UPWORK, INC Management’s discussion and analysis of financial condition and results of operations. (Form 10-Q)
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.
Insight
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 with independent talent, as measured by gross services volume, which we refer to as GSV. GSV represents the total amount that clients spend on both our marketplace offerings and our managed services offering as well as additional fees we charge to talent for other services. We define talent as users that advertise and provide services to clients through our work marketplace, and we define clients as users that seek and work with talent through our work marketplace. Talent includes independent professionals and agencies of varying sizes. The clients on our work marketplace range in size from small businesses to Fortune 100 companies.
Recent Events
Due toRussia's invasion ofUkraine and the resulting sanctions and other actions againstRussia andBelarus , there has been uncertainty and disruption in the global economy. OnMarch 7, 2022 , we announced the suspension of business operations inRussia andBelarus , with contracts with talent or clients inRussia orBelarus required to wind down byMay 1, 2022 . The first step was shutting down support for new business generation in each country. Shortly following the announcement, talent and clients inRussia andBelarus were no longer able to sign up for new accounts, initiate new contracts, or be visible in search on our work marketplace. Contracts with talent or clients inRussia orBelarus that were in place as of the date of the announcement are allowed to remain open untilMay 1, 2022 . Approximately 10% of our total revenue in 2021 was derived from work where either the talent or the client was located in the region. Nearly all such revenue was derived from work performed by talent inside the region for clients located in other parts of the world. At the beginning of the invasion in lateFebruary 2022 , we experienced immediate reductions in activity from talent across the entire region, but since that initial impact, we have seen activity from users inUkraine rebound to almost pre-war levels. During the three months endedMarch 31, 2022 , we estimate that the loss of revenue resulting fromRussia's invasion ofUkraine and our resulting suspension of business operations inRussia andBelarus was approximately$1.0 million . We expect to see a larger impact to revenue in the second quarter due to the winding down of all contracts with talent and clients inRussia andBelarus byMay 1, 2022 and also because all three months of the quarter will be affected byRussia's invasion ofUkraine . Additionally, while approximately 25% of client spend from our web, mobile, and software development category in 2021 was derived from work where either the talent or the client was located in the region, thus far, we have not experienced a material impact to client spend from, or other activity levels related to, this category. Given the complex nature of our business and two-sided nature of our work marketplace, and with talent on our work marketplace located in over 180 countries, we are monitoring the impact on client spend from clients that have historically engaged talent in the impacted region and the extent to which those clients engage talent in other regions. As users inRussia andBelarus are able to relocate to regions where we operate, we will be eager to support them in continuing their work on our work marketplace. 17 -------------------------------------------------------------------------------- During the three months endedMarch 31, 2022 , we incurred approximately$4.3 million of expenses associated with our humanitarian response efforts related to the war againstUkraine , including a$1.1 million donation toDirect Relief International in support of the Ukrainian population and providing our team members with financial and other forms of support and paying certain expenses for those team members seeking to relocate from the affected region. In addition, we have implemented ways for clients to purchase projects from talent inUkraine as a donation, meaning the clients do not expect any work in return and we waive the talent service fees. We have also initiated a number of product enhancements to make it easier for Ukrainian talent to preserve their careers. Although the Russian war againstUkraine did not have a material adverse impact on our revenue or other financial results for the three months endedMarch 31, 2022 , at this time we are unable to fully assess the aggregate impact it will have on our business in future periods due to various uncertainties, which include, but are not limited to, the duration of the war, the ability of talent based inUkraine to continue working, the war's effect on the economy, its impact to the businesses of our clients, actions that may be taken by governmental authorities related to the war, and other factors identified in Part II, Item 1A, "Risk Factors" in this Quarterly Report, including the risk factor titled "Russia's invasion ofUkraine and our decision to suspend our business operations inRussia andBelarus have affected and may continue to affect our business and results of operations." Additionally, the ongoing COVID-19 pandemic and the resulting restrictions intended to prevent its spread have continued to accelerate the secular shift toward remote and independent work, and, with our unique, remote-based business model, the COVID-19 pandemic has not impacted our clients' access to highly skilled talent to complete short- and long-term projects on our work marketplace. While we have not incurred significant disruptions to our business thus far from the ongoing COVID-19 pandemic, we continue to actively monitor the impact on all aspects of our business.
Key financial and operational indicators
From and for the three months ended
Three Months EndedMarch 31 ,
%
(In thousands, except percentages) 2022 2021 Change GSV$ 1,001,375 $ 786,777 27 % Marketplace revenue 129,425 104,670 24 % Marketplace take rate 13.1 % 13.5 % (0.4) % Net loss$ (24,738) $ (7,835) (216) % Adjusted EBITDA1$ (433) $ 6,911 (106) % As of March 31, % (Active clients are in thousands) 2022 2021 Change Active clients 793 685 16 % GSV per active client$ 4,742 $ 4,016 18 %
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 the limitations of measuring our key financial and operational metrics,
1Adjusted 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 -------------------------------------------------------------------------------- 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 includes both client spend and additional fees charged for other services. Client spend, which we define as the total amount that clients spend on both our marketplace offerings and our managed services offering, is the primary component of GSV. GSV also includes fees charged to talent, such as for transacting payments through our work marketplace, user memberships, and purchases of "Connects" (virtual tokens that allow talent to bid on projects and paid promotional products on our work marketplace), and foreign currency exchange. GSV is an important metric because it represents the amount of business transacted through our work marketplace.
Active customers and GSV per active customer
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 on 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, in turn, marketplace revenue. Marketplace Revenue Marketplace revenue, which represents the majority of our revenue, consists primarily of revenue derived from our Upwork Basic, Plus, and Enterprise offerings. We generate marketplace revenue from both talent and clients. Revenue from our Upwork Basic and Plus offerings are primarily comprised of talent service fees, and to a lesser extent, payment processing and administration fees charged to clients. Revenue from our Upwork Enterprise offering, which we refer to as Enterprise Revenue, includes all client fees, subscriptions, and talent service fees. We also generate marketplace revenue from fees for premium offerings associated with our Upwork Basic, Plus, and Enterprise offerings, including talent memberships, purchases of Connects, and other services, such as foreign currency exchange when clients choose to pay in currencies other than theU.S. dollar, and our Upwork Payroll offering. InApril 2022 , we will be combining our Upwork Basic and Plus client offerings into our new Client Marketplace Plan, which simplifies our client pricing model for non-Enterprise clients. This model makes available the most popular features of the current Upwork Plus offering, while eliminating the monthly client subscription fees and moving to a client marketplace fee of 5% on each transaction-or 3% if paid via ACH for eligible clients.
Market acceptance rate
Marketplace take rate measures the correlation between marketplace revenue and marketplace GSV and is calculated by dividing marketplace revenue by marketplace GSV. Marketplace take rate is an important metric because it is the key indicator of how well we monetize spend on our work marketplace from our Upwork Basic, Plus, Enterprise, Payroll, and other premium offerings, which we refer to as our marketplace offerings. Non-GAAP Financial Measures
In addition to our results determined in accordance with
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. Additionally, in response toRussia's invasion ofUkraine , during the three months endedMarch 31, 2022 , we incurred certain incremental expenses 19 -------------------------------------------------------------------------------- associated with our humanitarian response efforts, and we may continue to incur such expenses as the war continues to unfold. These expenses are not representative of our ongoing operations, and, as a result, we excluded these costs from adjusted EBITDA for the three months endedMarch 31, 2022 and, to the extent we continue to incur these expenses, intend to continue to do so in future periods. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance withU.S. GAAP. The following table presents a reconciliation of net loss, the most directly comparable financial measure prepared in accordance withU.S. GAAP, to adjusted EBITDA for each of the periods indicated: Three Months Ended March 31, (In thousands) 2022 2021 Net Loss$ (24,738) $ (7,835) Add back (deduct): Stock-based compensation expense 16,735 11,226 Depreciation and amortization 2,009 3,194 Interest expense 1,125 199 Other income, net (68) (78) Income tax provision 29 17 Tides Foundation common stock warrant expense 188 188 Humanitarian response efforts 4,287 - Adjusted EBITDA$ (433) $ 6,911 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 withU.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 theirU.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 underU.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 charges are non-cash charges, depreciated assets may need to be replaced in the future, and Adjusted EBITDA will not
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reflect cash capital expenditure requirements for these 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.
Due to these and other limitations, you should consider Adjusted EBITDA along with other measures of financial performance, including net loss and our other financial results prepared in accordance with
Components of our operating results
Marketplace revenue
Marketplace revenue represents the majority of our revenue and is generated by our marketplace offerings. Within these market offerings, we generate revenue from both talent and customers.
InApril 2022 , we will be combining our Upwork Basic and Plus client offerings into our new Client Marketplace Plan, which simplifies our client pricing model for non-Enterprise clients. This model makes available the most popular features of the current Upwork Plus offering, while eliminating the monthly client subscription fees and moving to a client marketplace fee of 5% on each transaction-or 3% if paid via ACH for eligible clients.
Managed Services Revenue
Through our managed services offering, we are responsible for providing services and engaging talent directly or as employees of third-party staffing providers to perform services for clients on our behalf. UnderU.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.
Revenue cost
Cost of revenue consists primarily of the cost of payment processing fees, amounts paid to talent 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
Selling and marketing expenses primarily include expenses related to personnel costs, including sales commissions, which we expense as incurred, and advertising and marketing activities.
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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 losses on transactions
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 charges
Interest expense includes interest on our outstanding borrowings.
Other (income) Expenses, net
Other (income) expense, net, primarily includes foreign exchange gains and losses and interest income that we derive from our deposits in money market funds and our investments in marketable securities.
Operating results
The following table sets forth our condensed consolidated results of operations for the periods presented: Three Months Ended March 31, (In thousands) 2022 2021 Revenue Marketplace$ 129,425 $ 104,670 Managed services 11,912 8,949 Total revenue 141,337 113,619 Cost of revenue(1) 37,916 30,441 Gross profit 103,421 83,178 Operating expenses Research and development(1) 38,161 26,613 Sales and marketing(1) 57,642 39,604 General and administrative(1) 29,141 23,531 Provision for transaction losses 2,129 1,127 Total operating expenses 127,073 90,875 Loss from operations (23,652) (7,697) Interest expense 1,125 199 Other income, net (68) (78) Loss before income taxes (24,709) (7,818) Income tax provision (29) (17) Net loss$ (24,738) $ (7,835) 22
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(1) Includes stock-based compensation expense as follows:
Three Months Ended March 31, (In thousands) 2022 2021 Cost of revenue$ 239 $ 201 Research and development 5,615 3,297 Sales and marketing 2,265 1,278 General and administrative 8,616 6,450
Total stock-based compensation
Comparison of the three months ended
Revenue
Three Months Ended March
31,
(In thousands, except percentages) 2022 2021 Change Marketplace$ 129,425 $ 104,670 $ 24,755 24 % Percentage of total revenue 92 % 92 % Managed services 11,912 8,949 2,963 33 % Percentage of total revenue 8 % 8 % Total revenue$ 141,337 $ 113,619 $ 27,718 24 % In the first quarter of 2022, 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 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 16% as ofMarch 31, 2022 compared to the same period in 2021. We believe that the decline in the year-over-year growth rate of active clients since the second quarter of 2021-when it reached the highest level since our initial public offering-is in large part due to the lapping of prior periods during which we experienced an acceleration of active client growth as a result of the COVID-19 pandemic. As a result, in the coming quarters, we expect the growth rate of active clients to return closer to pre-pandemic levels. Additionally, our GSV per active client increased 18% as ofMarch 31, 2022 , compared to the same period in 2021, driven by increased spend from existing clients. The growth in active clients and GSV per active client contributed to the growth of GSV and marketplace revenue. For the three months endedMarch 31, 2022 , GSV increased 27%, as compared to the same period in 2021. Marketplace revenue was driven by client spend, which for the three months endedMarch 31, 2022 , drove increases in talent service fees of 22%, as compared to the same period in 2021, and client payment processing and administrative fees of 28%, as compared to the same period in 2021. Additionally, during the three months endedMarch 31, 2022 , we continued our efforts to better address large enterprise and other clients and prospects with larger, longer-term independent talent needs through our Upwork Enterprise and other premium offerings. As a result, Enterprise Revenue increased 55% to$10.8 million , which fueled marketplace revenue for the three months endedMarch 31, 2022 . Marketplace revenue represented 92% of total revenue and increased by$24.8 million , or 24%, compared to the same period in 2021. Marketplace revenue grew more slowly than GSV from our marketplace offerings in the first quarter of 2022, and for the three months endedMarch 31, 2022 , our marketplace take rate was 13.1%, as compared to 13.5% for the same period in 2021. This trend was primarily a result of existing clients maturing into higher value clients and continuing to increase their spend with particular talent, which resulted in a higher mix of talent at the lower rates of our tiered service fee structure, partially offset by increases in marketplace take rate from increased activity related to our Upwork Enterprise offering. 23 -------------------------------------------------------------------------------- InMarch 2022 , we announced the suspension of business operations inRussia andBelarus , with contracts with talent or clients inRussia orBelarus required to wind down byMay 1, 2022 . The first step was shutting down support for new business generation in each country. Shortly following the announcement, talent and clients inRussia andBelarus were no longer able to sign up for new accounts, initiate new contracts, or be visible in search on our work marketplace. Contracts with talent or clients inRussia orBelarus that were in place as of the date of the announcement are allowed to remain open untilMay 1, 2022 . Approximately 10% of our total revenue in 2021 was derived from work where either the talent or the client was located in the region. Nearly all such revenue was derived from work performed by talent inside the region for clients located in other parts of the world. At the beginning of the invasion in lateFebruary 2022 , we experienced immediate reductions in activity from talent across the entire region, but since that initial impact, we have seen activity from users inUkraine rebound to almost pre-war levels. During the three months endedMarch 31, 2022 , we estimate that the loss of revenue resulting fromRussia's invasion ofUkraine and our resulting suspension of business operations inRussia andBelarus was approximately$1.0 million . We expect to see a larger impact to revenue in the second quarter due to the winding down of all contracts with talent and clients inRussia andBelarus byMay 1, 2022 and also because all three months of the quarter will be affected byRussia's invasion ofUkraine . Additionally, while approximately 25% of client spend from our web, mobile, and software development category in 2021 was derived from work where either the talent or the client was located in the region, thus far, we have not experienced a material impact to client spend from, or other activity levels related to, this category. Given the complex nature of our business and two-sided nature of our work marketplace, and with talent on our work marketplace located in over 180 countries, we are monitoring the impact on client spend from clients that have historically engaged talent in the impacted region and the extent to which those clients engage talent in other regions. As users inRussia andBelarus are able to relocate to regions where we operate, we will be eager to support them in continuing their work on our work marketplace. Although the Russian war againstUkraine did not have a material adverse impact on our revenue or other financial results for the three months endedMarch 31, 2022 , at this time we are unable to fully assess the aggregate impact it will have on our business in future periods due to various uncertainties, which include, but are not limited to, the duration of the war, the ability of talent based inUkraine to continue working, the war's effect on the economy, its impact to the businesses of our clients, actions that may be taken by governmental authorities related to the war, and other factors identified in Part II, Item 1A, "Risk Factors" in this Quarterly Report, including the risk factor titled "Russia's invasion ofUkraine and our decision to suspend our business operations inRussia andBelarus have affected and may continue to affect our business and results of operations." Additionally, inApril 2022 , we will be combining our Upwork Basic and Plus client offerings into our new Client Marketplace Plan, which simplifies our client pricing model for non-Enterprise clients. This model makes available the most popular features of the current Upwork Plus offering, while eliminating the monthly client subscription fees and moving to a client marketplace fee of 5% on each transaction-or 3% if paid via ACH for eligible clients. As a result of these client fee increases, we expect marketplace revenue and marketplace take rate to increase in future periods. For the three months endedMarch 31, 2022 , managed services revenue grew at a faster rate than our marketplace revenue as a result of increased spend from existing clients of our managed services offering. 24 --------------------------------------------------------------------------------
Revenue Cost and Gross Margin
Three Months Ended March 31, (In thousands, except percentages) 2022 2021 Change Cost of revenue$ 37,916 $ 30,441 $ 7,475 25 % Components of cost of revenue: Cost of talent services to deliver managed services 8,959 7,208 1,751 24 % Other components of cost of revenue 28,957 23,233 5,724 25 % Total gross margin 73 % 73 % For the three months endedMarch 31, 2022 , cost of revenue increased primarily as a result of increases in payment processing fees of$5.2 million , as compared to the same period in 2021, primarily due to increased client spend, as well as increases in cost of talent services to deliver managed services resulting from increases in managed services revenue for the three months endedMarch 31, 2022 , as compared to the same period in 2021. We expect cost of revenue to increase in absolute dollars in future periods as we continue to support growth on our work marketplace. Amounts paid to talent in connection with our managed services offering are tied to the volume of managed services used by our clients. The level and timing of these items could fluctuate and affect our cost of revenue in the future. Additionally, we will be combining our Upwork Basic and Plus client offerings into our new Client Marketplace Plan, which simplifies our client pricing model for non-Enterprise clients. This model eliminates the monthly client subscription fees and moves to a client marketplace fee of 5% on each transaction-or 3% if paid via ACH for eligible clients. We expect this change in pricing structure to positively impact gross margin in future periods. While we expect gross profit to increase in absolute dollars in future periods, because our managed services revenue and marketplace revenue grow at different rates, gross margin, expressed as a percentage of total revenue, may vary from period to period.
Research and development
Three Months Ended March
31,
(In thousands, except percentages) 2022 2021 Change Research and development$ 38,161 $ 26,613 $ 11,548 43 % Percentage of total revenue 27 % 23 % For the three months endedMarch 31, 2022 , research and development expense increased primarily due to our ongoing investments to build new product features, launch new offerings, and enhance the user experience. Specifically, investments we made to increase the size of our research and development workforce resulted in increases in personnel-related costs of$7.8 million , as compared to the same period in 2021, as well as increases in software licenses of$1.2 million . Additionally, for the three months endedMarch 31, 2022 , we incurred approximately$2.7 million of research and development expense related to our humanitarian response efforts related to the war againstUkraine . We believe continued investments in research and development are important to attain our strategic objectives, and we expect research and development expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period. 25 --------------------------------------------------------------------------------
Sales and Marketing
Three Months Ended March
31,
(In thousands, except percentages) 2022 2021 Change Sales and marketing$ 57,642 $ 39,604 $ 18,038 46 % Percentage of total revenue 41 % 35 % For the three months endedMarch 31, 2022 , sales and marketing expense increased primarily due to increases in marketing and brand awareness campaigns of$11.7 million , as compared to the same period in 2021, as well as increases in personnel-related costs of$5.2 million . Additionally, for the three months endedMarch 31, 2022 , we incurred approximately$0.3 million of sales and marketing expense related to our humanitarian response efforts related to the war againstUkraine . In an effort to continue evolving our offerings, products, brand positioning, and marketing to better address large enterprise and other clients and prospects with larger, longer-term independent talent needs, during the three months endedMarch 31, 2022 , we continued our investments in marketing to acquire new clients and drive brand awareness, and we expect to continue these investments throughout 2022. Beginning in the fourth quarter of 2021, we increased our investment in sales by expanding our sales team, and we expect this investment to continue throughout 2022 as we increase our efforts to acquire clients for our Upwork Enterprise offering. As a result, we expect this expense to increase in absolute dollars in future periods, although this expense expressed as a percentage of total revenue may vary from period to period.
General and administrative
Three Months Ended March
31,
(In thousands, except percentages) 2022 2021 Change General and administrative$ 29,141 $ 23,531 $ 5,610 24 % Percentage of total revenue 21 % 21 % For the three months endedMarch 31, 2022 , general and administrative expense increased primarily due to increases in personnel-related costs of$4.2 million , as compared to the same period in 2021, primarily because of increased stock-based compensation expense related to executive compensation arrangements. Additionally, for the three months endedMarch 31, 2022 , we incurred approximately$1.3 million of general and administrative expense related to our humanitarian response efforts and charitable donations related to the war againstUkraine . To achieve our strategic objectives, we expect to continue to invest in corporate infrastructure. Additionally, in 2020 we shifted to a flexible work model for our workforce and are evaluating our current need for office space. As a result, we may determine to either close or sublease certain of our other offices, either of which could result in further impairment charges being recognized in general and administrative expense.
Provision for losses on transactions
Three Months Ended March 31, (In thousands, except percentages) 2022 2021
Switch
Provision for transaction losses$ 2,129 $ 1,127 $ 1,002 89 % Percentage of total revenue 2 % 1 % For the three months endedMarch 31, 2022 , provision for transaction losses increased, as compared to the same period in 2021, due to higher chargeback losses and represented 2% of total revenue. We expect provision for transaction losses to approximate historical levels of 1% to 2% of revenue and to increase proportionally as GSV grows. 26
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Interest expense and other income, net
Three Months Ended March 31, (In thousands, except percentages) 2022 2021 Change Interest expense$ 1,125 $ 199 $ 926 465 % Other income, net (68) (78) 10 (13) % For the three months endedMarch 31, 2022 , 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 inAugust 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.
Cash 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, treasury bills, corporate bonds,U.S. government securities, asset-backed securities, and Yankee bonds. As ofMarch 31, 2022 andDecember 31, 2021 , we had$121.2 million and$187.2 million in cash and cash equivalents, respectively. As ofMarch 31, 2022 andDecember 31, 2021 , we had$551.8 million and$497.6 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 for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital requirements and capital expenditure requirements. In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from users, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the cost to host our work marketplace, the introduction of new offerings and services, the continuing market adoption of our work marketplace, any acquisitions or investments that we make in complementary businesses, products, and technologies and our ability to obtain equity or debt financing. Our principal commitments consist of obligations under our non-cancellable operating leases for office space and the Notes. There were no material changes to these principal commitments from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . For additional information about our Notes, see the section titled "-Convertible Senior Notes Due 2026." We anticipate satisfying our short-term cash requirements with our existing cash and cash equivalents and may satisfy our long-term cash requirements with cash and cash equivalents on hand or with proceeds from a future equity or debt financing. To the extent existing cash and cash equivalents, cash from marketable securities, and cash from operations (in periods in which we generate cash flow from operations) are insufficient to fund our working capital and capital expenditure 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. 27 -------------------------------------------------------------------------------- We also believe that our principal sources of liquidity will allow us to manage the impact of the COVID-19 pandemic, as well as the impact ofRussia's invasion ofUkraine and our decision to suspend our business operations inRussia andBelarus , 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 Part II, Item 1A, "Risk Factors" in this Quarterly Report, see the risk factors titled "Risk Factors-Our business experienced, and may again experience, an adverse impact from the ongoing COVID-19 pandemic, including as new variants of COVID-19 emerge. In addition, the positive impacts on our business resulting from the shift to remote work during the pandemic may not continue as the pandemic subsides and the restrictions intended to prevent its spread are relaxed or lifted" and "Russia's invasion ofUkraine and our decision to suspend our business operations inRussia andBelarus have affected and may continue to affect our business and results of operations." The challenges posed by the ongoing COVID-19 pandemic and ongoing Russian war againstUkraine on our business are expected to continue to evolve. Consequently, we will continue to evaluate our financial position in light of future developments. We did not have during the periods presented, and we do not currently have, any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
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 talent 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. Talent 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 talent 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 ofMarch 31, 2022 andDecember 31, 2021 , funds held in escrow were$196.4 million and$160.8 million , respectively.
Senior convertible bonds due 2026
In
The Notes are senior, unsecured obligations and will bear interest at a rate of 0.25% per year, payable semiannually in arrears, and are dueAugust 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 entered into capped buy transactions, which we refer to as capped calls. Capped call options are generally expected to reduce the potential dilution of our common stock upon any conversion of the Notes and/or offset any cash payment we are required to pay.
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make in excess of the principal amount of the Converted Notes, as the case may be, with such reduction and/or compensation subject to a cap based on the cap price.
The initial cap price of the Capped Calls is$92.74 per share of common stock, subject to certain customary adjustments under the terms of the Capped Calls. See "Note 7-Debt" of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding the Notes and the Capped Calls.
Cash flow
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31, (In thousands) 2022 2021 Net cash provided by (used in) operating activities$ (11,476) $ 1,876 Net cash provided by (used in) investing activities (55,043) 7,656 Net cash provided by financing activities 36,054 27,064 Net change in cash, cash equivalents, and restricted cash(1)$ (30,465) $ 36,596 (1) Includes increases in funds held in escrow, including funds in transit of$35.6 million and$26.4 million during the three months endedMarch 31, 2022 and 2021, 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 talent 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." For the three months endedMarch 31, 2022 , net cash used in operating activities was$11.5 million , which resulted from a net loss of$24.7 million and net cash outflows of$9.6 million from changes in operating assets and liabilities, partially offset by non-cash charges of$22.9 million . The change in operating assets and liabilities primarily resulted from the decrease in accrued expenses and other current liabilities due to the timing of payments made during the three months endedMarch 31, 2022 , as well as$4.3 million of expenses associated with our humanitarian response efforts related to the war againstUkraine .
For the three months ended
Investing activities
For the three months endedMarch 31, 2022 , net cash used in investing activities was$55.0 million , which was primarily a result of investing$160.3 million in various marketable securities, as well as$1.2 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$106.6 million . For the three months endedMarch 31, 2021 , net cash provided by investing activities was$7.7 million , which was primarily a result of proceeds from maturities of marketable securities of$31.0 million , offset by investing$21.0 million in various marketable securities, as well as$2.3 million of internal-use software and platform development costs that we paid during the period. 29
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Fundraising activities
For the three months ended
For the three months ended
Significant Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.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.
Unless otherwise indicated 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 in the “Management’s report and analysis of the financial position and results of operations”, there have been no material changes in our critical accounting policies and estimates from the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended
Recent accounting pronouncements
See “Note 2 – Basis of presentation and summary of significant accounting policies” in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report for recently issued accounting pronouncements that have not yet been adopted as of the date of this quarterly report.
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