UPWORK INC. 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 endedSeptember 30, 2021 , our key financial and operating metrics are as follows: Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change (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 withU.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 underU.S. GAAP. 18 --------------------------------------------------------------------------------
As of September 30, %
2021 2020 Change
(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.
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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 Nine Months Ended
September 30, 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
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•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. 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, 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.
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.
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.
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; impairment expense; and insurance.
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.
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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Revenue
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
Cost of revenue(1) 34,933 26,596 98,457 75,489
Gross profit 93,208 70,152 267,484 191,986
Operating expenses
Research and development(1) 30,873 20,833 85,610 60,728
Sales and marketing(1) 43,192 33,577 128,613 98,695General and administrative(1) 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)
(1) Includes stock-based compensation expense as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Cost of revenue $ 202 $ 203 $ 582 $ 579
Research and development 4,036 2,567 11,321 7,286
Sales and marketing 1,472 1,212 4,363 3,452
General and administrative 8,196 2,874 22,400 8,210
Total stock-based compensation
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Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
Revenue
(in thousands, except
percentages) Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Marketplace $ 117,783 $ 88,040 $ 29,743 34 % $ 336,913 $ 241,286 $ 95,627 40 %
Percentage of total
revenue 92 % 91 % 92 % 90 %
Managed services $ 10,358 $ 8,708 1,650 19 % $ 29,028 $ 26,189 2,839 11 %
Percentage of total
revenue 8 % 9 % 8 % 10 %
Total revenue $ 128,141 $ 96,748 $ 31,393 32 % $ 365,941 $ 267,475 $ 98,466 37 %
In the third quarter of 2021, we continued to execute on our strategic
initiatives, including investing in research and development to build new
product features, prioritizing our advertising efforts to reach new and existing
clients seeking to engage with independent talent, and investing in marketing to
accelerate the acquisition of new clients and drive brand awareness. As a
result, the number of active clients increased 25% as of September 30, 2021
compared to the same period in 2020, and our GSV per active client increased 12%
as of September 30, 2021 compared to the same period in 2020. The growth in
active clients and GSV per active client contributed to the growth of GSV and
marketplace revenue. For the three and nine months ended September 30, 2021 , GSV
increased 38% and 43%, respectively, as compared to the same periods in 2020.
Marketplace revenue was driven by client spend, which for the three and nine
months ended September 30, 2021 , drove increases in freelancer service fees of
33% and 39%, respectively, as compared to the same periods in 2020, and client
payment processing and administrative fees of 39% and 43%, respectively, as
compared to the same periods in 2020.
Marketplace revenue grew more slowly than GSV from our marketplace offerings,
and for the three and nine months ended September 30, 2021 , our marketplace take
rate was 13.2% and 13.3%, respectively, as compared to 13.6% for the same
periods in 2020. This trend was the result of a few factors. In particular, we
have seen the initial client cohorts following the start of the COVID-19
pandemic mature into higher value clients and continue to increase their spend
with particular freelancers, which resulted in a higher mix of freelancers at
the lower rates of our tiered service fee structure. Additionally, in the fourth
quarter of 2020, to drive GSV, we increased the number of free "Connects"
(virtual tokens that allow freelancers to bid on projects on our platform)
issued to freelancers, which drove revenue and GSV but also resulted in
freelancers purchasing fewer Connects and memberships during the three and nine
months ended September 30, 2021 , which resulted in slightly lower revenue as a
percentage of GSV during the three and nine months ended September 30, 2021 .
For the three and nine months ended September 30, 2021 , managed services revenue
increased as a result of increased spend from existing clients. For the three
and nine months ended September 30, 2021 , managed services revenue grew at a
slower rate than our marketplace revenue.
Cost of Revenue and Gross Margin
(in thousands, except
percentages) Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Cost of revenue $ 34,933 $ 26,596 $ 8,337 31 % $ 98,457 $ 75,489 $ 22,968 30 %
Components of cost of
revenue:
Cost of freelancer
services to deliver
managed services 8,189 7,093 1,096 15 % 23,192 21,327 1,865 9 %
Other components of
cost of revenue 26,744 19,503 7,241 37 % 75,265 54,162 21,103 39 %
Total gross margin 73 % 73 % 73 % 72 %
For the three and nine months ended
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primarily due to increased client spend, as well as increases in cost of
freelancer services to deliver managed services resulting from increases in
managed services revenue for the three and nine months ended September 30, 2021 ,
as compared to the same periods in 2020. Additionally, for the nine months ended
September 30, 2021 , third-party hosting costs increased $1.6 million , as
compared to the same period in 2020, driven by our use of two Amazon Web
Services , which we refer to as AWS, data centers during the period as we
complete our migration from the AWS facility in California to the AWS facility
in Oregon .
We expect cost of revenue to increase in absolute dollars in future periods as
we continue to support growth on our work marketplace. 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 these
items could fluctuate and affect our cost of revenue in the future. Because our
managed services revenue and marketplace revenue grow at different rates, we
expect gross profit to increase in absolute dollars in future periods, although
gross margin, expressed as a percentage of total revenue, may vary from period
to period.
Research and Development
(in thousands, except
percentages) Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Research and development $ 30,873 $ 20,833 $ 10,040 48 % $ 85,610 $ 60,728 $ 24,882 41 %
Percentage of total
revenue 24 % 22 % 23 % 23 %
For the three and nine months ended September 30, 2021 , research and development
expense increased primarily due to our ongoing and significant investments to
build new product features and launch new offerings. Specifically, investments
we made to increase the size of our research and development workforce resulted
in increases in personnel-related costs of $6.3 million and $17.5 million ,
respectively, as compared to the same periods in 2020, as well as increases in
software licenses and other costs of $1.0 million and $2.0 million ,
respectively. Additionally, during the three and nine months ended September 30,
2021 , we capitalized less internal-use software and platform development costs
than in the third quarter of 2020, when we capitalized an incremental $1.2
million .
We believe continued investments in research and development are important to
attain our strategic objectives, and we expect research and development 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.
Sales and Marketing
(in thousands, except
percentages) Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Sales and marketing $ 43,192 $ 33,577 $ 9,615 29 % $ 128,613 $ 98,695 $ 29,918 30 %
Percentage of total
revenue 34 % 35 % 35 % 37 %
For the three and nine months ended September 30, 2021 , sales and marketing
expense increased primarily due to increases in marketing and brand awareness
campaigns of $5.9 million and $22.4 million , respectively, as compared to the
same periods in 2020, as well as increases in personnel-related costs of $2.4
million and $5.8 million , respectively.
In an effort to further our acquisition of, and achieve increased spend from,
clients, we will continue to invest in marketing and brand awareness, and, to a
lesser extent, sales. In particular, we expect to increase our investment in
brand marketing beginning in the fourth quarter of 2021 and expand our sales
team beginning toward the end of the fourth quarter of 2021.
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General and Administrative
(in thousands, except
percentages) Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
General and
administrative $ 26,083 $ 18,047 $ 8,036 45 % $ 81,969 $ 52,973 $ 28,996 55 %
Percentage of total
revenue 20 % 19 % 22 % 20 %
For the three and nine months ended September 30, 2021 , general and
administrative expense increased primarily due to increases in personnel-related
costs of $7.6 million and $20.6 million , respectively, as compared to the same
periods in 2020, primarily because of increased stock-based compensation expense
related to executive compensation arrangements. Additionally, for the nine
months ended September 30, 2021 , we incurred an impairment charge of $7.4
million related to certain of our operating lease assets and associated property
and equipment.
To achieve our strategic objectives, we expect to continue to invest in
corporate infrastructure. Additionally, we recently shifted to a flexible work
model for our workforce and are evaluating our current need for office space. As
a result, we may determine to either close or sublease certain of our other
offices, either of which could result in further impairment charges being
recognized in general and administrative expense.
Provision for Transaction Losses
(in thousands, except
percentages) Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Provision for
transaction losses $ 1,377 $ 724 $ 653 90 % $ 3,701 $ 2,654 $ 1,047 39 %
Percentage of total
revenue 1 % 1 % 1 % 1 %
For the three and nine months ended September 30, 2021 , provision for
transaction losses represented 1% of total revenue. We expect provision for
transaction losses to approximate 1% of revenue and to increase proportionally
as GSV grows.
Interest Expense and Other (Income) Expense, Net
(in thousands, except
percentages) Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Interest expense $ 746 $ 152 $ 594 391 % $ 1,055 $ 640 $ 415 65 %
Other (income) expense,
net 222 (452) 674 (149) % 161 31 130 419 %
For the three and nine months ended September 30, 2021 , interest expense
increased as a result of the $575.0 million aggregate principal amount of 0.25%
convertible senior notes due 2026 that we issued in a private offering in August
2021 , which we refer to as the Notes. See "Note 7-Debt" of the notes to our
condensed consolidated financial statements included elsewhere in this Quarterly
Report for additional information. For the three and nine months ended
September 30, 2021 , other expense, net was driven by net foreign currency
transaction losses.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and
marketable securities, including the net proceeds from the sale of the Notes.
Our cash equivalents and marketable securities primarily consist of money market
funds, commercial paper, U.S. government securities, corporate bonds, and
asset-backed securities. As of September 30, 2021 and December 31, 2020 , we had
$600.1 million and $94.1 million in cash and cash equivalents, respectively. As
of September 30, 2021 and December 31, 2020 , we had $96.8 million and $75.6
million in marketable securities, respectively.
We believe our existing cash and cash equivalents, marketable securities, and
cash flow from operations (in periods in which we generate cash flow from
operations) will be sufficient to meet our working capital requirements for at
least the next 12 months. To the extent existing cash and cash equivalents, cash
from marketable securities, and cash
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from operations (in periods in which we generate cash flow from operations) are
insufficient to fund our working capital requirements, or should we require
additional cash for other purposes, we will need to raise additional funds. In
the future, we may attempt to raise additional capital through the sale of
equity securities or through equity-linked or debt financing arrangements, as we
did in the third quarter of 2021. If we raise additional funds by issuing equity
or equity-linked securities, the ownership and economic interests of our
existing stockholders will be diluted. If we raise additional financing by
incurring additional indebtedness, we will be subject to additional debt service
requirements and could also be subject to additional restrictive covenants, such
as limitations on our ability to incur additional debt, and other operating
restrictions that could adversely impact our ability to conduct our business.
Any future indebtedness we incur may result in terms that could also be
unfavorable to our equity investors. There can be no assurances that we will be
able to raise additional capital on terms we deem acceptable, or at all. The
inability to raise additional capital as and when required would have an adverse
effect, which could be material, on our results of operations, financial
condition and ability to achieve our business objectives.
We also believe that our principal sources of liquidity will allow us to manage
the impact of the COVID-19 pandemic on our business operations for the
foreseeable future, which could include reductions in revenue and delays in
payments from users, as further described below in "Risk Factors-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" in Part II, Item 1A in this
Quarterly Report. The challenges posed by the COVID-19 pandemic on our business
are expected to continue to evolve. Consequently, we will continue to evaluate
our financial position in light of future developments, particularly those
relating to the COVID-19 pandemic.
Escrow Funding Requirements
As a licensed internet escrow agent, we offer escrow services to users of our
work marketplace and, as such, we are required to hold our users' escrowed cash
and in-transit cash in trust as an asset and record a corresponding liability
for escrow funds held on behalf of freelancers and clients on our balance sheet.
We expect the balances of our funds held in escrow, including funds held in
transit, and the related liability to grow as GSV grows and may vary from period
to period. Escrow regulations require us to fund the trust with our operating
cash to cover shortages due to the timing of cash receipts from clients for
completed hourly billings. Freelancers submit their billings for hourly
contracts to their clients on a weekly basis every Sunday, and the aggregate
amount of such billings is added to escrow funds payable to freelancers on the
same day. As of each Sunday of each week, we have not yet collected funds for
hourly billings from clients as these funds are in transit. Therefore, in order
to satisfy escrow funding requirements, every Sunday we fund the shortage of
cash in trust with our own operating cash and typically collect this cash
shortage from clients within the next several days. As a result, we expect our
total cash and cash flows from operating activities to be impacted when a
quarter ends on a Sunday. As of September 30, 2021 and December 31, 2020 , funds
held in escrow were $172.7 million and $135.0 million , respectively.
Term and Revolving Loans
In September 2017 , we entered into a Loan and Security Agreement, as amended,
which we refer to as the Loan Agreement. 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 we refer to as the First Term
Loan, a term loan in the original principal amount of $9.0 million , which we
refer 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. The First Term Loan was scheduled
to mature in March 2022 , and the Second Term Loan and revolving line of credit
were scheduled to mature in September 2022 . All borrowings under the Loan
Agreement bore interest at floating rates.
On August 5, 2021 , we entered into an agreement, which we refer to as the Payoff
Agreement, with our lender to fully repay the remaining outstanding principal
amounts plus accrued and unpaid interest outstanding under our Term Loans and
terminate the Loan Agreement. There were no amounts outstanding under our line
of credit as of August 5, 2021 . Pursuant to the Payoff Agreement, the final
repayment on the Term Loans totaled $5.8 million , and as of August 5, 2021 , the
Loan Agreement, including the Term Loans and the revolving line of credit, was
terminated. As of September 30, 2021 , no amounts remained outstanding under the
Loan Agreement. We were in compliance with our covenants under the Loan
Agreement as of December 31, 2020 .
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During the three and nine months ended September 30, 2021 , we 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 , we 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 September 30, 2021 and December 31, 2020 , no amounts were outstanding on the
revolving line of credit.
Convertible Senior Notes Due 2026
On August 10, 2021 , we issued the Notes pursuant to an Indenture between us and
Wells Fargo Bank, National Association , as trustee, which we refer to as the
Indenture.
The Notes are senior, unsecured obligations and will bear interest at a rate of
0.25% per year, payable semiannually in arrears, and are due August 15, 2026 .
Upon conversion, we have an option to pay or deliver, as the case may be, cash,
shares of our common stock, or a combination of cash and shares of our common
stock. The net proceeds from the issuance of the Notes were approximately $560.1
million , after deducting debt issuance costs. We used approximately $49.4
million of the net proceeds from the Notes offering to pay the cost of the
Capped Calls (as defined below). We intend to use the remainder of the net
proceeds from the offering for general corporate purposes, including marketing,
brand awareness and sales, and which may include working capital, capital
expenditures, and investments in and acquisitions of other companies, products
or technologies that we may identify in the future.
Capped Calls
In connection with the issuance of the Notes, we used approximately $49.4
million of the net proceeds from the issuance of the Notes to enter into
privately negotiated capped call transactions, which we refer to as the Capped
Calls, with various financial institutions. The Capped Calls are expected
generally to reduce the potential dilution to our common stock upon any
conversion of the Notes and/or offset any cash payments we are required to make
in excess of the principal amount of converted Notes, as the case may be, with
such reduction and/or offset subject to a cap based on the cap price.
The initial cap price of the Capped Calls is $92.74 per share of common stock,
subject to certain customary adjustments under the terms of the Capped Calls.
See "Note 7-Debt" of the notes to our condensed consolidated financial
statements included elsewhere in this Quarterly Report for additional
information regarding the Notes and the Capped Calls.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Nine Months Ended
September 30,
2021 2020
Net cash provided by operating activities $ 23,284 $ 13,412
Net cash provided by (used in) investing activities (26,114) 7,008
Net cash provided by financing activities 546,975 39,684
Net increase in cash, cash equivalents, and restricted cash(1) $ 544,145 $ 60,104
(1) Includes increases in funds held in escrow, including funds in transit of $37.6 million and $19.4
million during the nine months ended September 30, 2021 and 2020, respectively.
Operating Activities
Our largest source of cash from operating activities is revenue generated from
our work marketplace. Our primary uses of cash from operating activities are for
personnel-related expenditures, marketing activities, including advertising,
payment processing fees, amounts paid to freelancers to deliver services for
clients under our managed services offering, and third-party hosting costs. In
addition, because we are licensed as an internet escrow agent, our total cash
and cash provided by (used in) operating activities may be impacted by the
timing of the end of our fiscal quarter as discussed in the section titled
"-Liquidity and Capital Resources-Escrow Funding Requirements."
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For the nine months ended September 30, 2021 , net cash provided by operating
activities was $23.3 million , which resulted from non-cash charges of $61.1
million , offset by a net loss of $33.7 million and net cash outflows of $4.1
million from changes in operating assets and liabilities. The change in
operating assets and liabilities primarily resulted from the increase in trade
and client receivables. Due to fluctuations in revenue and the number of
transactions on our platform, coupled with fluctuations in the timing of cash
receipts from clients, our trade and client receivables will likely continue to
fluctuate in the future.
For the nine months ended September 30, 2020 , net cash provided by operating
activities was $13.4 million , which resulted from a net loss of $23.8 million ,
offset by non-cash charges of $32.8 million and net cash inflows of $4.4 million
from changes in operating assets and liabilities. The change in operating assets
and liabilities primarily resulted from the increase in accounts payable of $5.1
million , which was a result of the timing of payments of invoices, and the
increase in accrued expenses and other current liabilities of $10.4 million ,
which was a result of additional accruals related to our ongoing marketing and
brand awareness and other efforts, partially offset by a reduction in trade and
client receivables of $12.5 million .
Investing Activities
For the nine months ended September 30, 2021 , net cash used in investing
activities was $26.1 million , which was primarily a result of investing $108.8
million in various marketable securities, as well as $4.2 million of
internal-use software and platform development costs that we paid during the
period, partially offset by proceeds from maturities of marketable securities of
$87.5 million .
For the nine months ended September 30, 2020 , net cash provided by investing
activities was $7.0 million , which was primarily a result of proceeds from
maturities of marketable securities of $89.0 million , offset by investing $70.2
million in various marketable securities, as well as $5.6 million of
internal-use software and platform development costs that we paid during the
period and purchases of property and equipment of $6.2 million primarily for
leasehold improvements and furniture related to our office lease in Chicago,
Illinois .
Financing Activities
For the nine months ended September 30, 2021 , net cash provided by financing
activities was $547.0 million , which resulted primarily from proceeds from the
Notes, net of debt issuance costs, of $560.1 million , an increase in escrow
funds payable of $37.6 million , cash received from stock option exercises of
$6.6 million , and proceeds received from our employee stock purchase plan of
$2.7 million , partially offset by purchases of the Capped Calls of $49.4 million
and repayments of borrowings on debt of $10.8 million .
For the nine months ended September 30, 2020 , net cash provided by financing
activities was $39.7 million , which resulted primarily from an increase in
escrow funds payable of $19.4 million , cash received from stock option exercises
of $23.3 million , and proceeds received from our employee stock purchase plan of
$2.7 million , partially offset by net repayments of borrowings on debt of $5.7
million .
Obligations and Other Commitments
Our principal commitments consist of obligations under
our non-cancellable operating leases for office space and the Notes. The
following table summarizes our contractual obligations as of September 30, 2021
(in thousands):
Less than 1 - 3 3 - 5 More Than
Total 1 Year Years Years 5 Years
Leases(1) $ 28,123 $ 6,542 $ 13,368 $ 4,567 $ 3,646
Convertible senior notes(2) 575,000 - - 575,000 -
Total contractual obligations
(1)Represents minimum operating lease payments under operating leases for office
facilities, excluding potential lease renewals and tenant improvement
allowances.
(2)Refer to "Note 7-Debt" of the notes to our condensed consolidated financial
statements included elsewhere in this Quarterly Report for additional
information.
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In the ordinary course of business, we enter into contracts and agreements that
contain a variety of representations and warranties and provide for
indemnification. In addition, we have entered into indemnification agreements
with our directors and executive officers and certain key employees that require
us, among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as our directors, executive officers,
or employees. The terms of such obligations may vary. To date, we have not paid
any material claims or been required to defend any actions related to our
indemnification obligations.
As of September 30, 2021 and December 31, 2020 , we had accrued liabilities
related to uncertain non-income tax positions based on management's best
estimate of its liability, which are reflected on our condensed consolidated
balance sheets. We could be subject to examination in various jurisdictions
related to income and non-income tax matters. The resolution of these types of
matters, giving recognition to the recorded reserve, could have an adverse
impact on our business.
Off-Balance Sheet Arrangements
As of September 30, 2021 , we did not have any relationships with other entities
or financial partnerships such as entities often referred to as structured
finance or special purpose entities that have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
U.S. GAAP. The preparation of the condensed consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, expenses, and related disclosures. We evaluate
our estimates and assumptions on an ongoing basis using historical experience
and other factors and adjust those estimates and assumptions when facts and
circumstances dictate. Actual results could materially differ from these
estimates and assumptions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, if different estimates reasonably could have
been used, or if changes in the estimate that are reasonably possible could
materially impact the financial statements. We believe estimates and assumptions
associated with the evaluation of revenue recognition criteria, including the
determination of revenue reporting as gross versus net in our revenue
arrangements, internal-use software and platform development costs, the fair
values of stock-based awards, and income taxes have the greatest potential
impact on our condensed consolidated financial statements. Therefore, we
consider these to be our critical accounting policies and estimates.
Except as otherwise disclosed in "Note 2-Basis of Presentation and Summary of
Significant Accounting Policies" of the notes to our condensed consolidated
financial statements included elsewhere in this Quarterly Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," there have been no material changes to our critical accounting
policies and estimates as compared to the critical accounting policies and
estimates described in our Annual Report on Form 10-K for the year ended
December 31, 2020 , which we refer to as our Annual Report.
Recent Accounting Pronouncements
See "Note 2-Basis of Presentation and Summary of Significant Accounting
Policies" of the notes to our condensed consolidated financial statements
included elsewhere in this Quarterly Report for recently issued accounting
pronouncements not yet adopted as of the date of this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We have operations both within the United States and internationally, and we are
exposed to market risks in the ordinary course of our business. These risks
primarily include interest rate and foreign currency exchange rates.
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while maximizing income without significantly increasing risk. We do not make
investments for trading or speculative purposes. Because our cash and cash
equivalents have a relatively short maturity, our portfolio's fair value is
relatively insensitive to interest rate
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changes. Borrowings under the Notes have a fixed interest rate. Borrowings under
the Loan Agreement had variable interest rates. As of September 30, 2021 , we had
$575.0 million aggregate principal amount of borrowings outstanding under the
Notes. As of December 31, 2020 , we had $10.8 million aggregate principal amount
of borrowings outstanding under our Loan Agreement. We do not believe that a
hypothetical increase or decrease in interest rates of 100 basis points would
have a material impact on our operating results or financial condition.
Foreign Currency Risk
Our operating results and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. In addition to the U.S. dollar, we offer
clients the option to settle invoices denominated in the U.S. dollar in the
following currencies: Euro, British Pound, Australian dollar, Canadian dollar,
Singapore dollar, South African rand, New Zealand dollar, Polish zloty, Swiss
franc, Norwegian krone, Danish krone, Swedish krona, Turkish lira, Japanese yen,
and Hong Kong dollar. When clients make payments in one of these currencies, we
are exposed to foreign currency risk during the period between when payment is
made and when the payment amounts settle. To mitigate this risk, we have entered
into forward contracts. As such, the impact of foreign currency exchange rate
fluctuations to our operating results have been insignificant to date.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, which we refer to as the Exchange Act, as of
September 30, 2021 . Our disclosure controls and procedures are designed to
ensure that information we are required to disclose in the reports we file or
submit under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures, and is
recorded, processed, summarized, and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission , which we refer
to as the SEC . Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of September 30, 2021 , our disclosure
controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that
occurred during the quarter ended September 30, 2021 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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