Washington, D.C. 20549
UPWORK INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Unless otherwise expressly stated or the context otherwise requires, references in this Annual Report on Form 10-K, (this “Annual Report”which we refer to as this Annual Report or “report”)report, to “Upwork,” “Company,” “our,” “us,” and “we” and similar references refer to Upwork Inc. and its wholly-owned subsidiaries.
This Annual Report contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Annual Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, potential growth or growth prospects, active clients, future research and development, sales and marketing and general and administrative expenses, provision for transaction losses, our plans with respect to our share repurchase program, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections as of the date of this filing about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, “Risk Factors” in this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report and in other documents we file from time to time with the Securities and Exchange Commission, (the “SEC”)which we refer to as the SEC, that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Annual Report are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Annual Report or to conform statements to actual results or revised expectations, except as required by law.
You should read this Annual Report and the documents that we reference herein and have filed with the SEC or incorporated by reference as exhibits to this Annual Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
Item 1. Business.
and payments services. The robust functionality of our platformwork marketplace is designed to enable freelancerstalent to more easily run and build their businesses and to enable clients to find, hire, and workcollaborate with high-quality talent globally.on a global scale.
Our mission—to create economic opportunities so people have better lives—is integral to our culture and how we hire, build amazing teams and products andto lead our industry. We practice a “work without limits” model that includes a distributed team of on-site andenable remote employees, and wework not only through our work marketplace for our customers, but also engage freelancers all over the world for our own specialized projects. We believe thisteam members, for whom we are proud to offer a remote-first work model, which has environmental and other benefits. Our team consists of corporate employees, independent talent that we engage through our work marketplace, and advisors. Our team members are distributed around the world, and while we have corporate offices, we have built an effective remote-first culture. Our team works with a variety of tools and has adopted practices to ensure all voices are heard, innovation is fostered, organizational effectiveness is prioritized and business results are achieved. Our hybrid team, and its belief in a team thatour mission, values, and vision is continually engaged and passionate aboutcritical to our success. With consistent investment in the positive impactdevelopment of our platform.team and our commitment
Our sales and marketing organizations work closely together to increase awareness, generate clientcustomer demand, build a strong sales pipeline, and grow account relationships across businessesclients of all sizes, fromincluding independent professionals and small businesses to Fortune 500100 companies, to accelerate GSV and revenue growth.
Our infrastructure is designed to provide high reliability and robust platform performance. There are threefour components to our reliability strategy:
Our platform is designed to help ensure the security of our data and systems, protect our users’customers’ personal information, and to meet the rigorous privacy and security requirements of our enterprise customers.clients. To that end, we have obtained the following security and privacy certifications: ISO 27001 and 27018, SOC 2 Type 2II certification, SOC 3 certification, PCI-DSS certification, and U.S.-EU and U.S.-Swiss Privacy Shield certifications. We are also TrustArc certified.
Our information security controls operate at multiple levels and are designed to detect, prevent, and mitigate cyber securitycybersecurity threats that could impact the privacy and security of our data and our user’scustomers’ data. To operate at scale, we have automated several risk mitigation strategies. We have implemented comprehensive trust and safety processes to help prevent and detect suspicious behavior on our platform. Over the years of developing our platform,work marketplace, we have developed and refined specific pattern-matching algorithms to detect unusual behavior on our platform.work marketplace.
Another component of our security strategy is to leverage third parties who provide value-added user verification services. Augmenting our knowledge of user identity verification through these third-party services improves our ability to better detectensure customers are accurately represented and verifyminimize suspicious activity on our platform.
All access to our platform is encrypted using industry-standard transport layer security technology. When userscustomers enter sensitive information, such as tax identification numbers, we encrypt the transmission of that information using secure socket layer
technology. We also use HTTP strict transport security to add an additional layer of protection for our users.customers. For servers that store personally identifiable information, the data is encrypted. In order to make secure payments through our platform, we are also Payment Card Industry Data Security Standard certified, which means we have demonstrated compliance with the Payment Card Industry security standards required for businesses that complete credit card or debit card transactions.
online freelancer platforms that serve either a diverse range of skill categories, such as Fiverr and Freelancer.com, or specific skill categories;
other online providers of products and services for individuals or businesses seeking work or to advertise their services, including personal and professional social networks, such as LinkedIn and GitHub (each owned by Microsoft), employment marketplaces, recruiting websites, and project-based deliverable providers;
software and business services companies focused on talent acquisition, management, invoicing, or staffing management products and services;
payment businesses, such as PayPal and Payoneer, that can facilitate payments to and from businesses and service providers;
businesses that provide specialized, professional services, including consulting, accounting, marketing, and information technology services; and
online and offline job boards, classified ads, and other traditional means of finding work and service providers, such as Craigslist, CareerBuilder, Indeed, Monster, and ZipRecruiter.
In addition, well-established internet companies, such as Google, LinkedIn, and Amazon, and social media platforms, such as Facebook, have entered or may decide to enter into our market segment, and some of these companies have launched products and services that directly compete with our platform. For example, in 2016, LinkedIn launched ProFinder, its service to connect LinkedIn members with one another for freelance service relationships. Many of these established internet companies and other competitors are considerably larger than we are and have considerably greater financial and other resources than we do. We also compete with companies that utilize emerging technologies, such as blockchain or artificial intelligence.
We believe the principal competitive factors in our market segment include:
•platform features and functionality;functionality, including efficient and accelerated time to hire;
•verified talent work history and client payment history;
•size and engagement of usercustomer base, including the ability to attract and retain clients with a need for freelancertalent services;
•breadth of skill categories offered by freelancers;a platform’s rated quality talent;
•availability of high-quality projects from clients of all sizes, including Fortune 100 companies;
•uniqueness, size, and scope of data assets;
•ease of use;
vision for the market;
•brand awareness and reputation;
efficient•trust and accelerated time to hire;safety;
•level of usercustomer satisfaction;
•relationships with third-party partners;
•strength of sales and marketing efforts;
•ability to innovate and develop new or improved productsofferings and services; and
pricing.•greater flexibility with cost structure and reduced operating costs.
We believe that we compete favorably with respect to these factors.factors and are committed to making continued investments in our business to ensure our long-term success.
Intellectual Property
The protection of our technology and intellectual property is an important aspect of our business. We rely upon a combination of patents, trademarks, trade secrets, copyrights, confidentiality procedures, contractual commitments, and other legal rights to establish and protect our intellectual property. We generally enter into confidentiality agreements and invention or work product assignment agreements with our employees, independent team members that we engage through our work marketplace, advisors, and consultants to control access to, and clarify ownership of, our software and other inventions and intellectual property, documentation, and other proprietary information.
As of December 31, 2018,2023, we held 1820 issued U.S. patents and had 8 U.S. patent applications pending. We also held one issued patent in a foreign jurisdiction.patents. As of December 31, 2018,2023, we held 12six registered trademarks in the United States, including Upwork, Elance, oDesk, and oDesk“Talent Cloud” and also held 126139 registered trademarks in foreign jurisdictions. We continually review our development efforts to assess the existence and patentability of new intellectual property.
Government Regulation
We are subjecthave a robust regulatory compliance program built to a number ofcomply with the various applicable U.S. federal and state and foreign laws and regulations that are applicable to internet companies and businesses that operate online marketplaces connecting businesses with freelancers.independent talent. Our compliance program gives us the ability to pursue products and features that are or may be governed by complex laws and regulatory regimes. These laws and regulations may involve areas such as worker classification, employment, data protection, online payment services, content regulation, intellectual property, data sharing and privacy, taxation, consumer protection, background checks, payment services, money transmitter regulations, anti-corruption, anti-money laundering and sanctions laws, or other subjects. Moreover, we provide escrow services to our userscustomers and are therefore licensed as an internet escrow agent by the DBO.California Department of Financial Protection and Innovation, which we refer to as the DFPI. Many of the laws and regulations that are or may be applicable to our business are still evolving and being tested in courts and could be interpreted in ways that could adversely impact our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the industry in which we operate. We continue to monitor existing and pending laws and regulations and while the impact of regulatory changes cannot be predicted with certainty, we do not expect compliance to have a material adverse effect.
Corporate Information
We were incorporated in the State of Delaware in December 2013 prior to and in connection with the combination of Elance, Inc., which we refer to as Elance, and oDesk Corporation, which we refer to as oDesk. In connection with the combination, we changed our name to Elance-oDesk, Inc. in March 2014, and then to Upwork Inc. in May 2015. In 2015, we commencedFollowing the consolidation of the Elance platform and the oDesk platform and following the consolidationplatforms in 2016, we began operating under a single platform.work marketplace.
Our principal executive offices areoffice is located at 441 Logue Avenue, Mountain View,475 Brannan Street, Suite 430, San Francisco, California 94043.94107, and our mailing address is 655 Montgomery Street, Suite 490, Department 17022, San Francisco, California 94111. Our telephone number is (650) 316-7500. Our website address is www.upwork.com.www.upwork.com. The information contained on, or that can be accessed through, our website is not a part of this Annual Report. Investors should not rely on any such information in deciding whether to purchase our common stock. Unless otherwise expressly stated or the context otherwise requires, references in this Annual Report to “Upwork,” the “Company,” “our,” “us,” and “we” and similar references refer to Upwork Inc. and its wholly-owned subsidiaries.securities.
Upwork, the Upwork logo, Upwork Enterprise, Elance, oDesk, Elance-oDesk,“Talent Cloud,” “Up We Go,” and other registered or common law trade names, trademarks, or service marks of Upwork appearing in this Annual Report are the property of Upwork. This Annual Report contains additional trade names, trademarks, and service marks of ours and of other companies. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with these other companies, or endorsement or sponsorship of us by these other companies. Other trademarks appearing in this Annual Report are the property of their respective holders. Solely for convenience, our trademarks and tradenamestrade names referred to in this Annual Report appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor, to these trademarks and tradenames.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, and, as such, we have elected to comply with certain reduced public company reporting requirements. We will remain an “emerging growth company” until the earliest of (i) December 31, 2023, which is the last day of the fiscal year following the fifth anniversary of the completion of our IPO, (ii) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more, (iii) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and references herein to “emerging growth company” are intended to have the meaning associated with it in the JOBS Act.trade names.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information that we file with the SEC electronically. Copies of our reports on Form 10-K, Forms 10-Q, and Forms 8-K, and amendments to those reports may also be obtained, free of charge, electronically through our investor relations website located at the web address appearing below as soon as reasonably practicalpracticable after we file such material with, or furnish it to, the SEC.
We use our investor relations website (investors.upwork.com/)(investors.upwork.com), our TwitterX handle (twitter.com/Upwork) and Stephane Kasriel’s Twitter, Hayden Brown’s X handle (twitter.com/skasriel)hydnbrwn) and LinkedIn profile (linkedin.com/in/kasriel)haydenlbrown), and Erica Gessert’s LinkedIn profile (linkedin.com/in/erica-gessert) as a means of disseminating or providing notification of, among other things, news or announcements regarding our business or financial performance, investor events, press releases, and earnings releases and as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The content of our websites and information that we may post on or provide to online and social media channels, including those mentioned above, and information that can be accessed through our websites or these online and social media channels are not incorporated by reference into this Annual Report or in any other report or document we file with the SEC, and any references to our websites or these online and social media channels are intended to be inactive textual references only.
Item 1A. Risk Factors.
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, as well as the other information in this Annual Report, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below, or of additional risks and uncertainties not presently known to us or that we currently deem immaterial, could materially and adversely affect our business, results of operations, financial condition, and growth prospects. In such an event, the market price of our common stock could decline, and you could lose all or part of your investment.
Summary of Risk Factors
Some of the more material risks that we face include:
•Our growth depends on our ability to attract and retain a community of talent and clients, and the failure to maintain or grow our community of customers and their activity on our platform in a cost-effective manner or at all could adversely impact our business.
•We have experienced growth in recent periods and expect to invest in our growth in the future. If we are unable to maintain similar levels of growth or manage our growth effectively, our business, operating results, and financial condition could be adversely affected.
•We continue to evolve our business strategy, offerings and pricing model, and changes that we make can adversely affect our business and make it difficult to evaluate our future prospects.
•We face payment and fraud risks that could adversely impact our business.
•If we are unable to maintain our banking and payment partner relationships on favorable terms, or at all, our business could be adversely affected.
•Our revenue growth and ability to achieve and sustain profitability will depend in part on being able to increase the productivity, effectiveness, and efficiency of our sales force.
•Our revenue growth depends in part on the success of our strategic relationships with third parties and their continued performance.
•Customers circumvent our work marketplace, which adversely impacts our business.
•Clients sometimes fail to pay their invoices, necessitating action by us to compel payment.
•We are subject to disputes with or between customers of our work marketplace.
•We face risks related to our international community of customers, which could increase as we seek to expand our international footprint.
•Our inability to generate revenue from our Marketplace offerings, which represents a substantial majority of our total revenue, would adversely affect our business, operating results, and financial condition.
•If the market for independent talent and the services they offer develops more slowly than we expect, our growth may slow or stall, and our operating results could be adversely affected.
•If we are not able to develop and release new offerings and services, or develop and release successful enhancements, new features, and modifications to our existing offerings and services, our business could be adversely affected.
•We face intense competition and could lose market share to our competitors, which could adversely affect our business, operating results, and financial condition.
•If we or our third-party partners experience a security breach, other hacking or phishing attack, ransomware or other malware attack, or other privacy or security incident, our work marketplace may be perceived as not being secure, our reputation may be harmed, demand for our work marketplace may be reduced, our operations may be disrupted, we may incur significant legal costs, fines, or liabilities, and our business could be adversely affected.
•If we fail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be adversely affected.
•If internet search engines’ methodologies or other channels that we utilize to direct traffic to our website are modified to our disadvantage, or our search result page rankings decline for other reasons, our customer growth could decline.
•Business or system errors, defects, or disruptions could diminish demand, adversely impact our business, operating results, and financial condition, and subject us to liability.
•Our business is subject to extensive government regulation and oversight. Any failure to comply with the extensive, complex, overlapping, and frequently changing laws and regulations, both in the United States and internationally, could adversely impact our business, operating results, and financial condition.
•We have a history of net losses, may increase our operating expenses in the future, and may not be able sustain profitability.
•Our operating results and performance metrics may fluctuate from period to period, which makes our future results difficult to predict.
•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.
•The stock price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment.
•We cannot guarantee that our Share Repurchase Program will be fully consummated or that it will enhance long-term stockholder value.
•Our indebtedness could limit the cash flow available for our operations and expose us to risks that could adversely affect our business, operating results, and financial condition.
•Adverse or changing economic conditions may negatively impact our business.
Risks Related to our Business Operations, Execution, and IndustryGrowth
Our growth depends on our ability to attract and retain a community of freelancerstalent and clients, and the loss of our users, or failure to attract new users,maintain or grow our community of customers and their activity on our platform in a cost-effective manner or at all could adversely impact our business.
The size of our community of users, includingcustomers, both freelancerstalent and clients, is critical to our success. Our ability to achieve significant future revenue growth in revenue in the future will depend,depends, in large part, upon our ability to attract new users to,customers and retain existing users on, our platform. Achieving growth incustomers, including large enterprise and retention of our community of users may require us to increasingly engage in sophisticated and costly sales and marketing effortsother clients with larger, longer-term independent talent needs, as well as talent that may not result in additional users or effectively retain our current users. We may also need to modify our pricing model to attract and retainmeet the criteria sought by such users. If we fail to attract new users or fail to maintain or expand existing relationships in a cost-effective manner, our revenue will grow more slowly than expected or may decline and our business could be adversely impacted.clients.
FreelancersTalent have many different ways of marketing their services, securing clients, and obtaining payments from clients, and the competition from offline and online models is significant. Likewise, there may be impediments to talent who would like to use our work marketplace, including meetinggeopolitical events such as Russia’s invasion of Ukraine in February 2022, which resulted in immediate reductions in activity from customers in the region.
Clients have similarly diverse options to find and contacting prospective clients through other services, advertising to prospective clients online or offline through other methods, signing up for online or offline third-party agencies, usingengage service providers, including other online or offline platforms, signing up with staffing firms using other payment services,and agencies, by engaging service providers directly, or findingby hiring temporary, full-time, or part-time employmentemployees directly or through an agency or directly with a business. If we fail to attract new freelancers, freelancers decrease their use of or cease using our platform, the quality or types of services provided by freelancers that use our platform are not satisfactory to clients, or freelancers increase their fees for services more than clients are willing to pay, clientsagency. Clients may decrease their use of, or cease using, our platformwork marketplace and our revenue may be adversely impacted.
Clients have similarly diverse optionsimpacted for many reasons, including: if we fail to findattract new talent and pay service providers, such as engagingretain existing talent; if the quality or types of services provided by talent on our work marketplace are not satisfactory to clients; or if generative artificial intelligence tools provide a suitable replacement for traditional talent tasks. Further, expenditures by clients may be cyclical and paying service providers directly, finding service providers through other onlinemay reflect overall macroeconomic conditions or offline platforms or through staffing firms and agencies, using other payment services, or hiring temporary, full-time, or part-time employees. For the years ended December 31, 2018 and 2017, we generated significant revenue frombudgeting patterns. Additionally, one client which accounted for more than 10% of revenueour trade and client receivables for each such periodof the years ended December 31, 2022 and therefore,2021. The loss of a decrease in revenue from thiskey client could have an adverse effect on our operating results. Moreover, any decrease in the attractiveness of our platform or failure to retain clients could lead to decreased traffic on our platform, diminished network effects, or result in a drop in GSV on our platform, which could adversely affect our business, revenue, financial condition, and operating results.business.
Users can generally decide to cease using our platform at any time. UsersCustomers may stop using our platformwork marketplace and related services if the quality of the usercustomer experience on our platform,work marketplace, including our support capabilities in the event ofor our ability to provide a problem,secure, reliable, and trustworthy work marketplace, does not meet their expectations or keep pace with the quality of the usercustomer experience generally
offered by competitive products and services. UsersCustomers may also choose, and in the past have chosen, to cease using our platformwork marketplace if they perceive that our pricing model, including associated fees, is not in line with the value they derive from our platformwork marketplace, or for other reasons. In addition, expenditures byreasons, including cost-cutting measures.
Our efforts to attract and retain customers may not be successful or cost effective, and if customers, particularly significant clients, may be cyclical and may reflect overall economic conditions or budgeting patterns. If users stop using, or reduce their use of, our platformwork marketplace and related services for any reason, including the foregoing reasons, our revenuebusiness, operating results, and businessfinancial condition would be adversely affected.
We have a history of net losses, anticipate increasingexperienced growth in recent periods and expect to invest in our operating expensesgrowth in the future,future. If we are unable to maintain similar levels of growth or manage our growth effectively, our business, operating results, and may not achieve or sustain profitability.financial condition could be adversely affected.
We have experienced growth in a historyrelatively short period of incurring net losses, and we expect to incur net losses for the foreseeable future. For the years ended December 31, 2018, 2017 and 2016, we incurred net losses of $19.9 million, $4.1 million and $16.2 million, respectively. As of December 31, 2018, we had an accumulated deficit of $143.5 million. We expect to make significant future expenditures related to the development and expansion of our business, including enhancing our Upwork Enterprise offering and our U.S.-to-U.S. domestic offering, expanding domestic-to-domestic offerings into new geographies, broadening and deepening the categories on our platform, enhancing our mobile product offering, and in connection with legal, accounting, and other administrative expenses related to operating as a public company. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these higher expenses. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than increases in our operating expenses, we will nottime. However, there can be able to achieve and maintain profitability in future periods. As a result, we may continue to generate losses. We cannot ensureno assurance that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability.
We have a limited operating history under our current platformhistorical growth rates or that any future investments in growth will be successful or cost-effective. Moreover, sustaining the same levels of growth in future periods will become more difficult if macroeconomic uncertainty, rising interest rates and pricing model, which makes it difficultinflation persist. To manage our growth, we must improve our operational, financial, and management information systems and expand, motivate, and effectively manage and train our workforce. If we are unable to evaluatemanage our growth successfully without compromising the quality of our offerings or customer experience, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, and prospects and increases the risks associated with your investment.
We operated the Elance and oDesk platforms separately until we relaunched as Upwork in May 2015 and consolidated those platforms into a single platform. In recent years, we have also expanded our Upwork Enterprise offering, which helps enterprises and other larger businesses connect with freelancers and provides these larger clients with additional products and services. We also made significant changes to our pricing model in 2016. As a result, our platform and pricing model have not been fully proven, and we have only a limited operating history with our current platformresults, financial condition, and pricing model to evaluate our business and future prospects, which subjects us to a number of uncertainties, including our ability to plan forsuccessfully market our work marketplace and model future growth. Ourserve our customers could be adversely affected.
Moreover, our historical revenue growth should not be considered indicative of our future performance. We have encountered, and will encounter in the future, risks, challenges, and uncertainties, including those described in this “Risk Factors” section. If our assumptions regarding these risks, challenges, and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our financial condition and operating results could differ materially from our expectations and those of investors and securities analysts, our growth rates may slow, and our business would be adversely impacted.
We continue to encounter, risks, difficulties,evolve our business strategy, offerings and uncertainties frequently experienced by growing companiespricing model, and changes that we make can adversely affect our business and make it difficult to evaluate our future prospects.
We have over time evolved, and will continue to evolve, our sales, marketing, and brand positioning efforts, as well as our business strategy and pricing model. We continuously evaluate and revise our current offerings and pricing model and create and test additional offerings, pricing models, features, and services to serve our current and prospective customer base.
Changes in rapidly changing industries,our offerings and pricing model and the continued evolution of our business strategy and brand positioning subject us to a number of uncertainties, including our ability to achieve market acceptanceplan for and project future growth and performance. In addition, we have in the past seen, and may in the future see, unexpected or unintended negative effects as a result of changes to our platformpricing model, offerings, and sales and marketing efforts, including increased customer dissatisfaction, harm to our reputation, increased circumvention rates, reductions in the rate or size of projects that get posted or completed, or a failure to attract and retain users,customers. These adverse effects may negatively affect our business, operating results, and financial condition. In recent periods, we have implemented a number of changes to our pricing model that were designed to improve the health of our work marketplace. However, there can be no assurances as well as increasing competitionto the long-term impact these changes will have on our business, operating results, and increasing expenses as we continue to growfinancial condition.
In addition, creating new offerings is expensive and time consuming, diverts the attention of our business. We cannot ensure that we willmanagement, and may not be successful or cost-effective to maintain. Moreover, if an offering does not achieve sufficient market acceptance or is otherwise unsuccessful, we may expend additional resources and divert the attention of management to implement modifications, which may not be successful. For example, in addressing these2019, we launched our Upwork Business offering, focused on mid-market businesses. In the fourth quarter of 2020, we decided that it was no longer cost-effective for our sales team to sell our Upwork Business offering, which resulted in an elimination of that offering and other challengesa reduction in force of approximately one-third of our sales employees at that time.
We face payment and fraud risks that could adversely impact our business.
Our controls relating to customer identity verification, customer authentication, and fraud detection are complex. If such controls are not effective, our work marketplace may be perceived as not being secure, our reputation may be harmed, we may face in the future,regulatory action or action by our payment partners, payment networks, or other third parties, and our business may be adversely affectedimpacted. In addition, bad actors around the world use increasingly sophisticated methods, including the use of artificial intelligence, to engage in illegal activities involving the theft and
misuse of personal information, such as: unauthorized or fraudulent use or misrepresentation of another’s identity, location, skills, payment information, or other information and the improper acquisition or use of banking or payment information.
Bad actors also may use our work marketplace to engage in unlawful or fraudulent conduct, such as money laundering, moving funds to regions or persons restricted by sanctions or export controls, terrorist financing, fraudulent sale of services, bribery, breaches of security, unauthorized acquisition of data, extortion or use of ransomware, distribution or creation of malware or viruses, piracy or misuse of software and other copyrighted or trademarked content, and other misconduct. For example, we experienced a significant increase in provision for transaction losses in the year ended December 31, 2022 due to increased instances of fraud, higher chargeback losses, and bad debt losses related to clients of our Enterprise Solutions offering. This conduct on our website could result in any of the following, each of which could harm our reputation and adversely impact our business:
•we may be, and historically have been, held liable for the unauthorized use of credit or debit card details and banking or other payment account information and required by card issuers, card networks, banks, and other payment partners to return the funds at issue and pay a chargeback, return, or other fee. If our chargeback or return rate becomes excessive, card networks may also require us to pay fines or other fees or engage in remediation efforts, which can be costly and divert the attention of management, or cease doing business with us;
•the DFPI, or other regulators may require us to hold larger cash reserves or take other action with respect to our internet escrow license or other licenses or licensing regimes;
•customers may seek to hold us responsible for losses, may lose confidence in and decrease use of our work marketplace, or publicize their negative experiences;
•law enforcement or administrative agencies could seek to hold us responsible for the conduct of or content posted by customers and impose fines and penalties, bring criminal action, or require us to change our business practices, and private actions or public enforcement may increase depending on interpretations of and possible changes to intermediary liability provisions such as Section 230 of the Communications Decency Act of 1996;
•we may be subject to additional risk and liability exposure, including for negligence, fraud, or other claims, if employees or third-party service providers, including talent that provide services to us, misappropriate our banking, payment, or other information or customer information for their own gain or to facilitate the fraudulent use of such information; and
•if talent misstate their qualifications or location, provide misinformation about their skills, identity, or otherwise, perform services they are not qualified or authorized to provide, produce insufficient or defective work product or work product with a harmful effect, clients or other third parties may seek to hold us responsible and may lose confidence in and decrease or cease use of our work marketplace, or seek recourse against us.
We have received in the past, and are likely to continue to receive in the future, complaints, notices, and inquiries from clients, talent, and other third parties, including law enforcement, administrative agencies, payment partners, payment networks, and the press, concerning misuse of our work marketplace and wrongful conduct of customers. We have also brought claims against clients and other third parties for their misuse of our work marketplace, and may bring similar claims in the future. Even if these claims do not result in litigation or are resolved in our favor, these claims could divert the attention and resources of our management, negatively impact our reputation, and adversely affect our business and operating results. Further, while we take steps to implement and improve our trust and safety program through the use of algorithms and machine learning techniques, any unauthorized or inadvertent disclosure of these tools might make our efforts to prevent fraud or the improper use of our platform temporarily less effective, and any new laws restricting our use of these techniques, or that force us to make the inner workings of these tools transparent to the public, may increase the risk of harm to our customers.
If we are unable to maintain our banking and payment partner relationships on favorable terms, or at all, our business could be adversely affected.
Our payment partners consist of payment processors and disbursement partners. We rely on banks and payment partners to provide us with corporate banking services, escrow trust accounts or other regulated accounts, and clearing, processing, and settlement functions for the funding of all transactions on our work marketplace and disbursement of funds to customers, and we may not always have a sufficient surplus of vendors in the event one or more relationships is terminated for any reason.
Our banking and payment partners are critical to our business. If we are unable to maintain our agreements with current partners on favorable terms, or at all, or we are unable to enter into new agreements with new partners on favorable terms, or at all, our ability to collect payments and disburse funds and our business, operating results, and financial condition may be adversely affected. This could occur for a number of reasons, including the following:
•our partners may be unable or unwilling or may fail to perform the services we require of them, such as processing payments to talent in a timely manner and in compliance with applicable legal requirements, including sanctions regimes;
•a failure by us to comply with our partners’ compliance standards, which could result in increased rates that they charge us or our customers or a reduction in services or benefits that they provide us with, or termination of our agreement with them altogether, and any remediation efforts undertaken by us to return to compliance may be costly, time consuming, and divert the attention of management;
•our partners may be subject to investigation, regulatory enforcement, or other proceedings that result in their inability or unwillingness to provide services to us or our unwillingness to continue to partner with them;
•our partners may be unable to effectively accommodate changing service needs, and we may have difficulty finding suitable partners to accommodate such needs; and
•our partners could experience instability, delays, limitations, or closures of their businesses, networks, partners, or systems, causing them to be unable to process payments or disburse funds for certain periods of time.
In addition, we may be forced to cease doing business with certain partners if card network operating rules, certification requirements and laws, regulations, or rules governing electronic funds transfers, change or are interpreted to make it difficult or impossible for us to comply.
Our revenue growth and ability to achieve and sustain profitability will depend in part on being able to increase the productivity, effectiveness, and efficiency of our sales force.
In order to increase our revenue from our premium offerings and achieve and sustain profitability, we must improve the effectiveness and efficiency of our sales force and generate additional revenue from new and existing customers. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, effectively deploying, and retaining sufficient numbers of qualified sales and sales support personnel to support our growth, which can be particularly challenging in times of significant competition for qualified personnel. Furthermore, hiring and effectively deploying sales personnel is complex, costly and requires significant training. In addition, new sales personnel do not always achieve productivity milestones within the timelines that we have projected, or at all, negatively impacting our ability to achieve our long-term financial projections associated with such personnel.
In addition, our sales efforts are primarily targeted at large enterprise and other clients and prospects with larger, longer-term independent talent needs. As a result of our focus on these larger clients, we face greater costs, longer sales cycles, and less predictability in completing some of our sales and in increasing spend by existing clients. For larger clients, use of our work marketplace often requires approvals by multiple departments and executive-level personnel and greater levels of services and client education regarding the uses, benefits and functionality of our work marketplace. Larger enterprises typically have longer implementation cycles and demand more customization, greater indemnification and risk shifting, higher levels of support, a broader range of services, and greater payment flexibility. We may expend significant time and resources, including sales and administrative support and professional services resources, on potential large enterprise clients who may ultimately choose not to use our services.
A significant portion of the fees we typically receive from clients is contingent on the level of spend by the client, and thus our revenue from any particular relationship may be minimal. If our sales personnel are not successful in obtaining new business or increasing sales, our business and results of operations will be adversely affected. Additionally, in the fourth quarter of 2021, we began increasing our investment in sales by expanding our sales team, which continued throughout 2022. However, in light of macroeconomic conditions as well as our efforts to reduce spend and streamline operations, we implemented a reduction of our workforce in May 2023, largely in our sales team. There can be no assurance that these or other actions we may take will increase the productivity or efficiency of our sales force.
Our revenue growth depends in part on the success of our strategic relationships with third parties and their continued performance.
To grow our business, we need to continue to establish and maintain relationships with third parties, such as staffing providers, software and technology vendors, and payment processing and disbursement providers. For example, we work with third-party staffing providers, upon which we are dependent to support our employment offering, Upwork Payroll. We have also recently established several partnerships that have allowed us to integrate generative artificial intelligence tools into our work marketplace aimed at improving customer experience and productivity. As our agreements with third-party partners terminate or expire, we may be unable to renew or replace these agreements on favorable terms, or at all. Moreover, we cannot guarantee that the parties with which we have strategic relationships will continue to offer the services for which we rely on them at economically reasonable terms or at all or devote the resources necessary to expand our reach, increase our distribution, or support an increased number of customers. Some of our strategic partners offer, or could offer, competing products and services or also work with our competitors. As a result, many of our third-party partners may choose to develop or support alternative products and services in addition to, or in lieu of, our work marketplace. If we are unsuccessful in establishing or maintaining our relationships with third parties on favorable terms, these relationships are not successful in improving our business, or one or more of our third-party staffing partners materially changes its business, our business, operating results, and financial condition may be adversely impacted.
Customers circumvent our work marketplace, which adversely impacts our business.
Our business depends on customers transacting through our work marketplace. Despite our efforts to prevent them from doing so, customers circumvent our work marketplace and engage with or take payment through other means to avoid our fees, and it is difficult or impossible to measure the losses associated with circumvention. Enhancements and changes we make to our pricing model, fees, offerings, services, and features may unintentionally cause, and may have unintentionally caused in the past, customers to circumvent our work marketplace. In addition, circumvention by customers of our work marketplace is likely to increase during a macroeconomic downturn, as customers may be more cost-sensitive. The loss of revenue associated with circumvention of our work marketplace has an adverse impact on our business, operating results, and financial condition. Moreover, certain changes we make to decrease circumvention by customers have in the past and could again inadvertently result in customer dissatisfaction, increased customer circumvention, and a decline in customer activity. Our efforts to reduce circumvention may be costly or disruptive to implement, fail to have the intended effect or have an adverse effect on our brand or customer experience, reduce the attractiveness of our work marketplace, or otherwise harm our business, operating results, and financial condition.
Clients sometimes fail to pay their invoices, necessitating action by us to compel payment.
In connection with our Enterprise Solutions offering, and for certain legacy clients, we advance payments to talent for invoiced services on behalf of the client and subsequently invoice the client for such services. In order to maintain these relationships, we have in the past been, and may in the future be, forced to agree to terms that are unfavorable to us, including extended payments terms. In addition, in certain instances, we will advance payment on a talent invoice if the client issues a chargeback or their payment method is declined. In this circumstance, the talent assigns us the right to recover any funds from the client. From time to time, clients fail to pay for services rendered by talent, and as a result, we may incur costs to enforce the applicable agreement or our terms of service, including through arbitration or litigation, and we may not be successful in collecting amounts owed. Furthermore, some clients may seek bankruptcy protection or other similar relief and fail to pay amounts due, or pay those amounts more slowly. Our risk of financial exposure increases if we do not adequately screen clients, do not conduct sufficient credit checks, or otherwise do not adequately monitor clients’ spend on our work marketplace. All of these risks are made more likely during a macroeconomic downturn and could result in increased costs to us. Our failure to manage these risks could adversely affect our business, operating results, and financial condition.
We are subject to disputes with or between customers of our work marketplace.
Our business model involves enabling connections between talent and clients that contract directly through our work marketplace. Talent and clients are free to negotiate any contract terms they choose, but we also provide optional service contract terms that they can elect to use. Disputes sometimes arise between talent and clients, including with respect to service standards, payment, confidentiality, work product, and intellectual property ownership and infringement. If either party believes the contract terms were not met, our standard terms and some individually negotiated services agreements provide a mechanism for the parties to request assistance from us, and, for some contracts, if that is unsuccessful, a provision referring the dispute to a third-party arbitrator. Whether or not talent and clients seek assistance from us, if these disputes are not resolved amicably, the parties might escalate to formal proceedings. Given our role in facilitating and supporting these arrangements, claims are sometimes brought
against us directly and talent or clients bring us into claims filed against each other, particularly when the other customer is insolvent or facing financial difficulties. Through our terms of service and services agreements for premium offerings, we disclaim responsibility and liability for any disputes between customers (except with respect to specified dispute assistance programs and services); however, we cannot guarantee that these terms will be effective in preventing or limiting our involvement in customer disputes or that these terms will be enforceable or otherwise effectively prevent us from incurring liability. Disputes with or between customers may become more frequent based on conditions outside our control, such as a macroeconomic downturn or actions of bad actors seeking to take advantage of other customers. Such disputes, or any increase in the number of disputes, may adversely affect our business, operating results, and financial condition.
We face risks related to our international community of customers, which could increase as we seek to expand our international footprint.
Although we currently have a limited physical presence outside of the United States, we have customers of our work marketplace located in over 180 countries, including some markets where we have limited experience. In these markets, challenges successfully.can be significantly different from those we have faced in existing markets and where business practices may create greater internal control risks. Further, certain skills and services are offered by talent concentrated in countries with higher risks of instability and geopolitical uncertainty. For example, in response to the ongoing war in Ukraine, we decided in March 2022 to suspend business operations in Russia and Belarus, and have prohibited customers in those countries from using our work marketplace for the duration of the suspension. In addition, we engage talent located in many countries to provide services for our Managed Services offering and to us for internal projects, which has also been suspended in Russia and Belarus. In addition, this international customer base subjects our business to risks relating to laws and regulations in jurisdictions outside the United States, as discussed elsewhere in these “Risk Factors.”
Additional risks inherent in conducting business with an international customer base, engaging talent globally, localizing our work marketplace, and expanding our operations internationally include, but are not limited to:
•varying and overlapping laws and regulations and approaches to enforcement, including with respect to worker classification and data protection and privacy;
•difficulties in, and costs of, establishing local brand recognition and staffing, managing, and operating international operations or support functions;
•compliance with U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;
•the imposition of taxes on transactions between us and our customers or among our customers, or the imposition of liability on us for the failure to collect and remit taxes owed by our customers;
•tariffs, export and import restrictions, restrictions on foreign investments, sanctions, changes to existing trade arrangements between various countries, and other trade barriers or protection measures, including those affecting certain countries with higher risks of instability and geopolitical uncertainty;
•geopolitical instability and security risks, such as armed conflict and civil or military unrest, political instability, human rights concerns, terrorist activity, ransomware, and cyberterrorism in countries where we have customers and retaliatory actions that governments may take in response;
•costs of localizing services and business practices, including adding the ability for clients to pay in local currencies or modifying our platform to offer our website in local languages;
•changes to laws, regulations, or central bank rules impacting us or our partners that may make payments for services exports more costly, difficult, or impossible to process, or that may reduce the availability of tools like digital wallets and related payment services in important global markets;
•contractual provisions that are designed to protect and mitigate against risks, including terms of service, services agreements, arbitration and class action waiver provisions, disclaimers of warranties, limitations of liabilities, releases of claims, and indemnification provisions, could be deemed unenforceable by a foreign court, arbitrator, or other decision-making body;
•economic weakness or currency-related challenges or crises;
•regional or global public health events;
•and organizing or similar activity by workers, local unions, works councils, or other labor organizations in the United States or elsewhere.
The risks described above may also make it costly or difficult for us to expand our operations internationally. If we are unable to comply with applicable laws and regulations or manage the complexity of global operations and support an international customer base successfully and in a cost-effective manner, our business, operating results, and financial condition could be adversely affected.
Our business depends largely on our ability to attract and retain talented employees, including senior management and key personnel. If we lose the services of Hayden Brown, our President and Chief Executive Officer, or other members of our senior management team or key personnel, we may not achieve sufficient revenuebe able to execute on our business strategy.
Our future success depends in large part on the continued services of senior management and other key personnel and our ability to attract, retain, and motivate them. In particular, we are dependent on the services of Hayden Brown, our President and Chief Executive Officer, and our future vision, strategic direction, work marketplace, and technology could be compromised if she were to take another position, become ill or incapacitated, or otherwise become unable to serve as our President and Chief Executive Officer. We rely on our leadership team and other key personnel across our business. Our senior management and other key personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason, and without notice, and we do not maintain any “key-person” life insurance policies. If we lose the services of senior management or other key personnel, if our succession plans prove inadequate, or if we are unable to retain, attract, train, and integrate the highly skilled personnel we need, our business, operating results, and financial condition could be adversely affected.
There have been, and may continue to be, changes in our management team resulting from the hiring or departure of executives, and we have made, and may continue to make, other changes that have been and will be disruptive to our personnel, such as changes to the composition of our leadership team and other key personnel and reorganizations of reporting lines of our workforce. These changes have resulted, and future personnel changes may result, in increased attrition or reduced productivity of our personnel, including due to changes in reporting relationships. Any such changes may also result in a loss of institutional knowledge, cause disruptions to our business, impede our ability to achieve our objectives, or distract or result in diminished morale in, or the loss of, workers.
We face intense competition for qualified personnel from numerous software and other technology companies, particularly with respect to qualified software engineers. We may not be able to retain our current key personnel or attract, train, integrate, or retain other highly skilled personnel in the future, and our personnel may not be productive. We may incur significant costs to attract and retain highly skilled personnel, we may lose employees to our competitors or other technology companies, and our succession plans may be insufficient to ensure business continuity. To the extent we move into new geographies, including internationally, we would need to attract and recruit skilled personnel in those areas.
Volatility, depreciation, or lack of appreciation in our stock price, whether due to broader stock market fluctuations or due to conditions and negative investor sentiment affecting us specifically, may also affect our ability to attract new skilled personnel and retain our key personnel.
We may be unable to integrate acquired businesses and technologies successfully or to achieve the expected benefits of such acquisitions. We may acquire or invest in additional companies, which may divert our management’s attention, result in additional dilution to our stockholders, and consume resources that are necessary to sustain our business.
Our business strategy may, from time to time, include acquiring complementary products, technologies, businesses, or other assets. We also may enter into relationships with other businesses to expand our work marketplace or our ability to provide our work marketplace in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels of distribution, or investments in other companies. In addition, these transactions, even if undertaken and announced, may not close, and any acquisition, investment, or business relationship may result in unforeseen or additional operating difficulties, risks, and expenditures. For one or more of those transactions, we may face the following risks, any of which could adversely impact our business, operating results, and financial condition. We may:
•use cash that we may need in the future to operate our business or issue equity that would dilute our stockholders’ ownership interest;
•become subject to different laws and regulations or more stringent scrutiny due to the nature or location of the acquired business, products, technologies, or other assets;
•incur expenses or assume substantial liabilities;
•encounter difficulties retaining key personnel of the acquired company or assimilating acquired operations and employee cultures;
•encounter difficulties integrating diverse technologies and systems;
•divert management’s attention;
•become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges;
•incur debt on terms unfavorable to us or that we are unable to repay; or
•be required to adopt new, or change our existing, accounting policies.
Risks Related to Our Industry, Offerings, and Services
Our inability to generate revenue from our Marketplace offerings, which represents a substantial majority of our total revenue, would adversely affect our business, operating results, and financial condition.
We derive, and expect to continue to derive in the near future, the substantial majority of our revenue from our Marketplace offerings. As such, market acceptance of our Marketplace offerings is critical to our continued success. If we are unable to meet customer demands and expectations, earn and maintain positive cash flow fromcustomer trust, expand our offerings or the categories of services offered on our work marketplace, develop features that are appealing to customers, or achieve and maintain more widespread market acceptance of our Marketplace offerings, our business operations, operating results, and financial condition may be adversely affected.
Demand for our Marketplace offerings is also affected by a number of other factors, including the timing and success of new offerings and services by our competitors, changes to our pricing model, our ability to respond to technological change and to effectively innovate and grow, macroeconomic conditions, contraction in our market, client spending patterns, talent activity levels, the size and price of projects on our work marketplace, changes in adoption of remote work, geopolitical conditions and the other risks identified herein. To the extent these or profitability in any given period, or at all.other factors negatively affect demand for our Marketplace offerings, our business, operating results, and financial condition may be adversely affected.
If the market for freelancersindependent talent and the services they offer develops more slowly than we expect, our growth may slow or stall, and our operating results could be adversely affected.
The market for freelancersonline independent talent and the services they offer is relatively new, rapidly evolving, and unproven. Our future success will depend in large part on the continued growth and expansion of this market and the willingness of businesses to engage freelancersindependent talent to provide services.services and independent talent to engage as service providers. It is difficult to predict the size, growth rate, and expansion of this market, whether any expansion will be long-term or temporary, particularly as the entry of productslabor market and services that are competitiveremote work trends continue to ours, the success of existing competitive productsbe unpredictable and services, or technological or other developments that will impact therecent challenging macroeconomic conditions continue. The overall demand for freelancer services. independent talent will continue to be impacted by competition in the marketplace, technological developments (including artificial intelligence), and macroeconomic, geopolitical, legal and regulatory conditions. In particular, a substantial portion of the services sought by clients and offered by talent on our work marketplace is related to information technology. If, for any reason, the market for information technology services declines or a sufficient number of qualified or desirable talent is not available on our work marketplace to meet our clients’ demands, the growth in the number of customers on our work marketplace may slow or decline, and as a result, our business, operating results, and financial condition may be adversely impacted.
Furthermore, many businesses may be unwilling to engage freelancersindependent talent for a variety of reasons, including perceived negative connotations with outsourcing work, quality of work, fraud, privacy, or data security concerns.concerns, or the rapidly evolving regulations that may impact the demand for independent contractor services more generally, including as discussed further in the risk factor titled “Our business is subject to extensive government regulation and oversight. Any failure to comply with the extensive, complex, overlapping, and frequently changing laws and regulations, both in the United States and internationally, could adversely impact our business, operating results, and financial condition.” Likewise, with the increased prevalence of remote work and increased flexibility in employment relationships in recent years, more skilled independent talent may choose traditional employment. If the market for freelancersindependent talent and the services they offer does not achieve widespread adoption, or there is a reduction in demand for freelancer services, it could result in decreased revenueindependent talent, our business, operating results, and our businessfinancial condition could be adversely affected.
If we are not able to develop and release new productsofferings and services, or develop and release successful enhancements, new features, and modifications to our existing productsofferings and services, our business could be adversely affected.
The market for our platformwork marketplace is characterized by rapid technological change, frequent new product and service introductions and enhancements, changing usercustomer demands, and evolving industry standards. For example, we have recently integrated generative artificial intelligence tools into our work marketplace aimed at improving customer experience and productivity. The introduction of productsofferings and services embodying new technologies can quickly make existing productsofferings and services obsolete and unmarketable. We invest substantial resources in researching and developing new productsofferings and services and enhancing our platformwork marketplace by incorporating additional features, improving functionality, modernizing our technology, and adding other improvements to meet our users’customers’ evolving demands in our increasingly highly competitive industry. The success of any enhancements or improvements to, or new features of, our platformwork marketplace or any new productsofferings and services depends on several factors, including timely completion,overall demand and market acceptance consistent with the intent of such offerings or services, competitive pricing, adequate quality testing, integration with new and existing technologies on our platformwork marketplace and third-party partners’ technologies, and overall market acceptance.timely completion. We cannot be sure that we will succeed on a timelyin delivering enhancements or cost-effective basis, in developing, marketing,new features or any new offerings and deliveringservices. Any enhancements or new features to our platformwork marketplace or any new productsofferings and services that respond to continued changes in the market for talent or business services, nor can we be sure that any enhancements or new features to our platform or any new products and services will achieve market acceptance. Because further development of our platform is complex, challenging, and dependent upon an array of factors, the timetable for the release of new products and services and enhancements to existing products and services is difficult to predict, and we may not offer new products and services as rapidly as users of our platform require or expect. Any new products or services that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, may not be properly integrated with new and existing technologies on our platform or third-party partners’ technologies, or may not achieve, and in the broadpast certain features and offerings have not achieved, market acceptance, necessarycost-effectiveness, or the intended effect. In the past, we have experienced, and in the future we may experience, unintended negative effects, including reduced client spend, diminished fill rates for projects on our work marketplace, errors and disruptions on our work marketplace, and customer dissatisfaction from certain modifications to generate sufficient revenue. our offerings, services, and features.
Moreover, even if we introduce new productsofferings and services, we may experience a decline in revenue from our existing productsofferings and services that is not offset by revenue from the new productsofferings or services. In addition, we may lose existing userscustomers that choose to use competing products or services. This could result in a temporary or permanent decrease in revenue and adversely affect our business.
Our operating results may fluctuate from quarter to quarter, which makes our future results difficult to predict.
Our quarterly operating results have fluctuated in the past and may fluctuate in the future. Additionally, we have a limited operating history with our current platform and pricing model, which makes it difficult to forecast our future results. As a result, you should not rely upon our past quarterly operating results as indicators of future performance. You should take into account the risks, difficulties, and uncertainties frequently encountered by companies in rapidly evolving markets. Our operating results in any given quarter can be influenced by numerous factors, many of which are unpredictable or are outside of our control, including:
our ability to generate significant revenue from our Upwork Standard offering and Upwork Enterprise and other premium offerings;
fluctuations in revenue from our managed services offering due to our recognition of the entire GSV as revenue, including the amounts paid to freelancers;
our ability to maintain and grow our community of users;
due to our tiered-pricing model for freelancer service fees, the mix in any period between freelancers that have billed larger amounts to clients on our platform, where we charge a lower rate on billings, and freelancers that have billed clients less on our platform, where we charge a higher rate on billings;
the demand for and types of skills and services that are offered on our platform by freelancers;
spending patterns of clients, including whether those clients that use our platform frequently, or for larger projects, reduce their spend, stop using our platform, or change their method of payment to us;
the disbursement methods chosen by freelancers;
seasonal spending patterns by clients or work patterns by freelancers and seasonality in the labor market, including the number of business days in any given quarter, the number of Mondays (i.e., the day we customarily bill our users) in any given quarter, as well as local, national, or international holidays;
fluctuations in the prices that freelancers charge clients on our platform;
fluctuations in the mix in payment provider costs;
changes to our pricing model, including associated fees;
our ability to introduce new products and services and enhance existing products and services;
our ability to generate significant revenue from new products and services;
our ability to respond to competitive developments, including new and emerging competitors, pricing changes, and the introduction of new products and services by our competitors;
the productivity of our sales force;
changes in the mix of products and services that enterprise clients or other users demand;
the length and complexity of our sales cycles;
the episodic nature of freelance work;
the cost and time needed to develop and upgrade our platform to incorporate new technologies;
security or privacy breaches and associated remediation costs and reputational harm;
the impact of outages of our platform and associated reputational harm;
changes to financial accounting standards and the interpretation of those standards that may affect the way we recognize and report our financial results, including changes in accounting rules governing recognition of revenue;
potential costs to attract, onboard, retain, and motivate qualified talent to perform services for us;
increases in, and timing of, operating expenses that we may incur to grow and expand our operations and to remain competitive;
costs related to the acquisition of businesses, talent, technologies, or intellectual property, including potentially significant amortization costs and possible write-downs;
litigation and adverse judgments, settlements, or other litigation-related costs;
changes in the common law, statutory, legislative, or regulatory environment, such as with respect to privacy, wage and hour regulations, worker classification (including classification of independent contractors or similar service providers and classification of employees as exempt or non-exempt), internet regulation, payment processing, global trade, or tax requirements;
operating lease expenses and other real estate expenses that will likely increase as we grow our operations;
fluctuations in transaction losses;
fluctuations in currency exchange rates;
changes in the mix of countries in which our users are located, which impacts the amount of revenue we derive from foreign exchange;
the impact of collecting indirect taxes on our user fees that we may introduce in new jurisdictions from time to time due to the applicability of sales, use, and other tax laws and regulations;
the impact of new laws and regulations (or changes in interpretation of existing laws and regulations) on the products and services offered on our platform;
the timing of stock-based compensation expense;
expenses incurred in connection with The Upwork Foundation initiative; and
general economic and political conditions and government regulations in the countries where we currently have significant numbers of users or where we currently operate or may expand in the future.
The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance. If we fail to meet or exceed the expectations of investors or securities analysts, then the trading price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.
Because we derive the substantial majority of our revenue from our marketplace offerings, with most of our marketplace revenue derived from our Upwork Standard offering, our inability to generate revenue from our marketplace offerings would adversely affect our business, operating results, financial condition, and growth prospects.
Currently, we derive and expect to continue to derive, in the near future, the substantial majority of our revenue from our marketplace offerings, with most of our marketplace revenue derived from our Upwork Standard offering. As such, market acceptance of our marketplace offerings is critical to our continued success. Demand for our marketplace offerings is affected by a number of factors beyond our control, including the timing of development and release of new products and services by our competitors, our ability to respond to technological change and to innovate and grow, contraction in our market, and the other risks identified herein. If we are unable to continue to meet user demands, to expand the categories of services offered on our platform, or to achieve more widespread market acceptance of our marketplace offerings, our business operations, financial results, and growth prospects could be adversely affected.
We may be subject to new and existing laws and regulations, both in the United States and internationally.
We are subject to a wide variety of foreign and domestic laws. Laws, regulations, and standards governing issues that may affect us, such as worker classification, employment, payments, worker confidentiality obligations and whistleblowing, intellectual property, consumer protection, taxation, privacy, and data security are often complex and subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may change or develop over time through judicial decisions or as new guidance or interpretations are provided by regulatory and governing bodies, such as federal and state administrative agencies. Many of these laws were adopted prior to the advent of the internet and mobile and related technologies and, as a result, do not contemplate or address the unique issues of the internet, mobile, and related technologies. Other laws and regulations may be adopted in response to internet, mobile, and related technologies. New and existing laws and regulations (or changes in interpretation of existing laws and regulations), including those concerning worker classification, independent contractors, employment, payments, whistleblowing and worker confidentiality obligations, intellectual property, consumer protection, taxation, privacy, data security, benefits, unionizing and collective action, arbitration agreements and class action waiver provisions, terms of service, website accessibility, background checks (such as the Fair Credit Reporting Act, 15 U.S.C. § 1681), escheatment, and federal contracting may also be adopted, implemented, or interpreted to apply to us and other online services marketplaces or our users. As our platform’s geographical scope expands and as we expand the categories of services offered on our platform, regulatory agencies or courts may claim that we, or our users, are subject to additional requirements, or are prohibited from conducting our business or conducting business with us in or with certain jurisdictions, either generally or with respect to certain services. It is also possible that certain provisions in agreements with our service providers or between freelancers and clients may be found to be unenforceable or not compliant with applicable law.
Recent financial, political, and other events may increase the level of regulatory scrutiny on larger companies, technology companies in general, and companies engaged in dealings with independent contractors or payments in particular. Regulatory agencies may enact new laws or promulgate new regulations that are adverse to our business or the interests of our users, or they may view matters or interpret laws and regulations differently than they have in the past or in a manner adverse to our business or the interests of our users. Such regulatory scrutiny or action may create different or conflicting obligations on us from one jurisdiction to another.
Our success, or perceived success, and increased visibility may also drive some businesses that view our business model to be a threat to raise concerns about our business model to local policymakers and regulators. These businesses and their trade association groups or other organizations may take actions and employ significant resources to shape the legal and regulatory regimes in countries where we have, or may seek to have, a significant number of users in an effort to change such legal and regulatory regimes in ways intended to adversely affect or impede our business and the ability of users to utilize our platform.
As we look to expand our international footprint over time, we may become obligated to comply with additional laws and regulations of the countries or markets in which we operate or have users. If we are found to be subject to new or existing laws and regulations, contractual provisions that are designed to protect and mitigate against risks, including terms of service, arbitration and class action waiver provisions, disclaimers of warranties, limitations of liabilities and indemnification provisions, could be deemed unenforceable as to the application of these laws and regulations by a court, arbitrator or other decision-making body. If we are unable to comply with these laws and regulations or manage the complexity of global operations and supporting an international user base successfully or in a cost-effective manner, our business, operating results, and financial condition could be adversely affected.
We face intense competition and could lose market share to our competitors, which could adversely affect our business, operating results, and financial condition, and operating results.condition.
The market for freelancersindependent talent and the clients that engage them is highly competitive, fragmented and rapidly evolving, fragmented, and subjectincluding due to changing technology, shifting needs, and frequent introductions of new competitors as well as new products and services.competitors. We compete with a number of online and offline platforms and services domestically and internationally, to attract and retain users and expand our share of user spend.as well as traditional staffing firms. Our main competitors fall into the following categories:
•traditional contingent workforce and staffing service providers and other outsourcing providers, such as The Adecco Group, Randstad, Recruit, ManpowerGroup,Allegis Group, and Robert Half International;
•online freelancer platforms that serve either a diverse range of skill categories, such as Fiverr, Guru, and Freelancer.com, or specific skill categories;
•other online providers of products and services for individuals or businesses seeking work or to advertise their services, including personal and professional social networks, such as LinkedIn and GitHub (each owned by Microsoft), employment marketplaces, platforms providing compliance services, recruiting websites, and project-based deliverable providers;
•software and business services companies focused on talent acquisition, management, invoicing, or staffing management products and services;
payment businesses,services, such as PayPal and Payoneer,Workday;
•payment businesses that can facilitate payments to and from businesses and service providers;providers, such as PayPal and Payoneer;
•businesses that provide specialized professional services, including consulting, accounting, marketing, and information technology services; and
•online and offline job boards, classified ads, and other traditional means of finding work and service providers, such as Craigslist, CareerBuilder, Indeed, Monster, and ZipRecruiter.
In addition, well-established internet companies, such as Google, LinkedIn, and Amazon, and social media platforms, such as Facebook,Meta, and businesses that operate driving, delivery, and other commoditized marketplaces, such as Uber Technologies, have entered or may decide to enter into our market segment, and somesegment. Some of these companies have launched or may launch, or have acquired or may acquire companies or assets that offer products and services that directly compete with our platform.work marketplace. For example, in 2016, LinkedIn launched ProFinder itsin 2016, Open for Business in
2019, and Services Marketplaces in 2021, each of which is a service to connect LinkedIn members with one another for freelance service relationships. Many of these established internet companies and other competitors are considerably larger than we are, and have considerably greater financial and other resources than we do.
Internationally, we compete against onlinedo, and offline channels andcould offer products and services in most countries. Local competitors might have greater brand recognition than us in their local country and a stronger understanding of local culture and commerce. They may also offer their products and services in local languages and currencies that we do not offer. Assimilar to our business grows internationally, we may increasingly compete with these international companies. We also compete against locally-sourced service providers and traditional, offline means of finding work and procuring services, such as personal and professional networks, classified ads, recruiters, and staffing businesses.
offerings for lower fees.
We also compete with companies that utilize emerging technologies and assets, such as blockchain, artificial intelligence, augmented reality, cryptocurrency, and machine learning. Many of the companies and services that utilize these technologies in our market are still new and not yet fully mature in their capabilities or network scale. However, we may face increased competition should these companies and services succeed. These competitors may offer products and services that may, among other things, provide automated alternatives to the services that freelancerstalent provide on our platform,work marketplace, use machine learning algorithms to connect businesses with service providers more effectively than we do, or otherwise change the way that businesses engage or pay service providers or the way service providers perform work so as to make our platformwork marketplace less attractive to users.customers. We may face increased competition from these competitors as they mature and expand their capabilities.
Internationally, we compete against online and offline channels and products and services. Local competitors, or competitors that have invested more in international expansion, have greater brand recognition in other countries and a stronger understanding of local or regional culture and commerce. Some competitors also offer their products and services in local languages and currencies that we do not offer. We also compete against locally sourced service providers and traditional, offline means of finding work and procuring services. In addition, our decision to suspend our business operations in Russia and Belarus in March 2022 may increase the risk that new competitors emerge in the region.
Many of our current and potential competitors both online and offline, enjoy substantial competitive advantages, such asas: greater name recognition;recognition and more prominent brand reputation; pre-existing relationships with desirable clients; more experience with international operations and localization of their offerings; longer operating histories; greater financial, technical, and other resources; more customers; newer technologies and more modern technical infrastructure; greater appeal to certain segments of customers, such as those entering the workforce; and, in some cases, the ability to rapidly combine online platforms with traditional staffing and contingent worker solutions. These companies may use these advantages to offer products and services similar to ours at a lower price, develop different or superiorcompetitive products, and services to compete with our platform, or respond more quickly and effectively than we do to new or changing opportunities, technologies, standards, regulatory conditions, useror customer preferences or requirements. In addition, while we compete intensely in more established markets, we also compete in developing technology markets that are characterized by dynamic and rapid technological change, many and differentvaried business models, and frequent disruption of incumbents by innovative online and offline entrants. The barriers to entry into these markets can be low, and businesses easily and quickly can launch online or mobile platforms and applications quickly and at nominal cost by using commercially available software or partnering with various established companies in these markets. For all of these reasons, we may not be able to compete successfully against our current and future competitors.
Moreover, current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others, including our current or future third-party partners. By doing so, these competitors may increase their ability to meet the needs of our existing or prospective users. These developments could limit our ability to obtain revenue from existing and new users. Ifcustomers. For all of these reasons, we are unablemay not be able to compete successfully against our current and future competitors, in which case our business, operating results, and financial condition would be adversely impacted.
If we fail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be adversely affected.
The Upwork brand did not exist before 2015, but we believe that developing, maintaining, and enhancing awareness and integrity of our brand and reputation in a cost-effective manner are important to achieving widespread acceptance and use of our platform and are important elements in attracting new users and retaining existing users. Successful promotion of our brand and our business model depends on, among other things, the effectiveness of our marketing efforts, our ability to provide a reliable, trustworthy, and useful platform at competitive prices, the perceived value of our platform, and our ability to provide quality support. In order to reach brand awareness levels of our competitors, we will need to continuously invest in marketing programs that may not be successful in achieving meaningful awareness levels. Further, brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in building and maintaining our brand and reputation. For example, in 2018 and 2017, we increased investment in offline advertising in certain markets to increase our brand awareness, and it is not certain that these investments will have a positive impact on our brand or will be cost effective. In order to protect our brand, we also expend substantial resources to register and defend our trademarks and to prevent others from using the same or substantially similar marks. Despite these efforts, we may not always be successful in registering and preventing misappropriation of our own marks and other intellectual property or preventing registration of confusingly similar marks, and we may suffer dilution, loss of reputation, genericization, or other harm to our brand. We also rely on our community of users in a variety of ways, including their willingness to give us feedback regarding our platform, and failure of our users to provide positive feedback on their experience on our platform or our failure to adequately address these concerns could negatively impact the willingness of prospective users to use our platform. If we fail to promote and maintain our brand successfully or to maintain loyalty among our users, or if we incur substantial expenses in unsuccessful attempts to promote and maintain our brand, we may fail to attract new users or retain our existing users and our business and financial condition may be adversely affected.
There may be adverse tax, legal, and other consequences if the contractor classification or employment status of freelancers that use our platform is challenged.
Clients are generally responsible for properly classifying the freelancers they engage through our platform under the terms of our user agreement. Some clients opt to classify freelancers as employees for certain work, while many freelancers are classified as independent contractors.
We offer an optional service to our Upwork Enterprise clients, for which we help classify freelancers as employees of third-party staffing providers or independent contractors. For clients that subscribe to this service, subject to applicable law and the terms of our agreement with the client, we indemnify clients from misclassification risk and make warranties to the client (e.g., as to compliance with applicable laws). In addition, we offer a number of other premium services where we provide increased assistance to enable users to find and contract with one another. Third-party staffing providers employ freelancers classified as
employees for clients, and failure of these staffing providers to comply with all legal and tax requirements could adversely affect our business. We also use our platform to find, classify, and engage freelancers to provide services for us or for our managed services offering. In general, were a court or administrative agency to determine that we or clients that use our platform have misclassified a freelancer as an independent contractor, we and/or our users could incur tax and other liabilities for failing to properly withhold or pay taxes on the freelancer’s compensation as well as potential wage and hour and other liabilities depending on the circumstances and jurisdiction. Although we maintain insurance policies covering liability for certain claims, we cannot be certain that our coverage will extend to or be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.
There is often uncertainty in the application of worker classification laws, and consequently there is risk to us and to users, both freelancers and clients, that independent contractors could be deemed to be misclassified under applicable law. The tests governing whether a service provider is an independent contractor or an employee are typically highly fact sensitive and vary by governing law. Laws and regulations that govern the status and misclassification of independent contractors are also subject to change as well as to divergent interpretations by various authorities, which can create uncertainty and unpredictability. A misclassification determination or allegation creates potential exposure for users and for us, including but not limited to monetary exposure arising from or relating to failure to withhold and remit taxes, unpaid wages, and wage and hour laws and requirements (such as those pertaining to minimum wage and overtime); claims for employee benefits, social security contributions, and workers’ compensation and unemployment insurance; claims of discrimination, harassment, and retaliation under civil rights laws; claims under laws pertaining to unionizing, collective bargaining, and other concerted activity; and other claims, charges, or other proceedings under laws and regulations applicable to employers and employees, including risks relating to allegations of joint employer liability. Such claims could result in monetary damages (including but not limited to wage-based damages or restitution, compensatory damages, liquidated damages, and punitive damages), interest, fines, penalties, costs, fees (including but not limited to attorneys’ fees), criminal and other liability, assessment, or settlement. Such an allegation, claim, or adverse determination, including but not limited to with respect to the freelancers that provide services to us, or the requirement for us to indemnify a client, could also harm our brand and reputation, which could adversely impact our business. While these risks are mitigated, in part, by our contractual rights of indemnification against third-party claims, such indemnification agreements could be determined to be unenforceable, could be costly to enforce or ineffective, or indemnification may otherwise prove inadequate.
Because a substantial portion of the services offered on our platform is information technology services, a decline in the market for information technology service providers could adversely affect our business.
A significant portion of the services offered by freelancers on our platform relate to information technology. If, for any reason, the market for information technology services declines, including as a result of global economic conditions, automation, increased use of artificial intelligence, or otherwise, or if need for these services slows or businesses satisfy their needs for these services through alternative means, the growth in the number of users of our platform may slow or decline and as a result our revenue and business may be adversely impacted.
Future changes to our pricing model could adversely affect our business.
We implemented a significant change to our pricing model in 2016, which has contributed to GSV having grown at a faster rate than revenue in recent periods, and we may from time to time decide to make further changes to our pricing model due to a variety of reasons, including changes to the market for our products and services, and as competitors introduce new products and services. Changes to any components of our pricing model may, among other things, result in user dissatisfaction and could lead to a loss of users on our platform and could negatively impact our operating results, financial condition, and cash flows.
Adverse or changing economic conditions may negatively impact our business.
Our business depends on the overall demand for labor and on the economic health of current and prospective clients that use our platform. Any significant weakening of the economy in the United States or Europe or of the global economy, more limited availability of credit, a reduction in business confidence and activity, decreased government spending, economic uncertainty, financial turmoil affecting the banking system or financial markets, a more limited market for independent professional service providers or information technology services, and other adverse economic or market conditions may adversely impact our business and operating results. Global economic and political events or uncertainty may cause some of our current or potential clients to curtail spending on our platform, and may ultimately result in new regulatory and cost challenges to our operations. These adverse conditions could result in reductions in revenue, increased operating expenses, longer sales cycles, slower adoption of new technologies, and increased competition. There is also risk that when overall global economic conditions are positive, our business could be negatively impacted by a decreased demand for freelancers. We cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally. If the conditions in the general economy significantly deviate from present levels, our business, financial condition, and operating results could be adversely affected.
Users may circumvent our platform, which could adversely impact our business.
Our business depends on users transacting through our platform. Despite our efforts to prevent them from doing so, users may circumvent our platform and engage with or pay each other through other means to avoid the fees that we charge on our platform. The loss of revenue associated with circumvention of our platform could have an adverse impact on our business, cash flows, operating results, and financial condition.
We face payment and fraud risks that could adversely impact our business.
Requirements on our platform relating to user authentication and fraud detection are complex. If our security measures do not succeed, our platform may be perceived as not being secure, our reputation may be harmed, and our business may be adversely impacted. In addition, bad actors around the world use increasingly sophisticated methods to engage in illegal activities involving personal information, such as unauthorized use of another’s identity or payment information, unauthorized acquisition or use of credit or debit card details and bank account information, and other fraudulent use of another’s identity or information. This could result in any of the following, each of which could adversely impact our business:
we may be, and we historically have been, held liable for the unauthorized use of an account holder’s credit card or bank account number and required by card issuers or banks to return the funds at issue and pay a chargeback or return fee, and if our chargeback or return rate becomes excessive, credit card networks may also require us to pay fines or other fees and the DBO may require us to hold larger cash reserves;
we may be subject to additional risk and liability exposure, including negligence, fraud, or other claims, if employees or third-party service providers, including freelancers that provide services to us, misappropriate our banking or other information or user information for their own gain or facilitate the fraudulent use of such information;
bad actors may use our platform, including our payment processing and disbursement methods, to engage in unlawful or fraudulent conduct, such as money laundering, terrorist financing, fraudulent sale of services, bribery, breaches of security, leakage of data, piracy or misuse of software and other copyrighted or trademarked content, and other misconduct;
users of our website that are subjected or exposed to the unlawful or improper conduct of other users or other third parties, including law enforcement, may seek to hold us responsible for the conduct of other users and may lose confidence in our platform, decrease or cease use of our platform, seek to obtain damages and costs, or impose fines and penalties;
we may be subject to additional risk if clients fail to pay freelancers for services rendered, as freelancers may seek to hold us responsible for the clients’ conduct and may lose confidence in our platform, may decrease or cease use of our platform, or seek to obtain damages and costs;
if freelancers misstate their qualifications or location, provide misinformation, perform services they are not qualified or authorized to provide, produce insufficient or defective work product, or work product with a viral or other harmful effect, clients or other third parties may seek to hold us responsible for the freelancers’ acts or omissions and may lose confidence in our platform, decrease or cease use of our platform, or seek to obtain damages and costs; and
we may suffer reputational damage as a result of the occurrence of any of the above.
Despite measures we have taken to detect and reduce the risk of this kind of conduct, we do not have control over users of our platform and cannot ensure that any of our measures will stop the use of our platform for, or to further, illegal or improper purposes. We have received in the past, and may receive in the future, complaints from clients, freelancers, and other third parties concerning misuse of our platform and wrongful conduct of other users. We have also brought claims against clients and other third parties for their misuse of our platform, and may be required to bring similar claims in the future. Even if these claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.
We may be subject to escrow, payment services, and money transmitter regulations that may adversely affect our business.
Our subsidiary, Upwork Escrow Inc. (“Upwork Escrow”), is licensed as an internet escrow agent under California’s Escrow Law and is subject to regulations applicable to internet escrow agents promulgated by the DBO. While we have received two inquiries, each prior to 2014, from regulatory authorities inquiring whether we are engaging in payment activities through Upwork Escrow or oDesk (which is now Upwork Global Inc. (“Upwork Global”)), these inquiries were resolved in our favor and did not require us to obtain a license in the applicable jurisdiction.
Although we believe that our operations comply with existing U.S. federal, state, and international laws and regulatory requirements related to escrow, money transmission, and the handling or moving of money, the laws or regulations may change, and interpretations of existing laws and regulations may also change. As a result, Upwork Escrow or Upwork Global could be
required to be licensed as an escrow agent or a money transmitter (or other similar licensee) in U.S. states or other jurisdictions or may choose to obtain such a license even if not required. Such a decision could also require Upwork Escrow or Upwork Global to register as a money services business under federal laws and regulations. It is also possible that Upwork Escrow or Upwork Global could become subject to regulatory enforcement or other proceedings in those states or other jurisdictions with escrow, money transmission, or other similar statutes or regulatory requirements related to the handling or moving of money, which could in turn have a significant impact on our business, even if we were to ultimately prevail in such proceedings. Upwork Escrow or Upwork Global may also be required to become licensed as a payment institution (or obtain a similar license) under the European Payment Services Directive or other international laws and regulations. Any developments in the laws or regulations related to escrow, money transmission, or the handling or moving of money, or increased scrutiny of our business may lead to additional compliance costs and administrative overhead.
The application of laws and regulations related to escrow, money transmission, and the handling or moving of money is subject to significant complexity and uncertainty, particularly as those laws relate to new and evolving business models. If Upwork Escrow or Upwork Global is ultimately deemed to be in violation of one or more escrow or money transmitter or other similar statutes or regulatory requirements related to the handling or moving of money in any U.S. state or other jurisdiction, we may be subject to the imposition of fines or restrictions on our business, our ability to offer some or all of our services in the relevant jurisdiction may be suspended, and we may be subject to civil or criminal liability and our business, operating results, and financial condition could be adversely affected.
Having an international community of users and engaging freelancers internationally exposes us to risks that could have an adverse effect on our business, operating results, and financial condition.
Even though we currently have a limited physical presence outside of the United States, our users have a global footprint that subjects us to the risks of being found to do business internationally. We have users on our platform located in over 180 countries, including some emerging markets where we have limited experience, where challenges can be significantly different from those we have faced in more developed markets, and where business practices may create greater internal control risks. Further, certain skills and services are offered by freelancers concentrated in countries with higher risks of instability and geopolitical uncertainty, like Russia and Ukraine. In addition, we engage freelancers located in many countries to provide services for our managed services offering and to us for internal projects. Because our website is generally accessible by users worldwide, one or more jurisdictions may claim that we or our users are required to comply with their laws. Laws outside of the United States regulating internet, payments, escrow, data protection, data residency, privacy, taxation, terms of service, website accessibility, consumer protection, intellectual property ownership, services intermediaries, labor and employment, wage and hour, worker classification, background checks, and recruiting and staffing companies, among others, which could be interpreted to apply to us, are often less favorable to us than those in the United States, giving greater rights to competitors, users, and other third parties. Compliance with international laws and regulations may be more costly than expected, may require us to change our business practices or restrict our service offerings, and the imposition of any such laws or regulations on us, our users, or third parties that we or our users utilize to provide or use our services, may adversely impact our revenue and business. In addition, we may be subject to multiple overlapping legal or regulatory regimes that impose conflicting requirements which could lead to additional compliance costs and enhanced legal risks.
Risks inherent in conducting business with an international user base and engaging freelancers globally include, but are not limited to:
being deemed to conduct business or have operations in the jurisdictions where we have users and being subject to their laws and regulatory requirements;
new or changed regulatory requirements;
varying worker classification standards and regulations;
tariffs, export and import restrictions, restrictions on foreign investments, sanctions, and other trade barriers or protection measures;
costs of localizing services, including adding the ability for clients to pay in local currencies;
lack of acceptance of localized services;
difficulties in and costs of staffing, managing, and operating international operations or support functions;
tax issues;
weaker intellectual property protection;
economic weakness or currency related challenges or crises;
the cost and burden of complying with a wide variety of laws that may be deemed to apply to us, including those relating to labor and employment matters (including but not limited to requirements with respect to works councils or similar labor organizations), consumer and data protection, privacy, network security, encryption, data residency, and taxes, as well as securing expertise in local law and related practices;
fluctuations in foreign currency exchange rates;
compliance with U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;
organizing or similar activity by local unions, works councils, or similar labor organizations;
our ability to adapt to business practices and client requirements in different cultures;
corporate or state-sponsored espionage or cyberterrorism;
macroeconomic and political conditions in certain foreign jurisdictions; and
geopolitical instability and security risks, such as armed conflict and civil or military unrest, political instability, human rights concerns, and terrorist activity in countries where we have users.
The risks described above may also make it difficult for us to expand our operations internationally. Analysis of, and compliance with, global laws and regulations may substantially increase our cost of doing business. We may be unable to keep current with changes in laws and regulations as they develop. Although we have implemented policies and procedures designed to analyze whether these laws apply and, if applicable, support compliance with these laws and regulations, there can be no assurance that we will always maintain compliance or that all of our employees, contractors, partners, users, and agents will comply. Any violations could result in enforcement actions or other proceedings, fines, civil and criminal penalties, damages, interest, costs and fees (including but not limited to legal fees), injunctions, loss of intellectual property rights, or reputational harm. If we are unable to comply with these laws and regulations or manage the complexity of global operations and supporting an international user base successfully and in a cost-effective manner, our business, operating results, and financial condition could be adversely affected.
If we or our third-party partners experience a security breach, other hacking or phishing attack, ransomware or other datamalware attack, or other privacy or security incident, whether inadvertently caused by us or intentionally caused by third parties, and unauthorized parties obtain access to our users’ data, our data, or our platform, networks, or other systems, our platformwork marketplace may be perceived as not being secure, our reputation may be harmed, demand for our platformwork marketplace may be reduced, our operations may be disrupted, we may incur significant legal costs, fines, or liabilities, and our business could be adversely affected.
Our business involves the storage, processing, and transmission of users’customers’ proprietary, confidential, and personal information as well as the use of third-party partners and vendors who store, process, and transmit users’customers’ proprietary, confidential, and personal information. We also maintainuse third-party partners and vendors who process certain other proprietary and confidential information relating to our business and personal information of our personnel. AnyOur systems, and the systems of our vendors and third-party partners, may be vulnerable to privacy or security breach,incidents, such as computer viruses and other hackingmalicious software, physical or phishing attack,electronic break-ins, or other datavulnerabilities resulting from intentional or unintentional service provider actions, and similar disruptions that could make all or portions of our website or applications unavailable for periods of time. Any privacy or security incident whether inadvertently caused by us or intentionally caused by third parties, that we experience could result inin: unauthorized access to, misuse of, or unauthorized acquisition of our, our personnel’s, or our users’ data,customers’ data; the loss, corruption, or alteration of this data,data; interruptions in our operations,operations; or damage to our computers or systems or those of our users.customers. Any of these could expose us to claims, litigation, fines, enforcement actions, other potential liability, and reputational harm. An increasing numberAdditionally, ransomware or other malware, viruses, social engineering (including business email compromise and related wire-transfer fraud), impersonation of online services
our company and executives on social media, and general hacking in our industry have disclosed breachesbecome more prevalent and more complex. Bad actors often try to take advantage of us, our customers, and our vendors and third-party partners by using social engineering and other methods to persuade their security, some of which have involved sophisticatedvictims to make fraudulent payments, or to download viruses, ransomware, or other malware into computer systems and highly targeted attacks on portions of their services.networks. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not foreseeable or recognized until launched against a target, we and our vendors and third-party partners may be unable to anticipate these techniquesincidents or to implement adequate preventative measures. Data security breaches and other privacy and security incidents may also result from non-technical means, such as actions taken by employees or contractors, including talent that we engage on our work marketplace to perform services for us. We have also integrated, and expect to continue to integrate, generative artificial intelligence tools into our platform and products, or our vendors may in turn incorporate generative artificial intelligence tools into their own offerings. We and the providers of these generative artificial intelligence tools may not meet existing or rapidly evolving regulatory or industry standards with respect to data privacy and protection. If we, our vendors, or our third-party partners experience an actual or perceived breach of our or our third-party partners’ security or privacy or other data privacy or security incident, occurs, public perception of the effectiveness of our security measures and brand could be harmed, and we could lose userscustomers and business. DataIn addition, significant unavailability of our work marketplace due to security breaches andor other data privacy and security incidents may also result from non-technical means, for example, actions taken by employeescould cause customers to decrease their use of or contractors, such as freelancers that we engage oncease using our platform to perform services for us. Any compromise of our or our third-party partners’ security could result in a violation of applicable privacy and other laws, regulatory or other governmental investigations, enforcement actions, and legal and financial exposure, including potential contractual liability that is not always limited to the amounts covered by our insurance. Any such compromise could also result in damage to our reputation and a loss of confidence in our security measures.work marketplace. Any of these effects could adversely impact our business.
Our and our third-party partners’ systemsWe may be vulnerable to computer viruses and other malicious software, physical or electronic break-ins, or weakness resulting from intentional or unintentional service provider actions, and similar disruptions that could make all or portions of our website or applications unavailable for periods of time. We mayalso need to expend significant resources to protect against, and to address issues created by, security breaches and other incidents. Security breaches and other privacy and security incidents, including any breaches ofincidents. These liabilities may exceed the amounts covered by our security measures or those of parties with which we have commercial relationships (e.g., freelancers or other third-party service providers who provide development or other services to us) that result
in the unauthorized access of users’ confidential, proprietary or personal information, or the belief that any of these have occurred, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Significant unavailability of our platform due to attacks could cause users to cease using our platform and adversely affect our business. Although we maintain cyber liability insurance,insurance; further, we cannot be certain that our insurance coverage will extend to or be adequate for liabilities actually incurred, or that insurance will continue to be available to us on economically reasonable terms, at coverage limits we deem prudent, or at all.
Errors,Depending on the nature of the information compromised, in the event of a security breach or other privacy or security incident, we may also have obligations to notify affected individuals and entities and regulators about the incident, and we may need to provide some form of remedy, such as a subscription to credit monitoring services, pay significant fines to one or more regulators, reimburse, defend or indemnify third parties, or pay compensation in connection with a class-action settlement (including under the private right of action under the California Consumer Privacy Act of 2018, which we refer to as the CCPA). Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises our, our customers’, our employees’, our contractors’, or other confidential, proprietary, or personal information.
If we fail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be adversely affected.
We believe that the awareness and integrity of our brand and reputation are important to achieving widespread acceptance and use of our work marketplace and attracting and retaining customers. Successful and efficient promotion and positioning of our brand and business depend on, among other things, the effectiveness of our marketing efforts and brand messaging and our ability to provide a reliable, trustworthy, and useful work marketplace and offerings at competitive prices. In order to reach the brand awareness and acceptance levels of some of our competitors, we need to continuously invest in marketing programs that may not be successful, particularly during early phases of expansion into new segments, such as international customers and customers who are reluctant to utilize remote or contract workers. Further, our brand promotion activities may not be successful or cost-effective. We have from time to time launched significant new brand campaigns, including as recently as the third quarter of 2022. We also frequently reassess our marketing spend and in May 2023 implemented measures to reduce our marketing spend. On the other hand, negative publicity and news coverage, fraud, or other illegal activity conducted by bad actors on our work marketplace, or decisions we make relating to geopolitical or social matters, may undermine our brand promotion efforts or harm our reputation.
Additionally, new and developing privacy laws have established individual rights with respect to personal information that may lead to downstream effects on our ability to realize and quantify the value of our marketing initiatives. As more jurisdictions adopt expansive data privacy regulations, an increasing number of customers and website visitors will have the right to opt-out of sharing their personal information for purposes of specific types of online advertising. This may lead to diminished efficacy of our marketing efforts, diminished visitor-to-customer conversions, and increased costs of maintaining compliance.
If we fail to promote and maintain our brand successfully, address customer concerns, or maintain loyalty among our customers, or if we incur substantial expenses in unsuccessful attempts to promote and maintain our brand, we
may fail to attract new customers or retain our existing customers and our business, operating results, and financial condition may be adversely affected.
If internet search engines’ methodologies or other channels that we utilize to direct traffic to our website are modified to our disadvantage, or our search result page rankings decline for other reasons, our customer growth could decline.
We depend in part on internet search engines and other channels to direct a significant amount of traffic to our website and mobile applications. Our ability to maintain the number of visitors directed to our website and mobile applications is not entirely within our control. For example, our competitors’ search engine optimization and other efforts such as paid search may result in their websites receiving a higher search result page ranking than ours, or we may make changes to our website or mobile applications that adversely impact our search engine optimization rankings and traffic in order to comply with requirements imposed by regulators, our vendors or third-party partners, or for other reasons. As a result, links to our website may not be prominent enough to drive sufficient traffic to our website, and we may not be able to influence search engine results.
In addition, search engines and other channels that we utilize to drive customers to our website and mobile applications periodically change their algorithms, policies, and technologies, sometimes in ways that cause traffic to our website and mobile applications to decline. These changes can also result in an interruption in customers’ ability to access our website, a drop in our search ranking, a misunderstanding among potential customers regarding the functionality or purpose of our work marketplace, or have other adverse impacts that negatively affect traffic on our website or mobile applications. We may also be forced to significantly increase marketing expenditures in the event that market prices for online advertising and paid listings escalate or our organic ranking decreases. Any of these changes could have an adverse impact on our customer acquisition, business, operating results, and financial condition.
Business or system errors, defects, or disruptions in our platform could diminish demand, adversely impact our business, operating results, and financial results,condition, and subject us to liability.
Our users utilizesystems and operations and those of our platform for important aspects of their businesses,customers and anythird-party service providers and partners have experienced from time to time, and may experience in the future, errors, defects, and disruptions from a variety of causes, including undetected hardware and software errors or disruptions in our platform,defects, natural disasters such as an earthquake, blizzard, hurricane, fire, or flood, and other catastrophic events, including public health events and pandemics, man-made problems such as warfare or terrorism, human error, cybersecurity attacks, power losses, telecommunications or other performance problems withtechnological failures, and similar events or circumstances. In particular, catastrophic events in geographical areas where our platformemployees or infrastructurecustomers are concentrated could harmhave more severe impacts on our brandbusiness, and reputationthe effects of climate change may increase the frequency and may damageintensity of such events. For example, our corporate headquarters and many key personnel are located in the businesses of users. San Francisco Bay Area, a region known for seismic activity and catastrophic fires.
As the usage of our platform grows,we expand, we will need an increasing amount of technical infrastructure and continued infrastructure modernization, including network capacity, and computing power, and improvements to continue to operate our platform. It is possible thathow we process and store data and transaction information. We may fail to continue to effectively scale and grow our technical infrastructure to accommodate these increased demands, which may adversely affect our usercustomer experience. We are also reliantrely on third-party softwareservice providers and infrastructure, including the infrastructure of the internet, to provide our platform.work marketplace. For example, we currently host our work marketplace, serve our customers, and support our operations using Amazon Web Services, a provider of cloud infrastructure services. We do not have control over the operations or the facilities of our third-party service providers, which are subject to risks of errors, defects, and disruptions. In addition, these third parties generally do not have an obligation to renew their agreements with us on commercially reasonable terms, or at all, and we may not be able to switch to another third-party service provider easily or without incremental costs. Any failureinterruption in the provision of services to us by these third parties for any reason or disruption to this software and infrastructureother unanticipated problems could also make our platform unavailableresult in interruptions to our users. work marketplace, and our and these third parties’ business continuity and disaster recovery plans may prove to be inadequate.
Our platform is constantly changing with new updates, which may contain undetected errors when first introduced or released. Anywork marketplace enables our customers to manage important aspects of their businesses, and any errors, defects, disruptions in service, or other performance or stabilityavailability problems with our platform,work marketplace, or the inadequacy of our effortsinability to adequately prevent or timely detect or remedy errors, defects, or defects,disruptions in service, could harm our brand and reputation, result in negative publicity,security breaches or the loss of or delay in market acceptancecritical data, adversely impact our business and the businesses of our platform, loss of competitive position,customers, impair or jeopardize our inability to timely and accurately maintain our financial records, inaccurate or delayedpartner relationships, result in delays in invoicing of clients delay ofor payment to us or freelancers,talent, negatively impact our ability to obtain or maintain licenses necessary to operate our business or deliver certain services, or result in claims by userscustomers for losses sustained by them.them or investigation or corrective action by regulatory agencies. In any such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to helpattempt
to resolve the issue. Moreover, we may not carry sufficient business interruption insurance to cover losses that may occur as a result of any such events, and we cannot be certain that insurance will continue to be available to us on economically reasonable terms, or at all. Accordingly, any errors, defects, or disruptions in our platformwork marketplace could diminish demand, adversely impact our business, operating results, and financial condition, and subject us to liability.
Our ability to attract and retain customers is dependent in part on the quality of our support, and any failure to offer high-quality support could adversely impact our brandbusiness, operating results, and financial condition.
Our ability to attract and retain customers is dependent in part on the ease of use, trustworthiness, and reliability of our work marketplace, including our ability to provide high-quality support. Our customers depend on our support organization to enforce our terms of service against bad actors, resolve any issues relating to our work marketplace, communicate effectively about their accounts, and assist in their use of our work marketplace, especially large enterprise clients, which expect higher levels of support. Our ability to provide effective support is largely dependent on our ability to attract, resource, and retain service providers who are both qualified and well versed in our work marketplace. The incorporation of generative artificial intelligence into our support tools, either by us or our third-party support partners, may lead to inconsistent quality of experience as these tools are integrated and refined. Offering our website and customer support in only a limited number of languages may negatively impact our relationships with our customers. As we seek to continue to grow our international customer base, our support organization will face additional challenges, including those associated with delivering support and documentation in additional languages. Any failure to maintain high-quality support or effectively communicate with our customers, or any market perception that we do not maintain high-quality support or act professionally, fairly, or effectively in our communications and actions, could harm our reputation, revenue,adversely affect our ability to sell our work marketplace to existing and prospective customers, and could adversely impact our business, operating results, and financial condition.
Our customer growth and engagement on mobile devices depend upon third parties maintaining open application marketplaces and effective operation with mobile operating systems, networks, and standards that we do not control.
Mobile devices are increasingly used for marketplace transactions. A significant and growing portion of our customers access our work marketplace through mobile devices, including through mobile applications. Our mobile applications rely on third parties maintaining open application store platforms, including the Apple App Store and Google Play, which make current and new applications or new versions of our mobile applications available for download and use on mobile devices. These platforms may not maintain their current structures or terms of access, continue to make our mobile applications or newer versions of our mobile applications available for download, and may charge us additional fees or impose additional requirements, which may be costly and burdensome to meet or may adversely affect customer experience. Additionally, popular mobile operating systems, such as Android and iOS, could stop supporting our work marketplace or the ability to make payments on our work marketplace at all or on commercially reasonable terms or make changes that degrade the functionality of or customer experience on our marketplace. In order to deliver high-quality mobile offerings, it is important that our offerings are designed effectively and work well with a range of mobile devices, technologies, systems, networks, and standards that we do not control, and we may not be successful in developing relationships with key participants in the mobile industry or in developing offerings that operate effectively. In the event that it is inconvenient or impossible for our customers to access and use our work marketplace on their mobile devices or our competitors develop offerings and services that are perceived to operate more effectively on mobile devices, our business, operating results, and financial condition could be adversely impacted.
Risks Related to Legal and Regulatory Matters
Our business is subject to extensive government regulation and oversight. Any failure to comply with the extensive, complex, overlapping, and frequently changing laws and regulations, both in the United States and internationally, could adversely impact our business, operating results, and financial condition.
We and our customers are subject to a wide variety of foreign and domestic laws and regulations. Laws, regulations, and standards governing issues that may affect our business, including worker classification, employment, worker health, payments, worker confidentiality obligations and whistleblowing, intellectual property, consumer protection, taxation, privacy, and data security, are often complex and subject to varying interpretations, and, as a result, their enforcement and application in practice may change or develop over time. Many of these laws were adopted prior to the advent of the internet, mobile, and related technologies and, as a result, do not contemplate or address the unique issues of such technologies.
In addition, because our website is generally accessible by customers worldwide, we have received in the past, and may continue to receive, notices from jurisdictions claiming that we or our customers are required to comply with their laws and regulations. Laws and regulations outside of the United States regulating areas that could be interpreted to apply to our business are often less favorable to us than those in the United States, giving greater rights to competitors, customers, and other third parties. Compliance with international laws and regulations may be more costly than expected, may require us to change our business practices or restrict or modify our offerings or obtain certain licenses, and such changes or licensure may not be possible on a reasonable timeline or at all, and the imposition of any such laws or regulations on us, our customers, or third parties that we or our customers utilize to provide or use our services, may adversely impact our business and operating results. In addition, we may be subject to multiple complex overlapping legal or regulatory regimes that impose conflicting requirements, including with respect to data protection and privacy, which could lead to additional compliance costs and enhanced legal risks.
ChangesRegulatory scrutiny on large companies, technology companies in general, and companies engaged in dealings with independent contractors, payments, or personal information in particular, has increased significantly and may continue to increase. New and existing laws and regulations (or changes in interpretation of existing laws and regulations) may be adopted, implemented, or interpreted to apply to our business or our customers, including as a result of new products or features we may introduce or international expansion of our business. In addition, these laws and regulations relatingaffect our customers and may affect demand for our work marketplace. If we determine additional legal requirements apply to privacyour business, we may expend resources to comply or obtain licenses, and such efforts may be a distraction to the business or require adverse changes to the manner in which we conduct our business or our work marketplace and may themselves cause regulatory agencies to scrutinize our business, including past practices. It is also possible that certain provisions in agreements with our customers or service providers, or between talent and clients, or the protectionfees we charge, may be found to be unenforceable or transfernot compliant with applicable law.
Although we have implemented policies and procedures designed to analyze and support compliance with applicable laws and regulations, there can be no assurance that we will maintain compliance, that our interpretations are or will remain correct, or that all of personal data,our employees, contractors, partners, customers, and agents will comply. We have in the past been, and may in the future be, subject to administrative inquiries and audits concerning our compliance with applicable laws and regulations, including the taxation and classification of our workers and the customers of our work marketplace. Any failure or any actual or perceivedalleged failure by us to comply with suchapplicable laws and regulations creates risk for our business and our employees, contractors and customers and could result in enforcement actions or other proceedings, criminal or civil fines and penalties or other actions, civil lawsuits, forfeiture of significant assets, the limitation or suspension of our privacy policies,ability to operate our business or certain services in a particular jurisdiction, damages, interest, loss of export privileges, costs and fees (including legal fees), injunctions, loss of intellectual property rights, whistleblower complaints, termination of agreements by our partners, the diversion of management’s attention and resources, or reputational harm and adverse media coverage. Certain claims may not be covered by our insurance, and we cannot be certain that our insurance coverage will cover liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Any of the foregoing could, individually or in the aggregate, harm our reputation and adversely affect our business, operating results, and financial condition, and we could be required to make costly and burdensome changes to our business practices or compliance programs.
Worker Classification
Our clients are generally responsible for properly classifying the talent they engage through our work marketplace. Some clients opt to classify talent as employees for certain work, while talent in many other cases are classified as independent contractors.
We offer an optional service to customers of our Enterprise Solutions offering and other premium offerings through which we help classify talent as employees of third-party staffing providers or independent contractors. For clients of these services, subject to applicable law and the terms of our agreement with the client, we indemnify clients from misclassification risk and make certain warranties to the client, such as to compliance with applicable laws. In addition, we offer other premium offerings where we provide increased assistance to customers to find and contract with one another, which could increase employment-related risks. Third-party staffing providers employ talent classified as employees for clients, and failure of these staffing providers to comply with all legal and tax requirements could adversely affect our business. We also use our work marketplace to find and engage talent to provide services for us and for our Managed Services offering, which subjects us to additional misclassification risk.
There is significant uncertainty in the worker classification regulatory landscape and the application of worker classification laws, which are regularly subject to further regulation, amendment, or re-interpretation, and consequently there is risk to us and to customers that independent contractors could be deemed to be misclassified under applicable law, including as a result of changes in our offerings or brand positioning that we may introduce. Laws and regulations that govern the status and misclassification of independent contractors are highly fact sensitive and also subject to change as well as to divergent interpretations by various authorities, which can create uncertainty and unpredictability. For example, in California, Assembly Bill 5, which we refer to as AB 5, went into effect on January 1, 2020 and is widely viewed as expanding the scope of the definition of “employee” for most purposes under California law. Since the enactment of AB 5, and subsequent amendments and challenges (including California’s Proposition 22) to the law, there is little guidance from the courts or the regulatory authorities charged with its enforcement and there remains a degree of uncertainty regarding its application. Further, in January 2024, the U.S. Department of Labor published a new final rule regarding the classification of workers as independent contractors or employees under the Fair Labor Standards Act, and while we expect this new rule to have minimal, if any, impact on the independent work relationships formed on our platform, it may increase uncertainty for our customers and may be delayed or changed again as a result of recently-filed litigation. Other federal agencies, U.S. states, or jurisdictions outside the United States may enact similar legislation or rules.
Even if any new regulations do not directly impact our business, public perception may result in confusion about the standards to be applied when making an employment determination and cause clients to explore alternative arrangements to meet their talent needs. In addition, any developments or changes in the regulatory environment impacting worker classification and independent contractors may reduce the demand for independent contractors more generally in one or more jurisdictions and have an adverse effect on our business, operating results, and financial condition.
Privacy and Data Protection
We receive, collect, store, process, transfer, and use personal information and other usercustomer data. There are numerous federal, state, local, and international laws and regulations regarding privacy, data protection, information security, and the collection, storing, sharing, use, processing, transfer, disclosure, and protection of personal information and other content, the scope of which are changing, subject to differing interpretations, and may be inconsistent among countries, or conflict with other laws and regulations.data. We are also subject to the terms of our privacy policies and legal and contractual obligations to third parties related to privacy, data protection, and information security. We strive to comply with applicable laws, regulations, policies, and other legal obligations relating to privacy, data protection, and information security to the extent possible. However, the
The regulatory framework for privacy and data protection worldwide is, and is likely to remain for the foreseeable future, uncertain and complex, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that we do not anticipate or that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Further, any significant changeIn addition, public and regulatory scrutiny of and complaints about technology companies in general regarding their data handling or data protection practices has increased and may continue to applicableincrease.
We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, automated processing, and information security. For example, Europe’s General Data Protection Regulation, which we refer to as the GDPR, the UK General Data Protection Regulation, and Europe’s Digital Services Act impose stringent data protection and data handling compliance requirements and provide for significant penalties for noncompliance. Additionally, there is increased focus on automated processing and processing via artificial intelligence that may lead to increased restrictions that could impact our platform’s functionality. For example, we have recently established several partnerships that have allowed us to integrate generative artificial intelligence tools into our work marketplace aimed at improving customer experience and productivity. If regulatory authorities or industry practices regardinglegal challenges against us or our vendors that provide us with artificial intelligence services impose new restrictions on artificial intelligence in ways that prevent the collection, use, retention, security, or disclosure of our users’ data, or their interpretation, or any changes regarding the manner in which the express or implied consent of users for the collection, use, retention, or disclosureincorporation of such tools into our platform or limit their functionality, the potential benefits to our business of artificial intelligence may not be fully realized. In California, the CCPA, in conjunction with its California Privacy Rights Act amendment, requires, among other things, covered companies to provide certain disclosures to California consumers and affords such consumers certain rights, including the right to opt-out of certain sales of personal data. The CCPA also provides for civil penalties for violations as well as a private right of action for data must be obtained,breaches that may increase data breach litigation. A growing number of U.S. states have enacted similar or other data protection legislation that have or will go into staggered effect in the near future, and several other states and countries are considering expanding or passing privacy laws in the near term.
The enactment of more restrictive laws, rules, regulations, or future enforcement actions or investigations could increase our costs and require us to materially modify our services and features, possibly in a material manner, which we may be unable to complete in a cost-effective manner, or at all, and may limit our ability to store and process usercustomer data or
develop new services and features.
We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, European legislators adopted the General Data Protection Regulation (“GDPR”), which became effective in May 2018, superseded existing European Union data protection legislation, imposes more stringent European Union data protection requirements, and provides for significant penalties for noncompliance. The GDPR creates new compliance obligations applicable to our business, users and third-party partners, which could cause us to change our business practices, and increases financial penalties for noncompliance, including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million, whichever is higher, for the most serious violations. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR has been and will be a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to governmental investigations or enforcement actions, fines and penalties, claims, litigation, and reputational harm in connection with any European activities. Additionally, in June 2018, California passed the California Consumer Privacy Act (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for companies, effective in 2020. Fines for noncompliance may be up to $7,500 per violation. The costs of compliance with, and other burdens imposed by, the GDPR and CCPA may limit the use and adoption of our products and services and could have an adverse impact on our business. As a result, we may need to modify the way we treat such information. Further, the United Kingdom has initiated a process to leave
the European Union that has created uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, although the United Kingdom has proposed a Data Protection Bill that would be substantially consistent with the GDPR, this bill remains in the legislative process in the United Kingdom and it remains unclear whether it will be enacted or what it will provide for if enacted.
Any failure or perceived failure by us to comply with our posted privacy policies, our privacy-related obligations to users or other third parties, or any other legal obligations or regulatory requirements relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in significant liability, cause our users to lose trust in us, and otherwise have an adverse effect on our reputation and business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our userscustomers may limit the adoption and use of, and reduce the overall demand for, our platform.
work marketplace. Additionally, ifviolations of applicable laws, regulations, or agreements by third parties we work with violate applicable laws, regulations, or agreements, such violations may put the data of our users’ datacustomers, employees, contractors, and others at risk, could result in governmental investigations or enforcement actions, fines, litigation, claims, or public statements against us by consumer advocacy groups or others, and could result in significant liability, causereduce our users to losecustomers’ trust in us, and otherwise have an adverse effect onharm our reputation and business. Further, public scrutiny of or complaints about technology companies or their data handling or data protection practices, even if unrelated to our business, industry, or operations, may lead to increased scrutiny of technology companies, including us, and may cause government agencies to enact additional regulatory requirements, or to modify their enforcement or investigation activities, which may disrupt the conduct of our business and increase our costs and risks.
We have experienced growth in recent periods and expect to continue to invest in our growth for the foreseeable future. If we are unable to manage our growth effectively, our revenue and profits could be adversely affected.
We have experienced growth in a relatively short period of time. For example, our total revenue for the year ended December 31, 2018 was $253.4 million, representing a year-over-year growth rate of 25% from 2017. We plan to continue to expand our operations and personnel significantly. Sustaining our growth will place significant demands on our management as well as on our administrative, operational, and financial resources. To manage our growth, we must continue to improve our operational, financial, and management information systems; expand, motivate, and effectively manage our workforce; and effectively collaborate with our third-party partners. If we are unable to manage our growth successfully without compromising our quality of service or our profit margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits,impact our business, operating results, and financial condition, and ability to successfully market our platform and serve our users could be adversely affected.condition.
Payments
Our recentsubsidiary, Upwork Escrow Inc., is licensed as an internet escrow agent under California’s Escrow Law and historical growth should not be considered indicativeis subject to regulations applicable to internet escrow agents promulgated by the DFPI. Although we are a licensed internet escrow agent and believe that our operations comply with existing U.S. federal, state, and international laws and regulatory requirements related to escrow, generating interest from customer funds held in escrow, money transmission, and the handling or moving of our future performance. We have encountered inmoney, the past,laws and will encounter in the future, risks, challenges, and uncertainties frequently experienced by growing companies in rapidly changing industries. If our assumptions regarding these risks, challenges, and uncertainties, which we use to plan and operate our business, are incorrectregulations or change, or if we do not address these risks successfully, our financial condition and operating results could differ materially from our expectations, our growth ratestheir interpretations may slow,change, and our business would be adversely impacted.
Our sales efforts are increasingly targeted at large enterprise clients,operations and asofferings may change resulting in new or different regulatory requirements being applicable to our business. As a result, we may encounter greater pricing, implementation, and customization challenges, and we may havecould be required, or choose, to delay revenue recognition for more complicated transactions, each of which could adversely impact our business and operating results.
Our sales efforts are increasingly targeted at large enterprise clients, andbecome licensed as an escrow agent or a money transmitter (or other similar licensee) in other states or jurisdictions or as a result, we face greater costs, longer sales cycles, and less predictability in completing some of our sales and in increasing spend by existing clients. For larger clients, use of our platform may require approvals by multiple departments and executive-level personnel and require us to provide greater levels ofmoney services and client education regarding the uses, benefits, security, privacy, worker classification, payments, and compliance services offered on our platform. Larger enterprises typically have longer decision-making and implementation cycles and may demand more customization, higher levels of support, a broader range of services, and greater payment flexibility. In addition, larger enterprises may require greater functionality and scalability and acceptance provisions that can lead to a delay in revenue recognition. We are often required to spend time and resources to better familiarize potential enterprise clients with the value propositions of our platform generally. Despite our efforts in familiarizing potential enterprise clients with the benefits of our platform, some potential enterprise clients may decide not to use our platform if, among other reasons, they do not feel that their procurement or compliance needs are or will be met.business. It is difficult to find sales personnel with the specific skills and technical knowledge needed to sell our Upwork Enterprise offering and other premium offerings. Even if we are able to hire qualified personnel, doing so may be costly and lengthy, as new sales personnel require significant training and can take a number of months to achieve full productivity. As a result of these factors, sales opportunities with large enterprises may require us to devote greater sales and administrative support and professional services resources to individual clients, which could increase our costs, lengthen our sales cycle, and divert our own sales and professional services resources to a smaller number of larger
clients. We may spend substantial time, effort, and money in our sales efforts without being successful in producing sales or growing client spend.
Even if we reach agreement with an enterprise client to use our platform, the agreement may not be on pricing or other terms that are favorable to us. Moreover, a significant portion of the fees we typically receive from enterprise clients is contingent on the level of spend by the client. If an enterprise client negotiates pricing terms that are not favorable to us, does not engage freelancers on our platform, or uses freelancers for projects of nominal value, our revenue from the relationship may be minimal.
We also have in the past agreed, and may in the future agree, to take on additional risk for worker classification, privacy, security, work product, payments, or other matters for larger clients, or to other terms that are unfavorable to us in order to secure a client’s business or increase their spend. All these factors can add further risk to business conducted with these clients even after a successful sale.
Our revenue growth and ability to achieve and sustain profitability will depend in part on being able to expand our sales force and increase the productivity of our sales force.
We have only recently begun generating revenue from our Upwork Enterprise offering and other premium offerings. In order to increase our revenue from these offerings and achieve and sustain profitability, we must increase the size of our sales force and generate additional revenue from new and existing users.
There is significant competition for sales personnel with the skills and technical knowledgepossible that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of sales and sales support personnel to support our growth. New sales personnel require significant training and can take a number of months to achieve full productivity. Our recent hires and planned hires may notcould become productive as quickly as we expect and if our new sales personnel do not become fully productive on the timelines that we have projected, or at all, our revenue will not increase at anticipated rates, or at all, and our ability to achieve long-term projections may be negatively impacted. We may also be unable to hire or retain a sufficient number of qualified sales personnel. Furthermore, hiring sales personnel in new markets requires additional costs that we may not recover if the sales personnel fail to achieve full productivity. If we are unable to hire and train a sufficient number of effective sales personnel, or if our sales personnel are not successful in obtaining new business or increasing sales to our existing user base, our business will be adversely affected.
Our user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control.
Mobile devices are increasingly used for marketplace transactions. A significant and growing portion of our users access our platform through mobile devices. There is no guarantee that popular mobile devices will continue to support our platform, that the use of mobile devices for marketplace transactions will be available on commercially reasonable terms, or that mobile device users will use our platform rather than competing products. We are dependent on the interoperability of our platform with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade the functionality of our website or applications or give preferential treatment to competitors could adversely affect our platform’s usage on mobile devices. Additionally, in order to deliver high-quality mobile products, it is important that our products are designed effectively and work well with a range of mobile devices, technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these devices, technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use our platform on their mobile devices or users find our mobile offering does not effectively meet their needs, our competitors develop products and services that are perceived to operate more effectively on mobile devices, or if our users choose not to access or use our platform on their mobile devices or use mobile products that do not offer access to our platform, our user growth, user engagement, and business could be adversely impacted.
If internet search engines’ methodologies or other channels that we utilize to direct traffic to our website are modified, or our search result page rankings decline for other reasons, our user growth could decline.
We depend in part on various internet search engines, such as Google and Bing, as well as other channels to direct a significant amount of traffic to our website. Our ability to maintain the number of visitors directed to our website is not entirely within our control. For example, our competitors’ search engine optimization and other efforts may result in their websites receiving a higher search result page ranking than ours, internet search engines or other channels that we utilize to direct traffic to our website could revise their methodologies in a manner that adversely impacts traffic to our website, or we may make changes to our website that adversely impact our search engine optimization rankings and traffic. As a result, links to our website may not be prominent enough to drive sufficient traffic to our website, and we may not be able to influence the results.
We may experience a decline in traffic to our website if third-party browser technologies are changed, or search engine or other channels that we utilize to direct traffic to our website change their methodologies or rules, to our disadvantage. We expect the search engines and other channels that we utilize to drive users to our website to continue to periodically change their algorithms,
policies, and technologies. These changes may result in an interruption in users’ ability to access our website or impair our ability to maintain and grow the number of users that visit our website. We may also be forced to significantly increase marketing expenditures in the event that market prices for online advertising and paid listings escalate or our organic ranking decreases. Any of these changes could have an adverse impact on our business and operating results.
If we are unable to maintain our payment partner relationships, or if our payment partners encounter business difficulties, our business could be adversely affected.
Our payment partners consist of payment processors and disbursement partners. We rely on banks and card processors to provide clearing, processing, and settlement functions for the funding of all transactions on our platform. We also rely on a network of disbursement partners to disburse funds to users.
Our payment partners are critical to our business. In order to maintain these relationships, we have in the past been, and may in the future be, forced to agree to terms that are unfavorable to us. If we are unable to maintain our agreements with current payment partners on favorable terms or at all, or we are unable to enter into new agreements with new payment partners on favorable terms or at all, our ability to disburse transactions and our revenue and business may be adversely affected. This could occur for a number of reasons, including the following:
our payment partners may be unable to effectively accommodate changing service needs, such as those which could result from rapid growth or higher volume;
our payment partners could choose to terminate or not renew their agreements with us, or only be willing to renew on different or less advantageous terms;
our payment partners could reduce the services provided to us, cease doing business with us, or cease doing business altogether;
our payment partners could be subject to delays, limitations, or closures of their own businesses, networks, or systems, causing them to be unable to process payments or disburse funds for certain periods of time;
our payment partners may be subject to investigation, regulatory enforcement or other proceedings that result in their inabilitystates or unwillingnessother jurisdictions with escrow, money transmission, electronic money, or other similar statutes or regulatory requirements related to provide services to us;the handling, storing, or
we moving of money, and such risk may be forced to cease doing business with payment processorsincrease if card association operating rules, certification requirements and laws, regulations, or rules governing electronic funds transfers to which we are subject changerequired or are interpretedchoose to make it difficultpursue additional or impossible for us to comply.
We relydifferent licenses, which could in turn have a significant impact on AWS to deliver our platform to our users, and any disruption of service from AWS or material change to our arrangement with AWS could adversely affect our business. We aremay also subjectbe required, or choose, to litigation relatingbecome licensed as a payment institution (or obtain a similar license) under the European Payment Services Directive or other international laws and regulations or may choose to our use of AWS.obtain such a license even if not required or in order to support new products or services.
We currently host our platform, serve our users, and support our operations using AWS, a provider of cloud infrastructure services. We do not have control overAny developments or inconsistencies in the operationsrequirements, interpretations, or applicability of the facilitieslaws or regulations related to escrow, money transmission, or the handling, storing, or moving of AWS that we use. AWS’s facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures, and similar events. The occurrence of any of these events, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions to our platform. The facilities also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. Our platform’s continuing and uninterrupted performance is critical to our success. Users may become dissatisfied by any system failure that interrupts our ability to provide our platform to them. We may not be able to easily switch our AWS operations to another cloud or other data center provider if there are disruptions or interference with our use of AWS, and, even if we do switch our operations, other cloud and data center providers are subjectmoney; material changes to the same risks. Sustainedmandate, purview or repeated system failures would reduceregulatory approach at the attractivenessDFPI; or increased scrutiny of our platformbusiness may lead to users, thereby reducing revenue.additional compliance costs and administrative overhead. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely impact use of our platform. We may not carry sufficient business interruption insurance to compensate us for lossesthe extent that may occurholding or pursuing escrow, money transmitter, or similar licenses involves complying with other regulatory frameworks, such as a result of any events that cause interruptions in our service.
AWS does not have an obligation to renew its agreements with us on commercially reasonable terms,GDPR or at all. If we are unable to renew our agreements on commercially reasonable terms, our agreements are prematurely terminated, or we add additional infrastructure providers,CCPA, we may experience costsincreased enforcement or downtime in connection with the transfer to, or the addition of, new data center providers. If these providers increase the cost of their services, we may have to increase the fees to use our platformother proceedings.
Anti-Corruption, Anti-Money Laundering, and our operating results may be adversely impacted.
In addition, we and other customers of AWS have been subject to litigation by third parties claiming that AWS and basic HTTP functions infringe their patents. Although we expect Amazon to indemnify us with respect to at least a portion of such claims, the litigation may be time consuming, it may divert management’s attention, and, if Amazon fails to fully indemnify us, it may adversely impact our operating results.
Failure to comply with anti-corruption, anti-money laundering, and sanctions laws, including the United States Foreign Corrupt Practices Act (the “FCPA”) and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.Sanctions
We have voluntarily implemented an anti-money laundering compliance program designed to address the risk of our platformwork marketplace being used to facilitate money laundering, terrorist financing, andor other illicitillegal activity. However, our program may not be sufficient to prevent our work marketplace from being used to improperly move money or may not satisfy the expectations of our partners or regulators. In addition, if we or a regulator determine that we are required to comply with the Bank Secrecy Act, 31 U.S.C. § 5311, or similar laws outside of the United States, we may be required to enhance or alter our anti-money laundering compliance program.
We also have policies, procedures, and sophisticated technology designed to allow us to comply with U.S. economic sanctions laws and prevent our platformwork marketplace from being used to facilitate business in countries, regions, or with persons or entities included on designated lists promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Control, (“OFAC”)which we refer to as OFAC, and equivalent foreign authorities. Although we have a program that we believe is reasonably designed to allow usOur efforts to comply with applicableOFAC regulations may not be effective, our partners or regulators may determine they are insufficient, or we may be required to comply with new sanctions laws rules, and regulations, wewhich may still be subjectrequire us to finesfurther revise or expand our compliance program. For example, as a result of the war in Ukraine, jurisdictions have issued and may in the future issue broad-ranging economic sanctions. The result of such sanctions has negatively affected and may continue to affect our customers and business. Additionally, any additional sanctions could include blocking sanctions targeting Russia and secondary sanctions against banks in China, India, or other penaltiesmarkets that have continued to transact with Russian entities, which may disrupt our ability to transact with entities located in one or more jurisdictions levied by federal or state or local regulators, including state attorneys general, as well as those levied by foreign regulators in the event that we engage in any conduct, intentionally or not, that facilitates money laundering, terrorist financing, or other illicit activity, or that violates sanctions or otherwise constitutes sanctionable activity. Moreover, while we have implemented policies and procedures for compliance with OFAC regulations, including, among others, internet protocol-blocking logic designed to prevent users from using our services within the OFAC-sanctioned countries of North Korea, Syria, Iran, and the Crimea region of Ukraine, givencountries. Given the technical limitations in developing controls to prevent, among other things, the ability of userscustomers to placepublish on our platformwork marketplace false or deliberately misleading information or to develop sanctions evasionsanctions-evasion methods, it is possible that we may inadvertently and without our knowledgeunknowingly provide services to individuals or entities that have been designated by OFACare subject to sanctions or are located in a country subject to an embargo by the United States that may not be in compliance with the economic sanctions regulations administered by OFAC. A State Department advisory issued in July 2018 stated that “there are cases where North Korean companies exploit the anonymity provided by freelancing websites to sell their IT services to unwitting buyers.” Additionally, recent press reports have stated that North Korean operatives have used various social media applications and freelancing websites, including ours. Accordingly, although we have controls in place to detect and prevent such OFAC violations and our systems show no access from persons in North Korea, nor from any other OFAC-sanctioned jurisdictions, we may face higher levels of scrutiny by users, partners, and regulators due to the publishing of this advisory and such press reports. In addition to fines, penalties for failing to comply with applicable rules and regulations could include criminal and civil lawsuits, forfeiture of significant assets, or other enforcement actions. We could also be required to make changes to our business practices or compliance programs as a result of regulatory scrutiny. In addition, any perceived or actual breach of compliance by us with respect to applicable laws, rules, and regulations could have a significant impact on our reputation and could cause us to lose existing users, prevent us from obtaining new users, cause payment partners to choose to terminate or not renew their agreements with us, negatively impact investor sentiment about our company, require us to expend significant funds to remedy problems caused by violations and to avert further violations, and expose us to legal risk and potential liability, all of which may adversely affect our business, operating results, and financial condition and may cause the price of our common stock to decline. Further, even if we maintain proper controls and remain in compliance with OFAC regulations, should any of our competitors not implement sufficient OFAC controls and be found to have violated OFAC regulations, user perception of online freelance marketplaces in general may decrease and our business, brand, and reputation may be adversely affected.embargo.
We are also subject to the U.S. Foreign Corrupt Practices Act, which we refer to as the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, and the United KingdomUK Bribery Act 2010, and may be subject to other anti-bribery anti-money laundering, and sanctions laws in countries in which we conduct activities or have users.customers. We face significant risks if
we fail to comply with the FCPA and other anti-corruption laws that prohibit companies and their agents and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties, and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person, or securing any advantage. In many foreign countries, particularlylaws. Local customs in countries with developing economies, itinternational jurisdictions may be a local custom that businesses engage ininvolve practices that are prohibited by the FCPA or other applicable laws and regulations. We may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities, and we may be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we prohibit or do not explicitly authorize such activities. We have implemented an anti-corruption compliance policy, but we cannot ensure that all of our employees, users,customers, and agents, as well as those contractors to which we outsource certain of our business operations, will not take actions in violation ofcomply with our policies or agreements and applicable law, for which we may be ultimately held responsible.
Any violation of the FCPA, otherEven if we maintain proper controls and remain in compliance with applicable anti-corruption, anti-money laundering, and sanctions laws or regulations, should any of our competitors not implement sufficient controls and other applicablebe found to have violated such laws could resultor regulations, customer perception of online freelance marketplaces in investigationsgeneral may decrease and actions by federal or state attorneys general or foreign regulators, loss of export privileges, severe criminal or civil fines and penalties or other sanctions, forfeiture of significant assets, whistleblower complaints, and adverse media coverage, which could have an adverse effect on our reputation, business, operating results, and prospects.financial condition may be adversely affected.
Export Controls
We may be subject to export controls and other similar regulations that prohibit the shipment or provision of certain products and services to certain countries, governments, and persons, and new export controls and similar regulations are promulgated from time to time. While we take precautions to prevent aspects of our work marketplace from being exported in violation of export controls, including implementing internet protocol address blocking and obtaining and relying on licenses and exemptions, we cannot guarantee that the precautions we take will prevent violations of export control and similar laws. In addition, respondingour customers may be subject to export control laws that do not apply to us and we may not be able to determine the applicability of such export control laws, and any enforcement actionviolations by them could harm our reputation and they could seek to hold us responsible for any monetary losses.
In addition, various countries regulate the import and export of certain encryption and other technology, including imposing import and export permitting and licensing requirements, and have enacted and may enact laws that could limit our ability to distribute aspects of our work marketplace or could limit our customers’ ability to access our work marketplace in those countries. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.
The applicability of sales,decreased use and other tax laws or regulations on our business is uncertain. Adverse tax laws or regulations could be enacted or existing laws could be interpreted as applying or otherwise applied to us or users of our platform, which could subject uswork marketplace by existing or our users to additional tax liability and related interest and penalties,potential customers with international operations and adversely impact our business.business, operating results, and financial condition.
The applicationWe are vulnerable to intellectual property infringement claims and challenges to our intellectual property rights brought against us by third parties.
We operate in a highly competitive industry, and there has been considerable activity in our industry to develop and enforce intellectual property rights. Intellectual property infringement claims against us or our customers or third-party partners could result in monetary liability or a material disruption to our business. We cannot be certain that aspects of federal, state, local,our work marketplace, content, and international tax laws to services provided over the internet is evolving. Many of the fundamental statutes and regulations that impose these taxes were established before the adoption and growth of the internet and ecommerce. In addition, governments are increasingly looking for ways to increase revenue, which has resulted in discussions about tax reform and other legislative action to increase tax revenue, including through indirect taxes. New income, sales, use, value-added, goods and services,brand names do not or will not infringe valid patents, trademarks, copyrights, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services provided over the internet, could target certain products and services offered onintellectual property rights held by third parties, including our platform, or could otherwise affect our financial position and operating results. Many countries in the European Union, as well as the United Kingdom and a number of other countries and organizations, such as the Organization for Economic Cooperation and Development, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations. In addition, the Tax Cuts and Jobs Act was enacted in the United States in December 2017 (the “Tax Act”). We continue to review the impact of these tax reforms on our business. Therecompetitors. Also, we are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.
We may also be subject to non-income taxes, such as payroll, sales, use, value-added, and goods and services taxes (including the “digital service tax”) in the United States and various foreign jurisdictions. In certain jurisdictions, we collect and remit indirect taxes on our fees. Our collection of indirect taxes on our fees in these jurisdictions may cause our users to use other platforms or other alternatives that do not collect indirect taxes on their fees, which may in turn affect our financial results. In addition, tax authorities may raise questions about, challenge or disagree with our calculation, reporting, or collection of taxes and may require us to remit additional taxes and interest, and could impose associated penalties and fees. Should any new taxes become applicable, or if the taxes we pay are found to be deficient, our business could be adversely impacted. Wenow, have in the past been, and may in the future be, auditedsubject to legal proceedings and claims relating to the intellectual property of others, including our competitors, in the ordinary course of our business. The likelihood of intellectual property-related litigation and disputes may increase as platforms like ours gain more prominence. In addition, the improper use of generative artificial intelligence by tax authorities with respect to non-income taxes, and wecustomers of our work marketplace may have exposurelead to additional non-income tax liabilities, whichclaims of intellectual property infringement. Our competitors and other third parties have in the past challenged, and may in the future challenge, our registration or use of our trademarks, including “Upwork,” and other intellectual property rights, and such a challenge, even if unsuccessful, could adversely affect our brand and business. Our competitors and others may now and in the future have an adverse effectsignificantly larger and more mature patent portfolios than we have or trademarks or other rights that pre-date and take precedence over our own. We may also be obligated to indemnify certain clients on our operating results and financial condition. In addition, our future effective tax rates could be favorablywork marketplace or unfavorably affected by changesstrategic partners or others in tax rates, changes in the valuationconnection with such infringement claims, or to obtain licenses from third parties. Some of our deferred tax assetsinfringement indemnification obligations related to intellectual property are contractually uncapped or liabilities, the effectivenesscapped at high amounts.
Any litigation or other disputes relating to allegations of our tax planning strategies, or changes in tax laws or their interpretation. Such changesintellectual property infringement could have an adverse impact on our operating resultsdivert management attention and financial condition.
Moreover, state, local, and foreign tax jurisdictions have differing rules and regulations governing sales, use, value-added, and other taxes, and these rules and regulations can be complex and are subject to varying interpretations and enforcement positions that may change over time. Existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us (possibly with retroactive effect), which could require us or our users to pay additional tax amounts on prior sales and going forward, as well as require us or our users to pay fines, penalties, and interest for past amounts. Although our terms of service require our users to pay all applicable sales and other taxes and to indemnify us for any requirement that we pay any withholding amount to the appropriate authorities, our users may be unwilling or unable to pay back taxes and associated interest or penalties and may fail to indemnify us, we may determine that it would not be commercially feasible or cost-effective to seek reimbursement, or the indemnification obligation may be deemed unenforceable. If we are required to collect and pay back taxes and associated interest and penalties, or we are unsuccessful in collecting such amounts from our users, we could incur potentially substantial unplanned expenses, thereby adversely impacting our operating results and cash flows. In addition, tax laws and regulations mayresources, subject us to audit by tax regulatorssignificant legal costs and liability for damages or new licenses, invalidate our proprietary rights, or require us to provide certain data and information, including user information, fromalter our platform to tax regulators in certain jurisdictions, namely outside the United States. If we are obligated to provide such information to tax regulators in any jurisdiction, users may choose to use other platformswork marketplace, or marketing strategy or other alternatives, which may in turn adversely affect our operating results and financial condition.
As a result of these and other factors, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial statements and any such difference may adversely impact our operating results in future periods in which we change our estimatesaspects of our tax obligations or in which the ultimate tax outcome is determined.business.
Failure to protect our intellectual property could adversely affect our business.
Our success depends in large part on our proprietary technology and data. We rely on various intellectual property rights, including patents, copyrights, trademarks, and trade secrets, as well as confidentiality provisions and contractual arrangements, to protect our proprietary rights. If we do not protect and enforce our intellectual property rights successfully or cost-effectively, including if we are unable to protect our trademarks and brand, our competitive position, business and brand may suffer, which couldwould adversely impact our operating results.
Our pending patent or trademark applications may not be approved, or competitors or others may challenge the validity, enforceability, or scope of our patents, the registrability of our trademarks, or the trade secret status of our proprietary information. There can be no assurance that additional patents will be issued or that any patents that are issued will provide significant protection for our intellectual property. In addition, our patents, copyrights, trademarks, trade secrets, and other intellectual property rights may not provide us a significant competitive advantage. There is no assurance that the particular forms of
intellectual property protection that we seek, including business decisions about when to file patents or register or renew trademarks and when and how to maintain and protect trade secrets, will be adequate to protect our business.
Moreover, recent amendments to, developing jurisprudence regarding, and possible changes to intellectual property laws and regulations, including U.S. and foreign patent law, may affect our ability to protect and enforce our intellectual property rights. In addition, the laws of some countries do not provide the same level of protection for our intellectual property as do the laws of the United States. As our global reputation grows and/or we expand our international activities, our exposure to unauthorized copying and use of our platform and proprietary information will likely increase. Despite our precautions, our intellectual property is vulnerable to unauthorized access through employee or third-party error or actions, theft, cyber security incidents, and other security breaches and incidents. It is possible for third parties to infringe upon or misappropriate our intellectual property, to copy our platform, and to use information that we regard as proprietary to create products and services that compete with ours. Effective intellectual property protection may not be available to us in every country in which our platform is available. In addition, many countries limit the enforceability of patents against certain third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Further, certain countries impose additional conditions on the transfer of intellectual property rights from individuals to companies, which may make it more difficult for us to secure and maintain intellectual property protection in those countries. We may need to expend additional resources to defend our intellectual property rights domestically or internationally, which could be costly, time consuming, and distracting to management and could impair our business or adversely affect our domestic or international expansion. Moreover, we may not pursue or file patent applications or apply for registration of copyrights or trademarks in the United States and foreign jurisdictions in which we have a presence with respect to our potentially patentable inventions, works of authorship, and marks and logos for a variety of reasons, including the cost of procuring or ability to procure such rights and the uncertainty involved in obtaining adequate protection from such applications and registrations. Moreover, changes to intellectual property laws and regulations, including U.S. and foreign patent law, may affect our ability to protect and enforce our intellectual property rights or defend against claims alleging we are infringing others’ rights. If the intellectual property rights that we develop are not sufficient to protect our proprietary technology and data, our brand, our business, operating results, and financial condition could be adversely affected.
In addition, the laws of some countries do not provide the same level of protection for our intellectual property as do the laws of the United States. As our global reputation grows and we expand our international activities, our exposure to unauthorized copying and use of our work marketplace and proprietary information will likely increase. Despite our precautions, our intellectual property is vulnerable to unauthorized access through employee or third-party error or actions, theft, cybersecurity incidents, private or public economic espionage, and other security breaches and incidents. Third parties may infringe upon or misappropriate our intellectual property, copy our work marketplace, and use information that we regard as proprietary to create products and services that compete with ours. Effective intellectual property protection may not be available to us in every country in which our work marketplace is available. In addition, many countries limit the enforceability of patents or other intellectual property rights against certain third parties, including government agencies or government contractors. Further, certain countries impose additional conditions on the transfer of intellectual property rights from individuals to companies, which may make it more difficult for us to secure and maintain intellectual property protection. We may need to expend additional resources to defend our intellectual property rights domestically or internationally, which could be costly, time consuming, and distracting to management and could impair our business or adversely affect our expansion. If we cannot adequately protect and defend our intellectual property, we may not remain competitive, and our business, operating results, and financial condition may be adversely affected.
We enter intorely on trade secrets as an important aspect of our intellectual property program and to cover much of our technology and know-how. We seek to protect our trade secrets and obtain rights in intellectual property developed by service providers through confidentiality and invention assignment or intellectual property ownership agreements with our employees, and contractors, and enter into confidentiality agreements with other parties. In addition, for employeesparties, as well as through implementing acceptable use policies, limiting access to our information and data through technological means, and monitoring and limiting the dissemination of third-party staffing providers or other contractors, the employer enters into these agreements with individual workers.our information and data outside of company-owned information systems. We cannot ensure that these agreements, or all the terms thereof, will be enforceable or compliant with applicable law, or otherwisethese agreements and other measures will be effective in controlling access to, use of,protecting our trade secrets and distributionintellectual property rights. Most of our proprietary information or in effectively securing exclusive ownership of intellectual property developed by our current or former employees and contractors. For example, when workingall of the contractors with contractors, particularly those whowhich we work are off-site,remote, which may make it may be more difficult to control use of confidential materials, increasing the risk that our source code or other confidential or trade secret information may be exposed. Further, these agreements with our employees, contractors, and other parties may not prevent other parties from independently developing technologies that are substantially equivalent or superior to our platform.
We may need to spend significant time and resources securing and monitoring our intellectual property rights, and we may or may not be able to detect infringement by third parties. Our competitive position may be adversely impacted if we cannot detect infringement or enforce our intellectual property rights quickly or at all. In some circumstances, we may choose not to pursue enforcement because an infringer has a dominant intellectual property position or for other business reasons. In addition, competitors might avoid infringement by designing around our intellectual property rights or by developing non-infringing competing technologies. We have in the past been forced to rely on litigation, opposition, and cancellation actions, and other claims and enforcement actions to protect our intellectual property, including to dispute registration or use of marks that may be confusingly similar to our own marks. Similar claims and other litigation may be necessary in the future to enforce and protect our intellectual property rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Further, our efforts to enforce our intellectual property rights may be met with defenses; counterclaims attacking the scope, validity, and enforceability of our intellectual property rights; or counterclaims and countersuits asserting infringement by us of third-party intellectual property rights. OurAny failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and our business, and we could lose the right to use certain intellectual property or lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others.
We are vulnerable to intellectual property infringement claims and challenges to our intellectual property rights brought against us by third parties.
We operate in a highly competitive industry, and there has been considerable activity in our industry to develop and enforce intellectual property rights. Successful intellectual property infringement claims against us or our users or third-party partners could result in monetary liability or a material disruption in the conduct of our business. We cannot be certain that aspects of our platform, content, and brand names do not or will not infringe valid patents, trademarks, copyrights, or other intellectual property rights held by third parties. We have in the past been, and may in the future be, subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Our competitors have in the past challenged, and may in the future challenge, our registration or use of our trademarks, including “Upwork,” and, if successful, such a challenge could adversely affect our business. Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to cease selling or using products and services that incorporate the intellectual property that we allegedly infringe; make substantial payments for legal fees, settlement payments,develop or other costs or damages; obtain a license to sell or use the relevant technology, which may not be available on reasonable terms or at all; or redesign the allegedly infringing products and services to avoid infringement, which could be costly, time-consuming, or impossible. Any claims or litigation, regardless of merit, could divert management’s attention and cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering aspects of our platform, or require that we comply with other unfavorable terms. Our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. We may also be obligated to indemnify certain clients on our platform or strategic partners or others in connection with such infringement claims, or to obtain licenses from third parties or modify our platform, and each such obligation could further exhaust our resources. Some of our infringement indemnification obligations related to intellectual property are contractually capped at a very high amount or not capped at all.
Any disputes resulting from allegations of intellectual property infringement could subject us to significant legal costs and liability for damages and invalidate our proprietary rights. Any potential future intellectual property disputes or litigation also could force us to do one or more of the following:
cease conducting certain operations in some or all jurisdictions, or stop using technology that contains the allegedly infringing intellectual property;
stop using the name “Upwork” or other trademarks in some or all jurisdictions;
incur significant legal expenses;
pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
make expensive changes in our methods of doing business; or
attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.
Even if intellectual property claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management anddata would adversely affect our business and operating results. We expect that the occurrence of infringement claims is likely to grow as the market for freelancers and the clients that engage them grows. Accordingly, our exposure to damages resulting from infringement claims could increase and this could further exhaust our financial and management resources.
Our revenue growth depends in part on the success of our strategic relationships with third parties and their continued performance.
To grow our business, we anticipate that we will need to continue to establish and maintain relationships with third parties, such as staffing providers, banks, and payment processing and disbursement providers. For example, we work with third-party staffing providers that support our employment offering for our marketplace, Upwork Payroll, and premium offerings. As our agreements with third-party partners terminate or expire, we may be unable to renew or replace these agreements on comparable terms, or at all. Moreover, we cannot guarantee that the parties with which we have strategic relationships will continue to devote the resources necessary to expand our reach, increase our distribution or support an increased number of users and associated use cases. Further, some of our strategic partners offer, or could offer, competing products and services or also work with our competitors. As a result of these factors, many of our third-party partners may choose to develop alternative products and services in addition to, or in lieu of, our platform, either on their own or in collaboration with others, including our competitors. If we are unsuccessful in establishing or maintaining our relationships with third parties on favorable terms, our ability to compete or to grow our total revenue could be impaired and our operating results may be adversely impacted. Even if we are successful in establishing and maintaining these relationships with third parties on comparable terms, we cannot ensure that these relationships will result in increased usage of our platform or increased revenue.
Our ability to attract and retain users is dependent in part on ease of use and reliability of our platform and the quality of our support, and any failure to offer high-quality support could adversely impact our business, operating results, and financial condition.
Our ability to attract and retain users is dependent in part on the easeThe use of use and reliability of our platform, including our ability to provide high-quality support. Our users depend on our support organization to resolve any issues relating to our platform. Our ability to provide effective support is largely dependent on our ability to attract, resource, and retain service providers who are not only qualified to support users of our platform, but are also well versed in our platform. As we seek to continue to grow our international user base, our support organization will face additional challenges, including those associated with delivering support and documentation in languages other than English. Any failure to maintain high-quality support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our ability to sell our platform to existing and prospective users, and could adversely impact our business, operating results, and financial condition.
Our business model may subject us to disputes with or between users of our platform.
Our business model involves connecting freelancers and clients that contract directly through our platform. Freelancers and clients are free to negotiate any contract terms they choose, but we also provide optional service contract terms that they can elect to use. It is possible that disputes may arise between freelancers and clients with regard to their contract terms, or otherwise, including with respect to service standards, payment, confidentiality, work product, and intellectual property ownership and infringement. If either party believes the contract terms were not met, our standard terms provide a mechanism for the parties to request assistance from us, and, for some contracts, if that is unsuccessful, they may choose to resolve the dispute with the help of a third-party arbitrator. Whether or not freelancers and clients decide to seek assistance from us, if these disputes are not resolved amicably, the parties might escalate to formal proceedings, such as by filing claims with a court or arbitral authority. Given our role in facilitating and supporting these arrangements, it is possible that claims will be brought against us directly as a result of these disputes, or that freelancers or clients may bring us into any claims filed against each other. Through our user agreements we disclaim responsibility and liability for any disputes between users (except with respect to the specified dispute assistance program); however, we cannot guarantee that these terms will, in all circumstances, be effective in preventing or limiting our involvement in user disputes. In addition, users may assert claims against us regarding their experience on our platform, including related to their search ranking results, their feedback ratings, our dispute resolution process, or admission or non-admission to the platform or other programs, including those designed to highlight successful freelancers. Even if these claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management, harm our reputation, and adversely affect our business and operating results.
Our business depends largely on our ability to attract and retain talented employees, including senior management and key personnel. If we lose the services of Stephane Kasriel, our President and Chief Executive Officer, or other members of our senior management team, we may not be able to execute on our business strategy.
Our future success depends on our continuing ability to attract, train, assimilate, and retain highly-skilled personnel, including software engineers and sales personnel. We face intense competition for qualified personnel from numerous software and other technology companies. In addition, competition for qualified personnel, particularly software engineers, is particularly intense in the San Francisco Bay Area, where our headquarters are located. We may not be able to retain our current key employees or attract, train, assimilate, or retain other highly-skilled personnel in the future. We may incur significant costs to attract and retain highly-skilled personnel, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. To the extent we move into new geographies, we would need to attract and recruit skilled personnel in those areas. If we are unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational, and managerial requirements, on a timely basis or at all, our business may be adversely affected.
Our future success also depends in large part on the continued services of senior management and other key personnel. In particular, we are dependent on the services of Stephane Kasriel, our President and Chief Executive Officer, and our technology, platform, future vision, and strategic direction could be compromised if he were to take another position, become ill or incapacitated, or otherwise become unable to serve as our President and Chief Executive Officer. We rely on our leadership team in the areas of product, engineering, operations, security, marketing, sales, support, and general and administrative functions. Our senior management and other key personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason, and without notice. Historically, we have maintained, and currently we maintain, a key-person life insurance policy only on our President and Chief Executive Officer. If we lose the services of senior management or other key personnel, or if we are unable to attract, train, assimilate, and retain the highly-skilled personnel we need, our business, operating results, and financial condition could be adversely affected.
Volatility or lack of appreciation in our stock price may also affect our ability to attract new talent and retain our key employees. Many of our senior personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own, or the shares underlying their vested
options, have significantly appreciated in value relative to the original purchase price of the shares or the exercise price of the options, or conversely, if the exercise price of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, or if we need to increase our compensation expenses to retain our employees, our business, operating results, financial condition, and cash flows could be adversely affected.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and operating results.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain additional executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of The Nasdaq Global Select Market, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an emerging growth company. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which would increase our costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve or otherwise change over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards (or changing interpretations of them), and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected. Being a public company and the associated rules and regulations makes it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit, risk, and compliance committee, compensation committee, and nominating and governance committee, and qualified executive officers.
As a result of disclosure of information in filings required of a public company, our business and financial condition has become more visible, which may result in threatened or actual litigation, including by competitors. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.
In addition, as a result of our disclosure obligations as a public company, we could face pressure to focus on short-term results, which may adversely affect our ability to achieve long-term profitability.
As a result of becoming a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. We have identified a material weakness in our internal control over financial reporting and if our remediation of this material weakness is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
As a public company, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting commencing with our Annual Report for the year ending December 31, 2019. Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on the effectiveness of our internal control over financial reporting, provided that our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first Annual Report required to be filed with the SEC following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date we are no longer an emerging growth company, as defined in the JOBS Act. We could be an emerging growth company for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation. We are required to disclose changes made in our internal control and procedures on a quarterly basis. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.
In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2017, we identified a number of adjustments relating to previously issued consolidated financial statements that resulted in a revision to our consolidated financial statements as of and for the year ended December 31, 2016. As a result of these adjustments, for the year ended December 31, 2016, net loss increased by $0.3 million and cash flows from operations decreased by $0.3 million. There was no impact to cash flows from investing or financing activities for the year ended December 31, 2016. Moreover, total assets decreased by $0.5 million and total liabilities increased by $0.7 million as of December 31, 2016. These adjustments were related to complexities involving the accounting for financial instruments and treasury activities. We identified the cause of these adjustments was due to growth in the business, which required additional qualified accounting personnel with an appropriate level of experience, and additional controls in the period-end financial reporting process commensurate with the complexity of the business. Accordingly, we have determined that this control deficiency constituted a material weakness in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis. This deficiency could result in additional misstatements to our consolidated financial statements that would be material and would not be prevented or detected on a timely basis.
We are evaluating and implementing additional procedures in order to remediate this material weakness, however, we cannot assure you that these or other measures will fully remediate the material weakness in a timely manner. At the beginning of 2016, we had 15 accounting and finance employees. As part of our remediation plan to address the material weakness identified above, we hired a new Chief Financial Officer in October 2017 and subsequently hired additional accounting and finance employees with the specific technical accounting and financial reporting experience necessary for a public company, including a senior director of technical accounting and reporting, a manager of technical accounting and reporting, a senior director of Sarbanes-Oxley compliance, a manager of revenue recognition, a senior manager of accounting operations, and additional treasury analysts. We have hired these personnel after considering the appropriateness of each individual’s experience and believe that these personnel are qualified to serve in their current respective roles. As of December 31, 2018, we had 28 accounting and finance employees. We believe the current staffing in our accounting and finance department is sufficient to meet our requirements as a public company. However, we will continue to assess the adequacy of our accounting and finance personnel and resources, and will add additional personnel, as well as adjust our resources, as necessary, commensurate with any increase in the size and complexity of our business. We also increased the depth and level of review procedures with regard to financial reporting and internal control procedures. Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. If we are unable to remediate the material weakness, or otherwise maintain effective internal control over financial reporting, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner. If our remediation
of this material weakness is not effective, or if we experience additional material weaknesses or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. We cannot assure you that all of our existing material weaknesses have been identified, or that we will not in the future identify additional material weaknesses. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business and results of operations and could adversely impact our business, operating results and financial condition.
We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing, and any required remediation in a timely fashion. During the evaluation and testing process, if we identify material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.
If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control, including as a result of the material weakness described above, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The Nasdaq Global Select Market.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect or financial reporting standards or interpretations change, our operating results could be adversely affected.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates, judgments, and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity as of the date of the financial statements, and the amount of revenue and expenses, during the periods presented, that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to determination of revenue recognition, the useful lives of assets, assessment of the recoverability of long-lived assets, goodwill impairment, allowance for doubtful accounts, reserves relating to transaction losses, the valuation of warrants, stock-based compensation, and accounting for income taxes. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of industry or financial analysts and investors, resulting in a decline in the trading price of our common stock.
Additionally, we regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards, and changes in interpretation, we might be required to change our accounting policies, alter our operational policies and implement new or enhance existing systems so that they reflect new or amended financial reporting standards, or we may be required to restate our published financial statements. Such changes to existing standards or changes in their interpretation may have an adverse effect on our reputation, business, financial position, and profit, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results.
Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions, and we could be obligated to pay additional taxes, which could adversely impact our operating results.
We may expand the geographic scope of our operations and personnel to support our global user base. Our corporate structure and associated transfer pricing policies contemplate future growth into international markets, and consider the functions, risks, and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies, and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to the intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.
Federal income tax reform could adversely affect us.
Legislation or other changes in tax laws could increase our liability and adversely affect our after-tax profitability. For example, the Tax Act could have a significant impact on our effective tax rate, cash tax expenses and net deferred tax assets. The Tax Act reduces the U.S. corporate statutory tax rate, eliminates or limits the deduction of several expenses that were previously deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. We have completed our evaluation of the overall impact of the Tax Act on our effective tax rate and consolidated balance sheet through fiscal year-end and reflected the amounts in our financial statements. The Tax Act may have significant impacts in future periods and certain deduction limitations and restrictions.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2018, we had net operating loss carryforwards for U.S. federal income tax purposes and state income tax purposes of $172.3 million and $38.5 million, respectively, available to offset future taxable income. If not utilized, the federal net operating loss carryforward amounts will begin to expire in 2019, including $0.9 million due to expire in 2019. The state net operating loss carryforward amounts will begin to expire in 2028. Realization of these net operating loss carryforwards depends on future income, and there is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could materially and adversely affect our operating results.
In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income may be limited. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards and other tax attributes to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
In 2017, we remeasured our deferred tax assets to the reduced federal corporate income tax rate, 35% to 21%, resulting in a reduction of $22.6 million in the value of its net deferred tax asset, which was entirely offset by the change in valuation allowance of $22.6 million. In 2019, we expect to continue to benefit from the Tax Act, which includes, among other items, a reduced federal corporate tax rate and accelerated depreciation deductions. At the same time, the legislation eliminates and restricts certain tax deductions including the business interest expense limitation and the repeal of the performance base exception relating to executive compensation deduction exceeding $1.0 million. State conformity to the Tax Act’s provision is applied on jurisdiction-by-jurisdiction basis.
Our platform contains open source software components, and failure to comply with the terms of the underlying licenses could restrict our ability to market or operate our platform.work marketplace and could negatively affect our business.
Our platformwork marketplace incorporates certain open source software. An open source license typically permits the use, modification, and distribution of software in source codesource-code form subject to certain conditions. Some open source licenses containThese conditions may require that any person who distributes a modification or derivative work of software that was subject to an open source licensesoftware make the modified version subject to the same open source license. Distributing software that is subject to this kind of open source license can lead to a requirement that certain aspects of our platformwork marketplace be distributed or made available in source code form. Although we do not believe that we have used open source software in a manner that might condition its use on our distribution of any portion of our platformwork marketplace in source code form, the interpretation of open source licenses is complex and, despite our efforts, it is possible that we may be liable for copyright infringement, breach of contract, or other claims if our use of open source software is adjudged not to comply with the applicable open source licenses.
Moreover, we cannot ensure that our processes for controlling our use of open source software in our platformwork marketplace will be effective. If we have not complied with the terms of an applicable open source software license, we may need to seek licenses from third parties to continue offering our platformwork marketplace and the terms on which such licenses are available may not be economically feasible, to re-engineer our platformwork marketplace to remove or replace the open source software, to discontinue the sale ofoffering our platformwork marketplace if re-engineering could not be accomplished on a timely basis, to pay monetary damages, or to make available the source code for aspects of our proprietary technology, any of which could adversely affect our business, operating results, and financial condition.
In addition to risks related to license requirements, use of open source software can involve greater risks than those associated with use of third-party commercial software, as open source licensors generally do not provide warranties;warranties or assurances of title, performance, or non-infringement; ornon-infringement, nor do they control the origin of the software. There is typically no support available for open source software, and we cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have established processes to help alleviate these risks, including a review process for screening
requests from our development organizations for the use of open source software, but we cannot be sure that all open source software is identified or submitted for approval prior to use in our platform.
Clients may fail to pay their invoices, necessitating action by us to compel payment.
In connection with our Upwork Enterprise offering and for certain legacy clients, we advance payments to freelancers for invoiced services on behalf of the client and subsequently invoice the client for such services. In addition, in certain instances, we will advance payment on a freelancer invoice if the client issues a chargeback or their payment method is declined and the freelancer assigns us the right to recover any funds from the client. If a client fails to pay for these services rendered by a freelancer, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the applicable enterprise agreement or our terms of service, including through litigation. Furthermore, some clients may seek bankruptcy protection or other similar relief and fail to pay amounts due, or pay those amounts more slowly, either of which could adversely affect our operating results, financial position, and cash flow.
We track certain performance metrics with internal tools and do not independently verify such metrics. Certain of our performance metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We track certain performance metrics, including GSV, the number of core clients, and client spend retention, with internal tools, which are not independently verified by any third party. Our internal tools have a number of limitations and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we report. If the internal tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report may not be accurate. In addition, limitations or errors with respect to how we measure data (or the data that we measure) may affect our understanding of certain details of our business, which could affect our longer-term strategies. If our performance metrics are not accurate representations of our business, user base, or traffic levels; if we discover material inaccuracies in our metrics; or if the metrics we rely on to track our performance do not provide an accurate measurement of our business, our reputation may be harmed, and our operating and financial results could be adversely affected.
We may be unable to integrate acquired businesses and technologies successfully or to achieve the expected benefits of such acquisitions. We may acquire or invest in additional companies, which may divert our management’s attention, result in additional dilution to our stockholders, and consume resources that are necessary to sustain our business.
Our business strategy may, from time to time, include acquiring other complementary products, technologies, or businesses. An acquisition, investment, or business relationship may result in unforeseen or additional operating difficulties, risks, and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, services, personnel, or operations of the acquired companies particularly if the key personnel of the acquired companies choose not to work for us, if an acquired company’s software is not easily adapted to work with ours, or otherwise. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for the development of our business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown or additional risks and liabilities.
We may in the future seek to acquire or invest in additional businesses, products, technologies, or other assets. We also may enter into relationships with other businesses to expand our platform or our ability to provide our platform in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing, or investments in other companies. Negotiating these transactions can be time consuming, difficult, and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may:
issue additional equity securities that would dilute our stockholders’ ownership interest;
use cash that we may need in the future to operate our business;
incur debt on terms unfavorable to us or that we are unable to repay;
incur expenses or substantial liabilities;
encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures;
encounter difficulties in assimilating acquired operations and development cultures;
encounter diversion of management’s attention to other business concerns; and
become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.
Any of these risks could adversely impact our business and operating results.
We may be required to comply with governmental export control laws and regulations. Our failure to comply with these laws and regulations could have an adverse effect on our business and operating results.
We may be subject to U.S. export controls and sanctions regulations that prohibit the shipment or provision of certain products and services to certain countries, governments, and persons targeted by U.S. sanctions. While we take precautions to prevent aspects of our platform from being exported in violation of these laws, including implementing internet protocol address blocking, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. If we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for the persons working for us.
In addition, various countries regulate the import and export of certain encryption and other technology, including imposing import and export permitting and licensing requirements, and have enacted laws that could limit our ability to distribute aspects of our platform or could limit our users’ ability to access our platform in those countries. Changes in our platform, or future changes in export and import regulations may prevent our international users from utilizing our platform or, in some cases, prevent the export or import of our platform to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our platform by existing or potential users with international operations. Any decreased use of our platform or limitation on our ability to export or sell our products would likely adversely affect our business, operating results, and financial results.
Future litigationLitigation could have a material adverse impact on our operating results and financial condition.
From time to time, we have been subject toare involved in litigation and make and receive demands and claims threatening possible litigation. The outcome of any litigation (including class actions and individual lawsuits or arbitration), regardless of its merits, is inherently uncertain. Regardless of the merits or ultimate outcome of any claims that have been or may be brought against us or that we may bring against others, pending or future litigation could result in a diversion of management’s attention and resources and reputational harm, and we may be required to incur significant expenses defending againstand liabilities in connection with these claims. If we are unable to prevail in litigation, we could incur substantial liabilities. We may also determine that the most cost-effective and efficient way to resolve a dispute is to enter into avia settlement, agreement.and terms of any settlement agreements are increasingly limited by legislation. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that it is probable, we record a related liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. However, because of uncertainties relating to litigation, the amount of our estimates could be wrong as determining reserves for pending litigation is a complex, fact-intensive process that is subject to judgment calls.calls and the uncertainties of litigation. Any adverse determination related to litigation or adverse terms contained in a settlement agreement could require us to change our technology or our business practices in costly ways, prevent us from offering certain productsofferings or services, require us to pay monetary damages, fines, or penalties, or require us to enter into royalty or licensing arrangements, and could adversely affect our reputation, business, operating results, and financial condition.
If we are deemed to be an investment company under the Investment Company Act of 1940, our results of operations could be harmed.
Under Sections 3(a)(1)(A) and (C) of the Investment Company Act of 1940, as amended, which we refer to as the Investment Company Act, absent an applicable exemption, a company generally will be deemed to be an “investment company” for purposes of the Investment Company Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities or (ii) it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding, or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash flows,items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of these sections of the Investment Company Act, including as a result of both the exemption set forth in Section 3(b)(1) of the Investment Company Act and the safe harbor set forth in Rule 3a-8 of the Investment Company Act. Section 3(b)(1) of the Investment Company Act provides that a company that would otherwise fit within the definition of an “investment company” under Section 3(a)(1)(C) of the Investment Company Act will not be required to register as an “investment company” if “it is primarily engaged, directly or through a wholly owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities.” We believe that we are and hold ourselves out as being engaged primarily in the operation of an online work marketplace, and our historical development, public representations of policy, the activity of our officers and directors, the nature of our present assets, the sources of our present income, and the public perception of the nature of our business all support the conclusion that we are an operating company and not an investment company. Rule 3a-8 under the Investment Company Act provides a nonexclusive safe harbor from the definition of “investment company” for certain research and development companies. We are currently a research and development company and comply with the safe harbor requirements of Rule 3a-8 under the Investment Company Act. As set forth above, we currently conduct, and intend to continue to conduct, our operations so that neither we, nor any of our subsidiaries, is required to register
as an “investment company” under the Investment Company Act. If we were obligated to register as an “investment company,” we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things, limitations on capital structure, restrictions on specified investments, prohibitions on transactions with affiliates, and compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would increase our operating and compliance costs, could make it impractical for us to continue our business as contemplated, and could have a material adverse effect on our business.
Risks Related to Finance, Accounting, and Tax Matters
We have a history of net losses, may increase our operating expenses in the future, and may not be able to sustain profitability.
Until 2023, we have had a history of incurring net losses. For the year ended December 31, 2022 and 2021, we incurred net losses of $89.9 million and $56.2 million, respectively. As of December 31, 2023, we had an accumulated deficit of $294.1 million. We have made, and expect to continue to make in the future, significant expenditures related to the development and expansion of our business. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these higher expenses. While our GSV and revenue have grown in recent years, we may not be able to sustain the same level of growth in future periods, or at all. For example, GSV remained relatively flat at $4.1 billion during the year ended December 31, 2023, as compared to the year ended December 31, 2022. In addition, although our profitability has improved in recent periods, if our revenue declines or fails to grow at a rate faster than increases in our operating expenses, we will not be able to maintain profitability in future periods and the trading price of our common stock could decline.
Our operating results and performance metrics may fluctuate from period to period, which makes our future results difficult to predict.
Our operating results and performance metrics have fluctuated recently, as they have in the past, and will likely continue to fluctuate in the future, particularly in light of macroeconomic uncertainty and rising interest rates and inflation. As a result, you should not rely upon our past operating results and performance metrics as indicators of future performance. You should take into account the risks, difficulties, and uncertainties frequently encountered by companies in highly competitive and rapidly evolving markets. Our operating results and performance metrics in any given period can be influenced by numerous factors, many of which are unpredictable or are outside of our control, including those described elsewhere in this “Risk Factors” section as well as the following:
•uncertainty regarding macroeconomic conditions and demand for our work marketplace;
•our ability to achieve and sustain profitability;
•our ability to generate significant revenue from our Marketplace offerings;
•our ability to maintain and grow our community of customers;
•our ability to respond to competitive developments and other market and technological dynamics, such as the emergence of generative artificial intelligence, and introduce new offerings and services or enhance existing offerings;
•changes to our pricing model and fee structure, including any resulting changes to our revenue recognition practices;
•changes in the spending patterns of clients or the mix of products and services that clients demand;
•the productivity and effectiveness of our sales force;
•repurchases by us of any of our outstanding shares of common stock, including under our Share Repurchase Program, or of our 0.25% convertible senior notes due 2026, which we refer to as the Notes;
•our ability to attract and retain talent that provide the types and quality of services sought by clients on our work marketplace;
•the impact of reductions in our workforce or involuntary or voluntary separations, including claims against us from departing employees or others;
•fluctuations in gross margin and revenue, including as a result of fluctuations in the use of our Managed Services offering due to our recognition of the entire GSV from our Managed Services offering as revenue, including the amounts paid to talent;
•the length and complexity of our sales cycles;
•the success of our marketing and brand positioning efforts;
•the impact of changing, consolidating, or terminating offerings and services;
•ongoing uncertainty regarding U.S. and global political conditions;
•the number of customers circumventing our work marketplace and our fees;
•the disbursement methods chosen by talent and changes in the mix of disbursement methods offered;
•fluctuations in the prices that talent charge clients on our work marketplace;
•ransomware, data security, or privacy breaches or incidents and associated remediation costs and reputational harm;
•increases in, and timing of, operating expenses that we may incur to grow and expand our operations and to remain competitive;
•seasonality in the labor market and spending patterns by clients and the number of business days and the number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) in any given period, as well as local, national, or international holidays;
•litigation, regulatory investigations or enforcement actions, and adverse judgments, settlements, or other litigation-related costs;
•fluctuations in transaction losses;
•operating lease expenses, other real estate expenses, and any impairment charges on our operating lease asset and related leasehold improvements being recognized as a general and administrative expense due to a reduction to our office space;
•the impact of sales, use, and other tax laws and regulations in jurisdictions in which we have customers;
•fluctuations in the mix of payment provider costs and the revenue generated from payment providers;
•changes in the law, application of the law (including as a result of changes in our services or offerings), or interpretation of law, or in the statutory, legislative, or regulatory environment;
•potential costs to attract, onboard, retain, and motivate qualified personnel to perform services for us;
•costs related to the acquisition of businesses, personnel, technologies, or intellectual property;
•the impact of outages of, and other errors, defects or disruptions on, our work marketplace and associated reputational harm;
•the impact of public health events, such as the COVID-19 pandemic;
•fluctuations in trade and client receivables due to the timing of cash receipts from clients and the number of transactions on our work marketplace;
•changes to financial accounting standards and the interpretation of those standards that may affect the way we recognize and report our financial results;
•general economic and political conditions and government regulations in the countries where we currently have significant numbers of customers or where we currently operate or may expand in the future, and fluctuations in currency exchange rates;
•revenue recognition fluctuations for arrangements subject to our tiered pricing model for talent service fees;
•losses and expenses from indemnification, dispute assistance, and other contractual obligations we owe to clients; and
•non-cash accounting charges such as stock-based compensation expense, including those related to executive compensation arrangements, and depreciation and amortization.
The impact of one or more of the foregoing and other factors may cause our operating results and performance metrics to vary significantly. As such, we believe that period-to-period comparisons of our operating results and performance metrics may not be meaningful and should not be relied upon as an indication of future performance. For example, future period-over-period growth rates of revenue and key performance metrics such as GSV and
active clients, when compared against the quarterly and full year results of 2022, may fail to meet the expectations of investors or securities analysts given the accelerated growth experienced during such periods due to the COVID-19 pandemic and the resulting increased adoption of remote work and reduced seasonality experienced during such periods. If we fail to meet or exceed the expectations of investors or securities analysts, the trading price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.
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.
We track certain performance metrics, including active clients and GSV per active client, GSV, and Marketplace take rate with internal tools that are not independently verified by any third-party. Our internal tools have a number of limitations and our methodologies for tracking these metrics may change over time, which could result in inaccurate or unexpected changes to our metrics. If the internal tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report may not be accurate. Our performance metrics are also impacted by illegal or improper activity on our work marketplace, including fraud, spam, fake accounts, and other activity that violates our terms of service and service agreements. We are unable to identify and remove all fake accounts and fraudulent activity from being reflected in the performance metrics that we report. Accordingly, our performance metrics may not accurately reflect activity on and the performance of our work marketplace. In addition, limitations or errors with respect to how we measure data, or the accuracy of the data that we measure, may affect our understanding of certain details of our business, which could affect our longer-term strategies and our ability to respond to business trends that may negatively impact our performance. If our performance metrics are not accurate representations of our business, customer base, or activity on our work marketplace; if we discover material inaccuracies in our metrics; or if the metrics we rely on to track our performance do not provide an accurate measurement of our business, our reputation may be harmed, we may be subject to legal or regulatory actions, and our operating and financial results could be adversely affected. In addition, from time to time we may change the performance metrics that we track, including metrics that we report, and any new performance metrics will also be subject to the foregoing limitations and risks.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis.
We have experienced and remediated a material weakness in the past, and if we experience additional material weaknesses or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or operating results or prevent fraud, which may adversely affect investor confidence in us and, as a result, the value of our common stock. We cannot assure you that all of our existing material weaknesses have been identified, or that we will not in the future identify additional material weaknesses. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business, operating results, and financial condition.
If we are unable to assert that our internal control over financial reporting is effective, material weaknesses are identified, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The Nasdaq Global Select Market.
If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.
As we expand our international footprint and make more services available to our customers internationally, we will become more exposed to the effects of fluctuations in currency exchange rates. Although we expect an increasing number of sales contracts to be denominated in currencies other than the U.S. dollar in the future, all of our sales contracts are and have historically been denominated in U.S. dollars. However, we offer clients the option to settle invoices denominated in U.S. dollars in the local currencies of several non-U.S. countries, and therefore, a portion
of our revenue is subject to foreign currency risk. While we currently use derivative instruments to hedge certain exposures to fluctuations in foreign currency exchange rates, the use of such hedging activities may not offset the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, geopolitical or macroeconomic events may also cause volatility in currency exchange rates between the U.S. dollar and other currencies, such as the Euro. Additionally, a strengthening of the U.S. dollar could increase the real cost of transacting on our work marketplace to clients located outside of the United States and could result in a loss of such clients or a portion of their spend, which could adversely affect our business, operating results, and financial condition.
The applicability of sales, use, and other tax laws or regulations on our business could subject us or our customers to additional tax liability and related interest and penalties, and adversely impact our business.
The application of indirect taxes, such as sales and use tax, value-added tax, goods and services tax, business tax, gross receipt tax, and digital services tax, and the tax information reporting obligations to our businesses are complex and evolving. Significant judgment is required to evaluate applicable tax obligations, and, as a result, amounts recorded are estimates and are subject to adjustments. In many cases, the ultimate tax determination is uncertain because it is not clear how new and existing statutes might apply to our business. For example, a number of U.S. states and other jurisdictions have enacted taxes and tax collection obligations on marketplace facilitators, requiring online marketplaces to collect and remit taxes for first- and third-party sales on their websites. A successful assertion that we should be collecting taxes or remitting taxes directly to states or other jurisdictions beyond those to which we already collect or remit could result in substantial tax liabilities for past transactions and additional administrative expenses, and could cause us to accrue additional estimates of taxes due, including interest and penalties. Moreover, a number of countries and intergovernmental organizations have recently proposed, recommended, or enacted new laws or changes to existing laws that could impact our tax obligations or add new compliance costs to our business to administer, assess, collect, and remit those taxes. These changes may happen with little or no advance notice or implementation time, which can increase various short term costs of compliance. The impact and burden of these regulations and proposed regulations on our business and the businesses of our customers is uncertain and may have a negative impact on our business.
Potential legislation and regulations, specifically in the United States, the EU, and other countries, may also result in additional costs or requirements that could have a negative impact on our business. For example, the implementation of statutory changes to Form 1099-K reporting in the United States and regulatory changes to the European Council Directive on Administrative Cooperation and Automatic Exchange of Information in the Field of Taxation reporting in the EU may create additional administrative burdens on Upwork. Similar reporting obligations may be enacted by other jurisdictions in the future. Tax collection responsibility and the additional costs associated with complex indirect tax collection, remittance and audit requirements, in addition to reporting requirements, could create additional tax exposure for us and additional burdens for customers on our websites and mobile platforms.
We may also be subject to additional tax liabilities and related interest and penalties due to: changes in federal, state, and international tax laws, statutes, rules, regulations, or ordinances; changes in taxing jurisdictions and administrative interpretations and applications; results of tax examinations, settlements, or judicial decisions; changes in accounting principles; changes to our business operations; and changes in tax positions taken in prior periods. Such changes could adversely impact us or our customers (possibly with retroactive effect), which could require us or our customers to pay additional tax amounts on prior sales and going forward, as well as require us or our customers to pay fines, penalties, and interest for past amounts. For example, if we are treated as an agent for customers on our work marketplace under U.S. state tax law, we may be primarily responsible for collecting and remitting sales taxes directly to certain states. It is possible that one or more states could seek to impose sales, use, or other tax collection obligations on us, which may be applicable to past sales. A successful assertion by a taxing authority that we should be collecting additional taxes or remitting such taxes directly to states could result in substantial tax liabilities for past sales and additional administrative expenses, which could negatively impact our business.
Our loanAny changes to our business operations, including international expansions, internal reorganizations, and security agreement providestransfer pricing could impact our lendertax liabilities. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions or disagree with our determinations as to the income and expenses attributable to specific jurisdictions or specific affiliates. If such a first-priority lien against substantially allchallenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest, and penalties.
We have in the past been, and may in the future be, audited by tax authorities with respect to non-income taxes, and we may have exposure to additional non-income tax liabilities, which could have an adverse effect on our operating results and financial condition. In addition, our future effective tax rates could be favorably or unfavorably
affected by changes in tax rates, changes in the valuation of our deferred tax assets (excludingor liabilities, the effectiveness of our intellectual property), and contains financial covenants and other restrictionstax planning strategies, or changes in tax laws or their interpretation. Such changes could have an adverse impact on our actions,operating results and financial condition.
Our ability to use our net operating loss carryforwards and certain other tax attributes is limited.
As of December 31, 2023, we had net operating loss, which we refer to as NOL, carryforwards for U.S. federal income tax purposes and California state income tax purposes of $181.2 million and $81.3 million, respectively, available to offset future taxable income. The federal NOLs will begin to expire in 2034 if not utilized. The California state NOL carryforward amounts will begin to expire in 2029 if not utilized. Realization of these NOL carryforwards depends on future income, and there is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could limit our operational flexibilitymaterially and otherwise adversely affect our financial condition.operating results.
Our loanIn general, under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, is subject to limitations on its ability to utilize its pre-change NOL carryforwards to offset future taxable income. We have completed an analysis of Section 382 ownership changes in our stock through December 31, 2023 and security agreement with Silicon Valley Bank (as amended, the “Loan Agreement”) restrictshave concluded that we have experienced ownership changes that will result in limitations in our ability to amonguse certain of our NOLs and tax credit carryforwards. In addition, other things:
incur additional indebtedness;
sell certain assets;
declare dividendsfactors outside our control could further limit our ability to utilize NOLs to offset future U.S. federal and state taxable income, including further changes in the ownership of our stock and regulatory changes. Any such material limitation or make certain distributions; and
undergo a merger or consolidation or other transactions.expiration of our NOLs may harm our future operating results by effectively increasing our future tax obligations.
In addition, the interest ratesTax Cuts and Jobs Act, as modified by the Coronavirus Aid, Relief, and Economic Security Act, limits the utilization of NOLs arising in taxable years beginning after December 31, 2017 to 80% of taxable income in any taxable year beginning after December 31, 2020. NOLs arising in taxable years beginning after December 31, 2017 can be carried forward indefinitely with no carryback allowed. As we pay undermaintain a full valuation allowance against our Loan Agreement are derived fromU.S. federal and state NOLs, these changes did not impact our consolidated balance sheet as of December 31, 2023. However, in future years, at the prime rate, which has increased recently, and may increasetime a deferred tax asset is recognized related to our NOLs, the changes in the future. Interest rate increases will result in us having to make higher interest payments and reduce the amountcarryforward/carryback periods as well as new limitations on use of working capital available to us. Our Loan Agreement also prohibits us from falling below an adjusted quick ratio and below certain quarterly EBITDA thresholds. Our ability to comply with these EBITDA thresholds and other covenants is dependent uponNOLs may significantly impact our future business performance.
Our failure to comply with the covenants or payment requirements, or the occurrence of other events specified in our Loan Agreement, could result in an event of default under the Loan Agreement, which would give our lender the right to terminate their commitments to provide additional loans under the Loan Agreement and to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, we have granted our lender first-priority liens against substantially all of our assets, as collateral, excluding our intellectual property (but including proceeds therefrom) and the funds and assets held by Upwork Escrow. We have also agreed to a negative pledge on our intellectual property. Failure to comply with the covenants or other restrictions in the Loan Agreement could result in a default. If the debt under our
Loan Agreement was to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay it, which would have an immediate adverse effect on our business and operating results. This could potentially cause us to cease operations and result in a complete loss of your investment in our common stock.valuation allowance assessments.
We may require additional capital to fund our business and support our growth, and any inability to generate or obtain such capital may adversely affect our business, operating results, and financial condition.
In order to support our growth and respond to business challenges, such as developing new features or enhancements to our platform,work marketplace, acquiring new technologies, and improving our infrastructure, we have made and expect to continue to make significant financial investments in our businessbusiness. In addition, we may, from time to time, seek to acquire or strategically invest in other complementary products, technologies, or businesses or repurchase outstanding shares of our common stock or the Notes. For example, we paid $170.8 million to consummate the Note Repurchases in March 2023, and we intend to continue to make such investments. As a result, wein November 2023, our board of directors authorized our Share Repurchase Program. We may need to engage in equity or debt financings in addition to our Loan Agreement, to provideobtain the funds required for these investments, acquisitions, and other business endeavors. If we raise additional funds through equity or convertible debt issuances, our existing stockholders may suffer significant dilution and these securities could have rights, preferences, and privileges that are superior to thatthose of holders of our common stock. If we obtain additional funds through debt financing, we may not be able to obtain such financing on terms favorable to us. Such terms may involve additional restrictive covenants making it difficult to engage in capital raising activities and pursue business opportunities, including potential acquisitions.acquisitions and strategic investments. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it,or at all, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be adversely affected, requiring us to delay, reduce, or eliminate some or all of our operations.
We are an emerging growth company, and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and, for so long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We will remain an emerging growth company until the earliest of: (i) December 31, 2023, which is the last day of the fiscal year following the fifth anniversary of our IPO; (ii) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (iii) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the date on which we qualify as a “large accelerated filer.” If we remeasured our emerging growth company status based on our current stock price and ownership, we would be considered a “large accelerated filer” and would be required to comply with all the reporting requirements applicable to other public companies including, but not limited to, the auditor attestation requirements of Section 404(b) of the Sarbanes–Oxley Act.
We cannot predict if investors will find our common stock less attractive or our company less comparable to certain other public companies because we rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future operating results may not be as comparable to the operating results of certain other companies in our industry that adopted such standards. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Our reported financial results may be adversely affected by changes in U.S. GAAP.
U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board (the “FASB”), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change.
In particular, in May 2014, the FASB issued ASC 606, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As an “emerging growth company,” we are allowed under the JOBS Act to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to take advantage of this extended transition period under the JOBS Act with respect to ASC 606, which will result in ASC 606 becoming effective for us for the year ending December 31, 2019. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.
We are continuing to evaluate the adoption method and the potential impact that the implementation of ASC 606 will have on our consolidated financial statements, specifically related to the following items:
identification of performance obligations;
principal agent considerations;
whether the discounts offered under our tiered pricing program for freelancer service fee result in a “material right” as that term is defined in ASC 606;
whether costs to obtain a contract with a customer will be capitalized or expensed;
timing of revenue recognition;
method of adoption; and
revenue disclosures which are expected to expand and may require judgment in certain areas.
If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.
As we expand our international footprint, we will become more exposed to the effects of fluctuations in currency exchange rates. Although we expect an increasing number of sales contracts to be denominated in currencies other than the U.S. dollar in the future, all of our sales contracts have historically been denominated in U.S. dollars. However, we offer clients the option to settle invoices denominated in U.S. dollars in the local currencies of several non-U.S. countries, and therefore, a portion of our revenue is subject to foreign currency risk. While we currently use derivative instruments to hedge certain exposures to fluctuations in foreign currency exchange rates, the use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, a strengthening of the U.S. dollar could increase the real cost of transacting on our platform to clients located outside of the United States and could result in a loss of such clients, which could adversely affect our business, operating results, financial condition, and cash flows.
We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
A significant natural disaster, such as an earthquake, blizzard, hurricane, fire or flood, or other catastrophic event, such as a power loss or telecommunications failure, could have a material adverse impact on our business, financial condition, and operating results. In the event of natural disaster or other catastrophic event, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in development of our platform, lengthy interruptions in service, breaches of data security, and loss of critical data, all of which could have an adverse effect on our operating results. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity and potentially subject to catastrophic fires. In addition, natural disasters and other catastrophic events could affect our partners’ ability to perform services for users on a timely basis. In the event any such partners’ information technology systems or service abilities are hindered by any of the events discussed above, our ability to provide our platform and other services may be impaired, resulting in missing financial targets for a particular quarter or year, or longer period. Further, if a natural disaster or other catastrophic event occurs in a region from which we derive a significant portion of our revenue, users in that region may delay or forego use of our platform or other services, which may adversely impact our operating results. In addition, acts of terrorism, civil disorder, or military conflict could cause disruptions in our business or the business and activity of our partners, users, or the economy as a whole. These disruptions may be more severe than in the case of natural disasters. All of the aforementioned risks may be augmented if our or our partners’ business continuity and disaster recovery plans prove to be inadequate. To the extent that any of the above results in delays or reductions in platform availability, activities or other services, our business, financial condition, and operating results would be adversely affected.
Risks Related to Ownership of Our Common Stock
The stock price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment.
The market price of our common stock has been and may continue to be volatile.volatile, particularly as a result of broader stock market fluctuations and in light of the current macroeconomic uncertainty. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
overall performance of the equity markets;
•actual or anticipated fluctuations in our revenue, measures of profitability, and other financial and operating results;results or our failure to meet the estimates of securities analysts or the expectations of investors;
changes in •the financial projections we may provide to the public or our failure to meet these projections;
•overall performance of the equity markets, including as a result of unfavorable investor sentiment toward unprofitable companies;
•the economy as a whole and market conditions in our industry;
•negative publicity related to the real or perceived trustworthiness, quality, or security of our work marketplace;
•the failure to timely launch new offerings and services that gain market acceptance;
•recruitment or departure of key personnel;
•rising interest rates and inflation, financial turmoil, or instability affecting the banking system or financial markets;
•failure of securities analysts to initiate or maintain coverage of us, inaccurate or unfavorable research by analysts, or changes in financial estimates by any securities analysts who follow our company, orcompany;
•repurchases by us of any of our failure to meet these estimatesoutstanding shares of common stock, including under our Share Repurchase Program, or the expectations of investors;Notes, on unfavorable terms or at all;
•speculative trading practices by stockholders and other market participants;
recruitment or departure of key personnel;
the economy as a whole and market conditions in our industry;
negative publicity related to the real or perceived quality or security of our platform, as well as the failure to timely launch new products and services that gain market acceptance;
•rumors and market speculation involving us or other companies in our industry and/or other industries;
•lawsuits threatened or filed against or by us or against our key personnel, litigation involving our industry, or lawsuits threatened or filed against our customers relating to their use of our work marketplace;
•increased interest and trading in our stock from retail investors;
•developments or disputes concerning our or other parties’ products, services, or intellectual property rights;
•acquisitions, strategic partnerships, joint ventures, or capital commitments;
•sales of shares of our common stock by us or our stockholders, including sales of large blocks of our stock relative to the size of our public float or sales of stock by our management, directors or significant stockholders that create negative investor perception;
•new laws or regulations or new interpretations of existing laws or regulations, including those governing worker classification, taxation of workers, or withholding and remitting taxes on income or earnings;
•announcements by us or our competitors of new or terminated products or services, commercial relationships, or significant technical innovations;
acquisitions, strategic partnerships, joint ventures, or capital commitments;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
lawsuits threatened or filed against us, litigation involving our industry, or both;
developments or disputes concerning our or other parties’ products, services or intellectual property rights;
•changes in accounting standards, policies, guidelines, interpretations, or principles; and
political•geopolitical changes or events, such as “Brexit” or U.S. government shutdowns;
other events or factors, including those resulting from war and incidents of terrorism, or responses to these events;
the expiration of contractual lock-up or market stand-off agreements;
sales of shares of our common stock by us or our stockholders; and
sales of large blocks of our stock relative to the size of our public float.terrorism.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies, and technology companies in particular, have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
We cannot guarantee that our Share Repurchase Program will be fully consummated or that it will enhance long-term stockholder value.
In November 2023, our board of directors authorized the Share Repurchase Program, under which we may repurchase up to $100.0 million of shares of our outstanding common stock. As of December 31, 2023, we had the entire $100.0 million available for future share repurchases under the Share Repurchase Program. The program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares of our common stock on any timetable or at all. The Share Repurchase Program could affect the trading price of our common stock, increase volatility, and diminish our cash reserves. The Share Repurchase Program may be
suspended, terminated, or modified at any time for any reason, and we cannot guarantee that the Share Repurchase Program will be fully consummated, or at all, or that it will enhance long-term stockholder value.
Sales of substantial amounts of our common stock in the public markets, particularly sales by our directors, executive officers, and significant stockholders, or the perception that these sales could occur, could cause the market price of our common stock to decline and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market.market, particularly sales by our directors, executive officers, and significant stockholders. The perception that these sales might occur may also cause the market price of our common stock to decline. We had a total of 106,454,321All shares of our common stock outstanding as of December 31, 2018. Of these shares, 14,348,196 shares of common stock were sold in the IPO and are freely tradable, exceptgenerally without restrictions or further registration under the Securities Act of 1933, as amended, which we refer to as the Securities Act, subject to certain exceptions for any shares purchasedheld by our “affiliates” as defined in Rule 144 under the Securities Act.
With respect to our outstanding shares of common stock not sold in the IPO, subject to certain exceptions, we, all of our directors and executive officers, the selling stockholders, and substantially all of the holders of our common stock and securities exercisable for or convertible into our common stock outstanding immediately prior to the IPO, are subject to market stand-off agreements with us or have entered into lock-up agreements with the underwriters of the IPO under which they have agreed, subject to specific exceptions, not to offer, sell, or agree to sell, directly or indirectly, any shares of common stock without the consent of the underwriters, for a period of 180 days from the IPO date (ending on March 31, 2019). These agreements are subject to certain customary exceptions. When the lock-up period expires, we and our securityholders subject to a lock-up agreement or market stand-off agreement will be able to sell our shares in the public market. In addition, the underwriters of the IPO may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
In addition, as of December 31, 2018, we had outstanding (i) stock options that, if fully exercised, would result in the issuance of 23,774,279 shares of common stock and (ii) 288,460 unvested restricted stock units (“RSUs”). We have filed registration statements on Form S-8 to register shares reserved for future issuance under our equity compensation plans. Subject to the satisfaction of applicable vesting requirements and lock-up agreements referred to above, the shares issued upon exercise of outstanding stock options or settlement orof outstanding RSUsrestricted stock units will be available for immediate resale in the United States on the open market.
Moreover, certain holders of our common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other stockholders.
We may also issue our shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, an acquisition, investments, or otherwise. We also expect to grant additional equity awards to employees, directors, and consultants under our 2018 Equity Incentive Plan and rights to purchase our common stock under our 2018 Employee Stock Purchase Plan. Any such issuances could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline.
The concentration of our stock ownership with insiders will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.
As of February 28, 2019, our executive officers, directors, current 5% or greater stockholders, and affiliated entities together beneficially owned the majority of our common stock. As a result, these stockholders, acting together, will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing, or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our common stock and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our common stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.
Even if our stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of our Loan Agreement. We anticipate that for the foreseeable future we will retain all of our future earnings for use in the development of our business, for repurchases under our Share Repurchase Program, and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and limit the market price of our common stock.
Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:
provide that•classify our board of directors is classified into three classes of directors with staggered three-year terms;
•permit the board of directors to establish the number of directors and fill any vacancies and newly-creatednewly created directorships;
•require super-majority voting to amend somecertain provisions in our restated certificate of incorporation and amended and restated bylaws;
•authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;plan (also known as a “poison pill”);
•provide that only the chairperson of our board of directors, our chief executive officer, president, lead independent director, or a majority of our board of directors will beare authorized to call a special meeting of stockholders;
•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
•provide that the board of directors is expressly authorized to make, alter, or repeal our amended and restated bylaws; and
•establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
In addition, our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, (the “DGCL”)which we refer to as the DGCL, our restated certificate of incorporation, or our amended and restated bylaws, or any
action asserting a claim against us that is governed by the internal affairs doctrine.doctrine, or any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. Our amended and restated bylaws also provide that the federal district courts of the United States would be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act (the “Federal Forum Provision”).Act. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision.
We note, however, that there is uncertainty as to whether a court would enforce this provision. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees.
In December 2018, the Delaware Court of Chancery found that provisions such as the Federal Forum Provision are not valid under Delaware law. In light of this decision of the Delaware Court of Chancery, we do not intend to enforce the Federal Forum Provision in our restated bylaws unless and until there is a final determination by the Delaware Supreme Court regarding the validity of provisions such as the Federal Forum Provision. To the extent the Delaware Supreme Court makes a final determination that provisions such as the Federal Forum Provision are not valid as a matter of Delaware law, the board of directors intends to amend our restated bylaws to remove the Federal Forum Provision.
Moreover, Section 203 of the DGCL may discourage, delay, or prevent a change of control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
Risks Related to Our Convertible Senior Notes Our indebtedness could limit the cash flow available for our operations and expose us to risks that could adversely affect our business, operating results, and financial condition.
In August 2021, we issued $575.0 million aggregate principal amount of the Notes. The Notes are senior, unsecured obligations and bear interest at a rate of 0.25% per year. The Notes will mature on August 15, 2026, unless earlier redeemed, repurchased, or converted in accordance with the terms of the Notes. In March 2023, we entered into separate, privately negotiated repurchase agreements with a limited number of institutional holders of the Notes to repurchase for cash an aggregate of $214.0 million principal amount of the Notes, which we refer to as the Note Repurchases. As of December 31, 2023, we had $361.0 million aggregate principal amount of the Notes outstanding. We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our stockholders and our business, operating results, and financial condition by, among other things:
•increasing our vulnerability to adverse economic and industry conditions;
•limiting our ability to obtain additional financing;
•requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes;
•limiting our flexibility to plan for, or react to, changes in our business;
•diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the Notes; and
•placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, and our cash needs may increase in the future.
The capped call transactions may affect the value of our common stock.
In connection with the Notes, we entered into the privately negotiated capped call transactions, which we refer to as the Capped Calls, with various financial institutions, which we refer to as the option counterparties. The Capped Calls remain in effect notwithstanding the Note Repurchases. 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 potential cash payments we are required to make in excess of the principal amount upon conversion of any Notes, with such reduction and/or offset subject to a cap.
In addition, the option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market transactions (and are likely to do so following any conversion of Notes, any repurchase of the Notes by us on any fundamental change repurchase date, any redemption date, or any other date on which the Notes are retired by us). This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
The potential effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.
General Risks
Adverse or changing economic conditions may negatively impact our business.
Our business depends on the overall demand for labor and on the economic health of current and prospective clients that use our work marketplace. Any significant weakening of the economy in the United States or Europe or of the global economy, including a continued rise in inflation, hiring freezes, layoffs, more limited availability of credit, a reduction in business confidence and activity, decreased government or business spending, economic and political uncertainty, financial turmoil or instability affecting the banking system or financial markets, trade wars, sanctions, higher tariffs, global or regional public health events or conditions, a more limited market for independent professional service providers or information technology services, shifts away from remote work, and other adverse economic or market conditions may adversely impact our business and operating results. These adverse conditions have resulted in the past, and may again result, in reductions in revenue, increased operating expenses, longer sales cycles, and increased competition. There is also a risk that when overall global economic conditions are positive, our business could be negatively impacted by a decreased demand for talent as businesses utilize more full-time employees relative to their use of independent contractors. We cannot predict the timing, strength, or duration of any economic slowdown, or any subsequent recovery generally. If the conditions in the general economy continue to deteriorate, our business, operating results, and financial condition could be adversely affected.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 1C. Cybersecurity.
Cybersecurity Risk Management and Strategy
Our cybersecurity and data privacy risk management processes are integrated in our overall risk management program, and we have developed processes for assessing, identifying, and managing material risks from cybersecurity threats. We have adopted physical, technological, and administrative controls on data security and have a defined procedure for incident detection, containment, response, and remediation. Our information security team is primarily responsible for managing our cybersecurity and data privacy risk management processes. We conduct regular test exercises to ensure all relevant teams are aware of their responsibilities during a cybersecurity event or incident, and we use these exercises to promote a culture of continuous improvement. We also have implemented controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.
Our platform is designed to help ensure the security of our data and systems, protect our customers’ personal information, and meet the rigorous privacy and security requirements of our Enterprise clients. To that end, we have obtained, and we maintain through regular audits where relevant, the following security and privacy certifications: ISO 27001 and 27018, SOC 2 Type 2 certification, SOC 3 certification, PCI-DSS Level 1 certification, and U.S.-EU and U.S.-Swiss Privacy Shield certifications. We are also TrustArc certified. In addition, we leverage the National Institute of Standards and Technology security framework to drive strategic direction and maturity improvement to protect against new and evolving cybersecurity risks over time.
Our information security controls operate at multiple levels and are designed to detect, prevent, and mitigate cybersecurity threats that could impact the privacy and security of our data and our customers’ data. To operate at scale, we have automated several risk mitigation strategies. We have implemented comprehensive trust and safety processes to help prevent and detect suspicious and fraudulent behavior on our platform. Over the years of developing our work marketplace, we have developed and refined specific pattern-matching algorithms to detect unusual behavior on our work marketplace, and we continue to improve such algorithms in the evolving threat landscape. We also regularly update our information security policies, standards and processes as needed to better reflect and account for updates in our cybersecurity posture, cybersecurity risks, and our risk mitigation strategies. We provide regular, mandatory training for our personnel regarding cybersecurity threats as a means to equip our personnel with effective tools to address cybersecurity threats, and to communicate our evolving information security policies, standards, processes and practices.
We engage third parties, including vendors and other external service providers, to support our cybersecurity and data privacy processes such as risk assessments, program enhancements, and value-added user verification services. These third parties provide security services, including regular reviews of our security environment to provide an independent, industry-recognized risk rating and internal audits of our technology and security controls. We have also developed a program and engaged with a bug bounty service for ongoing identification of exploitable
vulnerabilities in the environment. Separately, our information security team also conducts regular scans of the environment to identify known vulnerabilities for remediation.
We also have processes to oversee and identify risks from cybersecurity threats associated with our use of third-party service providers. To that end, we maintain a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of our systems, as well as the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third-party systems. In addition, we perform diligence on our vendors and prospective vendors regarding their cybersecurity posture. We conduct and maintain a regular enterprise risk management program that is overseen by the audit committee of our board of directors, and efforts to address cybersecurity risks are an important component of our overall approach to enterprise risk management.
We deploy technical safeguards that are designed to protect our information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, endpoint detection and response, logging, monitoring and alerting, anti-malware functionality, advanced email security, network security monitoring and access controls, which are evaluated and improved through vulnerability assessments and cybersecurity threat intelligence. All access to our platform is encrypted using industry-standard transport layer security technology. When customers enter sensitive information on our site, such as tax identification numbers, we encrypt the transmission of that information using secure socket layer technology. We also use the HSTS (HTTP strict transport security) to ensure visitors connect to the website over HTTPS which adds an additional layer of protection for our customers. For servers that store personally identifiable information, the data is encrypted. Moreover, our customers may elect to further secure their account credentials through two-factor authentication that requires them to authenticate with information provided by a second device. In order to make secure payments through our platform, we are Payment Card Industry Data Security Standard certified, which means we have demonstrated compliance with the Payment Card Industry security standards required for businesses that complete credit card or debit card transactions.
To date, cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected our business strategy, operating results, and/or financial condition. If we were to experience a material cybersecurity incident in the future, such incident may have a material effect, including on our business strategy, operating results, or financial condition. For more information regarding cybersecurity risks that we face and potential impacts on our business related thereto, see our risk factor disclosures in Part I, Item 1A of this Annual Report on Form 10-K titled “If we or our third-party partners experience a security breach, other hacking or phishing attack, ransomware or other malware attack, or other privacy or security incident, our work marketplace may be perceived as not being secure, our reputation may be harmed, demand for our work marketplace may be reduced, our operations may be disrupted, we may incur significant legal costs, fines, or liabilities, and our business could be adversely affected.”
Cybersecurity Governance
While everyone at Upwork plays a part in managing cybersecurity and data privacy risks, oversight responsibility is shared by our board of directors, audit committee, and management.
Our board of directors, as a whole, has responsibility for risk oversight, although the committees of our board of directors oversee and review risk areas that are particularly relevant to their respective functions. Among its focus areas, our audit committee reviews matters relating to cybersecurity and data privacy and regularly reports to our board of directors regarding such matters. One member of our audit committee earned the NACD’s CERT Certificate in Cybersecurity Oversight in 2023. Our audit committee receives quarterly cybersecurity-related updates from our Chief Information Security Officer, which we refer to as our CISO, including in the form of written reports and presentations. Our CISO and audit committee also provide cybersecurity-related updates to the full board of directors three times per year, including regarding recent developments, evolving standards, metrics about cyber threat response preparedness, program maturity milestones, material cybersecurity risks and risk mitigation status, and the current and emerging threat landscape. We also have implemented controls and procedures that provide for the communication of material cybersecurity incidents to our Chief Executive Officer, Chief Financial Officer, and Chief Legal Officer, as well as to our audit committee and/or to our full board of directors on a timely basis.
Our CISO is primarily responsible for our cybersecurity risk management program and partners with our legal team on data privacy matters at the management level. Our CISO has over 25 years of experience in various technology leadership positions across multiple industries including finance, healthcare and technology. He has held leadership positions specifically in the information security space since 2011 at four publicly traded companies. The CISO’s leadership team members are all seasoned information security professionals who have worked at some of the largest well-known brand names and are experts in their fields. Our CISO monitors, and participates in, our various cybersecurity policies and procedures, and our cybersecurity team regularly updates our CISO on the current status
of the cybersecurity environment, and cybersecurity incidents and actual or potential risks. Our CISO and his team provide regular updates to the management team and escalate events that require leadership’s attention.
Item 2. Properties.
Our corporate headquarters isare located in Mountain View,San Francisco, California, where we occupy a facilityfacilities totaling approximately 32,00018,500 square feet under a lease agreement that expires in June 2019. Historically, we have used this facility for administration, sales and marketing, technology and development, engineering, and customer support. In February 2019, we entered into a non-cancellable operating lease for a new office space located in Santa Clara, California, to which we plan to move our corporate headquarters upon the expiration of our current lease in Mountain View, California. August 2024.
We also lease office space in San Francisco, California and Chicago, Illinois and rent working space in Denver, Colorado, Atlanta, Georgia,Luxembourg and Oslo, Norway.
We may determine to either close, sublease, or relocate our offices. Or, we may procure additional space as we expand geographically or as we add employees and expand geographically. We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional space will be available to accommodate any such expansion of our operations.
employees. See Notes 5 and 15“Note 5—Balance Sheet Components” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information on our leased properties.
Item 3. Legal Proceedings.
We are not a party to any material pending legal proceedings. From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our common stock began tradinghas been traded on The Nasdaq Global Select Market under the symbol “UPWK” onsince October 3, 2018. Prior to that time, there was no public market for our common stock.
Holders of Record
As of February 28, 2019,January 31, 2024, there were 521approximately 1,280 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our common stock represented by these record holders.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item will be included in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2023, and is incorporated herein by reference.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Upwork Inc. under the Securities Act or the Exchange Act.
The following graph shows a comparison from October 3,December 31, 2018 (the date our common stock commenced trading on The Nasdaq Global Select Market), through December 31, 2018,2023 of the cumulative total returns for our common stock, the NASDAQ Composite Index and the NASDAQ 100 Technology Index, respectively. The graph assumes $100 was invested at the market close on October 3,December 31, 2018 in the common stock of Upwork Inc. Such returns are based on historical results and are not intended to suggest future
performance. The NASDAQ Composite Index and the NASDAQ 100 Technology Index assume reinvestment of any dividends.
Recent Sales of Unregistered Securities
None.
Use of Proceeds
In October 2018, we completed our IPO and received aggregate net proceeds of $109.4 million after deducting underwriting discounts and commissions but before deducting offering expenses payable by us. We incurred offering expenses of approximately $6.3 million. Thus, the net offering proceeds, after deducting underwriting discounts and offering expenses, were approximately $103.1 million. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-227207), which was declared effective by the SEC on October 2, 2018.There has been no material change in the planned use of the remainder of proceeds from the IPO as described in our final prospectus filed with the SEC on October 3, 2018 pursuant to Rule 424(b)(4).
None.
Issuer Purchases of Equity Securities
None.In November 2023, our board of directors authorized the repurchase of up to $100.0 million of shares of our outstanding common stock. The Share Repurchase Program has no expiration date and will continue until otherwise suspended, terminated, or modified at any time for any reason. There was no share repurchase activity during the quarter ended December 31, 2023.
Item 6. Selected Consolidated Financial Data.[Reserved]
The following tables present selected historical consolidated financial and other data for our business. We derived the selected consolidated statements of operations data for the years ended December 31, 2018, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial statements that are included elsewhere in this Annual Report. We derived the selected consolidated balance sheet data as of December 31, 2016 from our audited consolidated financial statements, which are not included in this Annual Report. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future. You should read this information in conjunction with the sections titled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this Annual Report.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Consolidated Statements of Operations Data: | (in thousands, except per share data and percentages) |
| Revenue: | | | | | |
| Marketplace | $ | 223,831 |
| | $ | 178,046 |
| | $ | 138,484 |
|
| Managed services | 29,523 |
| | 24,506 |
| | 25,961 |
|
| Total revenue | 253,354 |
| | 202,552 |
| | 164,445 |
|
Cost of revenue(1) | 81,458 |
| | 65,443 |
| | 62,578 |
|
| Gross profit | 171,896 |
| | 137,109 |
| | 101,867 |
|
| Operating expenses: | | | | | |
Research and development(1) | 55,488 |
| | 45,604 |
| | 37,902 |
|
Sales and marketing(1) | 72,963 |
| | 53,044 |
| | 37,437 |
|
General and administrative(1) | 49,336 |
| | 37,334 |
| | 35,446 |
|
| Provision for transaction losses | 5,821 |
| | 4,250 |
| | 5,550 |
|
| Total operating expenses | 183,608 |
| | 140,232 |
| | 116,335 |
|
| Loss from operations | (11,712 | ) | | (3,123 | ) | | (14,468 | ) |
| Interest expense | 2,038 |
| | 960 |
| | 858 |
|
| Other expense, net | 6,142 |
| | 62 |
| | 908 |
|
| Loss before income taxes | (19,892 | ) | | (4,145 | ) | | (16,234 | ) |
| Income tax benefit (provision) | (15 | ) | | 22 |
| | 1 |
|
| Net loss | $ | (19,907 | ) | | $ | (4,123 | ) | | $ | (16,233 | ) |
| Premium on repurchase of redeemable convertible preferred stock | — |
| | (6,506 | ) | | — |
|
| Net loss attributable to common stockholders | $ | (19,907 | ) | | $ | (10,629 | ) | | $ | (16,233 | ) |
Net loss per share attributable to common stockholders, basic and diluted(2) | $ | (0.38 | ) | | $ | (0.32 | ) | | $ | (0.51 | ) |
| Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted | 52,328 |
| | 32,945 |
| | 32,072 |
|
| | | | | | |
Other Financial and Operating Data: (3) | | | | | |
Core clients (4) | 105.5 |
| | 86.4 |
| | 76.5 |
|
GSV (5) | $ | 1,756,289 |
| | $ | 1,373,161 |
| | $ | 1,148,363 |
|
Client spend retention (6) | 108 | % | | 99 | % | | 85 | % |
Adjusted EBITDA (7) | $ | 3,824 |
| | $ | 7,909 |
| | $ | 1,260 |
|
| |
(1)
| Includes stock-based compensation expense as follows: |
|
| | | | | | | | | | | |
| Cost of revenue | $ | 282 |
| | $ | 290 |
| | $ | 193 |
|
| Research and development | 3,258 |
| | 1,797 |
| | 1,820 |
|
| Sales and marketing | 1,637 |
| | 1,299 |
| | 1,052 |
|
| General and administrative | 5,184 |
| | 3,460 |
| | 4,201 |
|
| Total | $ | 10,361 |
| | $ | 6,846 |
| | $ | 7,266 |
|
| |
(2)
| See Notes 2 and 11 of the notes to our consolidated financial statements included elsewhere in this Annual Report for an explanation of the calculations of our net loss per share attributable to common stockholders, basic and diluted. |
| |
(3)
| For a discussion of limitations in the measurement of core clients, GSV, and client spend retention, see the section titled “Risk Factors—We track certain performance metrics with internal tools and do not independently verify such metrics. Certain of our performance metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.” |
| |
(4)
| For the definition of core clients, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operational Metrics.” |
| |
(5)
| For the definition of GSV, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operational Metrics.” |
| |
(6)
| For the definition of client spend retention, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operational Metrics.” |
| |
(7)
| For the definition of adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of net loss to adjusted EBITDA, see the section below titled “—Non-GAAP Financial Measures.” |
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| Consolidated Balance Sheet Data: | (in thousands) |
| Cash and cash equivalents | $ | 129,128 |
| | $ | 21,595 |
| | $ | 27,326 |
|
| Working capital | 128,282 |
| | 29,483 |
| | 31,205 |
|
| Total assets | 391,573 |
| | 275,189 |
| | 249,600 |
|
| Debt, current and noncurrent | 23,910 |
| | 33,833 |
| | 16,962 |
|
| Redeemable convertible preferred stock | — |
| | 166,486 |
| | 178,785 |
|
| Total stockholders’ equity (deficit) | 243,745 |
| | (31,367 | ) | | (30,131 | ) |
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, the change in fair value of our Tides Foundation common stock warrant (see Note 8 of the notes to our consolidated financial statements included elsewhere in this Annual Report), and, if applicable, other non-cash transactions.
The following table presents a reconciliation of net loss to adjusted EBITDA, the most directly comparable financial measure prepared in accordance with U.S. GAAP, for each of the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Net loss | $ | (19,907 | ) | | $ | (4,123 | ) | | $ | (16,233 | ) |
| Add back (deduct): | | | | | |
| Stock-based compensation expense | 10,361 |
| | 6,846 |
| | 7,266 |
|
| Depreciation and amortization | 4,949 |
| | 4,186 |
| | 8,462 |
|
| Interest expense | 2,038 |
| | 960 |
| | 858 |
|
| Other expense, net | 6,142 |
| | 62 |
| | 908 |
|
| Income tax (benefit) provision | 15 |
| | (22 | ) | | (1 | ) |
| Change in fair value of Tides Foundation common stock warrant | 226 |
| | — |
| | — |
|
| Adjusted EBITDA | $ | 3,824 |
| | $ | 7,909 |
| | $ | 1,260 |
|
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, the change in fair value of our Tides Foundation common stock warrant (see Note 8 of the notes to our consolidated financial statements included elsewhere in this Annual Report), and, if applicable, other non-cash transactions that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;
our management uses adjusted EBITDA in conjunction with financial measures prepared in accordance with U.S. GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and
adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our core operating results, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows:
adjusted EBITDA excludes stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA does not reflect: (a) changes in, or cash requirements for, our working capital needs; (b) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (c) tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of this measure for comparative purposes.
Because of these and other limitations, you should consider adjusted EBITDA along with other financial performance measures, including net loss and our other financial results prepared in accordance with U.S. GAAP.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with the sections titled “Business,”“Business” and “Risk Factors,” and “Selected Consolidated Financial Data,”Factors” and the consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.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 Annual Report.
Overview
Business
Independent talent is an increasingly sought-after, critical, and expanding segment of the global workforce. We operate the world’s largest onlinework marketplace that enablesconnects businesses to find and work with highly-skilled freelancers,independent talent from across the globe, as measured by 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 userstalent and clients for other services. Freelancers are an increasingly sought-after, critical, and expanding segment of the global workforce. We define freelancers as users of our platform that advertise and provide services to clients through our platform, and we define clients as users of our platform that work with freelancers through our platform. The freelancers on our platform includeTalent includes independent professionals and agencies of varying sizes. The clientsClients on our platformwork marketplace range in size, from independent professionals and small businesses to Fortune 500100 companies. DuringWith customers in over 180 countries, our work marketplace enabled $4.1 billion of GSV for the year ended December 31, 2018, our platform enabled $1.8 billion of GSV in over 180 countries.2023. For purposes of determining countries where we enable GSV, we include both the countries in which the clients that paid for the applicable services are located, as well as the countries in which the freelancerstalent that provided those services are located.
In October 2018, we completedAs a global work marketplace that connects talent and clients regardless of their location, our IPO,GSV originates from around the world. Of the $4.1 billion of GSV enabled on our work marketplace in 2023, approximately 26% was generated from U.S. talent, which we issuedwas our largest talent geography in each of 2023, 2022, and sold an aggregate2021, as measured by GSV, while talent in India and the Philippines remained our next largest talent geographies in all three years. Of the $4.1 billion and $3.5 billion of 7,840,908 sharesGSV enabled on our work marketplace in 2022 and 2021, respectively, approximately 26% and 25% was generated from talent in the United States in each year, respectively.
Approximately 69% of our common stock, including 1,022,727 shares pursuantGSV in 2023 was generated from U.S. clients, compared to approximately 68% and 66% of GSV in 2022 and 2021, respectively, with clients in no other country representing more than 10% of our GSV in any such year.
In 2023, we changed the name of our Upwork Enterprise offering to Enterprise Solutions. Concurrently, to align with customer needs and internal decision-making, we combined Enterprise Solutions and Managed Services into a suite of Enterprise offerings. In order to conform to the exercisecurrent period presentation as of the underwriters’ option to purchase additional shares. The shares were sold to the underwriters at the IPO price of $15.00 per share less an underwriting discount of $1.05 per share. We received aggregate net proceeds of $109.4 millionDecember 31, 2023, we present revenue from the IPO after deducting underwriting discountsEnterprise Solutions and commissions but before deductingManaged Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering expenses payable by us.in Marketplace revenue and Marketplace take rate.
We generate a majorityrevenue from both talent and clients of our revenueMarketplace and Enterprise offerings. Revenue is primarily generated from talent service fees, chargedand to freelancers.a lesser extent, client marketplace fees. We also generate revenue throughfrom fees charged to clients for transacting payments throughpremium offerings, including our platform,Upwork Payroll offering, as well as purchases of Connects, talent memberships, and other services, such as foreign currency exchange fees, Upwork Payroll service fees, and fees for premium offerings. In addition, we provide a managed services offering where we engage freelancerswhen clients choose to complete projects, directly invoicepay in currencies other than the client, and assume responsibility for work performed by the freelancers. We generated revenue of $253.4 million in 2018, $202.6 million in 2017, and $164.4 million in 2016, representing year-over-year increases of 25% in 2018 and 23% in 2017.U.S. dollar.
Financial Highlights for 20182023
In 2018,2023, we implemented a number of initiatives that positively impacted our platform enabled $1.8 billionfinancial results, including increasing the number of GSV, representingConnects needed by talent to bid on projects, deploying ads products on our work marketplace, introducing a contract initiation fee in April 2023 for clients on our Marketplace offering, and retiring the tiered service fee structure in May 2023 for talent working with clients on our Marketplace offering in favor of a flat fee. These initiatives, along with others, resulted in an increase to Marketplace revenue of 28% over$67.8 million, or 13%, for the prior year ended December 31, 2023, compared to 2022.
In 2023, we implemented a number of cost-saving measures, including reducing our investments in brand marketing, vendor spend, and other non-personnel costs. Additionally, in light of the challenging macroeconomic conditions as well as our total revenue was $253.4 million,efforts to reduce spend and streamline operations, we implemented a reduction of our workforce in May 2023 representing an increaseapproximately 15% of 25% over the prior year. Our marketplace revenue was $223.9 million, representing an increasefull-time employees, largely in our sales team, and we also reduced a smaller percentage of 26% over the prior year. We continue to make significant investments to grow our business, including in sales and marketing, research and development, operations, and personnel and, asindependent team members. As a result, we generated a net lossincome of $19.9 $46.9
million in 20182023 compared to a net loss of $4.1$89.9 million in 2017.2022. Our adjusted EBITDA was $3.8$73.1 million in 2018, a decline2023, as compared to adjusted EBITDA loss of 52% from 2017.$4.0 million in 2022. We expect these measures will continue to positively impact net income and adjusted EBITDA in 2024. Adjusted EBITDA is a financial measure that is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with generally accepted accounting principles in the United States, which we refer to as U.S. GAAP. See the section titled “Selected Consolidated“Key Financial Data—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 to adjusted EBITDA.income (loss), the most directly comparable financial measure prepared under U.S. GAAP.
As a global platform that connects freelancers and clients regardless of their location, our GSV originates from around the world. Of the $1.8 billion of GSV enabled on our platform in 2018, approximately 23% was generated from U.S. freelancers, our largest freelancer geography, as measured by GSV, in both 2018 and 2017, while freelancers in India and the Philippines remained our next largest freelancer geographies in both years. Of the $1.4 billion of GSV enabled on our platform in 2017, approximately 19%, was generated from freelancers in the United States.
Approximately 66% of our GSV in 2018 was generated from U.S. clients, compared to approximately 67% of GSV in 2017, with clients in no other country representing more than 10% of our GSV in either year. We believe U.S. clients will continue to drive growth by engaging freelancers globally, particularly freelancers in the United States where there are various efficiencies associated with same-country engagements, such as cultural and contractual norms, time zones, and language.
Key Financial and Operational Metrics
We monitor the following key financial and operational metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions (in thousands, except percentages):decisions.
Our key metrics were as follows as of or for the periods presented: |
| | | | | | | | | | | |
| | As of or for the Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Core clients | 105.5 |
| | 86.4 |
| | 76.5 |
|
| GSV | $ | 1,756,289 |
| | $ | 1,373,161 |
| | $ | 1,148,363 |
|
| Client spend retention | 108 | % | | 99 | % | | 85 | % |
| Marketplace revenue | $ | 223,831 |
| | $ | 178,046 |
| | $ | 138,484 |
|
Adjusted EBITDA (1) | $ | 3,824 |
| | $ | 7,909 |
| | $ | 1,260 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of or for the Year Ended December 31, |
| (In thousands, except GSV per active client and percentages) | 2023 | | | | % Change | | 2022 | | | | % Change | | 2021 | | % Change |
| | | | | | | | | | | | | | | |
| GSV | $ | 4,142,252 | | | | | 1 | % | | $ | 4,104,891 | | | | | 16 | % | | $ | 3,546,774 | | | 41 | % |
Marketplace revenue (1) | $ | 586,099 | | | | | 13 | % | | $ | 518,282 | | | | | 21 | % | | $ | 427,476 | | | 37 | % |
Marketplace take rate (1) | 15.4 | % | | | | 1.6 | % | | 13.8 | % | | | | 0.6 | % | | 13.2 | % | | (0.4) | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Net income (loss) | $ | 46,887 | | | | | * | | $ | (89,885) | | | | | 60 | % | | $ | (56,240) | | | * |
Adjusted EBITDA (2) | $ | 73,134 | | | | | * | | $ | (4,029) | | | | | * | | $ | 19,127 | | | 36 | % |
| Active clients | 851 | | | | | 5 | % | | 814 | | | | | 6 | % | | 771 | | | 22 | % |
| GSV per active client | $ | 4,867 | | | | | (4) | % | | $ | 5,045 | | | | | 10 | % | | $ | 4,599 | | | 15 | % |
| |
(1)
| Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for a definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure prepared under U.S. GAAP. |
We*Not meaningful
(1)In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue and Marketplace take rate.
(2)Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. See “—Non-GAAP Financial Measures” below for the definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure prepared under U.S. GAAP.
As discussed below with respect to each key metric, we believe these key financial and operational metrics are useful to evaluate period-over-period comparisons of our business and in understanding our operating results. Theresults, and management uses these metrics to track our performance. We expect our key metrics may fluctuate between periods due to a number of core clientsfactors, including changing macroeconomic conditions; the number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) in any given period drives both GSV, which representsperiod; the amountlapping of business transacted throughsignificant launches of new products, pricing changes, and other monetization efforts; and ongoing efforts to improve processes on our platform,work marketplace, including project proposals and client spend retention. Client spend retention impacts the growth ratepurchases of GSV. We believe our marketplace revenue, which represents a majority of our revenue, will grow as GSV grows, although they could grow at different rates.Connects, among others. For a discussion of limitations in the measurement of core clients, GSV,our key financial and client spend retention,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.”
Core Clients
We define a core client as a client that has spent in the aggregate at least $5,000 since it began using our platform and also had spend-activity on our platform during the twelve months preceding the date of measurement. This includes the total amount spent by the client on both the Elance and oDesk platforms for the periods prior to the consolidation of the two platforms as described above under “Business—Corporate Information.” We believe $5,000 is an important spend milestone as it indicates that the client is actively using our platform. Historically, these core clients have been more likely to continue using our platform. We believe that the number of core clients is a key indicator of our growth and the overall health of our business because core clients are a primary driver of GSV, and, therefore, marketplace revenue.
Gross Services Volume
GSV includes both client spend and additional fees charged for other services. Client spend—the total amount that clients spend on both our marketplace offerings and our managed services offering—is the primary component of GSV. GSV also includes additional fees charged to both clients and freelancers for other services, such as freelancer withdrawals and foreign currency exchange. (GSV)
GSV is an important metric because it represents the amount of business transacted through our platform. work marketplace. The primary component of GSV is client spend, which we define as the total amount that clients spend on our offerings. GSV also includes fees charged to talent and clients, such as for transacting payments through our work marketplace, purchases of Connects, talent memberships, and foreign currency exchange.
Growth in the number of coreactive clients and increasedGSV per active client spend retention are the primary drivers of GSV. We derive a substantial portion of our GSV growth. In addition,and revenue from small- and medium-sized businesses.
Marketplace Revenue
Marketplace revenue is the primary driver of our marketplacebusiness, and we believe it provides comparability to other online marketplaces. Marketplace revenue represents the majority of our revenue and is derived from our Marketplace offerings, which include all offerings other than our Enterprise offerings—Enterprise Solutions, previously referred to as Upwork Enterprise, and Managed Services. We generate Marketplace revenue from both talent and clients. Marketplace revenue is primarily comprisedgenerated from talent service fees, and to a lesser extent, client marketplace fees. We also generate Marketplace revenue from fees for premium offerings, such as our Upwork Payroll offering, as well as purchases of Connects, talent memberships, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S. dollar. In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue.
Our Marketplace revenue is primarily generated from the service fees paid by freelancerstalent as a percentage of the total amount freelancers chargetalent charges clients for services accessed throughon our platform.Marketplace offering. Therefore, marketplaceMarketplace revenue is correlated to GSV, and we believe that our marketplaceMarketplace revenue will grow as GSV grows, although they could grow at different rates. We expect ourFor a discussion of how we measure and evaluate the correlation between Marketplace revenue and Marketplace GSV, to fluctuatesee “—Marketplace Take Rate” below.
Marketplace Take Rate
Marketplace take rate measures the correlation between periods due to a numberMarketplace 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 factors, including the volume and characteristics of projects that are posted by clientshow well we monetize spend on our platform, suchwork marketplace from our Marketplace offerings. In order to conform to the current period presentation as size, duration, pricing,of December 31, 2023, we present revenue from Enterprise Solutions and other factors.Managed Services together as Enterprise revenue in prior periods and no longer report revenue and GSV from our Enterprise Solutions offering in Marketplace take rate.
Active Clients and GSV per Active Client Spend Retention
We calculatedefine an active client as a client that has had spend retention by dividingactivity on our recurring client spend by our base client spend. We define base client spend as the aggregate client spend from all clientswork marketplace during the four quarters ended one year prior to12 months preceding the date of measurement. We define our recurringGSV per active client spend as the aggregate client spendis calculated by dividing total GSV during the four quarters ended on the date of measurement fromby the samenumber of active clients included in our measureon the date of base client spend. Our business is recurring in nature even though clients are not contractually required to spend on a recurring basis.measurement. We believe that the number of active clients and GSV per active client spend retention is a key indicatorare indicators of the value of our platformgrowth and the overall health of our business because it impacts the growth ratebusiness. The number of active clients is a primary driver of GSV and, therefore, marketplacein turn, Marketplace revenue.
The growth in our marketplace is driven primarily by long-term and recurring use by freelancers and clients, which leads to increased revenue visibility for us. While continued use of our platformwork marketplace by freelancerstalent is a factor that impacts our ability to attract and retain clients, our platformwe currently hashave a significant surplus of freelancerstalent in relation to the number of clients actively engaging freelancers.talent for most categories of services on our work marketplace. As a result of this surplus, of freelancers relative to clients, we primarily focus our efforts on retaining client spend and acquiring new clients, as opposed to acquiring new freelancerstalent and retaining existing freelancers.talent. Moreover, we generate revenue when clients engage and pay freelancerstalent, and therefore, our key metrics and operating results are directly impacted by client spend. On the other hand,Additionally, the number of freelancerstalent retained between periods is merely one of many factors that may impact client spend in a particular period and is not a primary driver of our key metrics and operating results. For these reasons,
Cohort Analysis
Client Spend by Annual Client Cohort
Our growth has been driven, in significant part, by retaining client spend from existing clients as we do not calculate or track freelancer retention metricsgrow our client base. As illustrated in orderthe chart below, we have been able to manage our business.
Marketplace Revenue
Marketplace revenue, which represents the majorityretain client spend over long periods of our revenue, consists of revenue derived from our Upwork Standard and Upwork Enterprise and other premium offerings. We generate marketplace revenue from both freelancers and clients. Our marketplace revenue is primarily comprised of the service fees paid by freelancers as a percentage of the total amount freelancers chargetime with clients for services accessed through our platform, andin historical cohorts continuing to a lesser extent, payment processing and administration fees charged to clients. We also generate marketplace revenue for other services, such as foreign currency exchange fees, Upwork Payroll service fees, and fees for premium offerings. Marketplace revenue is an important metric because it is the primary driver of our business model, and we believe it provides greater comparability to other online marketplaces. The growth rate of marketplace revenue fluctuates in relation to the growth rate of GSV. Therefore, marketplace revenue is correlated to GSV, and we believe that our marketplace revenue will grow as GSV grows, although they could grow at different rates.
Adjusted EBITDA
We define adjusted EBITDA as net loss adjusted for stock-based compensation expense, depreciation and amortization, interest expense, other (income) expense, net, provision for (benefit from) income tax, the change in fair value of our Tides Foundation common stock warrant (see Note 8 of the notes to our consolidated financial statements included elsewhere in this Annual Report), 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. See the section titled “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for informationspend meaningfully on our usework marketplace. A client belongs to an annual cohort based on the date of adjusted EBITDAfirst spend activity with talent. For example, the 2023 cohort includes all clients that had their first spend activity with talent between January 1, 2023 and a reconciliation of net loss to adjusted EBITDA.December 31, 2023. For the years ended December 31,
2023, 2022, and 2021, client spend from new client cohorts was $556.3 million, $507.6 million, and $537.9 million, respectively.
Components of Our Results of Operations
Revenue
Marketplace Revenue. Marketplace revenue is primarily generated from our Upwork Standard and Upwork Enterprise and other premium offerings. Under our Upwork Standard and Upwork Enterprise offerings, we generate revenue from both freelancers and clients.Marketplace revenue, which represents the majority of our total revenue, is primarily comprised of thetalent service fees, paid by freelancers as a percentage of the total amount that freelancers charge clients for services accessed through our platform and to a lesser extent, payment processing and administration fees paid by clients.client marketplace fees.
Our Upwork Standard offering provides clients with accessWe generate Marketplace revenue from talent of our Marketplace offerings. Prior to freelance talent with verified work history on our platform and client feedback, the ability to instantly match with the right freelancers, and built-in collaboration features. For our Upwork Standard offering,May 2023, we havehad a tiered freelancertalent service fee schedule based on cumulative lifetime billings by the freelancertalent to each client. FreelancersIn May 2023, we retired the tiered service fee structure for talent working with clients on our Upwork Standard offering typically pay usMarketplace offerings—ranging from 5% to 20%—in favor of a simplified flat fee of 10%. This change took effect for new contracts and existing contracts that would have otherwise been subject to a 20% fee under the first $500, 10%former tiered service fee model. Contracts under the former tiered service fee model that had a 5% fee retained that rate for those contracts through the end of 2023. We recognize revenue on Sunday of each week for the next $9,500, and then 5%majority of our talent service fees as that is the day we have the contractual right to bill talent for any amount over $10,000 they bill to each client through our platform. Wethe service fees. To a lesser extent, we also generate revenue from freelancerstalent through purchases of Connects, membership fees, and withdrawal and other fees, which are currently immaterial.fees.
In addition, we generate marketplaceMarketplace revenue from clients of our Upwork Standard offering by charging clientsMarketplace offerings, whereby we charge a payment processing and administration fee. Clients using our Upwork Standard offering pay either 2.75% of their client spend or a flatmarketplace fee of $25 per month5% on each transaction—or 3% if paid via ACH for unlimited payment transactions with qualifying payment methods. Weeligible clients. In April 2023, we introduced a contract initiation fee for clients on our Marketplace offerings. To a lesser extent, we also generate revenue from clients through foreign currency exchange fees when clients choose to pay in currencies other than the U.S. dollar and from interest earned on funds held on behalf of customers.
One of our premium offerings, Upwork Payroll, is available to clients whichwhen talent are currently immaterial.classified as employees for engagements on our work marketplace. We work with unrelated third-party staffing providers that provide employment services to such clients.
Enterprise Revenue. Enterprise offers two lines of service—Enterprise Solutions and Managed Services.
Our Upwork Enterprise Solutions offering and other premium offerings, which are designed for larger clients, includeincludes access to additional product features, premium access to top talent, professional services, custom reporting, and invoicing on a monthly basis.flexible payment terms. Revenue from our Enterprise Solutions offering includes all client fees, subscriptions, and talent service fees. For our Upwork Enterprise Solutions offering, we charge clients a monthly or annual subscription fee and a service fee calculated as a percentage of the client’s spend on freelancertalent services, in addition to thea 10% service feesfee paid by freelancers.talent. Additionally, Upworkclients of our Enterprise clientsSolutions offering can also subscribe to a compliance offeringservice that includes worker classification services for an additional fee. Upwork Enterprise clientsfee
and may also choose to use our platformwork marketplace to engage freelancerstalent that were not originally sourced through our platformwork marketplace for a lower fee percentage.
One of our premium offerings, Upwork Payroll, is available to clients when freelancers are classified as employees for engagements on our online marketplace. The client enters into an Upwork Payroll agreement with us, and we separately contract with unrelated
third-party staffing providers who provide employment services to such clients. Revenue from Upwork Payroll is currently immaterial.
Managed Services Revenue.Through our managed servicesManaged Services offering, we are responsible for providing services and engaging freelancerstalent directly or as employees of third-party staffing providers to perform services for clients on our behalf. The freelancers delivering managedtalent providing services in connection with our Managed Services offering include independent professionalstalent and agencies of varying sizes. Under U.S. GAAP, we are deemed to be the principal in these managed servicesManaged Services arrangements and therefore recognize the entire GSV of managed servicesManaged Services projects as managed servicesManaged Services revenue, as compared to recognizing only the percentage of the client spend that we receive, as we do with our marketplaceMarketplace and Enterprise Solutions offerings.
Cost of Revenue and Gross Profit
Cost of Revenue. Cost of revenue consists primarily of the cost of payment processing fees, amounts paid to freelancerstalent to deliver services for clients under our managed servicesManaged Services offering, personnel-related costs for our services and support personnel, third-party hosting fees for our use of AWS, and the amortization expense associated with acquired intangibles and capitalized internal-use software and platform development.development costs. We define personnel-related costs as salaries, bonuses, benefits, travel and entertainment, and stock-based compensation costs for employees and the costs related to other service providers we engage.
We expect cost of revenue to increase in absolute dollars in future periods due to higher payment processing fees, third-party hosting fees, and personnel-related costs in order to support growth on our platform. Amounts paid to freelancers to deliver services under our managed services offering are tied to the volume of managed services used by our clients. The level and timing of all of these items could fluctuate and affect our cost of revenue in the future.
Gross Profit and Gross Margin. Our gross profit and gross margin may fluctuate from period-to-period.period to period. Such fluctuations may be influenced by our revenue, the mix of payment methods that our clients choose, the timing and amount of investments to expand hosting capacity, our continued investments in our services and support teams, the timing and amount of services freelancers deliver for clients underamounts paid to talent in connection with our managed servicesManaged Services offering, and the amortization expense associated with acquired intangibles and capitalized internal-use software and platform development cost.costs. In addition, gross margin will be impacted by fluctuations in our revenue mix between marketplaceMarketplace revenue and our managed servicesEnterprise revenue. 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.
Operating Expenses
Research and Development. Research and development expense primarily consists of personnel-related costs and third-party hosting costs related to development.costs. Research and development costs are expensed as incurred, except to the extent that such costs are associated with internal-use software and platform development that qualifies for capitalization. We believe continued investments in research and development are important to attain our strategic objectives and expect research and development expense to increase in absolute dollars for the foreseeable future, although this expense, expressed as a percentage of total revenue, may vary from period to period.
Sales and Marketing. Sales and marketing expense consists primarily of expenses related to advertising and marketing activities, as well as personnel-related costs, including sales commissions, which we expense as they are incurred, and advertising and marketing activities. We continue to invest in our sales and marketing capabilities and 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.incurred.
General and Administrative. General and administrative expense consists primarily of personnel-related costs for our executive, finance, legal, human resources, and operations functions. General and administrative expense also includesfunctions; outside consulting, legal, and accounting services,services; impairment expense; and insurance. We also include the change in fair market value of our outstanding Tides Foundation common stock warrant within this line item. For further information regarding this charitable donation, see Note 8 of the notes to our consolidated financial statements included elsewhere in this Annual Report. We expect to continue to invest in corporate infrastructure and incur additional expenses associated with operating as a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums, and compliance costs. As a result, we expect general and administrative expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.
Provision for Transaction Losses. Provision for transaction losses consists primarily of losses resulting from fraud and bad debt expense associated with our trade and client receivables balance and transaction losses associated with chargebacks. Provisions for these items represent estimates of losses based on our actual historical incurred losses and other factors. As a result,
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income that we expect provision for transaction losses to increaseearn from our operating investments, namely our deposits in absolute dollarsmoney market funds and investments in future periods although thismarketable securities, interest expense expressed as a percentage of total revenue may vary from period-to-period.
Interest Expense
Interest expense consists of interest on our outstanding borrowings.
Other Expense, Net
Other expense, net consists primarily ofborrowings, as well as gains and losses from foreign currency exchange transactions, interest income that we earn from our money market funds, and expenses resulting from the revaluation of our convertible preferred stock warrant liability. Our convertible preferred stock warrant liability was converted to additional paid-in capital upon the completion of our IPO, which occurred in October 2018.transactions.
Income Tax Benefit (Provision)Provision
We account for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax liability and the change in deferred tax assets and liabilities. We establish a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income.
Deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the
realization criteria set forth in the relevant authoritative guidance. To the extent that we believe any amounts are less likely than not to be realized, we record a valuation allowance to reduce our deferred tax assets. The realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.
In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize potential liabilities based on an estimate of whether, and the extent to which, additional taxes will be due. We account for uncertain tax positions in accordance with the relevant guidance, which prescribes a recognition threshold and measurement approach for uncertain tax positions taken or expected to be taken in our income tax return, and also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The guidance utilizes a two-step approach forevaluation of uncertain tax positions. The first step is to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit. The second step is to measure the tax benefit as the largest amount whichthat is more likely than not to be realized on ultimate settlement. A liability is reported for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any interest and penalties related to unrecognized tax benefits are recorded as income tax expense.
Results of Operations
The following table sets forth our consolidated results of operations for the years ended December 31, 2018, 20172023, 2022, and 2016 (in thousands):2021:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2023 | | 2022 | | 2021 |
| Revenue: | | | | | |
Marketplace (1) | $ | 586,099 | | | $ | 518,282 | | | $ | 427,476 | |
Enterprise (1) | 103,037 | | | 100,036 | | | 75,321 | |
| Total revenue | 689,136 | | | 618,318 | | | 502,797 | |
Cost of revenue (2) | 170,450 | | | 160,402 | | | 135,508 | |
| Gross profit | 518,686 | | | 457,916 | | | 367,289 | |
| Operating expenses | | | | | |
Research and development (2) | 177,363 | | | 154,553 | | | 119,083 | |
Sales and marketing (2) | 220,681 | | | 246,882 | | | 183,294 | |
General and administrative (2) | 118,925 | | | 123,952 | | | 113,081 | |
| Provision for transaction losses | 12,977 | | | 25,153 | | | 6,048 | |
| Total operating expenses | 529,946 | | | 550,540 | | | 421,506 | |
| Loss from operations | (11,260) | | | (92,624) | | | (54,217) | |
| Other income (expense), net | 60,137 | | | 3,275 | | | (1,901) | |
| Income (loss) before income taxes | 48,877 | | | (89,349) | | | (56,118) | |
| Income tax provision | (1,990) | | | (536) | | | (122) | |
| Net income (loss) | $ | 46,887 | | | $ | (89,885) | | | $ | (56,240) | |
| | | | | |
(1) In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue. |
| | | | | |
(2) Includes stock-based compensation expense as follows: |
| | | | | |
| Cost of revenue | $ | 1,900 | | | $ | 1,356 | | | $ | 794 | |
| Research and development | 28,006 | | | 26,881 | | | 16,232 | |
| Sales and marketing | 14,030 | | | 11,511 | | | 5,923 | |
| General and administrative | 30,259 | | | 35,753 | | | 30,643 | |
| Total | $ | 74,195 | | | $ | 75,501 | | | $ | 53,592 | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Revenue: | | | | | |
| Marketplace | $ | 223,831 |
| | $ | 178,046 |
| | $ | 138,484 |
|
| Managed services | 29,523 |
| | 24,506 |
| | 25,961 |
|
| Total revenue | 253,354 |
| | 202,552 |
| | 164,445 |
|
Cost of revenue(1) | 81,458 |
| | 65,443 |
| | 62,578 |
|
| Gross profit | 171,896 |
| | 137,109 |
| | 101,867 |
|
| Operating expenses: | | | | | |
Research and development(1) | 55,488 |
| | 45,604 |
| | 37,902 |
|
Sales and marketing(1) | 72,963 |
| | 53,044 |
| | 37,437 |
|
General and administrative(1) | 49,336 |
| | 37,334 |
| | 35,446 |
|
| Provision for transaction losses | 5,821 |
| | 4,250 |
| | 5,550 |
|
| Total operating expenses | 183,608 |
| | 140,232 |
| | 116,335 |
|
| Loss from operations | (11,712 | ) | | (3,123 | ) | | (14,468 | ) |
| Interest expense | 2,038 |
| | 960 |
| | 858 |
|
| Other expense, net | 6,142 |
| | 62 |
| | 908 |
|
| Loss before income taxes | (19,892 | ) | | (4,145 | ) | | (16,234 | ) |
| Income tax benefit (provision) | (15 | ) | | 22 |
| | 1 |
|
| Net loss | $ | (19,907 | ) | | $ | (4,123 | ) | | $ | (16,233 | ) |
| | | | | | |
(1) Includes stock-based compensation expense as follows (in thousands): | | | | | |
| | | | | | |
| Cost of revenue | $ | 282 |
| | $ | 290 |
| | $ | 193 |
|
| Research and development | 3,258 |
| | 1,797 |
| | 1,820 |
|
| Sales and marketing | 1,637 |
| | 1,299 |
| | 1,052 |
|
| General and administrative | 5,184 |
| | 3,460 |
| | 4,201 |
|
| Total | $ | 10,361 |
| | $ | 6,846 |
| | $ | 7,266 |
|
Comparison of the Years Ended December 31, 20182023 and 20172022
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | % |
Marketplace (1) | $ | 586,099 | | | $ | 518,282 | | | 67,817 | | | 13 | % |
Percentage of total revenue (1) | 85 | % | | 84 | % | | | | |
Enterprise (1) | $ | 103,037 | | | $ | 100,036 | | | 3,001 | | | 3 | % |
Percentage of total revenue (1) | 15 | % | | 16 | % | | | | |
| Total revenue | $ | 689,136 | | | $ | 618,318 | | | $ | 70,818 | | | 11 | % |
(1) In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue. |
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Marketplace | $ | 223,831 |
| | $ | 178,046 |
| | 45,785 |
| | 26 | % |
| Percentage of total revenue | 88 | % | | 88 | % | | | | |
| Managed services | $ | 29,523 |
| | $ | 24,506 |
| | 5,017 |
| | 20 | % |
| Percentage of total revenue | 12 | % | | 12 | % | | | | |
| Total revenue | $ | 253,354 |
| | $ | 202,552 |
| | $ | 50,802 |
| | 25 | % |
TotalFor the year ended December 31, 2023, total revenue was $253.4$689.1 million, in 2018,representing an increase of $50.8$70.8 million, or 25%11%, as compared to 2017.
2022. In 2023, we implemented a number of initiatives that positively impacted Marketplace revenue and Marketplace take rate, including modifying existing offerings and other services and features. Specifically, we increased the number of Connects needed by talent to bid on projects, deployed ads products on our work marketplace, introduced a contract initiation fee in April 2023 for clients on our Marketplace offering, and in May 2023, retired the tiered service fee structure for talent working with clients on our Marketplace offering—ranging from 5% to 20%—in favor of a flat fee of 10%. As a result, for the year ended December 31, 2023, Marketplace revenue represented 88%85% of total revenue and increased by $67.8 million, or 13%, as compared to 2022. Marketplace revenue growth was primarily driven by increases in revenue from client marketplace fees, Connects, and talent service fees. Overall, these factors caused Marketplace revenue to grow at a faster rate than GSV from our Marketplace offerings, which caused Marketplace take rate to increase to 15.4%, as compared to 13.8% in 2022. We expect these factors will cause Marketplace revenue and Marketplace take rate to continue to increase in 2024.
Enterprise revenue represented 15% of total revenue for 2018, an increase of $45.8the year ended December 31, 2023 and increased by $3.0 million, or 26%3%, as compared to 2017. Marketplace revenue increased primarily2022, due to anincreased revenue from our Enterprise Solutions and Managed Services offerings. We intend to focus on efforts to attract new clients, as well as talent that meet the criteria sought by such clients. As a result of these efforts, we expect Enterprise revenue to increase in GSV. GSV grew by 28% in 2018 compared to 2017, primarily driven by a 22% increase in the number of core clients, and higher client spend retention, which increased to 108% for 2018 from 99% for 2017. We believe these increases were primarily due to investments in sales and marketing to acquire new clients and drive brand awareness and research and development to build new product features. Freelancer service fees generated $149.9 million and $120.9 million of marketplace revenue in 2018 and 2017, respectively. Client payment processing and administration fees generated $35.5 million and $27.9 million of marketplace revenue in 2018 and 2017, respectively.
Managed services revenue represented 12% of total revenue in both 2018 and 2017. Managed services revenue increased $5.0 million, or 20%, in 2018 compared to 2017, primarily due to an increase in the amount of freelancer services engaged by a client through our managed services offering. Managed services revenue is growing, as expected, at a slower rate than our marketplace revenue, and we anticipate this trend to continue.2024.
Cost of Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | % |
| Cost of revenue | $ | 170,450 | | | $ | 160,402 | | | $ | 10,048 | | | 6 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total gross margin | 75 | % | | 74 | % | | | | |
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Cost of revenue | $ | 81,458 |
| | $ | 65,443 |
| | $ | 16,015 |
| | 24 | % |
| Components of cost of revenue: | | | | | | | |
| Costs of freelancer services to deliver managed services | 24,490 |
| | 19,986 |
| | 4,504 |
| | 23 | % |
| Other components of cost of revenue | 56,968 |
| | 45,457 |
| | 11,511 |
| | 25 | % |
| Total gross margin | 68 | % | | 68 | % | | | | |
CostFor the year ended December 31, 2023, cost of revenue increased by $16.0$10.0 million, or 24%6%, in 2018as compared to 2017. The increase was2022, primarily due to the increase in other componentsas a result of cost of revenue, which included increases of $6.2 million in payment processing fees due to an increase in client spend on our platform, $2.4of $3.2 million, in third-party hosting costs directly related to increased usagecost of AWS, $1.1 million related to increased personnel-related costs, $1.0 million in costs directly associated with expanding our customer support team due to increased activity on our platform, and $0.8 million attributed to normal operating costs that increased due to the increase in revenue. Costs of freelancertalent services to deliver managed services increasedManaged Services of $2.6 million primarily driven by $4.5 million, or 23%, in 2018 compared to 2017, primarily due to a corresponding increasenew spend from existing clients of $5.0 million in managed services revenue in 2018 as compared to 2017. In general, the cost of freelancer services to deliver managed services is directly correlated to our managed services revenue.
Research and Development
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Research and development | $ | 55,488 |
| | $ | 45,604 |
| | $ | 9,884 |
| | 22 | % |
| Percentage of total revenue | 22 | % | | 23 | % | | | | |
Research and developmentManaged Services offering, amortization expense increased by $9.9 million, or 22%, in 2018 compared to 2017. The increase was primarily due to an increase in personnel-related costs of $10.9 million, an increase of $1.1 million in amortization of licensed software, an increase of $0.8 million in facilities-related and other costs, and an increase of $0.3 million in third-party hosting costs, partially offset by $3.1 million of additionalassociated with capitalized internal-use software and platform development costs of $1.9 million, and hosting fees and other software costs of $1.8 million.
We expect cost of revenue to increase 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. We expect the pricing changes that we have made over the past twelve months will continue to positively impact gross margin in 2024.
Research and Development
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | % |
| Research and development | $ | 177,363 | | | $ | 154,553 | | | $ | 22,810 | | | 15 | % |
| Percentage of total revenue | 26 | % | | 25 | % | | | | |
In 2023, we focused our investment in research and development on the quality and adoption of our current offerings and products. Specifically, we increased the size of our research and development workforce, enhanced platform functionality, and built new product features. As a result, for the year ended December 31, 2023, research and development expense increased by $22.8 million, or 15%, as compared to 2022, driven by increases in personnel-related costs of $28.4 million and software costs of $3.5 million, as compared to 2022. These increases were partially offset by $7.2 million of incremental internal-use software and platform development costs that we capitalized during the year ended December 31, 2023, as compared to 2022. Additionally, during the year ended December 31, 2022, we incurred approximately $2.7 million of research and development expense related to our humanitarian response efforts in 2018response to the war in Ukraine.
We intend to increase our investment in research and lower costs incurreddevelopment to further enhance our platform, including the quality of our offerings, and to build new features, in particular, with a focus on machine learning and generative artificial intelligence. As a result, 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 outside professional services of approximately $0.1 million.period to period.
Sales and Marketing
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | % |
| Sales and marketing | $ | 220,681 | | | $ | 246,882 | | | $ | (26,201) | | | (11) | % |
| Percentage of total revenue | 32 | % | | 40 | % | | | | |
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Sales and marketing | $ | 72,963 |
| | $ | 53,044 |
| | $ | 19,919 |
| | 38 | % |
| Percentage of total revenue | 29 | % | | 26% |
| | | | |
SalesIn 2023, we implemented a number of cost-saving measures, including reducing our investments in brand marketing, vendor spend, and other non-personnel costs. We also reduced our investments in sales, including slowing our Enterprise sales hiring pace, as compared to 2022. As a result, for the year ended December 31, 2023, sales and marketing expense increaseddecreased by $19.9$26.2 million, or 38%11%, in 2018, as compared to 2017.2022, driven primarily by reductions in marketing and advertising expense of $39.1 million. This increasedecrease was partially offset by increases in personnel-related costs of $10.4 million, as we continue to invest in opportunities for growth. We also implemented a reduction of our workforce in May 2023, resulting in employee severance and benefit costs of $2.5 million, largely in our sales team, during the year ended December 31, 2023.
As a result of our reduced investment in brand marketing, the reduction of our workforce, and other cost-saving measures implemented in 2023, we expect sales and marketing expense to decrease in 2024.
General and Administrative
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | % |
| General and administrative | $ | 118,925 | | | $ | 123,952 | | | $ | (5,027) | | | (4) | % |
| Percentage of total revenue | 17 | % | | 20 | % | | | | |
For the year ended December 31, 2023, general and administrative expense decreased by $5.0 million, or 4%, as compared to 2022. This decrease was primarily due to increaseslower expense related to indirect taxes of $10.0$5.8 million, as compared to 2022. Additionally, in personnel-related costs to build out our enterprise sales team, including sales commissions that2022, we expense as incurred $7.7 million in marketing and advertising costs associated with online and offline marketing programs to drive brand awareness and attract new users, $1.8approximately $1.3 million of facilities-related costs for our sales office, and $0.4 million related to travel and other miscellaneous costs.
General and Administrative
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| General and administrative | $ | 49,336 |
| | $ | 37,334 |
| | $ | 12,002 |
| | 32 | % |
| Percentage of total revenue | 19 | % | | 18 | % | | | | |
Generalgeneral and administrative expense increased by $12.0 million, or 32%, in 2018 compared to 2017. This increase was primarily due to increases of $7.1 million in personnel-related costs, which included adding additional personnel primarily within our finance and accounting organization and higher stock-based compensation, $1.8 million in professional expenses related to us preparing to become a public company, $1.4 million in facilities-relatedour humanitarian response efforts and other costs, $1.1 million in software licenses, $0.4 million in non-income taxes, and $0.2 millioncharitable donations related to the revaluationwar in Ukraine. These reductions in expense were partially offset by an increase in software costs of $1.4 million during the shares that are expectedyear ended December 31, 2023, as compared to vest2022.
We expect to continue to incur additional general and become exercisable under our Tides Foundation common stock warrant.administrative expenses, including increased stock-based compensation expense related to executive compensation arrangements, legal and accounting costs, insurance premiums, and compliance costs. As a result, we expect general and administrative expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.
Provision for Transaction Losses
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | | % |
| Provision for transaction losses | $ | 12,977 | | | $ | 25,153 | | | $ | (12,176) | | | | (48) | % |
| Percentage of total revenue | 2 | % | | 4 | % | | | | | |
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Provision for transaction losses | $ | 5,821 |
| | $ | 4,250 |
| | $ | 1,571 |
| | 37 | % |
| Percentage of total revenue | 2 | % | | 2 | % | | | | |
ProvisionIn 2023, we continued to enhance our trust and safety measures. As a result, for the year ended December 31, 2023, provision for transaction losses increaseddecreased by $1.6$12.2 million, or 37% in 2018 compared to 2017. The increase was due to growth in GSV and related trade and client receivables, partially offset by reductions resulting from increased efforts to reduce fraudulent activity on the platform.
Interest Expense and Other Expense, Net
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| Interest expense | $ | 2,038 |
| | $ | 960 |
| | $ | 1,078 |
| | 112 | % |
| Other expense, net | 6,142 |
| | 62 |
| | 6,080 |
| | 9,806 | % |
Interest expense increased $1.1 million in 201848%, as compared to 2017. This increase was2022, and represented approximately 2% of revenue, as compared to 4% in 2022. We continue to closely monitor this activity and maintain a number of measures designed to mitigate transaction losses going forward.
Other Income, Net
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | | % |
| Other income, net | $ | 60,137 | | | $ | 3,275 | | | $ | 56,862 | | | | * |
*Not meaningful
For the year ended December 31, 2023, other income, net increased by $56.9 million, as compared to 2022, primarily driven by a gain on early extinguishment of debt of $38.9 million related to the Note Repurchases, increases in interest income of $16.5 million primarily due to higher interest rates from our marketable securities, and lower interest expense as a higher amountresult of the Note Repurchases, which lowered our outstanding borrowingsdebt balance in 2018.March 2023. See Note 6“Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report.Report for additional information.
Other expense, netIncome Tax Provision
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change |
| (In thousands, except percentages) | 2023 | | 2022 | | $ | | | % |
| Income tax provision | $ | (1,990) | | | $ | (536) | | | $ | 1,454 | | | | * |
*Not meaningful
For the year ended December 31, 2023, income tax provision increased $6.1by $1.5 million, in 2018as compared to 2017,the same period in 2022, primarily due to a year-over-year increase in our U.S. federal taxable income.
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. Additionally, in response to the revaluationwar in Ukraine, during the year ended December 31, 2022, we incurred certain incremental expenses associated with our humanitarian response efforts. These expenses are not representative of our convertible preferred stock warrant liability. The value of the convertible preferred stock warrant liability increased significantly due to the completion of our IPOongoing operations, and, the final IPO offering price being significantly higher than the historical estimated fair value used to revalue the convertible preferred stock warrant liability. The expenses related to the convertible preferred stock warrant liability will not recur in future periods.
Comparison of the Years Ended December 31, 2017 and 2016
Revenue
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Marketplace | $ | 178,046 |
| | $ | 138,484 |
| | $ | 39,562 |
| | 29 | % |
| Percentage of total revenue | 88 | % | | 84 | % | | | | |
| Managed services | $ | 24,506 |
| | $ | 25,961 |
| | $ | (1,455 | ) | | (6 | )% |
| Percentage of total revenue | 12 | % | | 16 | % | | | | |
| Total revenue | $ | 202,552 |
| | $ | 164,445 |
| | $ | 38,107 |
| | 23 | % |
Total revenue increased by $38.1 million, or 23%, to $202.6 million in 2017 as compared to 2016.
Marketplace revenue represented 88% of total revenue in 2017, an increase of $39.6 million, or 29%, in 2017 as compared to 2016. Marketplace revenue increased primarily due to an increase in GSV. GSV grew by 20%, primarily driven by a 13% increase in the number of core clients, and higher client spend retention, which increasedresult, we excluded these costs from 85%adjusted EBITDA for the year ended December 31, 20162022. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, 99%financial measures prepared in accordance with U.S. GAAP.
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure prepared in accordance with U.S. GAAP, to adjusted EBITDA for each of the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2023 | | 2022 | | 2021 |
| Net income (loss) | $ | 46,887 | | | $ | (89,885) | | | $ | (56,240) | |
| Add back (deduct): | | | | | |
| Stock-based compensation expense | 74,195 | | | 75,501 | | | 53,592 | |
| Depreciation and amortization | 9,449 | | | 8,057 | | | 10,261 | |
Other (income) expense, net (1) | (60,137) | | | (3,275) | | | 1,901 | |
| Income tax provision | 1,990 | | | 536 | | | 122 | |
Other (2)(3)(4) | 750 | | | 5,037 | | | 9,491 | |
| Adjusted EBITDA | $ | 73,134 | | | $ | (4,029) | | | $ | 19,127 | |
(1)During the year ended December 31, 2017. Additionally, the number2023, we recognized a gain on early extinguishment of projects increased 13%debt of $38.9 million, which is included in other income (expense), from over 1.6 million in 2016 to over 1.8 million in 2017. We believe these increases were primarily due to investments in marketing to acquire new clients and drive brand awareness and research and development to build new product features. Marketplace revenue also grew, to a lesser extent, due to the Upwork Standard pricing model change implementednet in the second quarterconsolidated statement of 2016.
We changed our Upwork Standard pricing model late in the second quarter of 2016 to implement a tiered freelancer service fee based on cumulative lifetime billings by the freelancer to each client. Previously, we had typically charged freelancers a flat 10% fee. The goaloperations and comprehensive income (loss). See “Note 7—Debt” of the pricing change was to encourage longer-term relationships between freelancers and clients on our platform, allowing us to attract more projects, and to align client incentives with our incentives to use lower cost payment methods. Additionally, late in the second quarter of 2016, we introduced a client payment processing and administration fee that generated $12.6 million of marketplace revenue in 2016 and $27.9 million of marketplace revenue in 2017.
Managed services revenue represented 12% of total revenue in 2017 as compared to 16% in 2016. The decrease of $1.5 million, or 6%, was primarily due to a decline in the amount of freelancer services used by a client using our managed services offering.
Cost of Revenue and Gross Margin
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Cost of revenue | $ | 65,443 |
| | $ | 62,578 |
| | $ | 2,865 |
| | 5 | % |
| Components of cost of revenue: | | | | | | | |
| Costs of freelancer services to deliver managed services | 19,986 |
| | 21,051 |
| | (1,065 | ) | | (5 | )% |
| Other components of cost of revenue | 45,457 |
| | 41,527 |
| | 3,930 |
| | 9 | % |
| Total gross margin | 68 | % | | 62 | % | | | | |
Cost of revenue increased by $2.9 million, or 5%, in 2017 as compared to 2016. This increase was primarily due to increases of $3.6 million in payment processing fees as a result of an increase in client spend on our platform, $0.9 million in third-party hosting costs as a result of our transition to AWS and increased transaction volume on our platform, and $2.9 million in personnel-related costs from an increase in personnel to support our growth, partially offset by a decrease of $2.6 million in amortization of intangibles that related to developed technology and $0.5 million in amortization that related to capitalized internal-use software and platform development. Costs of freelancer services to deliver managed services decreased by $1.1 million, or 5%, due to a decline in the amount of freelancer services used by a client using our managed services offering. In general, the cost of freelancer services to deliver managed services is directly correlatednotes to our managed services revenue.
Total gross margin improved from 62% in 2016 to 68% in 2017 primarily driven by the introduction of the payment processing and administration fee to clients in June 2016.
Research and Development
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Research and development | $ | 45,604 |
| | $ | 37,902 |
| | $ | 7,702 |
| | 20 | % |
| Percentage of total revenue | 23 | % | | 23 | % | | | | |
Research and development expense increased by $7.7 million, or 20%, in 2017 as compared to 2016 and was consistent as a percentage of total revenue at 23%. The increase was primarily due to an increase in personnel-related costs, driven by development of new products and features.
Sales and Marketing
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Sales and marketing | $ | 53,044 |
| | $ | 37,437 |
| | $ | 15,607 |
| | 42 | % |
| Percentage of total revenue | 26 | % | | 23 | % | | | | |
Sales and marketing expense increased by $15.6 million, or 42%, in 2017 compared to 2016. This increase was primarily due to increases of $8.5 million in personnel-related costs to build out our enterprise sales team, including sales commissions that we expense as incurred, and $6.2 million in marketing and advertising costs associated with online and offline marketing programs to drive brand awareness and attract new users.
General and Administrative
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| General and administrative | $ | 37,334 |
| | $ | 35,446 |
| | $ | 1,888 |
| | 5 | % |
| Percentage of total revenue | 18 | % | | 22 | % | | | | |
General and administrative expense increased $1.9 million, or 5%, in 2017 as compared to 2016. This increase was primarily due to increases of $2.8 million of personnel-related costs and $0.5 million in audit and accounting-related costs in preparation to become a public company, partially offset by a $1.1 million legal settlement resulting from a trademark dispute accrued in 2016.
Provision for Transaction Losses
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Provision for transaction losses | $ | 4,250 |
| | $ | 5,550 |
| | $ | (1,300 | ) | | (23 | )% |
| Percentage of total revenue | 2% |
| | 3% |
| | | | |
Provision for transaction losses decreased $1.3 million, or 23%, in 2017 as compared to 2016. This decrease was primarily due to improvements in managing transaction losses and chargebacks for fraud on our platform and bad debt expense associated with our trade and client receivables as we improved on collections from enterprise clients.
Interest Expense and Other Expense, Net
|
| | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year Ended December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| Interest expense | $ | 960 |
| | $ | 858 |
| | $ | 102 |
| | 12 | % |
| Other expense, net | 62 |
| | 908 |
| | $ | (846 | ) | | (93 | )% |
Interest expense increased $0.1 million, or 12%, in 2017 as compared to 2016. This increase was due to a higher amount of outstanding borrowings in 2017 as compared to 2016.
Other expense, net decreased $0.8 million, or 93%, in 2017 compared to 2016. This decrease was primarily due to a decrease of $0.5 million in net losses from foreign currency transactions and a decrease of $0.3 million in prepayment fees paid to a lender.
kQuarterly Results of Operations
The following tables summarize our selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period ended December 31, 2018. The information for each of these quarters has been prepared on a basis consistent with our audited financial statements included elsewhere in this Annual Report for additional information regarding the Notes.
(2)During each of the years ended December 31, 2023, 2022, and 2021, we incurred $0.8 million of expense related to our Tides Foundation warrant.
(3)During the year ended December 31, 2022, in response to Russia’s invasion of Ukraine, we incurred certain incremental expenses associated with our humanitarian response efforts. These expenses are not representative of our ongoing operations, and, as a result, we excluded these costs from adjusted EBITDA for the year ended December 31, 2022. These expenses consisted of (i) $1.4 million of special one-time bonuses to our team members in the opinionregion impacted by Russia’s invasion of management, includes all adjustmentsUkraine, (ii) $1.5 million of expenses incurred in connection with the relocation of our team members in the impacted region, (iii) $1.1 million of donations made to humanitarian aid organizations to support initiatives related to humanitarian response efforts in the impacted region, primarily to Direct Relief International, a normal, recurring nature that are necessary forhumanitarian aid organization, and (iv) $0.4 million of payments of one-time service award bonuses (and associated taxes) to certain of our team members paid in recognition of contributions made by such team members to our humanitarian response efforts in the fair statementimpacted region.
(4)During the year ended December 31, 2021, we incurred impairment charges of $8.7 million as a result of the resultsexecution of operations for these periods in accordance with U.S. GAAP. The data should be read in conjunction withsublease agreements related to two of our auditedoperating leases. See “Note 5—Balance Sheet Components” of the notes to our consolidated financial statements and notes thereto included elsewhere in this Annual Report. Report for additional information regarding the Notes.
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 historical quarterlyuse 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 necessarily indicative ofreflect 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 resultscash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (c) tax payments that may be expectedrepresent 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 a full year orcomparative purposes.
Because of these and other limitations, you should consider adjusted EBITDA along with other financial performance measures, including net income (loss) and our other financial results prepared in any future period.accordance with U.S. GAAP.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 | | March 31, 2018 | | June 30, 2018 | | September 30, 2018 | | December 31, 2018 |
| | (in thousands) |
| Revenue: | | | | | | | | | | | | | | | |
| Marketplace | $ | 40,860 |
| | $ | 43,078 |
| | $ | 46,186 |
| | $ | 47,922 |
| | $ | 51,959 |
| | $ | 55,454 |
| | $ | 56,766 |
| | $ | 59,652 |
|
| Managed services | 5,886 |
| | 5,707 |
| | 6,076 |
| | 6,837 |
| | 7,259 |
| | 7,227 |
| | 7,347 |
| | 7,690 |
|
| Total revenue | 46,746 |
| | 48,785 |
| | 52,262 |
| | 54,759 |
| | 59,218 |
| | 62,681 |
| | 64,113 |
| | 67,342 |
|
Cost of revenue(1) | 15,025 |
| | 15,928 |
| | 16,894 |
| | 17,596 |
| | 19,617 |
| | 20,457 |
| | 20,504 |
| | 20,880 |
|
| Gross profit | 31,721 |
| | 32,857 |
| | 35,368 |
| | 37,163 |
| | 39,601 |
| | 42,224 |
| | 43,609 |
| | 46,462 |
|
| Operating expenses: | | | | | | | | | | | | | | | |
Research and development(1) | 10,303 |
| | 10,702 |
| | 11,514 |
| | 13,085 |
| | 13,491 |
| | 12,812 |
| | 14,377 |
| | 14,808 |
|
Sales and marketing(1) | 12,327 |
| | 11,374 |
| | 13,626 |
| | 15,717 |
| | 19,673 |
| | 16,414 |
| | 18,967 |
| | 17,909 |
|
General and administrative(1) | 8,623 |
| | 7,840 |
| | 8,952 |
| | 11,919 |
| | 11,176 |
| | 11,219 |
| | 11,707 |
| | 15,234 |
|
| Provision for transaction losses | 883 |
| | 901 |
| | 1,073 |
| | 1,393 |
| | 1,270 |
| | 1,450 |
| | 1,892 |
| | 1,209 |
|
| Total operating expenses | 32,136 |
| | 30,817 |
| | 35,165 |
| | 42,114 |
| | 45,610 |
| | 41,895 |
| | 46,943 |
| | 49,160 |
|
| Income (loss) from operations | (415 | ) | | 2,040 |
| | 203 |
| | (4,951 | ) | | (6,009 | ) | | 329 |
| | (3,334 | ) | | (2,698 | ) |
| Interest expense | 223 |
| | 207 |
| | 199 |
| | 331 |
| | 529 |
| | 556 |
| | 589 |
| | 364 |
|
| Other (income) expense, net | (160 | ) | | (25 | ) | | 260 |
| | (13 | ) | | 249 |
| | 173 |
| | 3,423 |
| | 2,297 |
|
| Income (loss) before income tax provision | (478 | ) | | 1,858 |
| | (256 | ) | | (5,269 | ) | | (6,787 | ) | | (400 | ) | | (7,346 | ) | | (5,359 | ) |
| Income tax benefit (provision) | (9 | ) | | (2 | ) | | (45 | ) | | 78 |
| | 3 |
| | (12 | ) | | — |
| | (6 | ) |
| Net income (loss) | $ | (487 | ) | | $ | 1,856 |
| | $ | (301 | ) | | $ | (5,191 | ) | | $ | (6,784 | ) | | $ | (412 | ) | | $ | (7,346 | ) | | $ | (5,365 | ) |
| | | | | | | | | | | | | | | | |
(1) Includes stock-based compensation expense as follows (in thousands): |
| | | | | | | | | | | | | | | | |
| Cost of revenue | $ | 52 |
| | $ | 141 |
| | $ | 48 |
| | $ | 49 |
| | $ | 52 |
| | $ | 53 |
| | $ | 59 |
| | $ | 118 |
|
| Research and development | 461 |
| | 378 |
| | 432 |
| | 526 |
| | 550 |
| | 538 |
| | 623 |
| | 1,547 |
|
| Sales and marketing | 267 |
| | 388 |
| | 312 |
| | 332 |
| | 340 |
| | 331 |
| | 355 |
| | 611 |
|
| General and administrative | 830 |
| | 774 |
| | 734 |
| | 1,122 |
| | 946 |
| | 871 |
| | 949 |
| | 2,418 |
|
| Total | $ | 1,610 |
| | $ | 1,681 |
| | $ | 1,526 |
| | $ | 2,029 |
| | $ | 1,888 |
| | $ | 1,793 |
| | $ | 1,986 |
| | $ | 4,694 |
|
The following table sets forth our unaudited quarterly consolidated results of operations data for each of the periods indicated as a percentage of total revenue:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 | | March 31, 2018 | | June 30, 2018 | | September 30, 2018 | | December 31, 2018 |
| Revenue: | | | | | | | | | | | | | | | |
| Marketplace | 87 | % | | 88 | % | | 88 | % | | 88 | % | | 88 | % | | 88 | % | | 89 | % | | 89 | % |
| Managed services | 13 |
| | 12 |
| | 12 |
| | 12 |
| | 12 |
| | 12 |
| | 11 |
| | 11 |
|
| Total revenue | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
|
| Cost of revenue | 32 |
| | 33 |
| | 32 |
| | 32 |
| | 33 |
| | 33 |
| | 32 |
| | 31 |
|
| Gross profit | 68 |
| | 67 |
| | 68 |
| | 68 |
| | 67 |
| | 67 |
| | 68 |
| | 69 |
|
| Operating expenses: | | | | | | | | | | | | | | | |
| Research and development | 22 |
| | 22 |
| | 22 |
| | 24 |
| | 23 |
| | 20 |
| | 22 |
| | 22 |
|
| Sales and marketing | 27 |
| | 23 |
| | 26 |
| | 28 |
| | 33 |
| | 27 |
| | 30 |
| | 27 |
|
| General and administrative | 18 |
| | 16 |
| | 19 |
| | 22 |
| | 19 |
| | 18 |
| | 18 |
| | 23 |
|
| Provision for transaction losses | 2 |
| | 2 |
| | 2 |
| | 3 |
| | 2 |
| | 2 |
| | 3 |
| | 2 |
|
| Total operating expenses | 69 |
| | 63 |
| | 69 |
| | 77 |
| | 77 |
| | 67 |
| | 73 |
| | 73 |
|
| Income (loss) from operations | (1 | ) | | 4 |
| | (1 | ) | | (9 | ) | | (10 | ) | | — |
| | (5 | ) | | (4 | ) |
| Interest expense | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Other (income) expense, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 3 |
|
| Income (loss) before income tax provision | (1 | ) | | 4 |
| | (1 | ) | | (10 | ) | | (11 | ) | | (1 | ) | | (11 | ) | | (8 | ) |
| Income tax benefit (provision) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | (1 | )% | | 4 | % | | (1 | )% | | (10 | )% | | (11 | )% | | (1 | )% | | (11 | )% | | (8 | )% |
Liquidity and Capital Resources
Prior toOur principal sources of liquidity are our IPO, we financed our operationscash and capital expenditures primarily through sales of convertible preferred stock, bank borrowings,cash equivalents and utilization of cash generated from operations inmarketable securities, including the periods in which we generated cash flows from operations. In October 2018, we completed our IPO, in which we issued and sold an aggregate of 7,840,908 shares of our common stock, including 1,022,727 shares pursuant to the exercise of the underwriters’ option to purchase additional shares. The shares were sold at the IPO price of $15.00 per share, less an underwriting discount of $1.05 per share. We received aggregate net proceeds of $109.4 million from the IPO after deducting underwriting discounts and commissions but before deducing offering expenses payable by us. We used approximately $10.0 million of net proceeds from the IPOsale of the Notes. Our cash equivalents and marketable securities primarily consist of money market funds, commercial paper, treasury bills, corporate bonds, U.S. and foreign government securities, asset-backed securities, and other types of fixed income securities. The primary objective of our investment activities from operating investments is to repay indebtedness underpreserve principal while maximizing income without significantly increasing risk. Since our inception, our business has consisted of the Loan Agreement.operation of an online work marketplace that connects businesses with independent talent from across the globe, and we do not make investments for trading or speculative purposes. As of December 31, 2018,2023 and 2022, we had $129.1$79.6 million and $129.4 million in cash and cash equivalents.equivalents, respectively. As of December 31, 2023 and 2022, we had $470.5 million and $557.2 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), and amounts available for borrowing under the Loan Agreement will be sufficient to meet our working capital requirements for at least the next twelve months. 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 customers, 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, macroeconomic conditions, the number of shares of our common stock that we repurchase under our Share Repurchase Program, or the aggregate principal amount of our outstanding Notes that we repurchase, and our ability to obtain equity or debt financing. Our principal commitments consist of the Notes and obligations under our non-cancellable operating leases for office space. In March 2023, we sold $138.2 million of available-for-sale marketable securities to enable the Note Repurchases. Assuming the remaining Notes are not converted into our common stock, repurchased or redeemed prior to maturity, (i) annual interest expense relating to the Notes will be $2.7 million in each fiscal year through 2026 and (ii) principal in the
amount of $361.0 million will be payable upon the maturity of the Notes on August 15, 2026. For additional information about our Notes, see the section below titled “—Convertible Senior Notes Due 2026.” As of December 31, 2023, our future lease commitments were $13.1 million (excluding adjustments for discount to present value), including $5.8 million for 2024.
In November 2023, our board of directors authorized the Share Repurchase Program, under which we may repurchase up to $100.0 million of shares of our outstanding common stock. Repurchases of our common stock under the Share Repurchase Program may be made from time to time on the open market (including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act), in privately negotiated transactions, or by other methods, at our discretion, and in accordance with applicable securities laws and other restrictions. The Share Repurchase Program has no expiration date and will continue until otherwise suspended, terminated, or modified at any time for any reason. The Share Repurchase Program does not obligate us to repurchase any dollar amount or number of shares, and the timing and amount of any repurchases will depend on market and business conditions. We had no share repurchase activity during the quarter ended December 31, 2023. On August 16, 2022, the Inflation Reduction Act of 2022, which we refer to as the Act, was signed into law. Under the Act, share repurchases after December 31, 2022 will be subject to a 1% excise tax. In addition, as market conditions warrant, we may, from time to time, repurchase additional outstanding Notes in the open market, in privately negotiated transactions, by tender offer, by exchange transaction, or otherwise. Such repurchases of Notes, if any, will depend on prevailing market conditions, our liquidity, and other factors, and may be commenced or suspended at any time. The amounts involved and total consideration paid may be material.
To the extent existing cash and cash equivalents, cash from marketable securities, and cash from operations and amounts available for borrowing under the Loan Agreement(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.arrangements, as we did with the offering of the Notes in 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 the incurrence ofincurring 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.
During the periods presented, we did not have, 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
WeAs a licensed internet escrow agent, we offer escrow services to userscustomers of our platform. Aswork marketplace and, as such, we are licensed as an internet escrow agent and are therefore required to hold our users’customers’ escrowed cash and in-transit cash in trust as an asset and record a corresponding liability for escrow funds held on behalf of freelancerstalent 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. FreelancersTalent 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 freelancerstalent 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 occurred on December 31, 2017 and September 30, 2018, and will occur on March 31, 2019 and June 30, 2019.Sunday. As of December 31, 20182023 and 2017,2022, funds held in escrow, including funds in transit, were $98.2$212.4 million and $87.2$161.5 million, respectively. We used $0.3 millionFunds held in escrow are deposited in interest-bearing checking accounts.
Convertible Senior Notes Due 2026
The Notes were issued in August 2021, pursuant to and $13.4 millionare subject to the terms and conditions of an indenture between us and Computershare Trust Company, National Association (as successor in interest to Wells Fargo Bank, National Association), as trustee, which is referred to as the Indenture. The Notes are senior, unsecured obligations and 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 onand shares of our common stock.
To consummate the Note Repurchases, in March 2023 we entered into separate, privately negotiated repurchase agreements with a limited number of institutional holders of the Notes to repurchase an aggregate of $214.0 million principal amount of the Notes for an aggregate cash payment of $170.8 million. As of December 31, 20182023, $361.0 million aggregate principal amount of the Notes remain outstanding. We intend to use the remainder of the net proceeds from the offering for general corporate purposes, including marketing, brand awareness and 2017, respectively, to temporarily fundsales, and which may include working capital, capital expenditures, and investments in and acquisitions of other companies, products or technologies that one week of hourly billings. To the extent we have not yet collected funds for hourly billings from clients which are in-transit due to timing differences in receipt of cash from clients and payments of cash to freelancers, we may from timeidentify in the future. See “Note 7—Debt” of the notes to time, utilizeour consolidated financial statements included elsewhere in this Annual Report for additional information regarding the revolving line of credit under our Loan Agreement to satisfy escrow funding requirements.Notes.
Term and Revolving LoansCapped Calls
In September 2017,connection with the issuance of the Notes, we entered into the Loan Agreement, which was amendedCapped Calls. 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 November 2017 and September 2018. The aggregateexcess of the principal amount of converted Notes, as the facility is up to $49.0 million, consisting of an outstanding $15.0 million term loan (the “First Term Loan”), an outstanding $9.0 million term loan (the “Second Term Loan” and, togethercase may be, with the First Term Loan, the “Term Loans”) and a revolving line of credit which permits borrowings of up to $25.0 millionsuch 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 conditions. Among other things, we may only borrow fundsadjustments under the revolving line of credit if, after giving effect thereto, our total borrowings under the line of credit do not exceed a specified percentage of eligible trade and client accounts receivable. The First Term Loan, Second Term Loan, and revolving line of credit mature in March 2022, September 2022, and September 2020, respectively. All borrowings under the Loan Agreement bear interest at floating rates and our borrowing costs are therefore affected by changes in market interest rates.
Specifically, the First Term Loan bears interest at the prime rate plus 0.25% per annum and has a repayment term of 18 months of interest-only payments ending in March 2019 followed by equal monthly installments of principal plus interest until the maturity in March 2022. The Second Term Loan bears interest at the prime rate plus 0.25% per annum and has a repayment term of 17 months of interest-only payments ending in March 2019, followed by equal monthly installments of principal plus interest until the maturity in September 2022. The revolving line of credit bears interest at the prime rate with accrued interest due monthly. When we entered into the Loan Agreement in September 2017, we borrowed the entire $15.0 million First Term Loan and used the proceeds to repay an outstanding $14.0 million loan. In November 2017, we borrowed $19.0 million (consistingterms of the full
$9.0 million Second Term Loan and $10.0 millionCapped Calls. See “Note 7—Debt” of borrowings under the revolving line of credit), which we usednotes to repurchase shares of our capital stock from a then-existing stockholder. As of December 31, 2018, we had $24.0 million outstanding pursuant toconsolidated financial statements included elsewhere in this Annual Report for additional information regarding the Term Loans and no borrowings outstanding under the revolving line of credit. We used approximately $10.0 million of net proceeds from the IPO to repay indebtedness under the Loan Agreement. Our obligations under the Loan Agreement are secured by first priority liens on substantially all of our assets excluding our intellectual property (but including proceeds therefrom)Notes and the funds and assets held by our subsidiary Upwork Escrow. Capped Calls.
The Loan Agreement prohibits us from pledging our intellectual property. The Loan Agreement contains affirmative covenants, including financial covenants that, among other things, require us to maintain a ratio of adjusted current assets to current liabilities of not less than 1.3 and to achieve certain minimum levels of EBITDA. The Loan Agreement also includes a restrictions on dividend payments, other than dividends payable solelyCapped Calls remain in common stock. The Loan Agreement also contains certain non-financial covenants. We were in compliance witheffect notwithstanding the covenants under the Loan Agreement as of December 31, 2018.Note Repurchases.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2018, 20172023, 2022, and 2016 (in thousands):2021:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2023 | | 2022 | | 2021 |
| Net cash provided by operating activities | $ | 27,221 | | | $ | 6,559 | | | $ | 10,836 | |
| Net cash provided by (used in) investing activities | 88,270 | | | (69,468) | | | (428,980) | |
| Net cash provided by (used in) financing activities | (114,304) | | | 6,082 | | | 537,739 | |
Net change in cash, cash equivalents, and restricted cash (1) | $ | 1,187 | | | $ | (56,827) | | | $ | 119,595 | |
(1) Includes increases in funds held in escrow, including funds in transit of $50.9 million, $0.6 million, and $25.8 million during the years ended December 31, 2023, 2022, and 2021, respectively. |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
Net cash provided by (used in) operating activities (1) | $ | 13,744 |
| | $ | (4,001 | ) | | $ | 3,148 |
|
| Net cash used in investing activities | (7,285 | ) | | (2,111 | ) | | (475 | ) |
| Net cash provided by financing activities | 101,074 |
| | 381 |
| | 5,232 |
|
| Net increase (decrease) in cash and cash equivalents | $ | 107,533 |
| | $ | (5,731 | ) | | $ | 7,905 |
|
| |
(1)
| We used $0.3 million and $13.4 million on December 31, 2018 and 2017, respectively, to temporarily fund the trust account associated with our escrow services. See the section titled “—Liquidity and Capital Resources—Escrow Funding Requirements.” |
Operating Activities
Our largest source of cash from operating cashactivities is revenue generated from our platform.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.”
Net cash provided by operating activities during 20182023 was $13.7$27.2 million, which resulted from a net lossincome of $19.9$46.9 million and non-cash charges of $45.1 million, offset by non-cash charges of $10.4 million for stock-based compensation, $4.9 million for depreciation and amortization, $6.1 million and $0.2 million related to the change in fair values of our redeemable convertible preferred stock warrant liability and the Tides Foundation common stock warrant, respectively, $5.1 million for provision for transaction losses, $0.2 million for amortization of debt issuance costs and loss on disposal of fixed assets, and net cash inflowsoutflows of $6.7$64.7 million from changes in operating assets and liabilities. The changeschange in operating assets and liabilities included cash inflows of $3.5 million resultingprimarily resulted from a decreasethe increase in trade and client receivables due to the timing of collections year-over-year.December 31, 2023 falling on a Sunday. Due to the fluctuations in revenue and the number of transactions on our platform,work marketplace, coupled with fluctuations ofin the timing of cash receipts from clients, our trade and client receivables will likely continue to fluctuate in the future. Additionally, changes in accounts payable and accrued expenses and other liabilities generated cash inflows of $1.6 million and $2.9 million, respectively. These cash inflows were partially offset by $1.3 million related to cash spent on prepaid expenses and other assets.
Net cash used in operating activities during 2017 was $4.0 million, which resulted from a net loss of $4.1 million and net cash outflows of $15.4 million from changes in operating assets and liabilities, primarily offset by non-cash charges of $6.8 million for stock-based compensation, $4.3 million for provision for transaction losses, and $4.2 million for depreciation and amortization. The net cash outflows from changes in operating assets and liabilities were primarily the result of increases of $8.9 million in trade and client receivables and $0.5 million in prepaid expenses and other assets and a decrease of $6.1 million in accrued expenses and other liabilities. The increase in trade and client receivables was primarily because the last calendar day of 2017 (i.e., December 31, 2017) fell on a Sunday, requiring us to fund the shortage of cash in the trust until we collect this from clients over the next few days, and an increase in our trade and client receivables for our Upwork Enterprise clients, that pay us on net terms. Due to the growth in revenue and the number of transactions on our platform, coupled with fluctuations of the timing of cash receipts from clients, our trade and client receivables may fluctuate in the future. The decrease in accrued expenses and other liabilities was primarily due to fluctuations in timing of cash payments.
Net cash provided by operating activities during 20162022 was $3.1$6.6 million, which resulted from non-cash charges of $8.5$112.2 million, for depreciation and amortization, $7.3 million for stock-based compensation, and $5.6 million for provision for transaction losses,
partially offset by a net loss of $16.2$89.9 million and net cash outflows of $2.1$15.7 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.
Net cash provided by operating activities during 2021 was $10.8 million, which resulted from non-cash charges of $83.5 million, offset by a net loss of $56.2 million and net cash outflows of $16.5 million from changes in operating assets and liabilities. The net cash outflows from changeschange in operating assets and liabilities were primarily resulted from the result of increases of $8.3 million in trade and client receivables and $0.5 million in prepaid expenses and other assets and a decrease of $0.6 million in accounts payable, partially offset by increases of $7.1 million in accrued expenses and other liabilities and $0.2 million in deferred revenue. The increase in trade and client receivables and deferred revenuereceivables.
Investing Activities
Net cash provided by investing activities during 2023 was $88.3 million, which was primarily duea result of proceeds from maturities of marketable securities of $648.8 million and proceeds from the sale of marketable securities of $165.0 million, including $143.7 million to growthenable the repurchase of a portion of the Notes, partially offset by investing $709.2 million in revenue and the number of transactions on our platformvarious marketable securities, as well as $12.7 million of internal-use software and platform development costs that we paid during the timingperiod, and $3.0 million purchase of cash receipts from clients. The decrease in accounts payable and the increase in accrued expenses and other liabilities was primarily due to the timing of cash payments and increased activities to support overall business growth.
Investing Activitiesan intangible asset.
Net cash used in investing activities during 20182022 was $7.3$69.5 million, which resulted from capitalizedwas primarily a result of investing $581.9 million in various marketable securities, as well as $7.5 million of internal-use software and platform development costs of $3.8 million,that we paid during the period and purchases of property and equipment of $3.0$1.2 million, primarily for leasehold improvements and furniture, and an increasepartially offset by proceeds from maturities of $0.4 million in restricted cash related to cash reserve requirements under California escrow laws and regulations and additional cash held as collateral related to our office leases.marketable securities of $521.2 million.
Net cash used in investing activities during 20172021 was $2.1$429.0 million, which resulted fromwas primarily a result of investing $525.3 million in various marketable securities, as well as $5.1 million of internal-use software and platform development costs that we paid during the period and purchases of property and equipment of $1.8 million and capitalized internal-use software and platform development costs of $0.5$1.0 million, partially offset by a decreaseproceeds from maturities of $0.2 million in restricted cash related to cash collateral for lettersmarketable securities of credit issued in conjunction with operating leases and foreign currency forward contracts.
Net cash used in investing activities during 2016 was $0.5 million, which resulted from purchases of property and equipment of $0.9 million, partially offset by a decrease of $0.4 million in restricted cash related to the refund of a security deposit for new office space.$102.5 million.
Financing Activities
Net cash provided byused in financing activities during 20182023 was $101.1$114.3 million, which was primarily duedriven by $171.3 million paid to consummate the Note Repurchases, including related fees to effect the Note Repurchases, partially offset by an increase in escrow funds payable of $50.9 million, proceeds received from our IPO, netemployee stock purchase plan of underwriting discounts and commissions, of $109.4$4.1 million, and cash received from the exercisestock option exercises of stock options and common stock warrants of $8.2 million, partially offset by net repayments of debt of $10.0 million, payments of taxes related to net share settlements of $0.2 million, and the payment of costs related to our IPO of $6.2$2.0 million.
Net cash provided by financing activities during 20172022 was $0.4$6.1 million, which was primarily due toa result of proceeds received from the exerciseour employee stock purchase plan of $3.8 million, cash received from stock options, proceeds from borrowingsoption exercises of $33.8$1.6 million, netand an increase in escrow funds payable of borrowing costs, under the Loan Agreement and $2.8 million from the exercise of stock options and a convertible preferred stock warrant, offset by the repayment of $17.0 million in borrowings under a prior loan and security agreement, and a repurchase by us of convertible preferred stock for $19.2$0.6 million.
Net cash provided by financing activities during 20162021 was $5.2$537.7 million, which resulted primarily due to netfrom proceeds from borrowingsthe Notes, net of $17.0debt issuance costs of $560.1 million, under a prior loanan increase in escrow funds payable of $25.8 million, cash received from stock option exercises of $7.2 million, and security agreement,proceeds received from our employee stock purchase plan of $4.8 million, partially offset by purchases of the repaymentCapped Calls of $12.0$49.4 million inand repayments of borrowings under an earlier loan and security agreement.on debt of $10.8 million.
Obligations and Other Commitments
Our principal commitments consist of obligations under our non-cancellable operating leases for office space and the Loan Agreement. The following table summarizes our contractual obligations as of December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years |
Leases(1) | $ | 28,302 |
| | $ | 3,569 |
| | $ | 9,597 |
| | $ | 10,246 |
| | $ | 4,890 |
|
| Debt principal | 24,000 |
| | 5,679 |
| | 15,142 |
| | 3,179 |
| | — |
|
| Total contractual obligations | $ | 52,302 |
| | $ | 9,248 |
| | $ | 24,739 |
| | $ | 13,425 |
| | $ | 4,890 |
|
| |
(1)
| Represents minimum operating lease payments under operating leases for office facilities, excluding potential lease renewals, net of tenant improvement allowances. |
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 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 December 31, 2018, 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 consolidated balance sheet. 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 December 31, 2018, 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 consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of the 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 Certain of our accounting policy is deemed to be critical if it requires anpolicies require higher degrees of judgment than others in their application. These include certain aspects of 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 offor revenue recognition, criteria, including the determination of revenue reporting as gross versus net in our revenue arrangements, internal-use software and platform development costs, fair values of stock-based awards,compensation, and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.taxes.
Revenue Recognition
We primarily generate revenue from freelancerstalent and clients from marketplaceour Marketplace and managed servicesEnterprise offerings.
We recognizeaccount for revenue in accordance with ASC 605, Revenue Recognition, and related authoritative guidance. Under ASC 605, revenue is recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) fees are fixed or determinable; (iii) the collection of the fees is reasonably assured; and (iv) services have been rendered.Topic 606. Revenue is recognized upon transfer of control of promised services to customers in an amount that reflects the consideration we expect to receive in exchange for those services.
Determining the method and amount of revenue to recognize requires management to make judgments and estimates. Judgments include determining whether to present revenue gross, as a principal, or net, of any taxes collected,as an agent, which are subsequently remitted to governmental authorities.
We report revenue in conformity with ASC 605-45, Revenue Recognition-Principal Agent Considerations. The determinationis based on an evaluation of whether we arecontrol the principal or agent,service prior to it being transferred to the client, and therefore whethercertain aspects of applying Topic 606 to report revenue on a gross basisour arrangements with talent subject to tiered service fees.
We apply judgement in the application of the portfolio approach practical expedient to our arrangements with talent subject to tiered service fees, which includes estimating the standalone selling price of the material rights and the
period of time over which to defer and recognize the consideration allocated to the material rights. Specifically, management applies judgement in assessing the continued appropriateness for the amount billed or on a net basis forestimates, which include assessing the amount earned from each transaction, requires uscontinued appropriateness of the methodology and relevant data inputs to evaluate a number of indicators. We evaluate each separate unit of account for gross versus net as required.
We also report revenue in conformity with ASC 605-50, Customer Paymentsestimate the likelihood and Incentives. The determination of whether we should characterize consideration paid to customers as costs or a reduction to revenue requires us to evaluate whether the consideration paid has an identifiable separable benefit to us and is at fair value.
Marketplace
Our marketplace revenue is derived from both our Upwork Standard offering and our Upwork Enterprise and other premium offerings.
Upwork Standard
We earn fees from freelancers under our Upwork Standard offering as follows:
Service Fees. We provide freelancers access to our platform to perform specified services agreed between freelancers and clients (“freelancer services”). Freelancers charge clients on an hourly or a milestone basis for services accessed through our platform (“freelancer billings”). We charge freelancers a service fee as a percentage of freelancer billings using a tiered service fee model based on cumulative lifetime billings by the freelancer to each client. For service fees charged to freelancers, we recognize revenue on a net basis, as an agent, for providing access to our platform as we take no responsibility for the freelancer services, and therefore we are not considered the primary obligor for the freelancer services. Additionally, freelancers and clients negotiate and agree upon the scope and price for freelancer services directly with each other. We recognize the service fee as services are rendered.
Withdrawal Fees. We generate revenue from withdrawal fees from freelancers when the freelancers withdraw funds from their cash balances held with us. We charge a flat withdrawal fee for each withdrawal transaction and recognize that fee as it is earned for each transaction.
Membership Fees. We generate revenue from membership fees from freelancers. These fees are charged monthly and provide freelancers access to additional features on our platform. Membership fees are recognized over the period of the membership,time over which is generally monthly.
Connects Fees. We generate revenue from connects fees from freelancers. These fees provide freelancers enhanced access to clients on our platform. These fees are recognized as services are rendered.
We earn fees from clients under our Upwork Standard offering as follows:
Client Payment Processingdefer and Administration Fees. We generate revenue from clients for payment processing fees at the time the client is charged for the amounts due from the client. We charge a fee per transaction or a flat monthly payment processing fee. Per-transaction payment processing fees are recognized when the client is charged for the amount due and fees charged on a monthly basis are recognized over the month that payment processing services are provided. For client payment processing fees, we earn revenue on a gross basis as a principal and not net of the third-party payment processing costs incurred because we are considered the primary obligor for payment processing and administration services and have the latitude to set the price with clients separate and apart from the fees we pay our third-party payment processors.
Foreign Currency Exchange Fees. We generate revenue from foreign currency exchange fees from clients by charging a fixed mark-up above quoted foreign currency exchange rates when we collect amounts denominated in foreign currency. Foreign currency exchange fees are recognized as they are earned for each payment transaction.
Upwork Payroll Service Fees.We generate revenue from Upwork Payroll service fees from clients when their freelancers are classified as employees for engagements on our platform. The client enters into an Upwork Payroll agreement with us, and we separately contract with unrelated third-party staffing providers who provide employment services to such clients. In such arrangements, freelancers providing freelancer services to clients become employees of third-party staffing providers. For more detail, see Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report.
Upwork Enterprise and Other Premium Offerings
We earn fees from freelancers under Upwork Enterprise and other premium offerings as follows:
Service Fees. We provide freelancers access to our platform to perform freelancer services for clients. We charge freelancers a service fee as a percentage of freelancer billings. We earn service fees based on a fixed percentage fee. For service fees charged to freelancers, we recognize revenue on a net basis, as an agent, for providing access to our platform as we take no responsibility for the freelancer services, and therefore we are not considered the primary obligor for the freelancer services. Additionally, freelancers and clients negotiate and agree upon the scope and the price for freelancer services directly with each other. We recognize the service fee as services are rendered.
consideration allocated to the material rights. We earn fees from clients under Upwork Enterprise and other premium offerings as follows:
Client Service Fees. We offer clients access to our platform to source freelancersutilize historical customer transaction data in exchange for a client service fee calculated as a percentage of freelancer billings. We recognize the client service fees as services are rendered by the freelancers.
Enterprise Compliance Service Fees. We generate revenue from enterprise compliance service fees from clients under a compliance agreement with us to determine whether a freelancer should be classified as an employee or an independent contractor based on the scope of freelancer services agreed between the client and freelancer and other factors. We charge enterprise compliance service fees as a percentage of freelancer billings.developing these estimates. We recognize revenue as services are rendered.
Subscription Fees. We generate revenue from monthly or annual subscription fees from clients for subscription services that include additional service features, premium access to top talent, professional services, custom reporting, and invoicing. The revenue attribution is consistent with membership fees for our Upwork Standard offering.
Revenue Sharing Arrangements
For our Upwork Standard, Upwork Enterprise, and other premium offerings, we generate a revenue share as a percentage of the fees charged by certain financial institutionsrelated to the freelancers. We recognize revenue from these arrangements as they are earned, which is generally monthly based on the contractual terms.
Managed Services
Under a managed services arrangement, we are responsible for providing services and engaging freelancers directly or as employees of third-party staffing providers to perform the services for clients on our behalf. We recognize revenue on a gross basis for amounts charged to the clientmaterial rights based on our determination that weestimate of when the material rights are deemed to be the primary obligor as we take responsibilityexercised, and riskadjust revenue for these services completed for the client. We determine pricing for these services and then identify and engage these freelancers or third-party staffing providers to fulfill the service obligation to the client. Revenue for these services is recognized as these services are rendered.
See Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report for a further description of our revenue recognition policies.
Goodwill
Goodwill represents the excess of the aggregate fair value of the consideration transferred over the fair value of the net tangible and identifiable assets acquired in 2014 as a result of the combination of Elance and oDesk described above under “Business—Corporate Information.” The total accounting purchase price of this combination was $147.4 million. Elance and oDesk each considered a number of factors when deciding whether to consummate the 2014 combination between the two companies. The business reasons for the combination, and the rationale for the purchase price, included creating greater scale and visibility of the combined company to gain increased market share by attracting new users, improving operational efficiencies, and benefits from cost synergies. Additional factors included our expectations regarding the ongoing changes in the labor market, including the impact of technology in reducing the prevailing inefficienciesestimates in the labor market, which we believed would result in a greater market opportunity for the combined company than had the two companies remained independent.
Our achievementperiod of these anticipated benefits is reflected in our overall performance following the 2014 combination, particularly starting in 2017 after the initial integration initiatives involving the two companies, including the migration to a unified Upwork platform, had generally concluded. Specifically, we have invested in building a robust, unified platform with features and functionalities that we believe resulted in a larger, more liquid marketplace, including more access to jobs for freelancers and skills and expertise for clients, and provided us with significant cost efficiencies. We also believe the quality of our unified platform, Upwork, is reflected in our NPS, which exceeded 60 on average from both freelancers and clients throughout 2017 and 2018.2
Goodwill from this combination is not amortized but is assessed for impairment at least annually, or more frequently if events or changes in circumstances indicate the goodwill may be impaired. We conduct our annual assessment during the fourth quarter of each calendar year basedchange on a single reporting unit structure.
We have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if we conclude otherwise, then we are required to perform the first of a two-step impairment test.
The first step involves comparing the estimated fair value of the reporting unit with its respective book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then a second step is required that compares the carrying amount of the goodwill with its implied fair value. The estimate of implied fair value of goodwill may require valuations of certain internally-generated and unrecognized intangible and tangible net assets. If the carrying amount of goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.
_____________________
2 NPS is a measure of client and freelancer satisfaction on a scale ranging from negative 100 to 100 based on the standard question: “On a scale of 0 to 10, with 10 being extremely likely, how likely are you to recommend Upwork to a friend or colleague?” NPS is based on users that respond to the survey question after closing a project and users who respond to the survey question once every 60 days. NPS is calculated by using the standard methodology of subtracting the percentage of users that respond that they are not likely to recommend us from the percentage of users that respond that they are extremely likely to recommend us.
For 2018, we conducted our goodwill impairment testing by performing the first step of the two-step impairment model. The fair value was determined by us using quoted market prices of our common stock. We determined that the fair value of our reporting unit exceeded the net book value of our reporting unit, and as such, we concluded that there was no impairment of goodwill at the impairment testing date.
For 2017, we conducted our goodwill impairment testing by assessing qualitative factors to determine whether it was more likely than not that the fair value of our reporting unit was less than its carrying amount. As part of this assessment, we considered factors, including but not limited to, the overall macroeconomic environment, specific industry and market conditions, cost factors, our overall financial performance against expectations, changes in strategy or the manner in which we use our assets, and changes in key management personnel. While we had a history of operating losses, our operating results improved in 2017 compared to 2016. No other indicators of impairment were identified during our assessment. Furthermore, we considered the most recent valuations of our common stock, which indicated that there was substantial excess of fair value over book value. Accordingly, we concluded there was no impairment to goodwill at the impairment testing date.
For 2016, we conducted our goodwill impairment testing by performing the first step of the two-step impairment model. The fair value was determined by us with assistance from an independent third-party valuation firm by using a combination of income and market approaches. In estimating the fair value of our reporting unit, we compared current period results to relevant projections. Actual revenue results for such period were approximately 20% lower than the initial projections prepared at the time of the combination of Elance and oDesk. The difference between actual and projected results for such period was primarily due to the decision (made subsequent to the consummation of the Elance-oDesk combination) to enable clients, freelancers, and their projects to migrate from the legacy Elance platform to the unified Upwork platform, which resulted in a portion of the pre-existing Elance clients and freelancers electing not to migrate to the unified Upwork platform. Projections used in estimating the fair value of the reporting unit incorporated the effects of the migration as well as other current management expectations. The estimated fair value of our reporting unit was approximately three times greater than the book value at the impairment testing date and as such, we concluded there was no impairment to goodwill at the impairment testing date.
Multiple-Element Arrangements
Some of our offerings consist of multiple elements, which can include a mix of service fees along with other services, including subscription services, Upwork Payroll services, compliance services, and payment processing services. Where neither vendor-specific objective evidence nor third-party evidence of selling price exists, we are required to use our best estimate of selling price to allocate arrangement consideration on a relative basis to each element. At the inception of arrangements, which do not include subscription services, as there is no fixed consideration to be allocated, a relative fair value allocation is not required. In the instance the multiple-element arrangement includes subscription services, the only fixed consideration relates to the subscription services, which is a separate unit of accounting, and the fixed consideration is allocated only to the subscription services at inception as all other fees in the arrangement are contingent on certain activities being performed.
Internal-Use Software and Platform Development Costs
We capitalize certain internal-use software and platform development costs associated with creating and enhancing internal-use software related to our software platform and technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the criteria for capitalization are expensed as incurred and recorded in research and development expenses in our consolidated statements of operations.
Software development activities generally consist of three stages: (i) the planning stage; (ii) the application and infrastructure development stage; and (iii) the post-implementation stage. Costs incurred in the planning and post-implementation stages of software development, including costs associated with the post configuration training and repairs and maintenance of the developed technologies, are expensed as incurred. We capitalize costs associated with software developed for internal use when both the preliminary project stage is completed and management has authorized further funding for the completion of the project. Costs incurred in the application and infrastructure development stages, including significant enhancements and upgrades, are capitalized. Capitalization ends once a project is substantially complete and the software and technologies are ready for their intended purpose. Internal-use software and platform development costs are amortized using a straight-line method over the estimated useful life of two years, commencing when the software is ready for its intended use. Amortization expense related to capitalized-internal use software is allocated to each functional expense based on headcount. Amortization expenses related to capitalized platform development costs are allocated to research and development expense.cumulative catch-up basis.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based awards granted to service providers, including stock options, restricted stock units, which we refer to as RSUs, performance stock units, which we refer to as PSUs, and purchase rights granted under our 2018 Employee Stock Purchase Plan, (“which we refer to as the 2018 ESPP”)ESPP, based on the estimated fair value of the award on the grant date. We calculate the estimated fair value of stock options and purchase rights granted under the 2018
ESPP on the date of grant using the Black-Scholes option-pricingoption pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected dividend yield, the expected term of the awards, the risk-free interest rates, and the expected common stock price volatility over the term of the option awards. PriorThe fair value and derived service period of stock options with market-based conditions is estimated using the Monte Carlo valuation model. We evaluate the assumptions used to our IPO,value option awards upon each grant of stock options. The grant date fair value of PSUs is determined using the estimated fair valueclosing common stock price of our common stock was determinedon the grant date multiplied by our boardthe number of directors, and had been based in part upon contemporaneous valuations performed at periodic intervals by unrelated third-party specialists. Because there had been no public market for our common stock, our boardPSUs that are probable of directors considered this independent valuation and other factors, including, but not limited to, our actual operating and financial performance, the current statusbeing earned as of the technical and commercial success of our operations, our financial condition, the stage of development and competition to establish the fair value of our common stock at the time of grant of stock options. Following our IPO, wedate. We use the quoted market price of our common stock as reported on The Nasdaq Global Select Market for the fair value of RSUs, PSUs, stock options, and RSUs and purchase rights under our 2018 ESPP.
We generally recognize the fair value of stock options and RSUs on a straight-line basis over the period during which a service provider is required to provide services in exchange for the award (generally the vesting period). The fair value of the performance based award granted to our Chief Executive Officer on July 1, 2018 is recognized using a graded vesting attribution method. Prior to the adoption of Accounting Standards Update No. 2016-09, or ASU 2016-09, on January 1, 2018, stock-based compensation expense was recognized only for those options expected to vest. We estimated forfeitures based on historical rates of forfeitures of stock options adjusted to reflect future changes in facts and circumstances, if any, and revised the estimated forfeiture rate if actual forfeitures differed from initial estimates. Subsequent to the adoption, we account for forfeitures as they occur. We recognize the fair value of purchase rights granted under the 2018 ESPP as an expense on a straight-line basis over the offering period and account for forfeitures as they occur.
The estimated grant-date fair value of our stock options issued to service providers was calculated using the Black-Scholes option-pricing model, based on the following assumptions for the years ended December 31, 2018, 2017 Stock-based compensation expense associated with service- and 2016:
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected term (in years) | 5.2 - 6.1 |
| | 5.3 - 6.3 |
| | 6.08 |
|
| Risk-free interest rate | 2.5% - 2.9% |
| | 1.9% - 2.2% |
| | 1.2% - 2.1% |
|
| Expected volatility | 38% - 45% |
| | 39% - 43% |
| | 42% - 45% |
|
The estimated grant-date fair value of purchase rights granted under the 2018 ESPP was calculated using the Black-Scholes option-pricing model, based on the following assumptions for the year ended December 31, 2018:
|
| | |
| 2018 |
Dividend yield | 0 | % |
Expected term (in years) | 0.5 - 2.0 |
|
Risk-free interest rates | 2.4% - 2.9% |
|
Unvested balance - expected volatility | 37 | % |
Dividend Yield. The expected dividend is zero as we have never declared dividends and have no current plans to do so in the foreseeable future.
Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. For awards containing only service conditions, we determine the expected term using the simplified method as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. We use relevant data, including past exercise patterns, if available, to determine the expected term for performance-based awards.
We estimate expected term using historical data on employee exercises and post-vesting employment termination behavior taking into account the contractual life of the award.
Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock option’s expected term.
Expected Volatility. We estimate the expected volatility from the average historical stock volatilities of several unrelated public companies within our industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock option grants. We intend to continue to consistently apply this process using the same or similar companies to estimate the expected volatility until sufficient historical information regarding the volatility of the share price of our common stock becomes available.
We also grant stock-based awards to non-employees. We believe that for stock options issued to non-employees, the fair value of the stock option is more reliably measurable than the fair value of the services rendered. Therefore, we estimate the fair value of non-employee stock options using a Black-Scholes valuation model with appropriate assumptions. The estimated fair value of non-employeemarket-based stock options is re-measuredrecognized over the vestinglonger of the expected achievement period for the service condition and market condition. Stock-based compensation expense associated with PSUs is recognized over the longer of the expected achievement period for the performance condition and the expense is recognized on a straight-line basis over the period during which the award vests.service condition.
Income Taxes
We utilize the asset and liability method under which deferred tax assets and liabilities arise from the temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements, as well as from net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided for under currently enactedcurrent tax law. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
In determining the need for a valuation allowance, we assess, among other things, the historical levels of income and various sources of taxable income. We regularly review our tax positions and benefits to be realized. We recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more likely than not to be sustained. An uncertain income tax position will be recognized only if it is more likely than not to be sustained. We recognize interest and penalties related to income tax matters as income tax expense.
Recent Accounting Pronouncements
See Note 2“Note 2—Basis of Presentation and Summary of Significant Accounting Policies” of the notes to our consolidated financial statements included elsewhere in this Annual Report for recently issued accounting pronouncements not yet adopted as of the date of this Annual Report.
Item 7A. 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
Borrowings under the Notes have a fixed interest rate. As of December 31, 2023 and 2022, we had $361.0 million and $575.0 million aggregate principal amount of borrowings outstanding under the Notes, respectively.
Additionally, we are exposed to interest rate risk relating to our investment portfolio. The primary objective of our investment activities from operating investments 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, ourOur portfolio’s fair value is relatively insensitive to interest rate changes. Borrowings under
We also earn interest on funds held on behalf of customers that we hold on our Loan Agreement have variableconsolidated balance sheets as funds held in escrow, including funds in transit. Because these balances are highly liquid, their fair value is relatively insensitive to interest rates. We had $24.0 million and $34.0 million aggregate principal amount of borrowings outstanding under our Loan Agreement as of December 31, 2018 and 2017, respectively. rate changes.
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 the invoices denominated in the U.S. dollar in the following currencies: Euro, the British Pound, the Australian dollar, or the 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 enteredmay enter into forward contracts.contracts or secure foreign currency exchange rates for certain durations with financial institutions. As such, the impact of foreign currency exchange rate fluctuations to our operating results have been insignificantimmaterial to date.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
Report of Independent Registered Public Accounting FirmFirm—PCAOB ID: 238 | |
Consolidated Balance Sheets as of December 31, 20182023 and 20172022 | |
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended December 31, 2018, 20172023, 2022, and 20162021 | |
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended December 31, 2018, 20172023, 2022, and 20162021 | |
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 20172023, 2022, and 20162021 | |
| Notes to Consolidated Financial Statements | |
The supplementary financial information required by this item is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Report of Independent Registered Public Accounting Firm
TotheBoard of Directors and Stockholders of Upwork Inc.
OpinionOpinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Upwork Inc. and its subsidiaries (the “Company”) as of December 31, 20182023 and 2017,2022, and the related consolidated statements of operations and comprehensive income (loss), of redeemable convertible preferred stock and stockholders’stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2018,2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182023 and 2017,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20182023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for OpinionOpinions
TheseThe Company's management is responsible for these consolidated financial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinionopinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Estimation of Standalone Selling Price of the Talent Material Rights and the Period of Time Over Which to Defer and Recognize the Consideration Allocated to the Material Rights
As described in Notes 2 and 12 to the consolidated financial statements, the Company charges talent a service fee as a percentage of talent billings primarily using a tiered service fee model based on cumulative lifetime billings by talent to each client. The Company recorded total revenue of $689.1 million for the year ended December 31, 2023, of which $369.9 million related to revenue from talent. Certain of the Company's contracts with talent contain multiple performance obligations in the event management determines a material right exists. Specifically, the arrangements with talent subject to tiered service fees include contract renewal options that represent a material right. For such arrangements, management allocates revenue to each performance obligation based on its relative standalone selling price by applying the portfolio approach practical expedient under Topic 606. Standalone selling prices for offerings subject to tiered service fees are estimated based on observable transactions when these services are sold on a standalone basis. Standalone selling price for a material right is estimated by determining the discount that the talent would obtain when exercising the option, adjusted for the likelihood that the option will be exercised. Management applies significant judgment in the application of the portfolio approach practical expedient, which includes estimating the standalone selling price of the material rights and the period of time over which to defer and recognize the consideration allocated to the material rights. Specifically, management applied significant judgment in assessing the appropriateness of the model for the estimates, which includes assessing the appropriateness of the methodology and relevant data inputs to (i) estimate the standalone selling price of the material rights, which includes the standalone selling price of the services when sold separately and the likelihood of exercise of the material rights, and (ii) estimate the period of time over which to defer and recognize the consideration allocated to the material rights. Management utilized historical user transaction data in developing the estimates. The Company recognizes revenue related to the material rights based on management's estimate of when the material rights are exercised.
The principal considerations for our determination that performing procedures relating to revenue recognition, specifically the estimation of standalone selling price of the talent material rights and the period of time over which to defer and recognize the consideration allocated to the material rights, is a critical audit matter are the significant judgment by management in assessing the appropriateness of the model, methodology and relevant data inputs to estimate the standalone selling price of the material rights, and the period of time over which to defer and recognize the consideration allocated to the material rights. This in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management's determination of the standalone selling price of the services when sold separately, the likelihood of exercise of the material rights, and the period of time over which to defer and recognize the consideration allocated to the material rights.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including the assessment of the appropriateness of the model, methodology and relevant data inputs to estimate the material rights standalone selling price and the period of time over which to defer and recognize the consideration allocated to the material rights. These procedures also included, among others, (i) evaluating the appropriateness of management's model used in developing the estimates, the reasonableness of the selected methodology and relevant data inputs used in determining the standalone selling price of the services when sold separately and the likelihood of exercise of the material rights, and the period of time over which to defer and recognize the consideration allocated to the material rights, (ii) testing the completeness and accuracy of data inputs, and (iii) testing the mathematical accuracy of the model's calculations and the amounts recorded for the material rights in the consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 7, 2019February 15, 2024
We have served as the Company’s auditor since 2016.
UPWORK INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 20182023 and 20172022
(In thousands, except share and per share data)
| | | | 2018 | | 2017 |
| (In thousands, except share and per share data) | | (In thousands, except share and per share data) | 2023 | | 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Current assets | |
| Current assets | |
| Current assets | |
| Cash and cash equivalents | $ | 129,128 |
| | $ | 21,595 |
|
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Marketable securities | |
| Funds held in escrow, including funds in transit | 98,186 |
| | 87,195 |
|
| Trade and client receivables – net of allowance of $2,832 and $1,577 as of December 31, 2018 and 2017, respectively | 22,315 |
| | 30,762 |
|
| Trade and client receivables – net of allowance of $5,141 and $12,464 as of December 31, 2023 and 2022, respectively | |
| Prepaid expenses and other current assets | 6,253 |
| | 4,574 |
|
| Total current assets | 255,882 |
| | 144,126 |
|
| Property and equipment, net | 10,815 |
| | 3,514 |
|
| Goodwill | 118,219 |
| | 118,219 |
|
| Intangible assets, net | 6,004 |
| | 8,672 |
|
| Operating lease asset | |
| Other assets, noncurrent | 653 |
| | 658 |
|
| Total assets | $ | 391,573 |
| | $ | 275,189 |
|
| | | | |
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) | | Current liabilities: | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| Current liabilities | |
| Accounts payable | |
| Accounts payable | |
| Accounts payable | $ | 2,073 |
| | $ | 462 |
|
| Escrow funds payable | 98,186 |
| | 87,195 |
|
| Debt, current | 5,671 |
| | 10,342 |
|
| | Accrued expenses and other current liabilities | |
| Accrued expenses and other current liabilities | |
| Accrued expenses and other current liabilities | 20,948 |
| | 16,030 |
|
| Deferred revenue | 722 |
| | 614 |
|
| Total current liabilities | 127,600 |
| | 114,643 |
|
| Debt, noncurrent | 18,239 |
| | 23,491 |
|
| Operating lease liability, noncurrent | |
| Other liabilities, noncurrent | 1,989 |
| | 1,936 |
|
| Total liabilities | 147,828 |
| | 140,070 |
|
| Commitments and contingencies (Note 5) |
| |
|
| Redeemable convertible preferred stock, $0.0001 par value; 76,141,345 shares authorized as of December 31, 2017; 61,279,079 shares issued and outstanding as of December 31, 2017; aggregate liquidation preference of $120,047 as of December 31, 2017 | — |
| | 166,486 |
|
| Stockholders’ equity (deficit): | | | |
| Common stock, $0.0001 par value; 490,000,000 and 150,000,000 shares authorized as of December 31, 2018 and 2017, respectively; 106,454,321 and 33,740,323 shares issued and outstanding as of December 31, 2018 and 2017, respectively | 11 |
| | 3 |
|
| Commitments and contingencies (Note 6) | | Commitments and contingencies (Note 6) | | | |
| Stockholders’ equity | |
| Common stock, $0.0001 par value; 490,000,000 shares authorized as of December 31, 2023 and 2022; 137,272,754 and 132,368,265 shares issued and outstanding as of December 31, 2023 and 2022, respectively | |
| Common stock, $0.0001 par value; 490,000,000 shares authorized as of December 31, 2023 and 2022; 137,272,754 and 132,368,265 shares issued and outstanding as of December 31, 2023 and 2022, respectively | |
| Common stock, $0.0001 par value; 490,000,000 shares authorized as of December 31, 2023 and 2022; 137,272,754 and 132,368,265 shares issued and outstanding as of December 31, 2023 and 2022, respectively | |
| Additional paid-in capital | 387,233 |
| | 92,222 |
|
| Accumulated other comprehensive income (loss) | |
| Accumulated deficit | (143,499 | ) | | (123,592 | ) |
| Total stockholders’ equity (deficit) | 243,745 |
| | (31,367 | ) |
| Total liabilities, redeemable convertible preferred stock, and stockholders' equity (deficit) | $ | 391,573 |
| | $ | 275,189 |
|
| Total stockholders’ equity | |
| Total liabilities and stockholders’ equity | |
The accompanying notes are an integral part of these consolidated financial statements.
UPWORK INC.
The accompanying notes are an integral part of these consolidated financial statements.
UPWORK INC.
The accompanying notes are an integral part of these consolidated financial statements.
UPWORK INC.
UPWORK INC.
Upwork Inc. (the “Company”, which is referred to as the Company or “Upwork”)Upwork, operates an onlinea work marketplace that enablesconnects businesses, (“clients”)which are referred to find andas clients, with independent talent. Independent talent on the Company’s work with highly-skilled independent professionals (“freelancers,”marketplace, which are referred to as talent, and, together with clients, “users”).as customers, include independent professionals and agencies of varying sizes and are an increasingly sought-after, critical, and expanding segment of the global workforce. The Company was originallyis incorporated in the state of Delaware in December 2013 prior to and in connection with the combination (the “Elance-oDesk Combination”) of Elance, Inc. (“Elance”) and oDesk Corporation (“oDesk”). The Company changed its name to Elance-oDesk, Inc. (“Elance-oDesk”) shortly before the Elance-oDesk Combination in March 2014, and later to Upwork Inc. in May 2015. In 2015, the Company relaunched as Upwork and commenced consolidation of its two operating platforms. In 2016, following completion of the platform consolidation, the Company began operating under a single platform. The Company is currently headquartered in Mountain View,San Francisco, California.
Unless otherwise expressly stated or the context otherwise requires, the terms “Upwork” and the “Company” in these notes to the consolidated financial statements refer to Upwork and its wholly-owned subsidiaries.
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Such estimates include, but are not limited to,to: the useful lives of assets; assessment of the recoverability of long-lived assets; goodwill impairment; standalone selling price of material rights and the period of time over which to defer and recognize the consideration allocated to the material rights; allowance for doubtful accounts;expected credit losses; liabilities relating to transaction losses; the valuation of warrants; stock-based compensation; and accounting for income taxes. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The Company evaluates its estimates, assumptions, and judgments on an ongoing basis using historical experience and other factors and revises them when facts and circumstances dictate.
Financial instruments that subject the Company to concentration of risk consist primarily of cash, restricted cash, funds held in escrow, including funds in transit, and trade and client receivables. The Company maintains its cash balances with large, high-credit quality financial institutions and other payment companies. At times, such deposits may be in excess of federally insured limits. The Company has not experienced any losses on its deposits. Credit risk on trade receivables is limited as a result of the large size of the Company’s client base as well as a large portion of payments made in the form ofusing pre-authorized credit cards. The Company performs ongoing credit evaluationevaluations of its clients and maintains allowances for potential credit losses. For any receivables that are deemed not collectible, losses are recorded when probable and estimable. These losses, when incurred, have been within the range of the Company’s expectations.
The Company is dependent upon third parties, such as Amazon Web Services, in order to meet the uptime and performance requirementsneeds of its clients.customers.
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, funds held in escrow, including funds in transit, marketable securities, trade and client receivables, prepaid and other current assets, escrow funds payable, debt, the redeemable convertible preferred stock warrant liability and the value of the common stock warrant liability. Prior to the IPO, the redeemable convertible preferred stock warrant liability was remeasured at the end of every period and was carried at fair value. Upon the IPO, the redeemable convertible preferred stock warrant was converted to a common stock warrant and is no longer remeasured. Prior to the IPO, the Company issued a common stock warrant to The Tides Foundation, which is remeasured at the end of each reporting period and carried at fair value (see Note 3 and Note 8).debt.
The Company uses derivative financial instruments not designated as hedges, such as foreign currency forward contracts, to minimize the short-term impact of foreign currency exchange rate fluctuations on certain foreign currency denominated assets and liabilities, as well as certain foreign currency denominated expenses, hedging the gains or losses generated by the re-measurement of significant foreign currency denominated monetary assets and liabilities. The Company does not enter into derivative instruments for speculative or trading purposes and these instruments generally have maturities within twelve12 months.
The foreign currency forward contracts are recorded at fair value and, when in gain positions, are reported within prepaid expenses and other current assets. When in loss positions, the foreign currency forward contracts are recorded within accrued expenses and other current liabilities in the consolidated balance sheets. Gains or losses from changes in the fair value of these foreign currency forward contracts not designated as hedging instruments are recorded in other expense,income (expense), net to offset the changes in the fair value of the underlying assets or liabilities being hedged.
The notional amounts associated with the Company’s foreign currency forward contracts atas of December 31, 20182023 and 20172022 were $4.8$7.0 million and $3.6$7.2 million, respectively, none of which were designated as cash flow hedges. The carrying values of the foreign currency forward contracts approximated their fair values due to their relatively short settlement durations. The fair values of the Company’s outstanding foreign currency forward contracts not designated as hedging instruments as of December 31, 20182023 and 20172022 were not material. Gains on foreign currency forward contracts not designated as hedging instruments were $0.5 million for the year ended December 31, 2023. Losses on foreign currency forward contracts not designated as hedging instruments were $0.4$0.2 million for the year ended December 31, 2018, were immaterial for the year ended December 31, 2017, and2022. Losses on foreign currency forward contracts not designated as hedging instruments were $0.5 million for the year ended December 31, 2016.2021.
The Company has one reportable segment. The Company’s chief operating decision maker is its President and Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Goodwill represents the excess of the aggregate fair value of the consideration transferred over the fair value of the net tangible and identifiable intangible assets acquired in the Elance-oDesk Combination.a 2014 business combination. Goodwill is not amortized, but rather is assessed for impairment at least annually, or more frequently if events and changes in circumstances indicate that its carrying amount may not be recoverable. The Company conductsperforms its annual impairment assessment during the fourth quarter of each calendar year based on a single
The Company periodically reviews the remaining estimated useful lives of its long-lived tangible and amortizable intangible assets. If the estimated useful life assumption for any asset is changed, the remaining unamortized balance would be depreciated or amortized over the revised estimated useful life, on a prospective basis. Intangible amortization expense related to developed technology and trade names is recorded as cost of revenue. Intangible amortization expense related to user relationships and domain namesan assembled workforce is included in operating expenses.research and development expense in the Company’s statement of operations.
Provision for transaction losses consists primarily of losses resulting from fraud on the platform and bad debt expense associated with the Company’sour trade and client receivablesreceivable balance and transaction losses expense related toassociated with chargebacks. Provision for these items represent estimates of losses based on the Company’s actual historical incurred losses and other factors.
Deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect for the years in which those tax assets are expected to be realized or settled. The Company regularly assesses the likelihood that its deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the realization criteria set forth in the relevant authoritative guidance. To the extent that the Company believes any amounts are not more likely than not to be realized, the Company records a valuation allowance to reduce its deferred tax assets. The realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.
In addition, the calculation of tax liabilities involved dealing with uncertainties in the application of complex tax regulations. The Company recognized potential liabilities based on its estimate of whether, and the extent to which, additional taxes will be due. The Company accounts for uncertain tax positions in accordance with the relevant guidance, which prescribes a recognition threshold and measurement approach for uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The guidance utilized a two-step approach for evaluation of uncertain tax positions. Step one, Recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. A liability is reported for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any interest and penalties related to unrecognized tax benefits are recorded as income tax expense.
The categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to its fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the assets or liability.liabilities.
The Company’s financial instruments that are carried at fair value consist of Level I and Level II assets as of December 31, 20182023 and Level III liabilities2022. The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant
Amortization expense related to the capitalized internal-use software and platform development costs was $0.1$6.5 million for the year ended December 31, 2018. There was no amortization expense for the year ended December 31, 2017 related to the internal-use software and platform development costs as the underlying assets had not been placed into service as of December 31, 2017. Amortization expense related to internal-use software and platform development costs was $1.0 million for the year ended December 31, 2016.
Accrued expenses and other current liabilities consisted of the following as of December 31, 20182023 and 2017 (in thousands):2022:
The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. FromPotential contingencies may include various claims and litigation or non-income tax matters that arise from time to time in the normal course of business, various claims and litigation have been asserted or commenced.business. Due to uncertainties inherent in litigation and other claimssuch contingencies, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability or damages. Any claims, litigation, or litigationother contingencies could have an adverse effect on the Company’s business, financial position, results of operations or cash flows in or following the period that claims, litigation or litigationother contingencies are resolved.
financial condition. Accordingly, the amounts accrued for contingencies for which the Company has determined that the existence ofbelieves a loss is probable were not material loss as of this date is neither probable nor reasonably possible.and for the years ended December 31, 2023 and 2022.
The Company has indemnification agreements with its officers, directors, and certain key employees to indemnify them while they are serving in good faith in their respective positions. In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to clients, business partners, vendors, and other parties, including, but not limited to, losses arising out of the Company’s breach of such agreements.agreements, claims related to potential data or information security breaches, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from the Company’s products and services or its acts or omissions. In addition, subject to the terms of the applicable agreement, as part of the Company’s Upwork Enterprise offering,Solutions and certain other premium offerings, the Company indemnifies clients that subscribe to worker classification services for losses arising from worker misclassification and intellectual property claims made by third parties relating to the use of the Company’s platform.misclassification. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the facts and circumstances involved in each particular provision.
Holders of common stock are entitled to one vote per share and are entitled to receive dividends, if any, on a pro rata basis whenever funds are legally available and when, as, and if declared by the Company’s board of directors.
are increased based on the provisions of the 2018 EIP. Any shares subject to outstanding awards under the Company’s 2014 EIPEquity Incentive Plan that are canceled or repurchased subsequent to the 2018 EIP’s effective date are returned to the pool of shares reserved for issuance under the 2018 EIP. Awards granted under the 2018 EIP may be (i) incentive stock options, (ii) nonqualified stock options, (iii) RSUs, (iv) restricted stock awards, or (v) stock appreciation rights, as determined by ourthe Company’s board of directors or compensation committee at the time of grant. As of December 31, 2018, 10,558,306 shares were reserved for future issuance under the 2018 EIP.
The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. TheFor performance-based awards, the Company uses relevant data, including past exercise patterns, if available, to determine the expected term for performance-based awards.term.
The fair value of RSUs awarded to employees is based on the closing price of the Company’s common stock, as reported on The Nasdaq Global Select Market on the date of grant.
up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2018 ESPP provides for 24-month offering periods beginning November 15 and May 15 of each year, and each offering period consists of four 6-month purchase periods. Pursuant to the terms of the 2018 ESPP, in January 2023, the number of shares of common stock available for issuance was increased by 1,058,946 shares.
On each purchase date, eligible employees may purchase the Company’s common stock at a price per share equal to 85% of the lesser of (1) the fair market value of ourthe Company’s common stock on the offering date or (2) the fair market value of ourthe Company’s common stock on the purchase date. In the event the price is lower on the last day of any purchase price period, in addition to using that price is used as the basispurchase price for that purchase period.
The following table summarizes the components of stock-based compensation expense recognized in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2018, 20172023, 2022, and 2016 (in thousands):2021:
Stock-based compensation expense related to employees for the year ended December 31, 20182023 was $8.6$5.1 million, $1.1$65.1 million, and $0.6$5.0 million related to stock option grants, RSU and PSU grants, and the 2018 ESPP, respectively. Stock-based compensation expense related to employees for the year ended December 31, 2022 was $11.4 million, $59.7 million, and $4.5 million related to stock option grants, RSU grants, and the 2018 ESPP, respectively. Stock-based compensation expense related to employees for the yearsyear ended December 31, 2017 and 20162021 was $6.3$12.7 million, $38.8 million, and $6.5$2.2 million respectively, related to stock option grants.
The following table sets forth the computation of the Company’s basic and diluted net lossincome (loss) per share attributable to common stockholders for the years ended December 31, 2018, 20172023, 2022, and 2016 (in thousands, except share and per share data):2021:
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 20182023 and 2017,2022, the significant components of the Company’s deferred tax assets and liabilities were as follows:
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the provision for income taxes in the period that such determination is made. As of December 31, 2018,2023, the Company did not currently recognize any penalties or interest charges relating to uncertain tax positions. The Company does not anticipate the recorded reserves to change significantly in the next twelve months as12 months.
The Company operates as one operating and reportable segment for purposes of allocating resources and evaluating financial performance.
The following table sets forth total revenue by type of service for the years ended December 31, 2018, 20172023, 2022, and 2016 (in thousands):2021:
Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 20182023 and 2017.2022.
Item 16. Form 10-K Summary.
None.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Stephane KasrielHayden Brown and Brian Kinion,Erica Gessert, and each of them, as his or her true and lawful attorneys-in-fact, proxies, and agents, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, proxies, and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, proxies, and agents, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
