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upwk-20210930

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, 2021


☐			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)

________________________________________________


Delaware		46-4337682
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
475 Brannan Street, Suite 430
San Francisco,	California	94107
(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 Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share	UPWK	The Nasdaq Stock Market LLC

_______________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller 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 September 30, 2021, there were 128,233,545 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


		Page
Special Note Regarding Forward-Looking Statements		1

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 6.	Exhibits	80
Signatures		81

Unless otherwise expressly stated or the context otherwise requires, references in this Quarterly Report on Form 10-Q, which we refer to as this Quarterly 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, active clients, future research and development, sales and marketing and general and administrative expenses, provision for transaction losses, 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, which we refer to as 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.

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, 2021		December 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	600,077	$	94,081
Marketable securities	96,764		75,570
Funds held in escrow, including funds in transit	172,691		135,042
Trade and client receivables – net of allowance of $2,274 and $1,661 as of September 30, 2021 and December 31, 2020, respectively	58,231		47,018
Prepaid expenses and other current assets	12,156		9,090
Total current assets	939,919		360,801
Property and equipment, net	22,344		28,139
Goodwill	118,219		118,219
Intangible assets, net	—		667
Operating lease asset	12,736		19,729
Other assets, noncurrent	1,269		1,672
Total assets	$	1,094,487	$	529,227

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	3,370	$	6,455
Escrow funds payable	172,691		135,042
Debt, current	—		7,581
Accrued expenses and other current liabilities	45,048		32,868
Deferred revenue	20,742		16,801
Total current liabilities	241,851		198,747
Debt, noncurrent	560,559		3,142
Operating lease liability, noncurrent	18,075		20,506
Other liabilities, noncurrent	9,169		7,522
Total liabilities	829,654		229,917

Commitments and contingencies (Note 6)

Stockholders’ equity
Common stock, $0.0001 par value; 490,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 128,233,545 and 124,795,222 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	13		12
Additional paid-in capital	493,328		494,122

Accumulated deficit	(228,508)		(194,824)
Total stockholders’ equity	264,833		299,310
Total liabilities and stockholders’ equity	$	1,094,487	$	529,227

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

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	128,141	$	96,748	$	365,941	$	267,475
Cost of revenue	34,933		26,596		98,457		75,489
Gross profit	93,208		70,152		267,484		191,986
Operating expenses
Research and development	30,873		20,833		85,610		60,728
Sales and marketing	43,192		33,577		128,613		98,695
General and administrative	26,083		18,047		81,969		52,973
Provision for transaction losses	1,377		724		3,701		2,654
Total operating expenses	101,525		73,181		299,893		215,050
Loss from operations	(8,317)		(3,029)		(32,409)		(23,064)
Interest expense	746		152		1,055		640
Other (income) expense, net	222		(452)		161		31
Loss before income taxes	(9,285)		(2,729)		(33,625)		(23,735)
Income tax provision	(26)		(18)		(59)		(57)
Net loss	$	(9,311)	$	(2,747)	$	(33,684)	$	(23,792)

Net loss per share, basic and diluted	$	(0.07)	$	(0.02)	$	(0.27)	$	(0.20)
Weighted-average shares used to compute net loss per share, basic and diluted	127,915		120,681		126,651		117,121

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

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)


Three Months Ended September 30, 2021	Common Stock		Additional Paid-in Capital			Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount
Balances as of June 30, 2021		127,616,789	$	13		$	527,712	$	(219,197)	$	308,528
Issuance of common stock upon exercise of stock options		224,785	—			909		—		909
Stock-based compensation expense		—	—			13,917		—		13,917
Issuance of common stock for settlement of RSUs		391,971	—			—		—		—
Tides Foundation common stock warrant expense and other		—	—			183		—		183
Issuance of common stock in connection with employee stock purchase plan		—	—			—		—		—
Purchases of capped calls related to convertible senior notes		—	—			(49,393)		—		(49,393)
Net loss		—	—			—		(9,311)		(9,311)
Balances as of September 30, 2021		128,233,545	$	13		$	493,328	$	(228,508)	$	264,833


Three Months Ended September 30, 2020	Common Stock		Additional Paid-in Capital			Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount
Balances as of June 30, 2020		119,267,694	$	12		$	463,133	$	(193,002)	$	270,143

Issuance of common stock upon exercise of stock options		2,096,934	—			7,333		—		7,333
Stock-based compensation expense		—	—			6,734		—		6,734
Issuance of common stock for settlement of RSUs		410,681	—			—		—		—
Tides Foundation common stock warrant expense and other		—	—			111		—		111

Net loss		—	—			—		(2,747)		(2,747)
Balances as of September 30, 2020		121,775,309	$	12		$	477,311	$	(195,749)	$	281,574


Nine Months Ended September 30, 2021	Common Stock		Additional Paid-in Capital			Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount
Balances as of December 31, 2020		124,795,222	$	12		$	494,122	$	(194,824)	$	299,310
Issuance of common stock upon exercise of stock options		1,899,902	1			6,635		—		6,636
Stock-based compensation expense		—	—			38,743		—		38,743
Issuance of common stock for settlement of RSUs		1,302,963	—			—		—		—
Tides Foundation common stock warrant expense and other		—	—			533		—		533
Issuance of common stock in connection with employee stock purchase plan		235,458	—			2,688		—		2,688
Purchases of capped calls related to convertible senior notes		—	—			(49,393)		—		(49,393)
Net loss		—	—			—		(33,684)		(33,684)
Balances as of September 30, 2021		128,233,545	$	13		$	493,328	$	(228,508)	$	264,833


Nine Months Ended September 30, 2020	Common Stock		Additional Paid-in Capital			Accumulated Deficit		Total Stockholders’ Deficit
		Shares			Amount
Balances as of December 31, 2019		113,604,398	$	11		$	431,370	$	(171,957)	$	259,424

Issuance of common stock upon exercise of stock options		6,744,484	1			23,342		—		23,343
Stock-based compensation expense		—	—			18,927		—		18,927
Issuance of common stock for settlement of RSUs		1,162,183	—			—		—		—
Tides Foundation common stock warrant expense and other		—	—			1,011		—		1,011
Issuance of common stock in connection with employee stock purchase plan		264,244	—			2,661		—		2,661
Net loss		—	—			—		(23,792)		(23,792)
Balances as of September 30, 2020		121,775,309	$	12		$	477,311	$	(195,749)	$	281,574

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

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(33,684)	$	(23,792)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for transaction losses	3,004		2,654
Depreciation and amortization	8,187		7,444
Amortization of debt issuance costs	441		43
Amortization of premium (accretion of discount) of purchases of marketable securities, net	103		(311)
Amortization of operating lease asset	2,712		2,927
Tides Foundation common stock warrant expense	563		564
Stock-based compensation expense	38,666		19,527

Impairment expense	7,389		—
Changes in operating assets and liabilities:
Trade and client receivables	(13,967)		(12,490)
Prepaid expenses and other assets	(2,163)		(284)
Operating lease liability	114		(1,420)
Accounts payable	(3,188)		5,087
Accrued expenses and other liabilities	9,987		10,448
Deferred revenue	5,120		3,015
Net cash provided by operating activities	23,284		13,412
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(108,828)		(70,215)
Proceeds from maturities of marketable securities	87,500		89,000
Purchases of property and equipment	(565)		(6,210)
Internal-use software and platform development costs	(4,221)		(5,567)
Net cash provided by (used in) investing activities	(26,114)		7,008
CASH FLOWS FROM FINANCING ACTIVITIES:

Changes in escrow funds payable	37,649		19,409
Proceeds from exercises of stock options	6,636		23,343



Proceeds from employee stock purchase plan	2,688		2,661
Proceeds from borrowings on debt	—		18,000
Repayment of debt	(10,750)		(23,729)
Proceeds from issuance of convertible senior notes	575,000		—
Payment of debt issuance costs	(14,855)		—
Purchases of capped calls related to convertible senior notes	(49,393)		—


Net cash provided by financing activities	546,975		39,684
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	544,145		60,104
Cash, cash equivalents, and restricted cash—beginning of period	232,463		159,603
Cash, cash equivalents, and restricted cash—end of period	$	776,608	$	219,707
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest	$	347	$	640
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Property and equipment purchased but not yet paid	$	251	$	395
Internal-use software and platform development costs incurred but not yet paid	$	118	$	—

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

UPWORK INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1—Description of Business

Upwork Inc., which is referred to as the Company or Upwork, operates a work marketplace that connects businesses, which are referred to as clients, with independent talent. Independent talent on the Company’s work marketplace, which are referred to as freelancers, and, together with clients, as users, include independent professionals and agencies of varying sizes and are an increasingly sought-after, critical, and expanding segment of the global workforce. The Company is currently headquartered in San Francisco, 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.

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, which is referred to as 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, 2020, which is referred to as the Annual Report, filed with the SEC on February 24, 2021.

The condensed consolidated balance sheet as of December 31, 2020 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 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, 2021.

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; 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.

The Company shifted to a flexible work model for its workforce and is evaluating its current need for office space. During the nine months ended September 30, 2021, the Company executed a sub-sublease agreement to sublease the entirety of its former headquarters in Santa Clara, California. As a result, during the nine months ended September 30, 2021, the Company incurred an impairment charge of $7.4 million related to the associated operating lease asset and property and equipment. The Company may determine to either close or sublease certain of its other offices, either of which may result in further impairment charges. See “Note 5—Balance Sheet Components” for additional information regarding this impairment.

Notwithstanding the foregoing, 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.

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 August 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. For public companies, this guidance is effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. The Company early adopted the standard as of January 1, 2021 and applied this guidance to the convertible senior notes issued in August 2021. Refer to “Note 7—Debt” for additional information.

Recent Accounting Pronouncements Not Yet Adopted

The Company has reviewed all accounting pronouncements issued during the nine months ended September 30, 2021 and concluded they were either not applicable or not expected to have a material impact on the Company’s condensed consolidated financial statements.

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, 2021, the Company had approximately $26.1 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, 2021, the Company expects to recognize approximately $20.7 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, 2021		December 31, 2020
Trade and client receivables, net of allowance	$	58,231	$	47,018
Contract liabilities
Deferred revenue	20,742		16,801
Deferred revenue (component of other liabilities, noncurrent)	5,356		4,177

During the three and nine months ended September 30, 2021, changes in the contract liabilities balances were a result of normal business activity and deferral, and subsequent recognition, of revenue related to arrangements with freelancers subject to tiered service fees and related allocation of transaction price to material rights.

Revenue recognized during the three and nine months ended September 30, 2021 that was included in deferred revenue as of June 30, 2021 and December 31, 2020 was $6.6 million and $14.0 million, respectively. 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.

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, 2021 and December 31, 2020. 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, 2021
	Level I		Level II		Level III		Total
Cash equivalents
Money market funds	$	578,138	$	—	$	—	$	578,138

Marketable securities
Commercial paper	—		63,721		—		63,721

U.S. government securities	9,981		—		—		9,981
Corporate bonds	—		14,652		—		14,652
Asset-backed securities	—		8,411		—		8,411
Total financial assets	$	588,119	$	86,784	$	—	$	674,903


	December 31, 2020
	Level I		Level II		Level III		Total
Cash equivalents
Money market funds	$	65,723	$	—	$	—	$	65,723
Commercial paper	—		5,999		—		5,999
Marketable securities
Commercial paper	—		50,965		—		50,965
Treasury Bills	4,499		—		—		4,499
U.S. government securities	20,106		—		—		20,106
Total financial assets	$	90,328	$	56,964	$	—	$	147,292

For each of the three and nine months ended September 30, 2021 and 2020, the gross unrealized gains and losses on the Company’s marketable securities were immaterial. As of September 30, 2021 and 2020, 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, 2021 and 2020.

As of December 31, 2020, the Company had debt obligations outstanding of $10.8 million under the Company’s Loan and Security Agreement, as amended, which is referred to as the Loan Agreement. As of September 30, 2021, the Loan Agreement had been terminated and no amounts thereunder were outstanding. See “Note 7—Debt” for additional information. The Company considered the balances outstanding under the Loan Agreement to be Level II liabilities as of December 31, 2020.

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, 2021 and December 31, 2020 (in thousands):


	September 30, 2021		December 31, 2020
Cash and cash equivalents	$	600,077	$	94,081
Restricted cash	3,840		3,340
Funds held in escrow, including funds in transit	172,691		135,042
Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statement of cash flows	$	776,608	$	232,463

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	September 30, 2021		December 31, 2020
Computer equipment and software	$	5,321	$	4,819
Internal-use software and platform development	24,781		20,727
Leasehold improvements	11,752		14,613
Office furniture and fixtures	3,353		3,354
Total property and equipment	45,207		43,513
Less: accumulated depreciation	(22,863)		(15,374)
Property and equipment, net	$	22,344	$	28,139

For the three months ended September 30, 2021 and 2020, depreciation expense related to property and equipment was $0.8 million and $1.0 million, respectively. For the nine months ended September 30, 2021 and 2020, depreciation expense related to property and equipment was $2.8 million and $2.5 million, respectively.

For the three months ended September 30, 2021 and 2020, the Company capitalized $0.7 million and $2.3 million of internal-use software and platform development costs, respectively. For the nine months ended September 30, 2021 and 2020, the Company capitalized $4.1 million and $5.6 million of internal-use software and platform development costs, respectively.

For the three months ended September 30, 2021 and 2020, amortization expense related to the capitalized internal-use software and platform development costs was $1.6 million and $1.0 million, respectively. For the nine months ended September 30, 2021 and 2020, amortization expense related to the capitalized internal-use software and platform development costs was $4.7 million and $3.0 million, respectively.

In 2021, the Company shifted to a flexible work model for its workforce and is evaluating its current need for office space. In April 2021, the Company executed a sub-sublease agreement to sublease the entirety of its former headquarters in Santa Clara, California. The sub-sublease agreement became effective in May 2021 upon receipt of the consent of the Company’s landlord and master lessor. The term of the sub-sublease commenced on June 1, 2021 and expires on May 31, 2024 unless terminated earlier in accordance therewith. Rent payments begin on January 1, 2022 and approximate $0.1 million per month. Rent payments will be recorded within general and administrative expenses within the Company’s condensed consolidated statements of operations. Neither party has the option to renew or extend the sub-sublease agreement.

Under the sub-sublease agreement, the Company is not relieved of its original obligation with the master lessor that expires on October 15, 2028. The Company determined the sub-sublease agreement is an operating lease, which is consistent with the classification of the original sublease with the master lessor. As a result of the execution of the sub-sublease agreement, the Company determined that indicators of impairment existed with respect to the asset group that consisted of the Santa Clara office operating lease asset and associated leasehold improvements, furniture

and fixtures, and hardware. Accordingly, the Company conducted an impairment test to assess whether the fair value of the asset group was lower than its carrying value. The results of the impairment test indicated that the fair value of the asset group was lower than its carrying value. The Company determined the fair value of the asset group using the discounted cash flow method. The assumptions used in the discounted cash flow analysis included projected sublease income over the remaining term of the original sublease with the master lessor, expected downtime prior to the commencement of future subleases, and a discount rate the Company believes reflects the level of risk associated with these future cash flows. The Company considers these assumptions to be Level III inputs in accordance with the fair value hierarchy described in “Note 4—Fair Value Measurements.”

During the nine months ended September 30, 2021, the Company recorded an impairment charge of $7.4 million, of which $4.3 million was allocated to the Santa Clara office operating lease asset, $2.9 million was allocated to the associated leasehold improvements, and $0.2 million was allocated to the associated furniture and fixtures and hardware. The Company recorded this impairment charge within general and administrative expenses within its condensed consolidated statement of operations for the nine months ended September 30, 2021.

Intangible Assets, Net

All of the Company’s identifiable intangible assets were fully amortized as of March 31, 2021. For the three months ended September 30, 2020, amortization expense of intangible assets was $0.7 million. For the nine months ended September 30, 2021 and 2020, amortization expense of intangible assets was $0.7 million and $2.0 million, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	September 30, 2021		December 31, 2020
Accrued compensation and related benefits	$	17,896	$	14,007
Accrued freelancer costs	1,335		1,235
Accrued indirect taxes	3,166		3,818
Accrued vendor expenses	13,847		8,662
Accrued payment processing fees	2,005		1,219
Operating lease liability, current	6,270		3,725
Other	529		202
Total accrued expenses and other current liabilities	$	45,048	$	32,868

Stockholders’ Equity

On January 18, 2021, which is referred to as the CEO Award Grant Date, the compensation committee of the board of directors of the Company approved a stock option grant, which is referred to as the CEO Award, exercisable for up to 1,500,000 shares of the Company’s common stock to Hayden Brown, the Company’s President and Chief Executive Officer, under the Company’s 2018 Employee Incentive Plan, which is referred to as the 2018 EIP. The CEO Award is subject to a service-based vesting requirement, which is referred to as the Service Condition, and a performance-based vesting requirement, which is referred to as the Market Condition. In order for any shares subject to the CEO Award to be exercisable, both the Service Condition and the Market Condition must be satisfied with respect to such shares. The CEO Award vests with respect to the Service Condition in sixteen equal quarterly installments following the CEO Award Grant Date, subject to Ms. Brown’s continuous service to the Company as Chief Executive Officer, Executive Chairperson, or any C-level officer position. The CEO Award vests with respect to the Market Condition upon the achievement of certain volume weighted-average common stock price targets measured over any consecutive 90-day period between the CEO Award Grant Date and April 18, 2026. The 90-day volume weighted-average common stock price targets, and the number of shares of the CEO Award that become

vested with respect to the Market Condition upon the achievement of each such target, are reflected in the following table:


Stock Price						Number of Shares Vested
$60						100,000
$70						200,000
$80						300,000
$90						400,000
$100						500,000

Stock-based compensation expense associated with the CEO Award will be recognized over the longer of the expected achievement period for the Market Condition and the Service Condition. The Market Condition period and the valuation of each tranche of the CEO Award were determined using a Monte Carlo simulation. Stock-based compensation expense for the CEO Award is recorded as a component of general and administrative expense in the Company’s condensed consolidated statement of operations. In the event the Market Condition is met prior to the expected achievement period, any then-unrecognized compensation expense associated with the shares that have vested with respect to both the Market Condition and the Service Condition will be recognized immediately in the Company’s condensed consolidated statements of operations.

For the three and nine months ended September 30, 2021, the Company recorded stock-based compensation expense of $3.0 million and $8.3 million, respectively, related to the CEO Award. As of September 30, 2021, total unrecognized stock-based compensation cost was $20.5 million, which is expected to be recognized over a weighted-average period of 2.0 years.

On February 17, 2021, which is referred to as the PSU Grant Date, the compensation committee of the board of directors of the Company approved performance stock unit awards, which are referred to as PSU Awards, to certain members of the Company’s leadership team under the 2018 EIP. The number of performance stock units, which are referred to as PSUs, that are earned by the recipients, which is referred to as Earned PSUs, will be determined based on the Company’s revenue achievement during fiscal year 2021, which is referred to as the PSU Performance Condition. Upon attainment of the PSU Performance Condition, the Earned PSUs will be subject to a time-based vesting requirement conditioned on the recipient of the PSU Award continuing to provide service to the Company for four years from the PSU Grant Date, which is referred to as the PSU Service Condition. The Earned PSUs will vest with respect to 25% of the Earned PSUs on the one-year anniversary of the PSU Grant Date and 1/16th of the Earned PSUs on a quarterly basis thereafter.

Stock-based compensation expense associated with the PSU Awards is a component of operating expenses in the Company’s condensed consolidated statements of operations and will be recognized over the longer of the expected achievement period for the PSU Performance Condition and the PSU Service Condition. The grant date fair value of the PSU Awards was determined using the Company’s closing common stock price on the PSU Grant Date multiplied by the number of PSUs that were probable of being earned on the PSU Grant Date. At each interim reporting date prior to the date on which the compensation committee of the board of directors certifies the PSU Performance Condition, the number of PSUs that are probable of being earned is reassessed and any changes are reflected in the total stock-based compensation expense associated with the PSU Awards.

During the three and nine months ended September 30, 2021, the Company recorded stock-based compensation expense of $0.9 million and $2.2 million related to the PSU Awards. As of September 30, 2021, total unrecognized stock-based compensation cost was $4.1 million, which is expected to be recognized over a weighted-average period of 1.9 years.

Note 6—Commitments and Contingencies

Letters of Credit

In conjunction with the Company’s operating lease agreements, as of September 30, 2021 and December 31, 2020, the Company had three irrevocable letters of credit outstanding in the aggregate amounts of $0.8 million and $1.0 million, respectively. The letters of credit are collateralized by restricted cash in the same amount. No amounts had been drawn against these letters of credit as of September 30, 2021 and December 31, 2020.

Contingencies

The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Potential contingencies may include various claims and litigation or non-income tax matters that arise from time to time in the normal course of business. Due to uncertainties inherent in such contingencies, 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, litigation, or other contingencies 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, litigation, or other contingencies are resolved.

As of September 30, 2021 and December 31, 2020, 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, including non-income tax matters, that could reasonably be expected to have a material adverse effect on its business, operating results, cash flows, or financial condition. Accordingly, the amounts accrued for contingencies for which the Company believes a loss is probable were not material as of September 30, 2021 and December 31, 2020.

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 and certain other premium offerings, 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.

Note 7—Debt

The following table presents the carrying value of the Company’s debt obligations as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021			December 31, 2020
Convertible Senior Notes	$	575,000		$	—
First Term Loan	—			6,250
Second Term Loan	—			4,500

Total debt	575,000			10,750
Less: unamortized debt issuance costs	(14,441)			(27)
Balance	560,559			10,723
Debt, current	—			(7,581)
Debt, noncurrent	$	560,559		$	3,142
Weighted-average interest rate	0.76		%	5.64		%

Term Debt

Under the Loan Agreement, the aggregate amount of the facility was up to $49.0 million, consisting of a term loan in the original principal amount of $15.0 million, which is referred to as the First Term Loan, a term loan in the original principal amount of $9.0 million, which is referred to as the Second Term Loan, and, together with the First Term Loan, as the Term Loans, and a revolving line of credit, which permitted borrowings of up to $25.0 million subject to customary conditions.

On August 5, 2021, the Company entered into an agreement, which is referred to as the Payoff Agreement, with its lender to fully repay the remaining outstanding principal amounts plus accrued and unpaid interest outstanding under its Term Loans and terminate the Loan Agreement. There were no amounts outstanding under the Company’s revolving line of credit as of August 5, 2021. Pursuant to the Payoff Agreement, the full repayment of the Term Loans amounted to $5.8 million, and as of August 5, 2021, the Loan Agreement, including the Term Loans and revolving line of credit, was terminated. As of September 30, 2021, no amounts remained outstanding under the Loan Agreement. The Company was in compliance with its covenants under the Loan Agreement as of August 5, 2021 and December 31, 2020.

During the three and nine months ended September 30, 2021, the Company repaid $3.8 million and $6.3 million related to the First Term Loan, respectively, and $3.2 million and $4.5 million related to the Second Term Loan, respectively. 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. As of December 31, 2020, no amounts were outstanding on the Company’s revolving line of credit.

Convertible Senior Notes

On August 10, 2021, the Company issued, at par value, $575.0 million aggregate principal amount of 0.25% convertible senior notes due 2026, which are referred to as the Notes. The issuance included the full exercise of an option granted by the Company to the initial purchasers of the Notes to purchase an additional $75.0 million aggregate principal amount of Notes. The Notes were issued pursuant to and are subject to the terms and conditions of an indenture, which is referred to as the Indenture, between the Company and Wells Fargo Bank, National Association, as trustee. The Notes were offered and sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

The Notes are senior, unsecured obligations of the Company and will bear interest at a rate of 0.25% per year. Interest will accrue from August 10, 2021 and will be payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2022, and the principal amount of the Notes will not accrete. The Notes will mature on August 15, 2026, unless earlier redeemed, repurchased, or converted in accordance with the terms of the Notes.

Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount at the option of the holder (i) prior to the close of business on the business day immediately preceding May 15, 2026, only upon satisfaction of certain conditions and during certain periods specified below, and (ii) on or after May 15, 2026, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date:

•during any calendar quarter commencing after the calendar quarter ending on December 31, 2021, if the last reported sale price of the Company’s common stock is greater than or equal to 130% of the conversion price for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter of the conversion price on each applicable trading day;

•during the five consecutive business day period after any five consecutive trading day period, which is referred to as the Measurement Period, in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;

•if the Company calls such Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; and

•upon the occurrence of specified corporate events described in the Indenture.

Upon conversion, the Notes may be settled in shares of the Company’s common stock, cash or a combination of cash and shares of the common stock, at the election of the Company. The Notes have an initial conversion rate of 15.1338 shares of common stock per $1,000 principal amount of Notes, which is subject to adjustment in certain circumstances. This is equivalent to an initial conversion price of approximately $66.08 per share of the Company’s common stock. The conversion rate is subject to customary adjustments under certain circumstances in accordance with the terms of the Indenture. In addition, if certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) occur or if the Company issues a notice of redemption with respect to the Notes prior to the maturity date, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The Company may redeem for cash all or any portion of the Notes (subject to a partial redemption limitation), at the Company’s option, on or after August 20, 2024, if the last reported sale price per share of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.

Upon the occurrence of a fundamental change (as defined in the Indenture), subject to certain conditions, holders have the right to require the Company to repurchase for cash all or a portion of their Notes at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest thereon, if any, until, but excluding, the fundamental change repurchase date.

The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The net proceeds from the issuance of the Notes were approximately $560.1 million, after deducting debt issuance costs. The total debt issuance costs incurred and recorded by the Company amounted to $14.9 million, which were recorded as a reduction to the face amount of the Notes and will be amortized to interest expense using the effective interest method over the contractual term of the Notes.

For the three and nine months ended September 30, 2021, interest expense related to the Notes and amortization of the issuance costs was $0.6 million. The effective interest rate for the three and nine months ending September 30, 2021 was approximately 0.78%. As of September 30, 2021, the if-converted value of the Notes did not exceed the outstanding principal amount. As of September 30, 2021, the total estimated fair value of the Notes was $588.8 million and was determined based on a market approach using actual bids and offers of the Notes in an over-the-counter market on the last trading day of the period. The Company considers these assumptions to be Level II inputs in accordance with the fair value hierarchy described in “Note 4—Fair Value Measurements.”

Capped Calls

In connection with the pricing of the Notes on August 5, 2021 and in connection with the full exercise by the initial purchasers on August 9, 2021 of their option to purchase additional Notes, the Company used approximately $49.4 million of the net proceeds from the issuance of the Notes to enter into privately negotiated capped call transactions, which are referred to as the Capped Calls, with various financial institutions.

Subject to customary anti-dilution adjustments substantially similar to those applicable to the Notes, the Capped Calls cover the number of shares of the Company’s common stock initially underlying the Notes. By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event a conversion of the Notes is settled in cash, to reduce its cash payment obligation) in the event that at the time of conversion of the Notes its common stock price per share exceeds the conversion price of the Notes, with such reduction subject to a cap based on the cap price. If, however, the market price per share of common stock, as measured under the terms of the Capped Calls, exceeds the cap price of the Capped Calls, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of common stock exceeds the cap price of the Capped Calls. The initial cap price of the Capped Calls is $92.74 per share of common stock, which represents a premium of 100% over the last reported sale price of the common stock of $46.37 per share on August 5, 2021, and is subject to certain customary adjustments under the terms of the Capped Calls; provided that the cap price will not be reduced to an amount less than the strike price of $66.08 per share.

The Capped Calls are separate transactions and are not part of the terms of the Notes. The Capped Calls meet the criteria for classification as equity and, as such, are not remeasured each reporting period and are included as a reduction to additional paid-in-capital within stockholders’ equity.

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,
	2021		2020		2021		2020
Numerator:
Net loss	$	(9,311)	$	(2,747)	$	(33,684)	$	(23,792)


Denominator:
Weighted-average shares used to compute net loss per share, basic and diluted	127,914,696		120,680,797		126,651,490		117,120,815

Net loss per share, basic and diluted	$	(0.07)	$	(0.02)	$	(0.27)	$	(0.20)

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,
	2021	2020
Options to purchase common stock	4,402,667	7,744,337
Common stock issuable upon exercise of common stock warrants	400,000	450,000
Common stock issuable upon vesting of restricted stock units	4,663,447	5,983,872
Common stock issuable in connection with employee stock purchase plan	262,029	898,426
Common stock issuable in connection with convertible senior notes	8,701,935	—
Total	18,430,078	15,076,635

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,
	2021		2020		2021		2020
Marketplace	$	117,783	$	88,040	$	336,913	$	241,286
Managed services	10,358		8,708		29,028		26,189
Total revenue	$	128,141	$	96,748	$	365,941	$	267,475

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,
	2021		2020		2021		2020
Freelancers
United States	$	18,429	$	15,832	$	55,308	$	44,129
India	11,109		8,796		31,430		24,148
Philippines	8,602		5,995		23,668		16,436
Rest of world	37,046		28,120		107,112		78,308
Total freelancers	75,186		58,743		217,518		163,021
Clients
United States	39,661		28,861		110,275		76,174
Rest of world	13,294		9,144		38,148		28,280
Total clients	52,955		38,005		148,423		104,454
Total revenue	$	128,141	$	96,748	$	365,941	$	267,475

Substantially all of the Company’s long-lived assets were located in the United States as of September 30, 2021 and December 31, 2020.

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

Independent talent is an increasingly sought-after, critical, and expanding segment of the global workforce. We operate the world’s largest work marketplace that connects businesses, which we refer to as clients, with independent talent, as measured by gross services volume, which we refer to as GSV. We define freelancers as users that advertise and provide services to clients through our work marketplace, and we define clients as users that work with freelancers through our work marketplace. Freelancers on our work marketplace include independent professionals and agencies of varying sizes. The clients on our work marketplace range in size from small businesses to Fortune 100 companies.

Impact of the COVID-19 Pandemic on Our Business

The COVID-19 pandemic and the resulting restrictions intended to prevent its spread have accelerated the secular shift toward remote and independent work. We derive a substantial portion of our GSV and revenue from small- and medium-sized businesses, but we continue to see businesses of all sizes use our work marketplace in a recurring way for larger, more complex projects. We expect our business to continue to grow over time, and while we have not incurred significant disruptions to our business thus far from the COVID-19 pandemic, we continue to monitor the potential impact it could have on our business as well as various uncertainties, which include, but are not limited to, the duration of the pandemic, its effect on the economy, its impact on our users, including their demand for talent on our work marketplace as the pandemic subsides, and other factors identified in Part II, Item 1A “Risk Factors” in this Quarterly Report, including the risk factor titled “Our business experienced, and may again experience, an adverse impact from the ongoing COVID-19 pandemic. In addition, users may reduce their use of our work marketplace as the pandemic continues to subside and the restrictions intended to prevent its spread are relaxed or lifted.”

Key Financial and Operational Metrics

As of and for the three and nine months ended September 30, 2021, our key financial and operating metrics are as follows:


	Three Months Ended September 30,						% Change		Nine Months Ended September 30,						% Change
	2021			2020					2021			2020

	(in thousands, except percentages)
GSV	$	903,989		$	654,538		38	%	$	2,566,572		$	1,795,982		43	%
Marketplace revenue	$	117,783		$	88,040		34	%	$	336,913		$	241,286		40	%
Marketplace take rate	13.2		%	13.6		%	(0.4)	%	13.3		%	13.6		%	(0.3)	%
Net loss	$	(9,311)		$	(2,747)		(239)	%	$	(33,684)		$	(23,792)		(42)	%
Adjusted EBITDA1	$	8,216		$	6,673		23	%	$	22,396		$	4,471		401	%

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,				% Change
	2021		2020

	(active clients are in thousands)
Active clients	752		602		25	%
GSV per active client	$	4,375	$	3,896	12	%

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. 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 certain details 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.

Gross Services Volume (GSV)

GSV is comprised of 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 is an important metric because it represents the amount of business transacted through our work marketplace.

Active Clients and GSV per Active Client

We define an active client as a client that has had spend activity on our work marketplace during the 12 months preceding the date of measurement. GSV per active client is calculated by dividing total GSV during the four quarters ended on the date of measurement by the number of active clients at the date of measurement. We believe that the number of active clients and GSV per active client are indicators of the growth and overall health of our business. The number of active clients is a primary driver of GSV and, therefore, marketplace revenue.

Marketplace Revenue

Marketplace revenue, which represents the majority of our revenue, is the primary driver of our business and provides comparability to other online marketplaces. Marketplace revenue is generated from our Upwork Basic, Plus, and Enterprise and other premium offerings and is primarily comprised of both the service fees paid by freelancers as a percentage of the total amount that freelancers charge clients for services accessed through our work marketplace and, to a lesser extent, payment processing and administration fees paid by clients.

Marketplace Take Rate

Marketplace take rate measures the correlation between marketplace revenue and GSV from our marketplace offerings and is a key indicator of how well we monetize spend from our Upwork Basic, Plus, and Enterprise and other premium offerings on our work marketplace. Marketplace take rate is calculated by dividing marketplace revenue by GSV from our marketplace offerings.

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,
	2021		2020		2021		2020
Net Loss	$	(9,311)	$	(2,747)	$	(33,684)	$	(23,792)
Add back (deduct):
Stock-based compensation expense	13,906		6,856		38,666		19,527
Depreciation and amortization	2,439		2,658		8,187		7,444
Interest expense	746		152		1,055		640
Other (income) expense, net	222		(452)		161		31
Income tax provision	26		18		59		57
Tides Foundation common stock warrant expense	188		188		563		564
Impairment expense	—		—		7,389		—
Adjusted EBITDA	$	8,216	$	6,673	$	22,396	$	4,471

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 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.

Components of Our Results of Operations

Marketplace Revenue. Marketplace revenue represents the majority of our revenue and is generated from our Upwork Basic, Plus, and Enterprise and other premium offerings. Under these marketplace offerings, we generate revenue from both freelancers and clients.

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. 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 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.