financial and operational metrics are useful to evaluate period-over-period comparisons of our business and in understanding our operating results, and management uses these metrics to track our performance. GSV represents the total amount that clients spend on our marketplace offerings and our managed services offering, as well as additional fees we charge to both clients and freelancers for other services. We believe that GSV is an important metric, as it represents the overall amount of business transacted through our platform, which in turn is a key driver of our financial results. We believe our marketplace revenue, which represents a majority of our revenue, will grow as GSV grows, although they could grow at different rates. We evaluate the correlation between marketplace revenue and GSV by measuring marketplace take rate, which is calculated as marketplace revenue divided by marketplace GSV. We use the number of core clients to track the number of clients that we consider are actively using our platform, and this metric in any given period drives both GSV and client spend retention. Similarly, client spend retention impacts the growth rate of GSV. In light of the COVID-19 pandemic, rapidly changing market and macroeconomic conditions continue to impact the businesses of many of our clients, which may lead to downward pressure on the number of core clients, client spend retention, GSV, and marketplace revenue. For information on how we define core clients and how we calculate client spend retention and marketplace take rate, see “—Core Clients,” “—Client Spend Retention,” and “—Marketplace Take Rate,” respectively, below. For a discussion of limitations in the measurement of our key financial and operational metrics, see “Risk Factors—We track certain performance metrics with internal tools and do not independently verify such metrics. Certain of our performance metrics may not accurately reflect the performance of our business, are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business” in Part II, Item 1A of this Quarterly Report.
Core Clients
We define a core client as a client that has spent in the aggregate at least $5,000 since it began using our platform and also had spend activity on our platform during the 12 months preceding the date of measurement. We believe

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that aggregate spend of at least $5,000 indicates that the client is actively using our platform. Historically, these core clients have been more likely to continue using our platform, although we saw a contraction in spend from many core clients during the first half of the second quarter that we believe is a result of the COVID-19 pandemic’s impact on the businesses of these clients. This trend stabilized in the second half of the second quarter, and then improved in the third quarter, as spend from clients increased due to a greater need for remote work resulting from the COVID-19 pandemic. Additionally, we saw an increase in core client acquisitions, as we have seen new clients come to our platform due in part to the increase in remote work resulting from the COVID-19 pandemic and the execution of our strategic initiatives. We continue to see businesses of all sizes use our platform in a recurring way for larger, more complex projects, and we expect the number of core clients to continue to increase over time. We have added between approximately 4,000 and 6,000 core clients per quarter over the last two years. We expect to add approximately 5,000 core clients per quarter in the coming quarters, but the number of core clients could vary quarter by quarter depending, in part, on the extent to which the COVID-19 pandemic and any resulting macroeconomic downturn impacts our business, the businesses of our clients, and other factors identified in Part II, Item 1A “Risk Factors” in this Quarterly Report, including the risk factor titled “Our business has experienced, and may continue to experience, an adverse impact from the ongoing COVID-19 pandemic.” We believe that the number of core clients is an indicator of our growth and the overall health of our business because core clients are a primary driver of GSV and, therefore, marketplace revenue.
Gross Services Volume
GSV includes both client spend and additional fees charged for other services. Client spend, which we define as the total amount that clients spend on both our marketplace offerings and our managed services offering, is the primary component of GSV. GSV also includes additional fees charged to both clients and freelancers for other services, such as freelancer memberships, purchases of Connects, freelancer withdrawals, and foreign currency exchange.
GSV is an important metric because it represents the amount of business transacted through our platform. Our marketplace revenue is primarily comprised of the service fees paid by freelancers as a percentage of the total amount freelancers charge clients for services accessed through our platform. Therefore, marketplace revenue is correlated to GSV, and we believe that our marketplace revenue will grow as GSV grows, although they could grow at different rates. For a discussion of how we measure and evaluate the correlation between marketplace revenue and GSV, see “—Marketplace Take Rate” below. Growth in the number of core clients and increased client spend retention are the primary drivers of GSV growth, and we expect the client spend retention trends discussed in “—Client Spend Retention,” below, to affect the rate at which GSV grows. We derive a substantial portion of our GSV and revenue from small- and medium-sized businesses. In light of the COVID-19 pandemic, rapidly changing market and macroeconomic conditions continue to impact the businesses of many of our clients, which may lead to downward pressure on client spend on our platform and, in turn, GSV. This downward pressure has been offset by an increase in spend from clients as well as increased client acquisitions, as we have seen new clients come to our platform due to an acceleration in the shift toward remote work, due in part to the COVID-19 pandemic and the execution of our strategic initiatives. We expect our GSV to fluctuate between periods due to a number of factors, including the current COVID-19 pandemic and its impact on our clients’ businesses, the volume of projects that are posted by clients on our platform, the characteristics of those projects, such as size, duration, and pricing, and the availability and qualifications of freelancers to complete those projects.
Client Spend Retention
We calculate client spend retention by dividing our recurring client spend by our base client spend. We define base client spend as the aggregate client spend from all clients during the four quarters ended one year prior to the date of measurement. We define our recurring client spend as the aggregate client spend during the four quarters ended on the date of measurement from the same clients included in our measure of base client spend. Our business is recurring in nature even though clients are not contractually required to spend on a recurring basis. We believe that client spend retention is an indicator of the value of our platform and the overall health of our business because it impacts the growth rate of GSV, and, therefore, marketplace revenue.
Long-term and recurring use by freelancers and clients are the primary drivers of growth in our marketplace and give us increased revenue visibility. While continued use of our platform by freelancers is a factor that impacts our ability to attract and retain clients, for most categories of services on our platform, we currently have a significant surplus of freelancers in relation to the number of clients actively engaging freelancers. This surplus has increased as

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a result of the COVID-19 pandemic, as we have experienced an increase in the number of independent professionals applying to join our platform. As a result of this surplus, we primarily focus our efforts on retaining client spend and acquiring new clients, as opposed to acquiring new freelancers and retaining existing freelancers. Moreover, we generate revenue when clients engage and pay freelancers, and therefore, our key metrics and operating results are directly impacted by client spend. On the other hand, the number of freelancers retained between periods is merely one of many factors that may impact client spend in a particular period and is not a primary driver of our key metrics and operating results. For these reasons, we do not calculate or consider freelancer retention metrics in evaluating our business.
As of September 30, 2020, client spend retention was 100%, down from 104% as of September 30, 2019. We believe that this decline in client spend retention is due in part to the impact of the rapidly changing market and macroeconomic conditions caused by the COVID-19 pandemic, which has impacted the businesses of many of our clients, resulting in a contraction in spend from some of these clients in the nine months ended September 30, 2020. Additionally, client spend retention has declined—from its historically highest levels in 2018 and the first quarter of 2019—following an acceleration in client spend retention that occurred subsequent to the launch of our U.S.-to-U.S. domestic marketplace offering in the second half of 2017, which initiated a substantial increase in the average hourly earnings rate of freelancers. These hourly rates stabilized over the course of 2019, causing the reduction in retention rate. Moreover, following the launch of our U.S.-to-U.S. domestic marketplace offering, an increasing proportion of U.S. clients are engaging primarily U.S. freelancers. We are observing that U.S. clients that engage solely U.S. freelancers post higher-budget projects and pay higher rates initially but, to date, have exhibited lower client spend retention than the rest of our clients. As we acquire more large enterprise, global account, and mid-market clients in current and future periods, we expect them to continue to make positive contributions to our client spend retention in future years. However, client spend retention will be challenged by the reduction in recurring client spend as a result of the COVID-19 pandemic. For these and other reasons, client spend retention will continue to vary from period to period due to client size and spending behavior, among other factors, including the impact of the ongoing COVID-19 pandemic, the related governmental restrictions intended to prevent its spread, and the resulting macroeconomic downturn on the businesses and spending behavior of our clients.
Marketplace Revenue
Marketplace revenue, which represents the majority of our revenue, consists of revenue derived from our Upwork Basic, Plus, Business, and Enterprise offerings, and our other premium offerings. We generate marketplace revenue from both freelancers and clients. Our marketplace revenue is primarily comprised of the service fees paid by freelancers as a percentage of the total amount freelancers charge clients for services accessed through our platform, and to a lesser extent, payment processing and administration fees charged to clients. We also generate marketplace revenue from fees for premium offerings, freelancer membership fees, Connects purchases, and other services, such as foreign currency exchange fees and Upwork Payroll service fees.
Marketplace revenue is an important metric because it is the primary driver of our business model, and we believe it provides greater comparability to other online marketplaces. The growth rate of marketplace revenue fluctuates in relation to the growth rate of GSV. Therefore, marketplace revenue is correlated to GSV, and we believe that our marketplace revenue will grow as GSV grows, although they could grow at different rates. We expect our marketplace revenue growth rates to continue to vary from period to period due to a variety of other factors such as the impact of the COVID-19 pandemic and any resulting macroeconomic impact on the businesses and spending behavior of our current and prospective clients; the number of Sundays (i.e., the day we bill and recognize revenue for the majority of our freelancer service fees each week) in any given quarter, or the number of Mondays (i.e., the day we bill and recognize revenue for a substantial portion of our client fees each week), in any given quarter; the lapping of significant launches of new products, pricing changes, and other monetization efforts; the performance of client spend retention; and the ability of the recent and continued investment in our enterprise sales team to accelerate the acquisition of, and achieve increased spend from, Upwork Enterprise clients, and the timing of those results. In the second and third quarters of 2020, we saw an increase in client acquisition that was driven by an acceleration in the shift toward remote work, due in part to the COVID-19 pandemic and the execution of our strategic initiatives. This increase in client acquisition continued to accelerate in the third quarter and drove an increase in freelancer billings, which, in turn, drove an increase in marketplace revenue.

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Marketplace Take Rate
Marketplace take rate measures the correlation between marketplace revenue and GSV and is calculated by dividing marketplace revenue by marketplace GSV. Marketplace take rate is an important metric because it is the key indicator of how well we monetize spend on our platform from our Upwork Basic, Plus, Business, and Enterprise offerings, and other premium offerings. We expect our marketplace take rate to vary from period to period as marketplace revenue and GSV vary as a result of a variety of factors, such as the number of Sundays (i.e., the day we bill and recognize revenue for the majority of our freelancer service fees each week) in any given quarter, or the number of Mondays (i.e., the day we bill and recognize revenue for a substantial portion of our client fees each week), in any given quarter; pricing changes; the ability of the recent and continued investment in our enterprise sales team to accelerate the acquisition of, and achieve increased spend from, our Upwork Enterprise clients and the timing of those results; and ongoing efforts to improve processes on our platform, including, but not limited to, project proposals and purchases of Connects. In the nine months ended September 30, 2020, our marketplace take rate increased primarily as a result of an influx of new clients, which caused freelancers to bill at higher rates of our tiered service fee structure.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, adjusted EBITDA is a non-GAAP measure that we believe is useful in evaluating our operating performance.
We define adjusted EBITDA as net income (loss) adjusted for stock-based compensation expense, depreciation and amortization, interest expense, other (income) expense, net, income tax (benefit) provision, and, if applicable, other non-cash transactions. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP.
The following table presents a reconciliation of net loss, the most directly comparable financial measure prepared in accordance with U.S. GAAP, to adjusted EBITDA for each of the periods indicated (in thousands):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net Loss$(2,747)$(3,547)$(23,792)$(11,158)
Add back (deduct):
Stock-based compensation expense6,856 3,932 19,527 10,858 
Depreciation and amortization2,658 1,671 7,444 4,498 
Interest expense152 317 640 1,047 
Other (income) expense, net(452)(462)31 (1,773)
Income tax provision18 — 57 28 
Tides Foundation common stock warrant expense188 62 564 439 
Adjusted EBITDA$6,673 $1,973 $4,471 $3,939 

We use adjusted EBITDA as a measure of operational efficiency. We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:
adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as stock-based compensation expense, depreciation and amortization, interest expense, other (income) expense, net, income tax (benefit) provision, and, if applicable, other non-cash transactions that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;
our management uses adjusted EBITDA in conjunction with financial measures prepared in accordance with U.S. GAAP for planning purposes, including the preparation of our annual operating budget, as a

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measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and
adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our core operating results, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows:
adjusted EBITDA excludes stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA does not reflect: (a) changes in, or cash requirements for, our working capital needs; (b) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (c) tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of this measure for comparative purposes.
Because of these and other limitations, you should consider adjusted EBITDA along with other financial performance measures, including net loss and our other financial results prepared in accordance with U.S. GAAP.

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Components of Our Results of Operations
Revenue
Marketplace Revenue. Marketplace revenue is generated from our Upwork Basic, Plus, Business, and Enterprise offerings, and other premium offerings. Under these marketplace offerings, we generate revenue from both freelancers and clients. Marketplace revenue, which represents the majority of our total revenue, is primarily comprised of the service fees paid by freelancers as a percentage of the total amount that freelancers charge clients for services accessed through our platform and, to a lesser extent, payment processing and administration fees paid by clients.
We recently decided that it was not cost-effective to continue to commit sales and other resources to support our Upwork Business offering for new clients. We do not expect this decision to have a material impact on our marketplace revenue, as we will service those clients that we had previously targeted with our Upwork Business offering with our other marketplace offerings, such as Upwork Basic and Plus.
https://cdn.kscope.io/600a9cc9c4f550c7f0f5ae98988644c3-upwk-20200930_g1.jpg
Although the COVID-19 pandemic did not have a material adverse impact on our financial results for the three and nine months ended September 30, 2020, the rapidly changing market and macroeconomic conditions caused by the COVID-19 pandemic have disrupted the business of many of our clients, which resulted in a reduction in spend on our platform from some of those affected clients. This trend stabilized in the second half of the second quarter, and then improved in the third quarter, as spend from clients increased due to a greater need for remote work resulting from the COVID-19 pandemic. This temporary reduction in spend was further offset by an increase in client acquisitions, as we have seen new clients come to our platform due to the increase in remote work resulting from the COVID-19 pandemic and the execution of our strategic initiatives. We are continuously evaluating the nature of and extent to which the COVID-19 pandemic will impact our business, operating results, and financial condition.
Managed Services Revenue. Through our managed services offering, we are responsible for providing services and engaging freelancers directly or as employees of third-party staffing providers to perform services for clients on our behalf. The freelancers providing services in connection with our managed services include independent professionals and agencies of varying sizes. Under U.S. GAAP, we are deemed to be the principal in these managed services arrangements and therefore recognize the entire GSV of managed services projects as managed services

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revenue, as compared to recognizing only the percentage of the client spend that we receive, as we do with our marketplace offerings.
Cost of Revenue and Gross Profit
Cost of Revenue. Cost of revenue consists primarily of the cost of payment processing fees, amounts paid to freelancers to deliver services for clients under our managed services offering, personnel-related costs for our services and support personnel, third-party hosting fees for our use of Amazon Web Services (“AWS”), and the amortization expense associated with capitalized internal-use software and platform development costs. We define personnel-related costs as salaries, bonuses, benefits, travel and entertainment, and stock-based compensation costs for employees and the costs related to other service providers we engage.
We expect cost of revenue to increase in absolute dollars in future periods due to higher payment processing fees, third-party hosting fees, and personnel-related costs in order to support growth on our platform. We expect third-party hosting fees to temporarily increase in 2020 as we migrate from the AWS data centers in California to the AWS data center in Oregon, as we will need to use both AWS facilities during the migration period. We plan to complete this migration in the first quarter of 2021 and believe this migration will ultimately reduce third-party hosting costs once completed.
Amounts paid to freelancers in connection with our managed services offering are tied to the volume of managed services used by our clients. The level and timing of all of these items could fluctuate and affect our cost of revenue in the future.
Gross Profit and Gross Margin. Our gross profit and gross margin may fluctuate from period-to-period. Such fluctuations may be influenced by our revenue, the mix of payment methods that our clients choose, the timing and amount of investments to expand hosting capacity, our continued investments in our services and support teams, the timing and amounts paid to freelancers in connection with our managed services offering, and the amortization expense associated with capitalized internal-use software and platform development costs. In addition, gross margin will be impacted by fluctuations in our revenue mix between marketplace revenue and managed services revenue. For example, our managed services revenue grew at a slower rate than our marketplace revenue for the three and nine months ended September 30, 2020 compared to the same period in 2019, and we anticipate this trend to continue, as we primarily focus on increasing client usage of and spend on our marketplace offerings. We expect gross margin to remain consistent throughout 2020 primarily due to the costs we will incur as a result of our migration from the AWS data centers in California to the AWS data center in Oregon.
Operating Expenses
Research and Development. Research and development expense primarily consists of personnel-related costs and third-party hosting costs related to development. Research and development costs are expensed as incurred, except to the extent that such costs are associated with internal-use software and platform development that qualifies for capitalization. We believe continued investments in research and development are important to attain our strategic objectives and expect research and development expense to increase in absolute dollars for the foreseeable future, although this expense, expressed as a percentage of total revenue, may vary from period to period.
Sales and Marketing. Sales and marketing expense consists primarily of expenses related to personnel-related costs, including sales commissions, which we expense as they are incurred, and advertising and marketing activities. We continue to invest in our sales and marketing capabilities and in light of the COVID-19 pandemic are focused on increasing our investment in brand awareness and marketing campaigns. We expect this expense to increase in absolute dollars in future periods, although this expense expressed as a percentage of total revenue may vary from period-to-period.
General and Administrative. General and administrative expense consists primarily of personnel-related costs for our executive, finance, legal, human resources, corporate development, and operations functions; outside consulting, legal, and accounting services; and insurance. We expect to continue to invest in corporate infrastructure and to incur additional expenses associated with operating as a public company, including increased legal and accounting costs, investor relations costs, insurance premiums, and compliance costs. Additionally, in light of the COVID-19 pandemic and the governmental restrictions intended to prevent its spread, we are evaluating our needs for our current office space, and any reductions to our office space may impact the recoverability of our operating lease

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asset, which could result in impairment charges being recognized in general and administrative expense. As a result, we expect general and administrative expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.
Provision for Transaction Losses. Provision for transaction losses consists primarily of losses resulting from fraud and bad debt expense associated with our trade and client receivables balance and transaction losses associated with chargebacks. Provisions for these items represent estimates of losses based on our actual historical incurred losses and other factors. We expect provisions for transaction losses to increase proportionally as GSV grows. As a result, we expect provision for transaction losses to increase in absolute dollars in future periods, although expressed as a percentage of total revenue, this expense may vary from period to period.
Interest Expense
Interest expense consists of interest on our outstanding borrowings.
Other (Income) Expense, Net
Other (income) expense, net consists primarily of gains and losses from foreign currency exchange transactions and interest income that we earn from our deposits in money market funds and investments in marketable securities.

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Results of Operations
The following table sets forth our condensed consolidated results of operations for the periods presented (in thousands):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenue  
Marketplace$88,040 $69,912 $241,286 $196,095 
Managed services8,708 8,103