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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:
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Such forward-looking statements are basedlargely 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 but not limited to, risks detailedthose described in thePart II, Item 1A, “Risk Factors” sectionin this Quarterly Report and the impact of this Form 10-Q.the COVID-19 pandemic. Readers are urged to carefully review and consider the various disclosures made in this Form 10-QQuarterly Report and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Form 10-QQuarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
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September 30, December 31, 2018 2017 ASSETS Current assets: Cash $ 27,055 $ 21,595 Funds held in escrow, including funds in transit 107,479 87,195 Trade and client receivables – net of allowance of $2,703 as of September 30, 2018 and $1,577 as of December 31, 2017, respectively 41,592 30,762 Prepaid expenses and other current assets 5,326 4,574 Total current assets 181,452 144,126 Property and equipment, net 6,260 3,514 Goodwill 118,219 118,219 Intangible assets, net 6,671 8,672 Other assets, noncurrent 6,240 658 Total assets $ 318,842 $ 275,189 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 5,471 $ 462 Escrow funds payable 107,479 87,195 Debt, current 29,594 10,342 Accrued expenses and other current liabilities 16,911 16,030 Deferred revenue 717 614 Total current liabilities 160,172 114,643 Debt, noncurrent 19,304 23,491 Other liabilities, noncurrent 6,110 1,936 Total liabilities 185,586 140,070 Commitments and contingencies (Note 5) Redeemable convertible preferred stock, $0.0001 par value; 76,141,345 shares authorized as of September 30, 2018 and December 31, 2017; 61,279,079 shares issued and outstanding as of September 30, 2018 and December 31, 2017; aggregate liquidation preference of $120,047 as of September 30, 2018 and December 31, 2017 166,486 166,486 Stockholders’ deficit: Common stock, $0.0001 par value; 150,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 36,945,317 and 33,740,323 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 4 3 Additional paid-in capital 104,900 92,222 Accumulated deficit (138,134 ) (123,592 ) Total stockholders’ deficit (33,230 ) (31,367 ) Total liabilities, redeemable convertible preferred stock, and stockholders' deficit $ 318,842 $ 275,189 Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Revenue $ 64,113 $ 52,262 $ 186,012 $ 147,793 Cost of revenue 20,504 16,894 60,578 47,847 Gross profit 43,609 35,368 125,434 99,946 Operating expenses: Research and development 14,377 11,514 40,680 32,519 Sales and marketing 18,967 13,626 55,054 37,327 General and administrative 11,707 8,952 34,102 25,415 Provision for transaction losses 1,892 1,073 4,612 2,857 Total operating expenses 46,943 35,165 134,448 98,118 Income (loss) from operations (3,334 ) 203 (9,014 ) 1,828 Interest expense 589 199 1,674 629 Other expense, net 3,423 260 3,845 75 Income (loss) before income taxes (7,346 ) (256 ) (14,533 ) 1,124 Income tax provision — (45 ) (9 ) (56 ) Net income (loss) $ (7,346 ) $ (301 ) $ (14,542 ) $ 1,068 Undistributed earnings allocable to preferred stockholders — — — (1,068 ) Net loss attributable to common stockholders $ (7,346 ) $ (301 ) $ (14,542 ) $ — Net loss per share attributable to common stockholders, basic and diluted $ (0.20 ) $ (0.01 ) $ (0.41 ) $ — Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 36,070 33,299 35,129 32,760 STOCKHOLDERS’ EQUITY thousands, except share amounts) Nine Months Ended September 30, 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (14,542 ) $ 1,068 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for transaction losses 4,612 2,857 Depreciation and amortization 3,542 3,135 Amortization of debt issuance costs 64 40 Change in fair value of redeemable convertible preferred stock warrant liability 3,610 41 Stock-based compensation expense 5,667 4,817 Loss (gain) on disposal of fixed assets 33 (3 ) Changes in operating assets and liabilities: Trade and client receivables (15,137 ) (7,239 ) Prepaid expenses and other assets (658 ) 183 Accounts payable 5,006 662 Accrued expenses and other liabilities (490 ) 7,833 Deferred revenue 103 56 Net cash provided by (used in) operating activities (8,190 ) 13,450 CASH FLOWS FROM INVESTING ACTIVITIES: Increase in restricted cash (94 ) (1 ) Purchases of property and equipment (1,598 ) (1,509 ) Internal-use software and platform development costs (2,670 ) (392 ) Net cash used in investing activities (4,362 ) (1,902 ) CASH FLOWS FROM FINANCING ACTIVITIES: Changes in funds held in escrow, including funds in transit (20,283 ) (12,016 ) Changes in escrow funds payable 20,283 12,016 Proceeds from exercises of stock options and common stock warrant 7,011 1,494 Proceeds from exercise of redeemable convertible preferred stock warrant — 260 Proceeds from borrowings on debt 15,000 15,000 Payment of debt issuance costs — (84 ) Repayment of debt — (17,000 ) Payments of deferred offering costs (3,999 ) (14 ) Net cash provided by (used in) financing activities 18,012 (344 ) NET INCREASE IN CASH 5,460 11,204 Cash, beginning of year 21,595 27,326 Cash, end of period $ 27,055 $ 38,530 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 7 $ 12 Cash paid for interest 1,573 663 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property and equipment purchased but not yet paid 166 77 Reclassification of redeemable convertible preferred stock warrant liability to redeemable convertible preferred stock — 144 Unpaid deferred offering costs 1,583 — subsidiaries. March 2, 2020. Use of Estimates statements. 2020, changes in the contract liabilities balances were a result of normal business activity, deferral of revenue related to arrangements with freelancers subject to tiered service fees and related allocation of transaction price to material rights, and a change in estimate related to the period of time over which to recognize the consideration allocated to the material rights. •Level I—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets; •Level II—Observable inputs other than Level I prices, such as unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and •Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on the Company’s own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation. liabilities. December 31, 2019. The following tables set forth the fair value of the Company’s financial September 30, 2018 Level I Level II Level III Total Financial Liabilities: Redeemable convertible preferred stock warrant liability $ — $ — $ 4,714 $ 4,714 Total financial liabilities $ — $ — $ 4,714 $ 4,714 December 31, 2017 Level I Level II Level III Total Financial Liabilities: Redeemable convertible preferred stock warrant liability $ — $ — $ 1,104 $ 1,104 Total financial liabilities $ — $ — $ 1,104 $ 1,104 cash flows as of June 30, 2020 and December 31, 2019 (in thousands): September 30, 2018 December 31, 2017 Computer equipment and software $ 5,250 $ 5,385 Internal-use software and platform development costs 4,988 2,318 Leasehold improvements 2,973 2,189 Office furniture and fixtures 1,952 1,550 Total property and equipment 15,163 11,442 Less: Accumulated depreciation (8,903 ) (7,928 ) Property and equipment, net $ 6,260 $ 3,514 September 30, 2018 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trade names $ 2,293 $ 2,293 $ — User relationships 18,678 12,007 6,671 Developed technology 10,356 10,356 — Domain names 529 529 — Total $ 31,856 $ 25,185 $ 6,671 December 31, 2017 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trade names $ 2,293 $ 2,293 $ — User relationships 18,678 10,006 8,672 Developed technology 10,356 10,356 — Domain names 529 529 — Total $ 31,856 $ 23,184 $ 8,672 September 30, 2018 Remainder of 2018 $ 670 2019 2,668 2020 2,668 2021 665 Total $ 6,671 September 30, 2018 December 31, 2017 Accrued compensation and related benefits $ 7,239 $ 8,399 Accrued freelancer costs 615 134 Accrued indirect taxes 1,634 1,861 Accrued vendor expenses 5,696 4,198 Accrued payment processing fees 683 593 Other 1,044 845 Total accrued expenses and other current liabilities $ 16,911 $ 16,030 streamline the delivery of its end-to-end user experiences. During the six months ended June 30, 2020, the Company incurred and paid $1.6 million related to these initiatives. September 30, 2018 Remainder of 2018 $ 1,036 2019 3,569 2020 4,223 2021 3,981 2022 4,095 2023 4,214 2024 3,039 Total minimum lease payments $ 24,157 2019. provision. September 30, 2018 December 31, 2017 First term loan—18 months of interest-only payments ending in March 2019 followed by 36 equal monthly installments of principal plus interest, maturing March 2022; interest at Prime plus 0.25% per annum $ 15,000 $ 15,000 Second term loan—11 months of interest-only payments ending in October 2018 followed by 47 equal monthly installments of principal plus interest, maturing September 2022. As of September 30, 2018, the Company achieved trailing six-month EBITDA of at least $1.0 million; as a result, the interest-only repayment period extended to March 2019, followed by 42 equal monthly installments of principal plus interest; bears interest at Prime plus 5.25% per annum 9,000 9,000 Line of credit—interest at Prime with accrued interest due monthly; matures September 2020 25,000 10,000 Total debt 49,000 34,000 Less: Unamortized debt discount issuance costs (102 ) (167 ) Balance 48,898 33,833 Debt, current (29,594 ) (10,342 ) Debt, noncurrent $ 19,304 $ 23,491 Weighted-average interest rate 6.08 % 5.93 % Shares Authorized Shares Issued and Outstanding Net Carrying Value Aggregate Liquidation Preference Series A-1 10,141,345 9,142,770 $ 72,181 $ 91,427 Series A-2 60,000,000 47,124,931 65,853 5 Series B-1 5,854,982 4,866,360 27,628 27,787 Series B-2 145,018 145,018 824 828 Total redeemable convertible preferred stock 76,141,345 61,279,079 $ 166,486 $ 120,047 September 30, 2018 December 31, 2017 Dividend yield 0% 0% Expected term (in years) 2.00 2.75 Risk-free interest rates 2.8% 1.8% Expected volatility 36.8% 34.6% September 30, 2018 December 31, 2017 Options issued and outstanding 24,312,203 23,607,746 Warrant to purchase redeemable convertible preferred stock 398,331 398,331 Warrant to purchase common stock 500,000 45,286 Conversion of redeemable convertible preferred stock 61,279,079 61,279,079 Remaining shares reserved for future issuances under 2014 Plan 197,859 3,962,024 Total 86,687,472 89,292,466 Options Outstanding Shares Available for Grant Number of Shares Underlying Outstanding Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balances at December 31, 2017 3,962,024 23,607,746 $ 3.10 7.39 $ 22,260 Authorized 100,000 — Granted (4,468,523 ) 4,468,523 5.88 Exercised — (3,159,708 ) 2.22 Forfeited and cancelled 604,358 (604,358 ) 3.72 Balances at September 30, 2018 197,859 24,312,203 $ 3.71 7.36 $ 269,431 Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Cost of revenue $ 59 $ 48 $ 164 $ 241 Research and development 623 432 1,711 1,271 Sales and marketing 355 312 1,026 967 General and administrative 949 734 2,766 2,338 Total stock-based compensation $ 1,986 $ 1,526 $ 5,667 $ 4,817 Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Numerator: Net income (loss) $ (7,346 ) $ (301 ) $ (14,542 ) $ 1,068 Less: Undistributed earnings allocable to preferred stockholders — — — (1,068 ) Net loss attributable to common stockholders $ (7,346 ) $ (301 ) $ (14,542 ) $ — Denominator: Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 36,069,502 33,298,773 35,129,250 32,760,339 Net loss per share attributable to common stockholders, basic and diluted $ (0.20 ) $ (0.01 ) $ (0.41 ) $ — September 30, 2018 2017 Options to purchase common stock 24,312,203 22,825,933 Common stock issuable upon conversion of redeemable convertible preferred stock 61,279,079 65,547,568 Common stock issuable upon exercise of common stock warrant 500,000 45,286 Common stock issuable upon exercise and redeemable conversion of preferred stock warrants 398,331 398,331 Total 86,489,613 88,817,118 Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Marketplace $ 56,766 $ 46,186 $ 164,180 $ 130,124 Managed services 7,347 6,076 21,832 17,669 Total $ 64,113 $ 52,262 $ 186,012 $ 147,793 The following table sets forth total revenue by geographic area based on the billing address of its freelancers and clients for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Freelancers: United States $ 10,273 $ 6,839 $ 28,930 $ 19,184 India 6,561 5,712 19,134 16,183 Philippines 4,377 3,795 12,535 10,839 Rest of world 20,168 17,519 59,352 50,767 Total freelancers 41,379 33,865 119,951 96,973 Clients: United States 16,504 14,339 50,153 39,703 Rest of world 6,230 4,058 15,908 11,117 Total clients 22,734 18,397 66,061 50,820 Total $ 64,113 $ 52,262 $ 186,012 $ 147,793 As of September 30, 2018 Consolidated Balance Sheet Data: Actual Pro Forma Adjustments Pro Forma Cash $ 27,055 $ 99,381 $ 126,436 Total current assets 181,452 99,381 280,833 Other assets 6,240 (5,648 ) 592 Total assets 318,842 93,733 412,575 Debt, current 29,594 (10,000 ) 19,594 Total current liabilities 160,172 (10,000 ) 150,172 Other liabilities, noncurrent 6,110 (4,714 ) 1,396 Total liabilities 185,586 (14,714 ) 170,872 Redeemable convertible preferred stock 166,486 (166,486 ) — Common stock 4 7 11 Additional paid-in capital 104,900 274,926 379,826 Total stockholders' equity (deficit) (33,230 ) 274,933 241,703 Total liabilities, redeemable convertible preferred stock, and stockholders' equity (deficit) 318,842 93,733 412,575 other parts of this Quarterly Report. With users in over 180 countries, our platform enabled $0.6 billion and $0.5 billion of GSV for the three months ended June 30, 2020 and 2019, respectively, and $1.1 billion and $1.0 billion of GSV for the six months ended June 30, 2020 and 2019, respectively. For purposes of determining countries where we enable GSV, we include both the countries in which the clients that paid for the applicable services are located, as well as the countries in which the freelancers that provided those services are located. ongoing COVID-19 pandemic.” Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Gross services volume (GSV) $ 449,472 $ 353,495 $ 1,284,004 $ 996,650 Marketplace revenue $ 56,766 $ 46,186 $ 164,180 $ 130,124 Adjusted EBITDA $ (61 ) $ 2,762 $ 195 $ 9,780 business” in Part II, Item 1A of this Quarterly Report. factors, including the current COVID-19 pandemic, the impact of the pandemic on our clients’ businesses, and the timing of the removal of restriction-in-place orders, both globally and in localized areas. which initiated a substantial increase in the average hourly earnings rate of freelancers. These hourly rates stabilized over the course of 2019, causing the reduction in retention rate. Moreover, following the launch of our U.S.-to-U.S. domestic marketplace offering, an increasing proportion of U.S. clients are engaging primarily U.S. freelancers. We are observing that U.S. clients that engage solely U.S. freelancers post higher-budget projects and pay higher rates initially but, to date, have exhibited lower client spend retention than the rest of our clients. As we acquire more mid-market, large enterprise, and global clients in current and future periods, we expect them to continue to make positive contributions to our client spend retention in future years. However, client spend retention will be challenged by the reduction in recurring client spend as a result of the COVID-19 pandemic. For these and other reasons, client spend retention will continue to vary from period to period due to client size and spending behavior, among other factors, including the impact of the ongoing COVID-19 pandemic, the related governmental restrictions intended to prevent its spread, and the resulting macroeconomic downturn on the businesses and spending behavior of our clients. We expect our marketplace revenue growth rates to continue to vary from period to period due to a variety of other factors such as the impact of the COVID-19 pandemic on the businesses and spending behavior of our current and prospective clients; the number of Sundays (i.e., the day we bill and recognize revenue for the majority of our freelancer service fees each week) in any given quarter, or the number of Mondays (i.e., the day we bill and recognize revenue for a substantial portion of our client fees each week); the lapping of significant launches of new products, pricing changes, and other monetization efforts; the performance of client spend retention; and the ability of the recent and continued investment in our enterprise sales team to accelerate the acquisition of, and achieve increased spend from, Upwork Enterprise and Business clients, and the timing of those results. In the second quarter of 2020, we saw an increase in client acquisition that was driven by an acceleration in the shift toward remote work, due in part to the COVID-19 pandemic and the execution of our strategic initiatives. This increase in client acquisition drove an increase in freelancer billings at the higher rates of our tiered service fee structure, which, in turn, drove an increase in marketplace revenue. We define adjusted EBITDA as net income (loss) adjusted for stock-based compensation expense, depreciation and amortization, interest expense, other (income) expense, net, provision, and, if applicable, other non-cash transactions. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Net income (loss) $ (7,346 ) $ (301 ) $ (14,542 ) $ 1,068 Add back: Stock-based compensation expense 1,986 1,526 5,667 4,817 Depreciation and amortization 1,287 1,033 3,542 3,135 Interest expense 589 199 1,674 629 Other expense, net 3,423 260 3,845 75 Provision for income tax — 45 9 56 Adjusted EBITDA $ (61 ) $ 2,762 $ 195 $ 9,780 •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, •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. •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. financial condition. revenue grew at a slower rate than our marketplace revenue for the three and six months ended June 30, 2020 compared to the same period in 2019, and we anticipate this trend to continue, as we primarily focus on increasing client usage of and spend on our marketplace offerings. We expect gross margin to remain consistent throughout 2020 primarily due to the costs we will incur as a result of our migration from the AWS data centers in California to the AWS data center in Oregon. may vary from period to period. period-to-period. We expect to continue to invest in corporate infrastructure and to incur additional expenses associated with revenue, may vary from period to period. periods, although expressed as a percentage of total revenue, this expense may vary from period to period. deposits in money market funds and investments in marketable securities. Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Revenue: Marketplace $ 56,766 $ 46,186 $ 164,180 $ 130,124 Managed services 7,347 6,076 21,832 17,669 Total revenue 64,113 52,262 186,012 147,793 Cost of revenue(1) 20,504 16,894 60,578 47,847 Gross profit 43,609 35,368 125,434 99,946 Operating expenses: Research and development(1) 14,377 11,514 40,680 32,519 Sales and marketing(1) 18,967 13,626 55,054 37,327 General and administrative(1) 11,707 8,952 34,102 25,415 Provision for transaction losses 1,892 1,073 4,612 2,857 Total operating expenses 46,943 35,165 134,448 98,118 Income (loss) from operations (3,334 ) 203 (9,014 ) 1,828 Interest expense 589 199 1,674 629 Other expense, net 3,423 260 3,845 75 Income (loss) before income tax provision (7,346 ) (256 ) (14,533 ) 1,124 Income tax provision — (45 ) (9 ) (56 ) Net income (loss) $ (7,346 ) $ (301 ) $ (14,542 ) $ 1,068 (1) Includes stock-based compensation expense as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Cost of revenue $ 59 $ 48 $ 164 $ 241 Research and development 623 432 1,711 1,271 Sales and marketing 355 312 1,026 967 General and administrative 949 734 2,766 2,338 Total $ 1,986 $ 1,526 $ 5,667 $ 4,817 2019 (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 Change 2018 2017 Change Marketplace $ 56,766 $ 46,186 $ 10,580 23% $ 164,180 $ 130,124 $ 34,056 26% Percentage of total revenue 89% 88% 88% 88% Managed services $ 7,347 $ 6,076 $ 1,271 21% $ 21,832 $ 17,669 $ 4,163 24% Percentage of total revenue 11% 12% 12% 12% Total revenue $ 64,113 $ 52,262 $ 11,851 23% $ 186,012 $ 147,793 $ 38,219 26% 2020 and 2019, respectively. (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 Change 2018 2017 Change Cost of revenue $ 20,504 $ 16,894 $ 3,610 21% $ 60,578 $ 47,847 $ 12,731 27% Components of cost of revenue: Costs of freelancer services to deliver managed services 6,120 4,985 1,135 23% 18,172 14,568 3,604 25% Other components of cost of revenue 14,384 11,909 2,475 21% 42,406 33,279 9,127 27% Total gross margin 68% 68% 67% 68% (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 Change 2018 2017 Change Research and development $ 14,377 $ 11,514 $ 2,863 25% $ 40,680 $ 32,519 $ 8,161 25% Percentage of total revenue 22% 22% 22% 22% (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 Change 2018 2017 Change Sales and marketing $ 18,967 $ 13,626 $ 5,341 39% $ 55,054 $ 37,327 $ 17,727 47% Percentage of total revenue 30% 26% 30% 25% costs team. (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 Change 2018 2017 Change General and administrative $ 11,707 $ 8,952 $ 2,755 31% $ 34,102 $ 25,415 $ 8,687 34% Percentage of total revenue 18% 17% 18% 17% period. (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 Change 2018 2017 Change Provision for transaction losses $ 1,892 $ 1,073 $ 819 76% $ 4,612 $ 2,857 $ 1,755 61% Percentage of total revenue 3% 2% 2% 2% 2020. (in thousands, except percentages) Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 Change 2018 2017 Change Interest expense $ 589 $ 199 $ 390 196% $ 1,674 $ 629 $ 1,045 166% Other expense, net 3,423 260 3,163 1,217% 3,845 75 3,770 5,027% marketable securities, respectively. our covenants under the Loan Agreement as of $1.3 million and $2.5 million related to the First Term Loan, respectively, and $0.6 million and $1.3 million related to the Second Term Loan, respectively. During both the three and six months ended June 30, 2019, we repaid $1.3 million related to the First Term Loan and $0.6 million related to the Second Term Loan. Nine Months Ended September 30, 2018 2017 Net cash provided by (used in) operating activities $ (8,190 ) $ 13,450 Net cash used in investing activities (4,362 ) (1,902 ) Net cash provided by (used in) financing activities 18,012 (344 ) Net increase in cash $ 5,460 $ 11,204 $1.9 million. Payments due by period as of September 30, 2018 Total Less than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years Leases(1) $ 24,157 $ 3,546 $ 12,320 $ 8,206 $ 85 Debt principal 49,000 29,606 19,394 — — Total contractual obligations $ 73,157 $ 33,152 $ 31,714 $ 8,206 $ — Payments due by period as of December 31, 2017 Total Less than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years Leases(1) $ 6,320 $ 3,892 $ 2,428 $ — $ — Debt principal 34,000 10,383 13,346 10,271 — Total contractual obligations $ 40,320 $ 14,275 $ 15,774 $ 10,271 $ — Annual Report on Form 10-K for the year ended December 31, 2019 (our “Annual Report”). report. marketing to better address mid-market, large enterprise, and global account prospects and clients with larger, longer-term talent needs. And more recently, in the wake of the COVID-19 pandemic, we have prioritized our advertising, marketing, and certain product development efforts to reach those new and existing clients seeking to engage with remote freelancers in light of the governmental restrictions intended to prevent the spread of COVID-19. The evolution of these and other efforts, either individually or in the aggregate, may not be successful in producing sales or growing client spend from the target clients, and in the event these efforts result in the loss of or reduction in spend by other clients that is not offset by increased activity from mid-market, large enterprise, and global account clients, they may result in a temporary or long-term deceleration in GSV growth. 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. condition. relationships, and recently announced that it intends to create a series of online vertical marketplaces addressing specific skill categories. 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. user 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 different 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 adverse tax, legal, and other consequences if the contractor classification or employment status of freelancers that use our platform is challenged.” All these factors can add further risk and expenses to business conducted with these clients even after a successful sale. and overtime); claims for employee benefits, social security contributions, and workers’ compensation and would be adversely impacted. Failure to comply with anti-corruption, anti-money laundering, and sanctions laws, including the operations, will not take actions in violation of our policies or agreements and applicable law, for which we may be ultimately held responsible. operating results. uncertain, but may have a negative impact on our business. In addition, tax laws and regulations may subject us to audit by tax regulators and require us to provide certain data and information, including user information, from our platform to tax regulators in certain jurisdictions. If we are obligated to provide such information to tax regulators in any jurisdiction, users may choose to use other platforms or other alternatives, which may in turn adversely affect our operating results and financial condition. Any failure to 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. 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. clients. 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. Our reported financial results may be adversely affected by changes in U.S. GAAP. change and could result in variability of our financial results. 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. business. Risks Related to Ownership of Our Common Stock In addition, as of Incorporated by Reference Filed or Furnished Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 X 3.2 X 4.1 S-1 333-227207 4.1 9/6/18 10.1 S-1 333-227207 10.1 9/6/18 10.2 2014 Equity Incentive Plan, as amended, and forms of equity agreements thereunder. S-1 333-227207 10.3 9/6/18 10.3 2018 Equity Incentive Plan and forms of award agreements thereunder. S-1 333-227207 10.4 9/6/18 10.4 2018 Employee Stock Purchase Plan and enrollment forms thereunder. S-1 333-227207 10.5 9/6/18 10.5 S-1 333-227207 10.14 9/21/18 10.6 Offer Letter, dated August 3, 2018, by and between Upwork and Gary Steele. S-1 333-227207 10.16 9/6/18 31.1 X 31.2 X 32.1* X 32.2* X 101.INS XBRL Instance Document. X 101.SCH XBRL Taxonomy Extension Schema Document. X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. X Hayden Brown Date: By: /s/ Brian Kinion Brian KinionFINANCIALFINANCIAL INFORMATIONJune 30, 2020 December 31, 2019 ASSETS Current assets Current assets Cash and cash equivalents Cash and cash equivalents $ 76,755 $ 48,392 Marketable securities Marketable securities 69,606 85,481 Funds held in escrow, including funds in transit 129,553 108,721 Trade and client receivables – net of allowance of $2,075 and $2,215 as of June 30, 2020 and December 31, 2019, respectively Trade and client receivables – net of allowance of $2,075 and $2,215 as of June 30, 2020 and December 31, 2019, respectively 33,230 30,156 Prepaid expenses and other current assets 9,009 7,885 Total current assets 318,153 280,635 Property and equipment, net 27,284 21,454 Goodwill 118,219 118,219 Intangible assets, net 2,001 3,335 Operating lease asset Operating lease asset 21,645 21,908 Other assets, noncurrent 1,546 829 Total assets $ 488,848 $ 446,380 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Current liabilities Accounts payable $ 5,180 $ 652 Escrow funds payable 129,553 108,721 Debt, current 7,594 7,584 Accrued expenses and other current liabilities 25,364 18,342 Deferred revenue 14,984 13,799 Total current liabilities 182,675 149,098 Debt, noncurrent 6,929 10,699 Operating lease liability, noncurrent Operating lease liability, noncurrent 22,105 21,186 Other liabilities, noncurrent 6,996 5,973 Total liabilities 218,705 186,956 Commitments and contingencies (Note 6) Commitments and contingencies (Note 6) Stockholders’ equity Stockholders’ equity Common stock, $0.0001 par value; 490,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 119,267,694 and 113,604,398 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively Common stock, $0.0001 par value; 490,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 119,267,694 and 113,604,398 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively 12 11 Additional paid-in capital 463,133 431,370 Accumulated deficit (193,002) (171,957) Total stockholders’ equity Total stockholders’ equity 270,143 259,424 Total liabilities and stockholders’ equity Total liabilities and stockholders’ equity $ 488,848 $ 446,380 Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue $ 87,531 $ 73,783 $ 170,727 $ 142,259 Cost of revenue 25,408 21,588 48,893 42,713 Gross profit 62,123 52,195 121,834 99,546 Operating expenses Research and development 20,547 15,696 39,895 31,496 Sales and marketing 34,440 24,479 65,118 44,997 General and administrative 17,102 14,064 34,926 29,725 Provision for transaction losses 1,018 855 1,930 1,492 Total operating expenses 73,107 55,094 141,869 107,710 Loss from operations (10,984) (2,899) (20,035) (8,164) Interest expense 258 357 488 730 Other (income) expense, net (248) (832) 483 (1,311) Loss before income taxes (10,994) (2,424) (21,006) (7,583) Income tax provision (30) (27) (39) (28) Net loss $ (11,024) $ (2,451) $ (21,045) $ (7,611) Net loss per share, basic and diluted $ (0.09) $ (0.02) $ (0.18) $ (0.07) Weighted-average shares used to compute net loss per share, basic and diluted 116,524 108,683 115,321 107,665 CASH FLOWSthousands)Three Months Ended June 30, 2020 Common Stock Additional Paid-in Capital Accumulated
DeficitTotal
Stockholders’
EquityShares Amount Balances as of March 31, 2020 114,866,938 $ 11 $ 440,703 $ (181,978) $ 258,736 Issuance of common stock upon exercise of stock options 3,697,663 1 12,844 — 12,845 Stock-based compensation expense — — 6,866 — 6,866 Issuance of common stock for settlement of RSUs 438,849 — — — — Tides Foundation common stock warrant expense and other — — 59 — 59 Issuance of common stock in connection with employee stock purchase plan 264,244 — 2,661 — 2,661 Net loss — — — (11,024) (11,024) Balances as of June 30, 2020 119,267,694 $ 12 $ 463,133 $ (193,002) $ 270,143 Three Months Ended June 30, 2019 Common Stock Additional Paid-in Capital Accumulated
DeficitTotal
Stockholders’
EquityShares Amount Balances as of March 31, 2019 106,729,758 $ 11 $ 392,188 $ (160,458) $ 231,741 Issuance of common stock upon exercise of stock options and common stock warrants 3,645,434 — 9,583 — 9,583 Stock-based compensation expense — — 2,528 — 2,528 Issuance of common stock for settlement of RSUs 53,030 — — — — Issuance of common stock in connection with employee stock purchase plan 280,308 — 3,577 — 3,577 Net loss — — — (2,451) (2,451) Balances as of June 30, 2019 110,708,530 $ 11 $ 407,876 $ (162,909) $ 244,978 Six Months Ended June 30, 2020 Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of December 31, 2019 113,604,398 $ 11 $ 431,370 $ (171,957) $ 259,424 Issuance of common stock upon exercise of stock options 4,647,550 1 16,009 — 16,010 Stock-based compensation expense — — 12,193 — 12,193 Issuance of common stock for settlement of RSUs 751,502 — — — — Tides Foundation common stock warrant expense and other — — 900 — 900 Issuance of common stock in connection with employee stock purchase plan 264,244 — 2,661 — 2,661 Net loss — — — (21,045) (21,045) Balances as of June 30, 2020 119,267,694 $ 12 $ 463,133 $ (193,002) $ 270,143 Six Months Ended June 30, 2019 Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of December 31, 2018 106,454,321 $ 11 $ 387,233 $ (143,499) $ 243,745 Cumulative effect adjustment from adoption of new accounting pronouncement — — — (11,799) (11,799) Issuance of common stock upon exercise of stock options and common stock warrants 3,918,539 — 10,350 — 10,350 Stock-based compensation expense — — 6,716 — 6,716 Issuance of common stock for settlement of RSUs 55,362 — — — — Issuance of common stock in connection with employee stock purchase plan 280,308 — 3,577 — 3,577 Net loss — — — (7,611) (7,611) Balances as of June 30, 2019 110,708,530 $ 11 $ 407,876 $ (162,909) $ 244,978 Six Months Ended June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (21,045) $ (7,611) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for transaction losses 1,606 1,038 Depreciation and amortization 4,786 2,827 Amortization of debt issuance costs 26 26 Amortization of discount on purchases of marketable securities (257) (665) Amortization of operating lease asset 1,945 2,177 Tides Foundation common stock warrant expense 376 377 Stock-based compensation expense 12,671 6,926 Changes in operating assets and liabilities: Trade and client receivables (4,773) (29,978) Prepaid expenses and other assets (968) (585) Operating lease liability (925) (998) Accounts payable 4,403 (589) Accrued expenses and other liabilities 7,232 (2,088) Deferred revenue 1,585 1,317 Net cash provided by (used in) operating activities 6,662 (27,826) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (47,748) (86,567) Proceeds from maturities of marketable securities 64,000 24,800 Purchases of property and equipment (5,627) (7,435) Internal-use software and platform development costs (3,559) (2,182) Net cash provided by (used in) investing activities 7,066 (71,384) CASH FLOWS FROM FINANCING ACTIVITIES: Changes in escrow funds payable 20,832 20,116 Proceeds from exercises of stock options and common stock warrants 16,010 10,340 Proceeds from borrowings on debt 18,000 50,000 Repayment of debt (21,786) (26,893) Proceeds from employee stock purchase plan 2,661 3,577 Net cash provided by financing activities 35,717 57,140 NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 49,445 (42,070) Cash, cash equivalents, and restricted cash—beginning of period 159,603 230,067 Cash, cash equivalents, and restricted cash—end of period $ 209,048 $ 187,997 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 499 $ 714 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES: Property and equipment purchased but not yet paid $ 478 $ 3,140 Internal-use software and platform development costs incurred but not yet paid $ 170 $ — Organization and Description of Businessmarketplacetalent solution that enables businesses (“clients”) to find and work with highly-skilled independent professionals (“freelancers,” and, together with clients, “users”). The Company was originally incorporated in the state of Delaware in December 2013 prior to and in connection with the combination (the “Elance-oDesk Combination”) of Elance, Inc. (“Elance”) and oDesk Corporation (the “Elance-oDesk Combination”(“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 two2 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,Santa Clara, California.Thesubsidiaries taken as a whole. Form 10-QQuarterly Report should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in our final prospectusthe Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”), filed with the SEC on October 3, 2018 (the “Prospectus”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”).20172019 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP.wholly ownedwholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.aredo not necessarilypurport to be indicative of the results of operations or financial condition to be anticipated for the full year ending December 31, 2018.Initial Public OfferingIn October 2018, the Company completed its initial public offering (the “IPO”), in which the Company issued and sold an aggregate of 7,840,908 shares of the Company’s common stock, including 1,022,727 shares pursuant to the exercise of the underwriters’ option to purchase additional shares, and selling stockholders sold 6,507,288 shares of the Company’s common stock, including 848,776 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. The Company received aggregate net proceeds of $109.4 million from the IPO after deducting underwriting discounts and commissions. Because the IPO closed in October 2018, the condensed consolidated financial statements as of September 30, 2018 and for the periods then ended, do not reflect the impact of the IPO. See Note 14—Subsequent Events.Income TaxesThe Company recorded immaterial provision for income taxes in all periods presented. The Company continues to maintain a full valuation allowance against its net deferred tax assets.As of September 30, 2018, the Company had unrecognized tax benefits of $10.8 million, none of which would currently affect the Company’s effective tax rate if recognized due to the Company’s net deferred tax assets being fully offset by a valuation allowance. The Company does not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at September 30, 2018 will significantly increase or decrease within the next 12 months. There was no interest expense or penalties related to unrecognized tax benefits recorded through September 30, 2018.A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would not require the use of cash.On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate income tax rates and implementing a territorial tax system. The corporate tax rate was reduced from 35% to 21% for tax years beginning after December 31, 2017 and certain provisions exist on which to allow accelerated expensing of equipment for a portion of 2017 and for future years. These changes primarily impacted the value of the Company’s deferred tax assets with a corresponding offset to valuation allowance, both of which were recognized in the year ended December 31, 2017.The Tax Act also limits the amount of net operating losses that can be used to reduce taxable income to 80% for net operating losses generated for periods beginning after December 31, 2017. Existing net operating losses, arising in years on or before December 31, 2017 are not affected by the Tax Act. The Company expects to finalize the assessment of the accounting for the income tax effects of the Tax Act, as it relates to its current structure, including provisions that are effective for tax years beginning in 2018 during the three months ended December 31, 2018. The Company’s preliminary assessment is subject to revisions to any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, the Financial Accounting Standards Board (“FASB”), and other standard-setting and regulatory bodies. Adjustments may materially impact the Company’s provision for income taxes and the assessment of the accounting for the tax effects of the Tax Act will not extend beyond one year from the enactment date.Significant Accounting PoliciesThere have been no changes to the Company’s significant accounting policies that are described in the Prospectus.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; 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. differ from these estimates.Recentestimates under different assumptions or conditions.Not Yet AdoptedAs an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allowson 2019 Interim Reportingto delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.In May 2014, the FASB issuedadopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC(“Topic 606”). ASC 606 supersedes the revenue recognition requirements in ASC 605, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers (“Subtopic 340-40” and together with ASC 606, the “new revenue standard”), which requires the deferral of incremental costs of obtaining a contract with a customer. In August 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. In 2016, the FASB issued amendments on this guidance with the same effective date and transition guidance. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.The Company is required to adopt the new revenue standard for the year ending December 31, 2019. Interim reporting under ASC 606 will not be required until 2020. To date, the Company has established an implementation team and is in the process of evaluating the impact of the new revenue standard on its accounting policies, processes, and system requirements. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new revenue standard.The Company is continuing to evaluate adoption methods and the potential impact that the implementation of this standard will have on its condensed consolidated financial statements, including the identification of performance obligations, evaluation of material right considerations, principal agent considerations, the timing of revenue recognition, and related disclosures, but has not yet determined whether the effects of adoption will be material to its condensed consolidated financial statements.In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842)(“Topic 842”), related to how an entity should recognize lease assets and lease liabilities. The guidance specifies that an entity that is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. Accounting for leases by lessors is largely unchanged under the new guidance. In 2018, the FASB also approved an amendment that would permit the option to adopt the newstandard prospectively as of the effective date, without adjusting comparative periods presented. The new standard becomes effective for the Company for the year ending on December 31, 2020.The Company is currently evaluating the impact of adopting this new guidance on its condensed consolidated financial statements.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payment, to clarify how certain cash receipts and payments are presented and classified in the statement of cash flows. The new guidance becomes effective for the Company for the year ending December 31, 2019, although early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on its condensed consolidated financial statements.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, that (“Topic 230”) effective as of January 1, 2019. As a result, interim results for reporting periods beginning on or after January 1, 2019 will require thatdiffer from amounts previously reported on the amounts generally described as restricted cashCompany’s quarterly reports on Form 10-Q. The following table summarizes the impacts of adopting these standards on the Company’s previously issued condensed consolidated statements of operations forrestricted cash equivalents would be included with cashsix months ended June 30, 2019 and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on thecondensed consolidated statement of cash flows. The new guidance also requires certain disclosures to supplement the statement of cash flows. The guidance becomes effectiveflows for the Company forsix months ended June 30, 2019 (in thousands):Balances,
Previously IssuedTopic
606Topic
230Balances,
as ReportedCondensed Consolidated Statement of Operations for the Three Months Ended June 30, 2019 Revenue $ 74,256 $ (473) $ — $ — $ 73,783 Operating expense—General and administrative 14,113 — (49) — 14,064 Net loss (2,027) (473) 49 — (2,451) Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2019 Revenue $ 143,180 $ (921) $ — $ — $ 142,259 Operating expense—General and administrative 29,790 — (65) — 29,725 Net loss (6,755) (921) 65 — (7,611) Net loss per share, basic and diluted (0.06) (0.01) — — (0.07) Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2019 Operating activities Net loss $ (6,755) $ (921) $ 65 $ — $ (7,611) Amortization of operating lease asset — — 2,177 — 2,177 Trade and client receivables (30,288) 310 — — (29,978) Prepaid expenses and other assets (701) — 116 — (585) Operating lease liability — — (998) — (998) Accrued expenses and other liabilities (430) (298) (1,360) — (2,088) Deferred revenue 408 909 — — 1,317 Investing activities—decrease (increase) in restricted cash 150 — — (150) — Financing activities—changes in funds held in escrow, including funds in transit (20,116) — — 20,116 — NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH (62,036) — — 19,966 (42,070) Cash, cash equivalents, and restricted cash—beginning of period 129,128 — — 100,939 230,067 Cash, cash equivalents, and restricted cash—end of period 67,092 — — 120,905 187,997 year ending on December 31, 2019, although early adoption is permitted. of Topic 842.Company is currently evaluatingsignificant accounting policies applied in the impact of adopting this new guidance on itsCompany’s audited consolidated financial statements, as disclosed in the Annual Report, are applied consistently in these unaudited interim condensed consolidated financial statements, except as noted below.Impairment.Impairment. ASU No. 2017-04 eliminates Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. UnderThe Company adopted ASU No. 2017-04 an entity should perform its annual or interim goodwill impairment test by comparingon January 1, 2020. The adoption did not have a material impact on the fair value of the reporting unit with its carrying amount and recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The guidance becomes effective for the Company on a prospective basis for its annual or any interim goodwill impairment tests during the year ending on December 31, 2021, although early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on itsCompany’s condensed consolidated financial statements.In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU No. 2017-12 is effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has not yet evaluated the impact of this standard on its financial statements and related disclosures.In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU No. 2018-07 expands the scope of Topic 718, Compensation-Stock Compensation to include share-based payment transactions for acquiring goods and services from non-employees. These awards are measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The guidance is effective for the Company for the fiscal year ending on December 31, 2020, although early adoption is permitted but not earlier than the Company’s adoption of ASC 606, and the guidance requires a modified retrospective application to awards that have not been settled as of the adoption date. The Company has not yet evaluated the impact of this standard on its financial statements and related disclosures.Framework-ChangesFramework—Changes to the Disclosure Requirements for Fair Value Measurement,, which modifies the disclosure requirements on fair value measurements. The Company adopted ASU No. 2018-13 is effective foron January 1, 2020. The adoption did not have a material impact on the Company for the fiscal year ending on December 31, 2021, although early adoption is permitted. The Company has not yet evaluated the impact of this standard on itsCompany’s condensed consolidated financial statements and related disclosures.Intangibles—Intangibles—Goodwill and Other—Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.Contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The Company adopted ASU No. 2018-15 is effective for the Company for the fiscal year ending on December 31, 2021, although early adoption is permitted. The Company has not yet evaluated the impact of this standard on its financial statements and related disclosures.Recently Adopted Accounting PronouncementIn March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The Company adopted this standard as of January 1, 2018. ASU 2016-09 eliminates2020 using the requirement to delay the recognition of excess tax benefits until they reduce current taxes payable. Under this standard, previously unrecognized excess tax benefits shall be recognized on a modified retrospective basis. ASU No. 2016-09 also requires excess tax benefits and deficiencies to be recognized prospectively in the Company’s provision for income taxes rather than additional paid-in capital.Additionally, the Company elected to account for forfeitures as they occur rather than estimate expected forfeiture using a modified retrospective transitionprospective adoption method. Finally, ASU No. 2016-09 requires excess tax benefits to be presented as a component of operating cash flows rather than financing cash flows. The Company elected to adopt this requirement prospectively and accordingly, prior periods have not been adjusted. The adoption of this standard was immaterial to the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018.In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions ofdid not have a share-based payment award require an entity to apply modification accounting in the ASU. The Company adopted this standard as of January 1, 2018. The adoption of this standard had nomaterial impact on the Company’s condensed consolidated financial statements asstatements.June 30, 2020 December 31, 2019 Trade and client receivables, net of allowance $ 33,230 $ 30,156 Contract liabilities Deferred revenue 14,984 13,799 Deferred revenue (component of other liabilities, noncurrent) 3,552 3,153 ninesix months ended SeptemberJune 30, 2018.3—4—Fair Value MeasurementsThe Company measures its redeemable convertible preferred stock warrant liability at fair value on a recurring basis. liability.III liabilities. The Company’s redeemable convertible preferred stock warrant liability is classified withinI and Level III because the warrants are valued using a Black-Scholes valuation model, for which some inputs are unobservable in the market. The valuation methodologyII assets as of June 30, 2020 and underlying assumptions are discussed further in Note 8 – Preferred and Common Stock Warrants.liabilitiesassets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):The increaseJune 30, 2020 Level I Level II Level III Total Cash equivalents—money market funds $ 59,832 $ — $ — $ 59,832 Marketable securities Commercial paper — 44,876 — 44,876 U.S. government securities 24,730 — — 24,730 Total financial assets $ 84,562 $ 44,876 $ — $ 129,438 December 31, 2019 Level I Level II Level III Total Cash equivalents—money market funds $ 35,286 $ — $ — $ 35,286 Marketable securities Commercial paper — 50,794 — 50,794 U.S. government securities 34,687 — — 34,687 Total financial assets $ 69,973 $ 50,794 $ — $ 120,767 Level III from December 31, 2017market value to September 30, 2018 was due solely to the remeasurementbe temporary in nature and did not consider any of the Company’s redeemable convertible preferred stock warrant liability, which was $3.6 million formarketable securities to be other-than-temporarily impaired. As such, the nineCompany did not record any impairment charges with respect to its marketable securities during each of the three and six months ended SeptemberJune 30, 2018,2020 and 2019.includedconsistent with when the debt was originated. The Company considered the balances outstanding under the Loan Agreement to be Level II liabilities as of June 30, 2020 and December 31, 2019. See “Note 7—Debt.”other expense, netescrow that are restricted as reported in the Company’scondensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of operations.Note 4—Balance Sheet ComponentsJune 30, 2020 December 31, 2019 Cash and cash equivalents $ 76,755 $ 48,392 Restricted cash 2,740 2,490 Funds held in escrow, including funds in transit 129,553 108,721 Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statement of cash flows $ 209,048 $ 159,603 June 30, 2020 December 31, 2019 Computer equipment and software $ 4,664 $ 3,613 Internal-use software and platform development Internal-use software and platform development 16,027 12,726 Leasehold improvements 14,597 10,576 Office furniture and fixtures 3,354 2,454 Total property and equipment 38,642 29,369 Less: accumulated depreciation Less: accumulated depreciation (11,358) (7,915) Property and equipment, net $ 27,284 $ 21,454 Depreciationand $0.4 million forrespectively. For the threesix months ended SeptemberJune 30, 20182020 and 2017, respectively.Depreciation2019, depreciation expense related to property and equipment was $1.5 million and $1.1$1.4 million, forrespectively.ninethree months ended SeptemberJune 30, 20182020 and 2017, respectively.The2019, the Company capitalized $0.8$1.7 million and $0.2$1.4 million of internal-use software and platform development costs, duringrespectively. For the threesix months ended SeptemberJune 30, 20182020 and 2017, respectively, and $2.72019, the Company capitalized $3.3 million and $0.4$2.5 million during the nine months ended September 30, 2018 and 2017, respectively. There was no amortization expense during the three and nine months ended September 30, 2017 related to the internal-use software and platform development costs. During the three months ended September 30, 2018, the Company placed into service approximately $0.6 million of the underlying assets. Amortization expense related to the internal-use software and platform development costs, forrespectively.ninesix months ended SeptemberJune 30, 20182020, amortization expense related to the capitalized internal-use software and platform development costs was $1.1 million and $2.0 million, respectively. For the three and six months ended June 30, 2019, amortization expense related to the capitalized internal-use software and platform development costs was immaterial.Intangible assets, net consistedFor each of the following (in thousands):Totalthree months ended June 30, 2020 and 2019, amortization expense of intangible assets was $0.7 million formillion. For each of the threesix months ended SeptemberJune 30, 20182020 and 2017 and $2.0 million and $2.1 million for the nine months ended September 30, 2018 and 2017, respectively.2019, amortization expense of intangible assets was $1.3 million. Amortization expense wasis included in general and administrative expenses. As of September 30, 2018, the remaining useful life for user relationships was 2.5 years. As of December 31, 2017, the remaining useful life for user relationships was 3.3 years.The estimated future amortization expense for the acquired intangible assets is as follows (in thousands): June 30, 2020 December 31, 2019 Accrued compensation and related benefits $ 7,245 $ 5,344 Accrued freelancer costs 1,552 622 Accrued indirect taxes 2,044 2,401 Accrued vendor expenses 9,720 5,485 Accrued payment processing fees 837 832 Operating lease liability, current Operating lease liability, current 3,053 3,214 Other 913 444 Total accrued expenses and other current liabilities $ 25,364 $ 18,342 Note 5—CommitmentsContingenciesTheleases office space under four non-cancelablecommenced an operating lease agreements,of 1 additional floor in its Chicago, Illinois office. As a result, the Company recognized a $1.7 million operating lease asset and $1.7 million operating lease liability on January 1, 2020, which expire from 2019 through 2024.are included in operating lease asset and operating lease liability, noncurrent, respectively, on the condensed consolidated balance sheet as of June 30, 2020. The termslease has an initial term of five years with the option to renew for an additional five years at the end of the office leases contain rent escalation clauses, rent holidays, or tenant improvement allowances. The Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and records the difference between cash payments and the recognition of rent expense as a deferred rent liability. Where leases contain escalation clauses, rent holidays, or tenant improvement allowances, the Company applies them in the determination of straight-line rent expense over theinitial lease term. In September 2015, the Company entered into an agreement to sublease a portion of its office space in San Francisco and recognized sublease income of $0.3 million and $0.8 million during the three and nine months ended September 30, 2017. The sublease agreement was terminated in November 2017.In September 2018, the Company entered into an agreement to extend its non-cancellable operating lease for its San Francisco office through 2024. From September 1, 2019 through August 31, 2024, totalTotal minimum lease payments under the lease agreementinitial term are $15.7 million, with$2.1 million. For the initial measurement of the present value of the lease payments ranging from $1.0 million to $2.2 million per year from 2019 to 2024.Also in September 2018,associated with this lease, the Company entered into an agreementused its incremental borrowing rate, which is a collateralized rate and approximates the rate at which the Company could borrow, on a secured basis for a non-cancellablesimilar term, an amount equal to its lease payments in a similar economic environment.new office space in Chicago through 2024. From June 1, 2019 through October 31, 2024, total minimum lease payments under the lease agreement are $5.1 million, with lease payments ranging from $0.5 million to $1.0 million per year from 2019 to 2024.Future aggregate minimum lease payments under the non-cancelableany of its operating leases werein its determination of lease liabilities as follows (in thousands):Rent expense was $1.1 million$0.9 million for the three months ended September 30, 2018 and 2017, respectively. Rent expense was $3.0 million and $2.8 million for the nine months ended September 30, 2018 and 2017, respectively.ContingenciesAs of September 30, 2018 and December 31, 2017, intwo3 irrevocable letters of credit outstanding in the aggregate amountamounts of $0.6$1.0 million and $0.8 million, respectively. The letters of credit are collateralized by restricted cash in the same amount and expire in 2019. No amounts havehad been drawn against these letters of credit as of SeptemberJune 30, 20182020 and December 31, 2017.SeptemberJune 30, 20182020 and December 31, 2017,2019, the Company was not a party to any material legal proceedings or claims, nor is the Company aware of any pending or threatened litigation or claims that could reasonably be expected to have a material adverse effect on its business, operating results, cash flows, or financial condition. Accordingly, the Company has determined that the existence of a material loss as of this datethese dates is neither probable nor reasonably possible.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, 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.6—7—Debt June 30, 2020 December 31, 2019 First Term Loan—18 months of interest-only payments ended in March 2019 followed by 36 equal monthly installments of principal plus interest, maturing March 2022; interest at prime plus 0.25% per annum First Term Loan—18 months of interest-only payments ended in March 2019 followed by 36 equal monthly installments of principal plus interest, maturing March 2022; interest at prime plus 0.25% per annum $ 8,750 $ 11,250 Second Term Loan—17 months of interest-only payments ended in March 2019 followed by 42 equal monthly installments of principal plus interest, maturing September 2022; interest at prime plus 0.25% per annum Second Term Loan—17 months of interest-only payments ended in March 2019 followed by 42 equal monthly installments of principal plus interest, maturing September 2022; interest at prime plus 0.25% per annum 5,785 7,071 Total debt 14,535 18,321 Less: unamortized debt discount issuance costs Less: unamortized debt discount issuance costs (12) (38) Balance 14,523 18,283 Debt, current (7,594) (7,584) Debt, noncurrent $ 6,929 $ 10,699 Weighted-average interest rate 4.99 % 6.93 % Company entered into a Loan and Security Agreement (the “Loan Agreement”), which was subsequently amended in November 2017 and September 2018. The Loan Agreement, consisted initiallythe aggregate amount of the facility is up to $49.0 million, consisting of a term loan in the original principal amount of $15.0 million (the “First Term Loan”) of $15.0 million and, a $15.0 million revolving line of credit based on eligible trade and client accounts receivable, for an aggregate facilityterm loan in the original principal amount of $30.0 million. However, upon the Company achieving adjusted net revenue of at least $49.0$9.0 million in a trailing three-month period on or before June 30, 2018, the revolving line of credit increased to $25.0 million with a corresponding increase to the aggregate facility amount to $40.0 million. The Loan Agreement was amended in November 2017 to include a second term loan of $9.0 million(the(the “Second Term Loan,”Loan” and, together with the First Term Loan, the “Term Loans”), and a revolving line of credit, which in turn, increased the aggregate maximum amount of the facilitypermits borrowings of up to $49.0 million. The Company incurred debt issuance costs of $0.2$25.0 million which was primarily classified as a deductionsubject to the long-term portion of the Term Loan. In November 2017,customary conditions. Among other things, the Company drewmay only borrow funds under the revolving loanline of credit if, after giving effect thereto, total borrowings under the line of $10.0 millioncredit do not exceed a specified percentage of eligible trade and Term Loan borrowings of $9.0 million.client accounts receivable. The Company has granted its lender first-priority liens against substantially all of its assets, as collateral, excluding the Company’s intellectual property (but including proceeds therefrom) and the funds and assets held by the Company’s subsidiary, Upwork Escrow Inc. The Company has also agreed to a negative pledge on its intellectual property. The Loan Agreement is also subject torequires that the Company maintainingmaintain an adjusted quick ratio of 1.30 and achieving minimum EBITDA levels over trailing periods ranging from three to twelve months.1.75. The Loan Agreement also includes a restrictive covenant on dividend payments other than dividends paid solely in common stock.In September 2018, the The Company entered into a second amendment (the “Second Amendment”) towas in compliance with its covenants under the Loan Agreement which expanded the typesas of eligible tradeJune 30, 2020 and client accounts receivable considered for the determinationDecember 31, 2019.borrowing base of the revolving line of credit. The Second Amendment also provided for a reduction in the interest rate for the Second Term Loan, from prime plus 5.25% to prime plus 0.25%, from and after the occurrence of an initial public offeringuncertainty caused by the Company with net proceeds of more than $50.0 million. Because the IPO occurred in October 2018, the change in interest rate had no effect on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018. To the extent the Company has 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, the Company plans, from time to time, to utilize the revolving line of credit to satisfy escrow funding requirements. In September 2018,COVID-19 pandemic, the Company drew down $15.0 million and $3.0 million under the revolving line of credit for such purpose. In October 2018,in March and April 2020, respectively, both of which the Company subsequently repaid in full in May 2020.a total of $25.0$1.3 million of indebtedness owed under the Loan Agreement. See Note 14—Subsequent Events.The amortization expenseand $2.5 million related to the debt discount was immaterial forFirst Term Loan, respectively, and $0.6 million and $1.3 million related to the Second Term Loan, respectively. During both the three and ninesix months ended SeptemberJune 30, 2018 and 2017. The2019, the Company was in compliance with all financial-related covenants under the Loan Agreement as of September 30, 2018 and December 31, 2017.Note 7—Redeemable Convertible Preferred StockRedeemable convertible preferred stock as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands, except share data):Note 8—Preferred and Common Stock WarrantsRedeemable Convertible Preferred Stock WarrantsAs a result of the Elance-oDesk Combination, a redeemable convertible preferred stock warrant that was originally issued by Elance priorrepaid $1.3 million related to the Elance-oDesk Combination became exercisable to purchase up to 26,000First Term Loan and 57,181 shares of the Company’s Series A-1 and Series A-2 redeemable convertible preferred stock, respectively, at an exercise price of $3.13 per share. In June 2017, the warrant was exercised in full.Further, as a result of the Elance-oDesk Combination, another redeemable convertible preferred stock warrant that was originally issued by Elance prior$0.6 million related to the Elance-oDesk Combination became exercisable to purchase up to 124,506 and 273,825 shares of the Company’s Series A-1 and Series A-2 redeemable convertible preferred stock, respectively, at an exercise price of $3.13 per share. The warrant was outstanding and exercisable as of September 30, 2018 and December 31, 2017.The Company estimated the fair value of each redeemable convertible preferred stock warrant using the Black-Scholes valuation model. The redeemable convertible preferred stock liability, included in other noncurrent liabilities, was $4.7 million as of September 30, 2018, and $1.1 million as of December 31, 2017. The following assumptions were used to calculate the fair value of the then-outstanding warrants as of September 30, 2018 and December 31, 2017:Common Stock WarrantAs a result of the Elance-oDesk Combination, a common stock warrant that was originally issued by oDesk prior to the Elance-oDesk Combination became exercisable to purchase up to 45,286 shares of the Company’s common stock at an exercise price of $0.06 per share. The warrant was outstanding and exercisable as of December 31, 2017 with the fair value of the warrant reflected in additional paid-in capital in the condensed consolidated balance sheets. In May 2018, the Company issued 45,286 shares of common stock upon the exercise of this common stock warrant.In April 2018, the Company established The Upwork Foundation initiative. The program will include a donor-advised fund created through the Tides Foundation. In May 2018, the Company issued a warrant to purchase 500,000 shares of its common stock at an exercise price of $0.01 per share to the Tides Foundation.This warrant is exercisable as to 1/10th of the shares on each anniversary of the IPO, with proceeds from the sale of such shares to be donated in accordance with the Company’s directive. The IPO occurred in October 2018; as such, the issuance of this warrant has had no effect on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018.9—Common StockHolders of common stock are entitled to one vote per share and are entitled to dividends on a pro rata basis with the holders of redeemable convertible preferred stock whenever funds are legally available and when, as, and if declared by the Company’s board of directors, subject to the rights of the holders of the Company’s redeemable convertible preferred stock.As of September 30, 2018 and December 31, 2017, the Company was authorized to issue 150,000,000 shares of common stock. As of September 30, 2018 and December 31, 2017, the Company had reserved shares of common stock, on an as-converted basis, for future issuance as follows:Note 10—Stock-Based CompensationThe following table summarizes activity under the Company’s stock option plans:In July 2018, the Company’s board of directors granted Stephane Kasriel, Chief Executive Officer, an option to purchase 1,860,000 shares of common stock at an exercise price of $6.61 per share, with vesting contingent on continuous service and the achievement of various business milestones, including the completion of the IPO. Because the IPO had not been completed as of September 30, 2018, vesting had not commenced and, as a result, there has been no effect on the Company’s condensed consolidated financial statements as of and for the period ended September 30, 2018. In addition to the IPO milestone, vesting of this award is contingent upon the achievement of certain financial milestones, such as positive EBITDA and GSV growth rates from 2019 through 2023.Stock-Based CompensationThe following table summarizes the components of stock-based compensation expense recognized in the condensed consolidated statements of operations (in thousands):Stock-based compensation expense related to non-employee stock option grants was immaterial for the three and nine months ended September 30, 2018 and 2017. The amount of stock-based compensation capitalized to internal-use software and platform development costs for the three and nine months ended September 30, 2018 and 2017 was immaterial.Secondary Market TransactionsCertain common stockholders (who were employees or former employees of the Company) sold the Company’s common stock in secondary market transactions to third parties. During the second quarter of 2017, an aggregate of 195,000 shares of common stock were sold for $0.9 million at an average price of $4.50 per share. The incremental value between the sale price and the fair value of the common stock at each date of sale resulted in aggregate stock-based compensation expense of $0.2 million for the nine months ended September 30, 2017. There were no secondary transactions during the three months ended September 30, 2018 and 2017. There was an immaterial secondary market transaction during the nine months ended September 30, 2018.Note 11—8—Net Loss per Share Attributable to Common Stockholdersattributable to common stockholdersfor the periods presented (in thousands, except share and per share data): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Net loss $ (11,024) $ (2,451) $ (21,045) $ (7,611) Denominator: Weighted-average shares used to compute net loss per share, basic and diluted 116,523,570 108,683,099 115,321,264 107,665,492 Net loss per share, basic and diluted $ (0.09) $ (0.02) $ (0.18) $ (0.07) attributable to common stockholders because including them would have been anti-dilutive: As of June 30, 2020 2019 Options to purchase common stock 9,878,333 19,771,277 Common stock issuable upon exercise of common stock warrants 450,000 500,000 Common stock issuable upon vesting of restricted stock units 6,191,541 1,213,337 Common stock issuable in connection with employee stock purchase plan 964,974 802,389 Total 17,484,848 22,287,003 12—9—Segment and Geographical Informationhas determined it operates as one1 operating and reportable segment for purposes of allocating resources and evaluating financial performance.Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Marketplace $ 78,464 $ 65,728 $ 153,246 $ 126,183 Managed services 9,067 8,055 17,481 16,076 Total revenue Total revenue $ 87,531 $ 73,783 $ 170,727 $ 142,259 Marketplace revenue included freelancer service fees of $36.5 million and $31.0 million for the three months ended September 30, 2018 and 2017, respectively, and client payment processing and administrative fees of $9.0 million and $7.3 million for the three months ended September 30, 2018 and 2017, respectively. Marketplace revenue included freelancer service fees of $108.5 million and $88.6 million for the nine months ended September 30, 2018 and 2017, respectively, and client payment processing and administrative fees of $25.8 million and $20.6 million for the nine months ended September 30, 2018 and 2017, respectively.Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Freelancers Freelancers United States $ 14,300 $ 12,360 $ 28,297 $ 24,129 India 7,879 6,834 15,352 13,398 Philippines 5,304 4,880 10,441 9,411 Rest of world 25,833 22,360 50,188 43,838 Total freelancers 53,316 46,434 104,278 90,776 Clients Clients United States 24,354 21,431 47,313 39,105 Rest of world 9,861 5,918 19,136 12,378 Total clients 34,215 27,349 66,449 51,483 Total revenue Total revenue $ 87,531 $ 73,783 $ 170,727 $ 142,259 SeptemberJune 30, 20182020 and December 31, 2017.Note 13—401(k) PlanThe Company offers the Upwork Retirement Savings Plan (“Retirement Plan”), a defined contribution plan that allows employees to contribute a portion of their salary, subject to the annual limits. Under the Retirement Plan, eligible employees may defer a portion of their pretax salaries, but not more than the statutory limits. The Retirement Plan provides for a discretionary employer matching cash contribution. The Company makes matching cash contributions equal to 50% of each dollar a participant contributed, subject to a maximum contribution of $5,000 per year. The Company’s total expense for the matching contributions was $0.3 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively. The Company’s total expense for the matching contributions was $1.4 million and $1.0 million for the nine months ended September 30, 2018 and 2017, respectively.In August 2018, the Company’s board of directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”) and ceased granting awards under the 2014 Equity Incentive Plan. The 2018 Plan became effective in connection with the IPO. The Company reserved 10,500,000 shares of its common stock for issuance under the 2018 Plan. Any remaining shares available for issuance under the 2014 Equity Incentive Plan on the effective date of the 2018 Plan were added to the shares of common stock reserved for issuance under the 2018 Plan. On October 3, 2018, the Company granted approximately 327,000 restricted stock units (“RSUs”) to certain employees, service providers and members of the Company’s board of directors. Of the total RSUs granted, approximately 55,000 were approved and granted to certain members of the Company’s board of directors and will vest within one year from the date of the grant. The RSUs granted to the Company’s employees will vest over four years from the date of the grant.In October 2018, prior to the IPO, the Company repaid the $15.0 million of indebtedness owed under its Loan Agreement, which was initially drawn to satisfy its escrow funding requirements as of September 30, 2018. See Note 6—Debt.The Company completed its IPO in October 2018, in which the Company issued and sold 7,840,908 shares of common stock at a public offering price of $15.00 per share. The following table shows, on a pro forma basis, the effect of the IPO as if the IPO had been completed as of September 30, 2018 (in thousands):A description of the pro forma adjustments, as well as their location in the above table, are as follows:Cash: Received net proceeds of $109.4 million after deducting underwriting discounts and commissions of $8.2 million.Other assets: Reclassification of $5.6 million deferred offering costs against additional paid-in capital, which is a component of total stockholders’ equity.Debt, current: Repayment of $10.0 million of indebtedness under the loan agreement from net proceeds.Other liabilities, noncurrent: Reclassification of $4.7 million related to the redeemable convertible preferred stock liability to additional paid-in capital, a component of total stockholders’ equity.Redeemable convertible preferred stock: Automatic conversion into 61,279,079 shares of common stock on a one-for-one basis.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsTheOperations.should be read in conjunctiontogether with ourthe section titled “Risk Factors” and the condensed consolidated financial statements and related notes appearingincluded elsewhere in this Form 10-Q and our Prospectus. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the followingQuarterly Report. This discussion and analysis contains forward-looking statements based upon current expectations that involve risks and uncertainties, as well as assumptions that if theymay never materialize or prove incorrect, could cause ourthat may be proven incorrect. Our actual results tomay differ materially from those expressed or implied by suchanticipated in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below andstatements as a result of various factors, including those discussed in the sectionsections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” under Part II, Item 1A in this Form 10-QFactors,” and in our Prospectus.global marketplacetalent solution that enables businesses to find and work with highly-skilled freelancersindependent professionals, as measured by gross services volume (“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 usersboth clients and freelancers for other services. Freelancers are an increasingly sought-after, critical, and expanding segment of the global workforce. We define freelancers as users of our platform that advertise and provide services to clients through our platform, and we define clients as users of our platform that work with freelancers through our platform. The freelancers on our platform include independent professionals and agencies of varying sizes. The clients on our platform range in size from small businesses to Fortune 500100 companies.platform reduces inefficiencies associatedadjusted EBITDA loss of $2.2 million during the six months ended June 30, 2020, was driven primarily by a $1.6 million expense that we incurred related to our changes in organizational structure to better align with searching for, contractingour business strategies and collaboratingstreamline the delivery of our end-to-end user experiences, as well as marketing expense of $4.4 million related to brand awareness and performance marketing. Adjusted EBITDA is a financial measure that is not prepared in accordance with, and payingis not an alternative to, financial measures prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). See the section titled “Key Financial and Operational Metrics—Non-GAAP Financial Measures” below for a definition of adjusted EBITDA and information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure prepared under U.S. GAAP.freelancers for short-term and longer-term projects. As early innovators in this space, we have built an expansive and unique repository of dataindependent professionals on our platform to complete short- and long-term projects.combinedwe reported first quarter earnings in early May 2020. This increase in client acquisition drove an increase in freelancer billings at the higher rates of our tiered service fee structure, which, in turn, drove increases in marketplace revenue and marketplace take rate. We derive a substantial portion of our GSV and revenue from small- and medium-sized businesses, and the pandemic and related effects have affected and continue to significantly affect demand for our products and services from these clients, although we expect that economic conditions have and may continue to affect spend from clients of all sizes.our machine learning capabilities, enables usremote freelancers due to better connect clients with the bestgovernmental restrictions related to the COVID-19 pandemic. In addition, we may also implement a reduction or elimination of certain fees normally charged to users or may implement other promotions in an effort to support those affected by the COVID-19 pandemic or those seeking to engage freelancers for their projects. As a result, clients are able to obtain specialized talent in lessthe first time, and any such changes may result in a reduction in revenue. We are continuously evaluating the nature and extent to which the ongoing COVID-19 pandemic will continue to have on our business, operating results, and financial condition.a lower cost comparedthis time, we are unable to traditional channels.We serve as a powerful marketing channel for freelancersfully assess the aggregate impact it will have on our business due to find rewarding, engaging, and flexible work. Freelancers usingvarious uncertainties, which include, but are not limited to, the duration of the pandemic, actions that may be taken by governmental authorities specific to the COVID-19 pandemic, the impact to the businesses of our platform benefit from access to quality clients, and secureother factors identified in Part II, Item 1A “Risk Factors” in this Quarterly Report, including the risk factor titled “Our business is experiencing, and timely payments while enjoyingis expected to continue to experience, an adverse impact from the freedom to run their own businesses, create their own schedules, and work from their preferred locations. Moreover, freelancers have real-time visibility into opportunities that are highest in demand, so that they can invest their time and focus on developing sought-after skills.Our platform provides clients with fast, secure, and efficient access to high-quality talent with over 5,000 skills across over 70 categories, such as content marketing, customer service, data science and analytics, graphic design, mobile development, sales, and web development. We offer a direct-to-talent approach, reducing reliance on intermediaries such as staffing firms, recruiters, and traditional agencies while providing features that help instill trust in remote work. Our platform also enables clients to streamline workflows, such as talent sourcing, outreach, and engagement. In addition, our platform provides access to essential functionality for remote engagements, including communication and collaboration, time tracking, invoicing, and payments.decisions (in thousands):decisions. Our key metrics were as follows as of or for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) GSV $ 581,950 $ 518,732 $ 1,141,444 $ 1,005,379 Marketplace revenue $ 78,464 $ 65,728 $ 153,246 $ 126,183 Marketplace take rate 13.7 % 12.9 % 13.6 % 12.8 % Net loss $ (11,024) $ (2,451) $ (21,045) $ (7,611) $ (1,184) $ 1,152 $ (2,202) $ 1,966 We As of June 30, 2020 2019 (in thousands, except percentages) Core clients 133.3 115.7 Client spend retention 100 % 105 % results. The number of coreresults, and management uses these metrics to track our performance. GSV represents the total amount that clients in any given period drivesspend on our marketplace offerings and our managed services offering, as well as additional fees we charge to both clients and freelancers for other services. We believe that GSV whichis an important metric, as it represents the overall amount of business transacted through our platform, and client spend retention. Client spend retention impacts the growth ratewhich in turn is a key driver of GSV.our financial results. We believe our marketplace revenue, which represents a majority of our revenue, will grow as GSV grows, although they could grow at different rates. We evaluate the correlation between marketplace revenue and GSV by measuring marketplace take rate, which is calculated as marketplace revenue divided by marketplace GSV. We use the number of core clients to track the number of clients that we consider are actively using our platform, and this metric in any given period drives both GSV and client spend retention. Similarly, client spend retention impacts the growth rate of GSV. In light of the COVID-19 pandemic, rapidly changing market and economic conditions continue to disrupt the businesses of many of our clients, which has led, and may continue to lead, to downward pressure on the number of core clients, client spend retention, GSV, and marketplace revenue. For information on how we define core clients and how we calculate client spend retention and marketplace take rate, see “—Core Clients,” “—Client Spend Retention,” and “—Marketplace Take Rate,” respectively, below. For a discussion of limitations in the measurement of 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 are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.”spend-activityspend activity on our platform during the twelve12 months preceding the date of measurement. This includes the total amount spent by the client on boththe Elance and oDesk platforms for the periods prior to the consolidation of the two platforms. We believe $5,000 is an importantthat aggregate spend milestone as itof at least $5,000 indicates that the client is actively using our platform. Historically, these core clients have been more likely to continue using our platform.platform, although we saw a contraction in spend from many core clients during the second quarter that we believe is a result of the COVID-19 pandemic’s disruption of the businesses of these clients. Over the last two years, we have seen businesses of all sizes use our platform in a recurring way for larger, more complex projects; as a result, we have added between approximately 4,000 and 5,000 additional core clients per quarter over the last two years. We believe we will continue to add approximately 4,000 core clients per quarter in the coming quarters; however, the impact on the number of core clients resulting from the COVID-19 pandemic may not be evident until early 2021. The number of core clients could vary quarter by quarter depending, in part, on the extent to which the COVID-19 pandemic impacts our business, the businesses of our clients, and other factors identified in Part II, Item 1A “Risk Factors” in this Quarterly Report, including the risk factor titled “Our business is experiencing, and is expected to continue to experience, an adverse impact from the ongoing COVID-19 pandemic.” 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. We had 101,000 and 82,600 core clients as of September 30, 2018 and September 30, 2017, respectively.spend—spend, which we define as the total amount that clients spend on both our marketplace offerings and our managed services offering—offering, is the primary component of our GSV. GSV also includes additional fees charged by usto both clients and freelancers for other services, such as freelancer memberships, purchases of Connects, freelancer withdrawals, and foreign currency exchange.Growth in the number of core clients and increased client spend retention are the primary drivers of GSV growth. In addition, ourOur marketplace revenue is primarily comprised of the service fees paid by freelancers as a percentage of the total growth rates to fluctuate between periods due to a number of factors, including the volume and characteristics of projects that are posted by clients on our platform as well as the characteristics of those projects, such as size, duration, pricing, and other factors.The growth in our marketplace is driven by long-termwhich leads toare the primary drivers of growth in our marketplace and give us increased revenue visibility for us.visibility. While continued use of our platform by freelancers is a factor that impacts our ability to attract and retain clients, our platform currently has a significant surplus of freelancers in relation to the number of clients actively engaging freelancers. This surplus has increased as a result of the COVID-19 pandemic, as we have experienced an increase in the number of independent professionals applying to join our platform. As a result of this surplus, of freelancers relative to core clients, we primarily focus our efforts on retaining client spend and acquiring new clients, as opposed to acquiring new freelancers and retaining existing freelancers. Moreover, we generate revenue when clients engage and pay freelancers, and therefore, our key metrics and operating results are directly impacted by client spend. On the other hand, the number of freelancers retained between periods is merely one of many factors that may impact client spend in a particular period and is not directly related toa primary driver of our key metrics and operating results. For these reasons, we do not calculate or trackconsider freelancer retention metrics in order to manageevaluating our business. Our108% and 95%100%, down from 105% as of SeptemberJune 30, 2019. We believe that this decline in client spend retention is due in part to the impact of the rapidly changing market and economic conditions caused by the COVID-19 pandemic, which have disrupted the businesses of many of our clients, resulting in a contraction in spend from many of our clients in the first half of 2020. Additionally, client spend retention has declined—from its historically highest levels in 2018 and September 30,the first quarter of 2019—following an acceleration in client spend retention that occurred subsequent to the launch of our U.S.-to-U.S. domestic marketplace offering in the second half of 2017, respectively.StandardBasic, Plus, Business, and Upwork Enterprise offerings, and our other premium offerings. We generate marketplace revenue from both freelancers and clients. Our marketplace revenue is primarily comprised of the service fees paid by freelancers as a percentage of the total amount freelancers charge clients for services accessed through our platform. In addition, we generate marketplace revenue from our Upwork Standard offering by charging clientsplatform, and to a lesser extent, payment processing and administration fee.fees charged to clients. We also generate marketplace revenue from fees for premium offerings, freelancer membership fees, Connects purchases, and other services, such as foreign currency exchange fees and premium offerings. Upwork Payroll service fees.Adjusted EBITDAand income tax (benefit) provision.income (loss) to adjusted EBITDA,loss, the most directly comparable financial measure prepared in accordance with U.S. GAAP, to adjusted EBITDA for each of the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net Loss Net Loss $ (11,024) $ (2,451) $ (21,045) $ (7,611) Add back (deduct): Add back (deduct): Stock-based compensation expense 7,134 2,631 12,671 6,926 Depreciation and amortization 2,478 1,295 4,786 2,827 Interest expense 258 357 488 730 Other (income) expense, net Other (income) expense, net (248) (832) 483 (1,311) Income tax provision Income tax provision 30 27 39 28 Tides Foundation common stock warrant expense Tides Foundation common stock warrant expense 188 125 376 377 Adjusted EBITDA $ (1,184) $ 1,152 $ (2,202) $ 1,966 and 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;StandardBasic, Plus, Business, and Upwork Enterprise offerings, and other premium offerings. Under our Upwork Standard offering,these marketplace offerings, we generate revenue from both freelancers and clients.Marketplace revenue, which represents the majority of our total revenue, is primarily comprised of the service fees paid by freelancers as a percentage of the total amount that freelancers charge clients for services accessed through our platform.Our Upwork Standard offering provides clients with access 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, we have a tiered freelancer service fee schedule based on cumulative lifetime billings by the freelancer to each client.Freelancers on our Upwork Standard offering typically pay us 20% of the first $500, 10% for the next $9,500, and then 5% for any amount over $10,000 they bill to each client through our platform. We also generate revenue from freelancers through withdrawal and other fees, which are currently immaterial.In addition, we generate marketplace revenue from our Upwork Standard offering by charging clients alesser extent, payment processing and administration fee. Clients using our Upwork Standard offering pay either 2.75% of their client spend or a flat fee of $25 per month for unlimited payment transactions with qualifying payment methods. We also generate revenue from foreign currency exchange fees from clients, which are currently immaterial.Our Upwork Enterprise offering and other premium offerings, which are designed for larger clients, include access to additional product features, premium access to top talent, professional services, custom reporting, and invoicing on a monthly basis. For our Upwork Enterprise offering, we charge clients a monthly or annual subscription fee and a service fee calculated as a percentage of the client’s spend on freelancer services, in addition to the service fees paid by freelancers. Additionally, Upwork Enterprise clients can also subscribeclients.
a compliance offering that includes worker classificationresult, in significant reductions in demand for our products and services for an additional fee. Upwork Enterprise clients may also choose to use our platform to engage freelancers that were not sourced through our platform for a lower fee percentage.Onefrom many of our premium offerings, Upwork Payroll, is availableclients, especially with respect to clients when freelancersour small- and medium-sized businesses, from which we derive a substantial portion of our GSV and revenue. We are classified as employees for engagements oncontinuously evaluating the nature and extent of the impact to our online marketplace. The client enters into an Upwork Payroll agreement with us,business, operating results, and we separately contract with unrelated third-party staffing providers who provide employment services to such clients. Revenue from Upwork Payroll is currently immaterial.deliveringproviding services in connection with our managed services include independent professionals and agencies of varying sizes. Under U.S. GAAP, we are deemed to be the principal in these managed services arrangements and therefore recognize the entire GSV of managed services projects as managed services revenue, as compared to recognizing only the percentage of the client spend that we receive, as we do with our marketplace offerings.the clientclients under our managed services offering, personnel-related costs for our services and support personnel, third-party hosting fees for our use of Amazon Web Services (“AWS”), and the amortization expense associated with 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.additional transaction volumegrowth on our platform. We expect third-party hosting fees to temporarily increase in 2020 as we migrate from the AWS data centers in California to the AWS data center in Oregon, as we will need to use both AWS facilities during the migration period. We plan to complete this migration in the fourth quarter of 2020 and believe this migration will ultimately reduce third-party hosting costs once completed.to deliver services underin connection with our managed services offering are tied to the volume of managed services used by our client.clients. The level and timing of all of these items could fluctuate and affect our cost of revenue in the future.amount of servicesamounts paid to freelancers deliver for clients underin connection with our managed 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 marketplace revenue and managed services revenue. For example, our managed services revenue.butfor the foreseeable future, although this expense, may varyexpressed as a percentage of total revenue, for the foreseeable future.In 2017 and 2018, we increased our marketing expenditures by investing in outdoor and radio advertising to drive greater brand awareness. Further, to grow our Upwork Enterprise offering, we hired additional sales personnel in 2017, with many of them starting late in the year, and in 2018. We continuedcontinue to invest in our sales and marketing capabilities and in light of the threeCOVID-19 pandemic are focused on increasing our investment in brand awareness, marketing campaigns, and nine months ended September 30, 2018in our enterprise sales team in an effort to accelerate our acquisition of Upwork Enterprise and Business clients. We expect this expense to increase in absolute dollars in future periods. Sales and marketingperiods, although this expense expressed as a percentage of total revenue may fluctuatevary from period-to-period based on total revenue levels and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.functions. General and administrative expense also includesfunctions; outside consulting, legal, and accounting services,services; and insurance. transitioning to and operating as a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums, and compliance costs. Additionally, in light of the COVID-19 pandemic and the governmental restrictions intended to prevent its spread, we are evaluating our needs for our current office spaces, and any reductions to our office space may impact the recoverability of our operating lease asset, which could result in a one-time impairment charge being recognized in general and administrative expense.butalthough this expense, may varyexpressed as a percentage of total revenue.varyincrease in absolute dollars in future periods.expenses resultinginterest income that we earn from the revaluation of our warrant liability. Our warrant liability was converted to additional paid-in capital upon the completion of our IPO, which occurred subsequent to September 30, 2018. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue Revenue Marketplace $ 78,464 $ 65,728 $ 153,246 $ 126,183 Managed services 9,067 8,055 17,481 16,076 Total revenue 87,531 73,783 170,727 142,259 25,408 21,588 48,893 42,713 Gross profit 62,123 52,195 121,834 99,546 Operating expenses Operating expenses 20,547 15,696 39,895 31,496 34,440 24,479 65,118 44,997 17,102 14,064 34,926 29,725 Provision for transaction losses 1,018 855 1,930 1,492 Total operating expenses 73,107 55,094 141,869 107,710 Loss from operations Loss from operations (10,984) (2,899) (20,035) (8,164) Interest expense 258 357 488 730 Other (income) expense, net Other (income) expense, net (248) (832) 483 (1,311) Loss before income taxes Loss before income taxes (10,994) (2,424) (21,006) (7,583) Income tax provision (30) (27) (39) (28) Net loss Net loss $ (11,024) $ (2,451) $ (21,045) $ (7,611) ——————— Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Cost of revenue $ 202 $ 73 $ 376 $ 217 Research and development 2,769 1,686 4,719 3,066 Sales and marketing 1,312 583 2,240 1,225 General and administrative 2,851 289 5,336 2,418 Total stock-based compensation $ 7,134 $ 2,631 $ 12,671 $ 6,926 NineSix Months Ended SeptemberJune 30, 20182020 and 2017(in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Marketplace $ 78,464 $ 65,728 $ 12,736 19 % $ 153,246 $ 126,183 $ 27,063 21 % Percentage of total revenue 90 % 89 % 90 % 89 % Managed services $ 9,067 $ 8,055 1,012 13 % $ 17,481 $ 16,076 1,405 9 % Percentage of total revenue 10 % 11 % 10 % 11 % Total revenue $ 87,531 $ 73,783 $ 13,748 19 % $ 170,727 $ 142,259 $ 28,468 20 % Total revenue increased by $11.9 million, or 23%, to $64.1 million forSeptemberJune 30, 2018 as compared to the three months ended September 30, 2017.Marketplace revenue represented 89% of2020, total revenue for the three months ended September 30, 2018,was $87.5 million, an increase of $10.6$13.7 million, or 23%19%, as compared to the same period in 2019. For the six months ended June 30, 2020, total revenue was $170.7 million, an increase of $28.5 million, or 20%, as compared to the same period in 2019.SeptemberJune 30, 2017.2020, marketplace revenue represented 90% of total revenue and increased by $12.7 million, or 19%, compared to the same period in 2019. For the six months ended June 30, 2020, marketplace revenue represented 90% of total revenue and increased by $27.1 million, or 21%, compared to the same period in 2019. Marketplace revenue increased primarily due to an increase in GSV. GSV, which grew by 27% period-over-period, primarily driven by12% and 14% during the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2019, and a 22%15% increase in the number of core clients and higher client spend retention, which increased to 108% as of SeptemberJune 30, 2018 from 95% as of September2020 compared to June 30, 2017.2019. We believe these increases in marketplace revenue, GSV, and core clients were primarily due to investments in sales and marketing to acquire new clients and drive brand awareness, launch new offerings such as Upwork Plus and Upwork Business, and ramp up our sales organization, the recent changes made in the pricing and packaging of Connects purchases in 2019, and investments in research and development to build new product features. We believe there were primarily two factors drivingfeatures, and we intend to continue to focus on these efforts. Additionally, marketplace revenue also increased as a result of an increase in client acquisition that was driven by an acceleration in the trendshift toward remote work, due in recent periods that GSV grew faster than revenue. First,part to the COVID-19 pandemic and execution of our strategic initiatives. This increase in client acquisition drove an increase in freelancer billings at the higher rates of our Upwork Standard offering, we charge freelancers a tiered service fee for each unique freelancer-client relationship. Over time, we have seenstructure, which, in turn, drove an increasing number of these unique relationships move to the 5% service fee tier.increase in marketplace revenue. Freelancer service fees generated $36.5$46.4 million and $42.5 million of marketplace revenue induring the three months ended SeptemberJune 30, 20182020 and $31.02019, respectively. Freelancer service fees generated $90.5 million and $83.1 million of marketplace revenue induring the threesix months ended SeptemberJune 30, 2017. A larger share of these fees was derived from the 5% tier than in the same period in 2017, which contributed to GSV growing at a faster rate than revenue period-over-period. Second, in our Upwork Standard offering we charge clients a 2.75% payment processing2020 and administration fee when a client pays using credit card; or we charge a small subscription fee, with no per transaction fee, if a client pays through Automated Clearing House (“ACH”). We have experienced an increase in ACH adoption since introducing this client fee.2019, respectively. Client payment processing and administration fees generated $9.0$12.8 million and $10.6 million of marketplace revenue induring the three months ended SeptemberJune 30, 20182020 and $7.32019, respectively. Client payment processing and administration fees generated $25.0 million and $19.9 million of marketplace revenue induring the threesix months ended SeptemberJune 30, 2017.SeptemberJune 30, 2018 as compared to 12% for the three months ended September 30, 2017. The increase of $1.3 million, or 21%, was primarily due to an increase in the amount of freelancer2020 and 2019, respectively. Managed services engaged by a client through our managed services offering.Total revenue increased by $38.2$1.0 million, or 26%, to $186.0 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.Marketplace revenue represented 88% of total revenue for the nine months ended September 30, 2018, an increase of $34.1 million, or 26%, as compared to the nine months ended September 30, 2017. Marketplace revenue increased primarily due to an increase in GSV. GSV grew by 29% period-over-period, primarily driven by a 22% increase in the number of core clients, and higher client spend retention, which increased to 108% as of September 30, 2018 from 95% as of September 30, 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. Freelancer service fees generated $108.5 million of revenue in the nine months ended September 30, 2018 and $88.6 million of revenue in the nine months ended September 30, 2017. Client payment processing and administration fees generated $25.8 million of revenue in the nine months ended September 30, 2018 and $20.6 million of revenue in the nine months ended September 30, 2017.Managed services revenue represented 12% of total revenue for the nine months ended September 30, 2018 as compared to 12% for the nine months ended September 30, 2017. The increase of $4.1 million, or 24%, was primarily due to an increase in the amount of freelancer services engaged by a client through our managed services offering.Cost of Revenue and Gross MarginCost of revenue increased by $3.6 million, or 21%13%, for the three months ended SeptemberJune 30, 20182020 compared to the same period in 2019. Managed services revenue represented 10% and 11% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Managed services revenue increased by $1.4 million, or 9%, for the six months ended June 30, 2020 compared to the same period in 2019. Managed services revenue grew at a slower rate than our marketplace revenue in the three and six months ended June 30, 2020 compared to the same periods in 2019, and we anticipate this trend to continue as compared towe primarily focus on increasing client usage of and spend on our marketplace offerings.(in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Cost of revenue $ 25,408 $ 21,588 $ 3,820 18 % $ 48,893 $ 42,713 $ 6,180 14 % Components of cost of revenue: Cost of freelancer services to deliver managed services 7,272 6,635 637 10 % 14,234 13,398 836 6 % Other components of cost of revenue 18,136 14,953 3,183 21 % 34,659 29,315 5,344 18 % Total gross margin 71 % 71 % 71 % 70 % SeptemberJune 30, 2017.2020, cost of revenue increased by $3.8 million, or 18%, compared to the same period in 2019. The increase was primarily due to thea $3.2 million, or 21%, increase in other components of cost of revenue, which included $1.3was driven by an increase of $1.0 million in third-party hosting costs, $0.9 million in payment processing fees due to an increase in client spend on our platform, $0.5and $0.7 million in third-party hosting costs, and $0.6 million in personnel-related costs due to an increase in personnel to support our growth. Costsamortization of freelancer services to deliver managed servicescapitalized platform development costs.23% to $6.1$6.2 million, for the three months ended September 30, 2018 from $5.0 million for the three months ended September 30, 2017. The increase was due to an increase of $1.3 million in managed services revenue for the three months ended September 30, 2018 asor 14%, compared to the same period in 2017. In this period, we used more costly freelancer resources to provide managed services.Cost of revenue increased by $12.7 million, or 27%, for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017.2019. The increase was primarily due to thea $5.3 million, or 18%, increase in other components of cost of revenue, which included $4.7was driven by an increase of $1.5 million in third-party hosting costs, $1.8 million in payment processing fees due to an increase in client spend on our platform, $2.7and $1.4 million in third-party hosting costs,amortization of capitalized platform development costs.$1.7 million in personnel-related costs due to an increase in personnel to support our growth. Costs of freelancer services to deliver managed servicesDevelopment(in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Research and development $ 20,547 $ 15,696 $ 4,851 31 % $ 39,895 $ 31,496 $ 8,399 27 % Percentage of total revenue 23 % 21 % 23 % 22 % 25% to $18.2$4.9 million, for the nine months ended September 30, 2018 from $14.6 million for the nine months ended September 30, 2017. The increase was due to an increase of $4.1 million in managed services revenue for the nine months ended September 30, 2018or 31%, as compared to the same period in 2017. In this period, we used more costly freelancer resources to provide managed services.Total gross margin was consistent at 68% for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Total gross margin was 67% for the nine months ended September 30, 2018 as compared to 68% for the nine months ended September 30, 2017.Research and DevelopmentResearch and development expense increased by $2.9 million, or 25%, for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017 and was consistent at 22% of total revenue.2019. The increase was primarily due to an increase in personnel-related costs of $3.0$4.8 million, an increasewhich resulted from investments made in connection with the execution of $0.2 million in amortization of licensed software,our strategic initiatives, and an increase in depreciation expense of $0.3 million, in facilities-related and other costs, partially offset by $0.6the capitalization of $0.3 million of additional internal-use software and platform development costs capitalized incosts.threesix months ended SeptemberJune 30, 2018.Research2020, research and development expense increased by $8.2$8.4 million, or 25%27%, for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017 and was consistent at 22% of total revenue.same period in 2019. The increase was primarily due to an increase in personnel-related costs of $8.7 million, an increasewhich resulted from investments made in connection with the execution of $0.6 million in amortization of licensed software, an increase of $0.7 million in facilities-related and other costs,our strategic initiatives, and an increase in depreciation expense of $0.4$0.5 million, in third-party hosting costs, partially offset by $2.2the capitalization of $0.7 million of additional internal-use software and platform development costs capitalized incosts.(in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Sales and marketing $ 34,440 $ 24,479 $ 9,961 41 % $ 65,118 $ 44,997 $ 20,121 45 % Percentage of total revenue 39 % 33 % 38 % 32 % ninethree months ended SeptemberJune 30, 2018.Sales and MarketingSales2020, sales and marketing expense increased by $5.3$10.0 million, or 39%41%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.same period in 2019. This increase was primarily due to year-over-year increases of $2.5$5.5 million in personnel-related costs to build out our enterprise sales team, including sales commissions that we expense as incurred, $2.4and $4.4 million in marketing and advertisingassociated with online and localdue to our ongoing digital marketing programs to drive brand awareness and attract new users, and $0.4 million of facilities-related costs.Salesour television advertising campaign.$17.7$20.1 million, or 47%45%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.same period in 2019. This increase was primarily due to year-over-year increases of $8.5$10.1 million in personnel-related costs to build out our enterprise sales team, including sales commissions that we expense as incurred, $7.8$9.0 million in marketing and advertising costs associated with online and localdue to our ongoing digital marketing programs and our television advertising campaign, and $1.0 million in amortization of licensed software and facilities-related and other costs resulting from ongoing business growth.driveaccelerate our acquisition of Upwork Enterprise and Business clients, we will continue to invest in our sales and marketing capabilities and, in light of the COVID-19 pandemic, are focused on increasing our investment in brand awareness, marketing campaigns, and, attract new users and $1.4 million of facilities-related costs forto a lesser extent, our enterprise sales office.(in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change General and administrative $ 17,102 $ 14,064 $ 3,038 22 % $ 34,926 $ 29,725 $ 5,201 17 % Percentage of total revenue 20 % 19 % 20 % 21 % General$2.8$3.0 million, or 31%22%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.same period in 2019. This increase was primarily due to increases of $1.6$2.6 million in personnel-related costs which included adding additional personnel in our finance organization, $0.5 million in facilities-related and other costs, $0.3 million in licensed software costs, $0.2 million in non-income taxesoutside consulting and $0.2 million inother professional expenses related to us preparing to become a public company.Generalservices.$8.7$5.2 million, or 34%17%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.same period in 2019. This increase was primarily due to increases of $5.0$4.9 million in personnel-related costs which included adding additional personnel in our finance organization, $1.0and $0.8 million in software licenses, $0.8 millionoutside consulting and other professional services, partially offset by reductions in facilities-related and other costs,expenses of $0.5 millionmillion.non-income taxesa one-time impairment charge being recognized in general and $1.4 millionadministrative expense. As a result, we expect general and administrative expense to increase in professional expenses relatedabsolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to us preparing to become a public company.(in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Provision for transaction losses $ 1,018 $ 855 $ 163 19 % $ 1,930 $ 1,492 $ 438 29 % Percentage of total revenue 1 % 1 % 1 % 1 % Provision$0.8$0.2 million, or 76%19%, for the three months ended September 30, 2018 as compared to the threesame period in 2019, and represented approximately 1% of revenue for each period. For the six months ended SeptemberJune 30, 2017. The increase was due to a slight increase in aging of trade and client receivables due to growth in GSV and the resulting increase in allowances. Provision2020, provision for transaction losses increased by $1.8$0.4 million, or 61%29%, for the nine months ended September 30, 2018 as compared to the ninesame period in 2019, and represented approximately 1% of revenue for each period. We expect provisions for transaction losses to be between 1% and 2% of revenue and to increase proportionally as GSV grows; however, as a result of the COVID-19 pandemic, provision for transaction losses may increase as a percentage of revenue, although we did not experience this trend in the six months ended SeptemberJune 30, 2017. The period-over-period increase was due to growth in GSV and related trade and client receivables.(in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Interest expense $ 258 $ 357 $ (99) (28) % $ 488 $ 730 $ (242) (33) % Other (income) expense, net Other (income) expense, net (248) (832) 584 (70) % 483 (1,311) 1,794 (137) % Interestincreaseddecreased by $0.4$0.1 million or 196%, forand $0.2 million, respectively, as compared to the same periods in 2019 due to lower balances outstanding on the Term Loans.SeptemberJune 30, 20182020, other income, net was $0.2 million, as compared to $0.8 million for the same period in 2019, which was primarily driven by lower investment income received from marketable securities of $0.4 million, as well as additional foreign currency exchange losses in the three months ended SeptemberJune 30, 2017. Interest expense increased by $1.0 million, or 166%, for2020. For the ninesix months ended SeptemberJune 30, 20182020, other expense, net was $0.5 million, as compared to the nine months ended September 30, 2017. These increases were primarily due to an increase in outstanding borrowings in the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017. See Note 6—Debt.Other expense,other income, net increased by $3.2of $1.3 million for the three months ended September 30, 2018 as compared to the three months ended 2017. Other expense, net increasedsame period in 2019, which was primarily driven by $3.8additional foreign currency exchange losses of $1.2 million for the nine months ended September 30, 2018 as compared to the nine months ended 2017. These increases were primarily due to the revaluationfrom higher volumes of our convertible preferred stock warrant liability. The value of the convertible preferred stock warrant liability increased significantly as of September 30, 2018 due to the proximity of our IPO and the final IPO offering price being significantly higher than the historical estimated fair value used to revalue the convertible preferred stock warrant liability. We will have oneforeign currency transactions resulting from additional remeasurement of our redeemable convertible preferred stock warrant liabilityforeign currencies added in the fourthsecond quarter of 2018 to reflect the value2019, as well as lower investment income received from marketable securities of the warrant upon automatic conversion to common stock warrant on the closing date of our IPO.We have financedoperationscash and capital expenditurescash equivalents, marketable securities, and amounts available for borrowing under our Loan and Security Agreement, as amended (the “Loan Agreement”) referred to below under “—Term and Revolving Loans.” Our cash equivalents and marketable securities primarily through salesconsist of convertible preferred stock, bank borrowings,commercial paper, treasury bills, and utilization of cash generated from operations in the period in which we generated cash flows from operations.U.S. government securities. As of SeptemberJune 30, 2018,2020 and December 31, 2019, we had $27.1$76.8 million and $48.4 million in cash. In October 2018,cash and cash equivalents, respectively. As of June 30, 2020 and December 31, 2019, we completed our IPO,had $69.6 million and $85.5 million 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, and selling stockholders sold 6,507,288 shares of common stock, including 848,776 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. We received aggregate net proceeds of $109.4 million from the IPO after deducting underwriting discounts and commissions. We used approximately $10.0 million of net proceeds from the IPO to repay indebtedness under the Loan Agreement.twelve12 months. To the extent existing cash and cash equivalents, cash from marketable securities, cash from operations (in periods in which we generate cash flow from operations), and amounts available for borrowing under the Loan Agreement are insufficient to fund future activities,our working capital requirements, or should we mayrequire 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. 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 maywill be subject to increased fixed payment obligationsadditional 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 indebtednesscapital.capital on terms we deem acceptable, or at all. The inability to raise additional capital as and when required would adversely affecthave an adverse effect, which could be material, on our results of operations, financial condition and ability to achieve our business objectives.Weplatform. Asplatform and, as such, we are licensed as an internet escrow agent and are therefore required to hold our users’ escrowed cash and in-transit cash in trust as an asset and record a corresponding liability offor escrow funds held on behalf of freelancers and clients on our balance sheet. Escrow regulations require us to fund the trust with our parent company’s operating cash if there is ever a shortageto cover shortages due to the timing of cash receipts from clients for completed hourly billings. Freelancers submit their billings for hourly contracts to their clients on a weekly basis every Sunday and the aggregate amount of such billings is added to escrow funds payable to freelancers on the same day. As of Sunday 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 any shortage of cash in trust with our own operating cashJune 30, 2020 and 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. As of December 31, 2017 and September 30, 2018, funds held in escrow including funds in transit, were $87.2$129.6 million and $107.5$108.7 million, respectively. We used $13.4 million of our cash on December 31, 2017 to temporarily fund that one week of hourly billings. To the extent we have not yet collected funds for hourly billings from clients which are in-transitin transit due to timing differences in receipt of cash from clients and payments of cash to freelancers, we may, from time to time, utilize the revolving line of credit under our Loan Agreement to satisfy escrow funding requirements. To fund the shortage of cash in trust that occurred on September 30, 2018, we used $5.3 million of our operating cash together with $15.0 million that we drew down pursuant to the revolving line of credit under the Loan Agreement in September 2018, which we repaid on October 1, 2018.which was amended in November 2017 and September 2018. Thethe aggregate amount of the facility is up to $49.0 million, consisting of a term loan in the original principal amount of $15.0 million (the “First Term Loan”), a term loan in the original principal amount of $9.0 million (the “Second Term Loan” and, together with the First Term Loan, of $15.0 million, the Second Term Loan of $9.0 million,“Term Loans”), and a revolving line of credit, which permits borrowings of up to $25.0 million based onsubject to customary conditions. Among other things, we may only borrow funds under the revolving line of credit if, after giving effect thereto, total borrowings under the line of credit do not exceed a specified percentage of eligible trade and client accounts receivable. Contemporaneously, we used the proceeds of the First Term Loan to pay off our outstanding borrowings under a prior loan and security agreement in the then-principal amount of $14.0 million. The First Term Loan, Second Term Loan, and revolving line of credit mature in March 2022, September 2022, and September 2020, respectively. The First Term Loan bears interest at the prime rate plus a spread of 0.25% per annum and has a repayment term of 18 months of interest-only payments ending in March 2019 followed by 36 equal monthly installments of principal plus interest. The Second Term Loan bears interest at the prime rate plus a spread of 0.25% per annum. The Second Term Loan has a repayment term of seventeen months of interest-only payments ending in March 2019, followed by 42 equal monthly installments of principal plus interest. The revolving line of credit, bears interest at the prime rate with accrued interest due monthly. In November 2017, we borrowed $19.0 millionFirst Term Loan, and Second Term Loan mature in September 2020, March 2022, and September 2022, respectively. All borrowings under the Loan Agreement whichbear interest at floating rates, and, therefore, our borrowing costs are affected by changes in market interest rates.used to repurchase shares of our capital stock from a then-existing stockholder. As of September 30, 2018, we had $24.0drew down $15.0 million outstanding pursuant to the Term Loans and $25.0$3.0 million outstanding pursuant tounder the revolving line of credit under the Loan Agreement. As of December 31, 2017,in March and April 2020, respectively, which we had $24.0 million outstanding pursuant to the Term Loans and $10.0 million outstanding pursuant to the revolving line of credit under the Loan Agreement. We used approximately $10.0 million of net proceeds from the IPO to repay indebtedness under the Loan Agreement. subsequently repaid in full in May 2020.Escrow.Escrow Inc. (“Upwork Escrow”). The Loan Agreement prohibits us from pledging our intellectual property. The Loan Agreement also includes a restriction on dividend payments, other than dividends payable solely in common stock. The Loan Agreement contains affirmative covenants, including financial covenantsa covenant requiring that among other things, require us towe maintain an adjusted quick ratio, of not less than 1.3 and achieve certain EBITDA targets. The Loan Agreement also contains certain non-financial covenants. We were in compliance with theSeptemberJune 30, 2018. For2020 and December 31, 2019.reasons describedterms of the Loan Agreement, we commenced repayment on the Term Loans in April 2019. During the section titled “—Escrow Funding Requirements,” we drew down $15.0 million in September 2018 under the revolving line of credit, whichthree and six months ended June 30, 2020, we repaid on October 1, 2018. Six Months Ended June 30, 2020 2019 Net cash provided by (used in) operating activities $ 6,662 $ (27,826) Net cash provided by (used in) investing activities 7,066 (71,384) Net cash provided by financing activities 35,717 57,140 Net increase (decrease) in cash, cash equivalents, and restricted cash $ 49,445 $ (42,070) cashactivities is revenue generated from our platform. Our primary uses of cash from operating activities are for personnel-related expenditures, marketing activities, including advertising, payment processing costs, marketing and advertising expenditures,fees, amounts paid to freelancers to deliver services for clients under our managed services offering, and third-party hosting costs. In addition, because we are licensed as an internet escrow agent, our total cash and cash provided by (used in) operating activities may be impacted by the timing of the end of our fiscal quarter as discussed in the section titled “—Liquidity and Capital Resources—Escrow Funding Requirements.”Netduring the nine months ended September 30, 2018 was $8.2$27.8 million, which resulted primarily from non-cash chargesa net loss of $3.5$7.6 million for depreciation and amortization, $5.7 million for stock-based compensation, $4.6 million for provision for transaction losses, $3.6 million related to the change in fair value of our redeemable convertible preferred stock warrant liability, and $0.1 million for amortization of debt issuance costs, offset by net cash outflows of $11.2$32.9 million from changes in operating assets and liabilities, and a net losspartially offset by non-cash charges of $14.5$12.7 million. The $11.2 million in net cash outflows from changesend of the second quarter of 2019 fell on a Sunday, which directly impacted our trade and client receivables balance as of June 30, 2019. The change in operating assets and liabilities were primarily resulted from the result of increases of $15.1 millionincrease in trade and client receivables $0.7 millionof $30.0 million. Due to fluctuations in prepaid expensesrevenue and other assets, and a decreasethe number of $0.5 milliontransactions on our platform, coupled with fluctuations in accrued expenses and other liabilities, offset by increasesthe timing of $5.0 million in accounts payable and $0.1 million in deferred revenue. The increase of $15.1 million incash receipts from clients, our trade and client receivables was primarily attributablewill likely continue to an increase of $9.7 million related to weekly hourly billings from our marketplace offerings duringfluctuate in the last week offuture.quartersix months ended SeptemberJune 30, 2018 from the last week of the quarter ended December 31, 2017.Net2020, net cash provided by operatinginvesting activities during the nine months ended September 30, 2017 was $13.4$7.1 million, which resultedwas primarily from non-cash charges of $3.1 million for depreciation and amortization, $4.8 million for stock-based compensation, $2.9 million for provision for transaction losses, net cash inflows of $1.5 million from changes in operating assets and liabilities and net income of $1.1 million. The net cash inflows from changes in operating assets and liabilities were primarily thea result of increases of $7.8investing $47.7 million in accrued expenses and other liabilities, $0.7various marketable securities, as well as $3.6 million in accounts payable, a $0.2 million decrease in prepaid and other assets, offset by an increase of $7.2 million in trade and client receivables.Investing ActivitiesNet cash used in investing activities during the nine months ended September 30, 2018 was $4.4 million, which resulted from capitalized internal-use software and platform development costs of $2.7 million,that we paid during the period and purchases of property and equipment of $1.6$5.6 million primarily for leasehold improvements and furniture and an increase of $0.1 million in restricted cash related to our office lease in Chicago, Illinois. These uses of cash reserve requirements under California escrow laws and regulations based onwere partially offset by proceeds from maturities of marketable securities of $64.0 million.transaction volume.Netsix months ended June 30, 2019, net cash used in investing activities was $71.4 million, which was primarily a result of investing $86.6 million in various marketable securities during the nine months ended September 30, 2017 was $1.9first half of 2019, as well as $2.2 million which resulted from capitalizedof internal-use software and platform development costs of $0.4 millionthat we paid during the period and purchases of property and equipment of $1.5$7.4 million primarily for leasehold improvements and furniture related to our office leases in Santa Clara, California and Chicago, Illinois. These uses of cash were partially offset by sales of marketable securities of $24.8 million.Netduring the nine months ended September 30, 2018 was $18.0$35.7 million, due to proceedswhich resulted primarily from an increase in escrow funds payable of $7.0$20.8 million, cash received from the exercisestock option exercises of stock options$16.0 million, and proceeds received from borrowingsour employee stock purchase plan of debt of $15.0$2.7 million, partially offset by $4.0 million in deferred offering costs paid for our IPO.Netnet repayments of borrowings on debt of $3.8 million.used inprovided by financing activities duringwas $57.1 million, which resulted primarily from the nine months ended September$25.0 million we elected to draw from our revolving line of credit to satisfy our escrow funding requirements as of June 30, 2017 was $0.32019, as well as changes in escrow funds payable of $20.1 million, primarily due to the repaymentcash received from stock option exercises of $17.0 million of debt borrowings, offset by proceeds from borrowings of $15.0$10.3 million, and proceeds from our employee stock purchase plan of $1.7$3.6 million, frompartially offset by total principal repayments on the exerciseTerm Loans of stock options and a convertible preferred stock warrant.non-cancelablenon-cancellable operating leases for office space and the Loan Agreement. The following tables summarizetable summarizes our contractual obligations as of SeptemberJune 30, 2018 and December 31, 20172020 (in thousands):———————(1)Represents minimum operating lease payments under operating leases for office facilities, excluding potential lease renewals, net of tenant improvement allowances.Total Less than
1 Year1 - 3
Years3 - 5
YearsMore Than
5 Years$ 36,203 $ 6,458 $ 13,177 $ 10,781 $ 5,787 Debt principal 14,535 7,571 6,964 — — Total contractual obligations $ 50,738 $ 14,029 $ 20,141 $ 10,781 $ 5,787 2017 and September 30, 2018,2019, we had accrued liabilities related to uncertain non-income tax positionsindirect taxes based on management’s best estimate of its liability, which are reflected on our condensed consolidated balance sheet.sheets. We could be subject to examination in various jurisdictions related to income and non-income tax matters. The resolution of these types of matters, giving recognition to the recorded reserve, could have an adverse impact on our business.SeptemberJune 30, 2018,2020, 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.ThereProspectus.Note“Note 2—Basis of Presentation and Summary of Consolidated Financial StatementsSignificant Accounting Policies” of the notes to our condensed consolidated financial statements included elsewhere in this Form 10-QQuarterly Report for recently issued accounting pronouncements not yet adopted as of the date of this Form 10-Q.QualitativeQualitative Disclosures about Market Risk.hasand cash equivalents have a relatively short maturity, our portfolio’s fair value is relatively insensitive to interest rate changes. Borrowings under our Loan Agreement have variable interest rates. We had $49.0$14.5 million and $34.0$18.3 million aggregate principal amount of principalborrowings outstanding under our Loan Agreement as of SeptemberJune 30, 20182020 and December 31, 2017,2019, respectively. 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.the invoices denominated in the U.S. dollar in the following currencies: Euro, the British Pound, the Australian dollar, Canadian dollar, Singapore dollar, South African rand, New Zealand dollar, Polish zloty, Swiss franc, Norwegian krone, Danish krone, Swedish krona, Turkish lira, Japanese yen, and the CanadianHong Kong dollar. When clients make payments in one of these currencies, we are exposed to foreign currency risk during the period between when payment is made and when the payment amounts settle. To mitigate this risk, we have entered into forward contracts. As such, the impact of foreign currency exchange rate fluctuations to our operating results have been insignificant to date.SeptemberJune 30, 2018.2020. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.Becauseforms of the material weakness in our internal control over financial reporting previously disclosed in our Prospectus,Securities and Exchange Commission (the “SEC”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of SeptemberJune 30, 2018,2020, our disclosure controls and procedures were not effective. In lightthis fact,Previously Disclosed Material Weakness in Internal Control over Financial Reportingmanagement, including our Chief Executive Officerremediation plan and Chief Financial Officer, has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.Previously Reported Material WeaknessAs disclosed in the section titled “Risk Factors” in Part II, Item 1A of this Form 10-Q, we previously identifiedsuccessfully remediated a material weakness in our internal control over financial reporting related to the identification of a number of adjustments to our consolidated financial statements that resulted in a revision to previously issued financial statements.statements as of and for the year-ended December 31, 2016. 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-endperiod end financial reporting process commensurate with the complexity of the business.We have commenced measures remediate the identified material weakness. Those remediation measures are ongoingweakness, management, with the oversight of the audit, risk, and include the hiringcompliance committee of our board of directors, hired additional accounting and finance employees with a requisite level of experiencespecific technical accounting and the implementation of additional control activities related to the period-end financial reporting process.While we believe that these efforts will improve ourexperience necessary for a public company, including internal control over financial reporting, the implementationreporting. The execution of our remediation is ongoing and will requireplan also included validation and testing of the design and operating effectiveness of certain new and enhanced internal controls in the period-end financial reporting process over a sustained period of financial reporting cycles.We believe we are making progress toward achieving the effectiveness of our internal controls and disclosure controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the material weakness in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting, which may necessitateadditional evaluation and implementation time. We will continue to assess the effectiveness of our internal control over financial reporting and take steps to remediate the known material weakness.period covered by this reportquarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.OTHEROTHER INFORMATIONForm 10-Q,Quarterly Report, including our condensed 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.costlylengthy sales and marketing efforts that may not result in additional users that transact on our platform or effectively retain our current users.users that transact on our platform, or may not do so in a cost-effective manner. We may also need to modify our pricing model or other services and features to attract and retain such users. Such modifications may not have the intended effect of attracting and retaining users and may have unintended negative consequences such as a loss of users or a reduction of user activity or spend on our platform.relationshipsusers in a cost-effective manner or at all, our revenue will grow more slowly than expected or may decline and our business couldwill be adversely impacted. other services, advertising to prospective clients online or offline through other methods, signing up for online or offline third-party agencies, using other online or offline platforms, signing up with staffing firms, using other payment services, or finding full-time or part-time employment 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, clients may decrease their use of, or cease using, our platform and our revenue may be adversely impacted.employees.employees directly or through an agency. For the nine months ended September 30, 2018 and yearyears ended December 31, 2017,2019 and 2018, we generated significant revenue from one client, which accounted for more than 10% of revenue for each such period and, therefore,from one client, to which we provide services through our managed services offering. Therefore, a decrease in revenue from this client could have an adverse effect on our operating results. Moreover, any decrease inrevenue from this client has grown at a slower rate than revenue generated from the attractivenessrest of our platform or failurebusiness, and we anticipate this trend to retain clients could lead to decreased traffic on our platform, diminished network effects, or result in a drop in GSV on our platform,continue, which could adversely affect our business, revenue, financial condition,condition.operating results.reasons.reasons, including cost-cutting measures or other effects of the COVID-19 pandemic. Moreover, as discussed below in the risk factor titled “Users may circumvent our platform, which could adversely impact our business,” users may circumvent the payment services on our platform and pay freelancers directly or through another service, which is likely to happen more frequently during a macroeconomic downturn, such as the one caused by the COVID-19 pandemic, as users may be more cost sensitive or reduce their spending altogether during such period. In addition, expenditures by clients may be cyclical and may reflect overall economic conditions or budgeting patterns.ninesix months ended SeptemberJune 30, 20182020 and the yearyears ended December 31, 2017,2019 and 2018, we incurred net losses of $14.5$21.0 million, $16.7 million, and $4.1$19.9 million, respectively. As of June 30, 2020, we had an accumulated deficit of $193.0 million. We expect to make significant future expenditures related to the development and expansion of our business, including investing in marketing programs and activities, such as brand promotion efforts, including those designed to reach new and existing clients seeking to engage with remote freelancers in light of the governmental restrictions related to the COVID-19 pandemic; enhancing our Upwork Enterprise, offeringUpwork Business, and other premium offerings; expanding our U.S.-to-U.S. domestic offering, expanding domestic-to-domestic offerings into new geographies,services and features; broadening and deepening the categories on our platform,platform; promoting client engagement of those freelancers that typically optimize to deliver larger projects, including through our Upwork Payroll offering; localizing our offerings in select locations; expanding our sales force; enhancing our U.S.-to-U.S. domestic marketplace offering and our mobile product offering; and in connection with legal, accounting, and other administrative expenses related to operating as a public company. These and other 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, we may not be able to sustainifplatformbusiness strategy and pricing model, which makes it difficult to evaluate our business and prospectsfuture prospects.increases the risks associatedwill continue to evolve, our sales, marketing, and brand positioning efforts. Recently we have expanded our focus on mid-market, large enterprise, and global account and other clients with your investment.We operated the Elance and oDesk platforms separately until we relaunched as Upworklarger, longer-term talent needs. To better serve this market segment, in May 2015 and consolidated those platforms into a single platform. In recent years we have also expanded our Upwork Enterprise offering and launched our Upwork Business offering, both of which helpshelp enterprises and other larger businesses connect with freelancers and providesprovide these larger clients with additional products and services. We also continue to develop our current offerings and create and test additional premium offerings, features, and services to serve this and other market segments. Moreover, we made significant changes to our pricing model in 2016.2016 and launched our U.S.-to-U.S. domestic marketplace offering in the second half of 2017. In 2019, we launched other pricing changes, including new paid membership types for clients and new Connects pricing for freelancers. In addition, we recently launched “Direct Contracts,” a service for freelancers to easily charge clients that are not registered users on Upwork’s platform. As a result, our platformcurrent business strategy and pricing model have not been fully proven, and we have only a limited operating history withunder our current platformbusiness strategy and pricing model to evaluate our business and future prospects, and we continue to evolve our business strategy and related pricing, which subjectssubject us to a number of uncertainties, including our ability to plan for and model future growth.growth and make accurate projections regarding our future performance. Our historical revenue growth should not be considered indicative of our future performance.performance, particularly in light of the uncertainty caused by the COVID-19 pandemic and the resulting macroeconomic downturn. We have encountered, and will continue to encounter, risks, difficulties, and uncertainties frequently experienced by growing companies in rapidly changing industries, including our ability to achieve market acceptance of our platform and offerings and attract and retain users, as well as increasing competition and increasing expenses as we continue to grow our business. In addition, we have in the past, and may in the future, see unexpected or unintended effects, sometimes negative, as a result of changes to our pricing model, products and offerings, and sales, brand positioning, and marketing efforts, including a failure to attract new clients that spend on our platform or the loss of spend from existing clients. For example, since 2019, we have experienced a decline in client spend retention, which we believe was related to the launch of our U.S.-to-U.S. domestic marketplace offering in the second half of 2017 and more recently, due to the COVID-19 pandemic, as discussed in the section titled “Management’s Discussion and Analysis for Financial Condition and Results of Operations—Key Financial and Operational Metrics.” We cannot ensure that we will be successful in addressing these and other challenges we may face in the future, and our business may be adversely affected if we do not manage these challenges successfully. In addition, we may not achieve sufficient revenue to achieve or maintain positive cash flow from operations or profitability in any given period, or at all.Iffreelancersour 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, client spending patterns, macroeconomic effects, such as those resulting from the COVID-19 pandemic, and the other risks identified herein. Moreover, as a result of the macroeconomic downturn caused by the COVID-19 pandemic, we have experienced, and may continue to experience, an increase in the number of users requesting athey offer developsoffered on our platform, or to achieve and maintain more slowly than we expect,widespread market acceptance of our marketplace offerings, our business operations, financial results, and growth may slow or stall, and our operating resultsprospects could be adversely affected.The market for freelancers 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 freelancers to provide services. It is difficult to predict the size, growth rate, and expansion of this market, the entry of products and services that are competitive to ours, the success of existing competitive products and services, or technological or other developments that will impact the overall demand for freelancer services. Furthermore, many businesses may be unwilling to engage freelancers for a variety of reasons, including perceived negative connotations with outsourcing work, quality of work, or security concerns. If the market for freelancers 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 revenue and our business could be adversely affected. new product and service introductions and enhancements, changing user demands, and evolving industry standards. The introduction of products and services embodying new technologies can quickly make existing products and services obsolete and unmarketable. We invest substantial resources in researching and developing new products and services and enhancing our platform by incorporating additional features, improving functionality, and adding other improvements to meet our users’ evolving demands in our increasingly highly competitive industry. The success of any enhancements or improvements to, or new features of, our platform or any new products and services depends on several factors, including timely completion, competitive pricing, adequate quality testing, integration with new and existing technologies on our platform and third-party partners’ technologies, overall demand and overall market acceptance.acceptance, and resulting user activity that is consistent with the intent of such products or services. We cannot be sure that we will succeed, on a timely or cost-effective basis, in developing, marketing, and delivering on a timely and cost-effective basis enhancements or new features to our platform or any new products 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. acceptance or produce the intended effect. In the past, we have experienced unintended negative effects, including reduced client spend retention, from certain modifications to our products and services. For example, since 2019, we have experienced a decline in client spend retention which we believe was related to the launch of our U.S.-to-U.S. domestic marketplace offering in the second half of 2017 and more recently, due to the COVID-19 pandemic, as discussed in the section titled “Management’s Discussion and Analysis for Financial Condition and Results of Operations—Key Financial and Operational Metrics.”or may not achieve the broad market acceptance necessary to generate sufficient revenue.revenue, or may adversely impact existing client spend and user growth and retention. Moreover, even if we introduce new products and services, we may experience a decline in revenue from our existing products and services that is not offset by revenue from the new products or services. In addition, we may lose existing users whothat choose to use competing products or services. This could result in a temporary or permanent decrease in revenue and adversely affect our business.future.future, particularly during a macroeconomic downturn such as the one caused by the COVID-19 pandemic. Additionally, we have a limited operating history withunder our current platformbusiness strategy and pricing model, and we make pricing, product, and other changes from time to time, all of which makesmake 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 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;•the demand for and types of skills and services that are offered on our platform by freelancers;•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;•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 or 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;•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 to develop and upgrade our platform to incorporate new technologies;•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;•security or privacy breaches and associated remediation costs and reputational harm;•litigation and adverse judgments, settlements, or other litigation-related costs;
•ongoing uncertainty and impact on the global economy and spending by large, medium and small companies relating to the COVID-19 pandemic, availability of qualified freelancers, and uncertainty regarding the timing and nature of any future economic recovery, as discussed further above;
•our ability to attract, retain and grow small- and medium-sized business clients;•operating lease expenses and other real estate expenses;•fluctuations in transaction losses;•fluctuations in currency exchange rates;
•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, including in each case as a result of the implementation of macroeconomic or other external factors, new pricing or the introduction of new or modified products or services on our platform, such as the changes made in the pricing and packaging of Connects purchases in 2019, and any pricing or other changes made in response to the COVID-19 pandemic;•changes in the mix of countries in which our users are located, which impacts the amount of revenue we derive from foreign exchange;
•our ability to maintain and grow our community of users, including our ability to acquire mid-market, large enterprise and global account clients with larger, longer-term talent needs and qualified freelancers;•the timing of stock-based compensation expense;•expenses incurred in connection with The Upwork Foundation initiative; and
47•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.then the trading price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.Becausederive the substantial majorityfail to develop, maintain, and enhance our brand and reputation cost-effectively, our business and financial condition may be adversely affected.revenue from our marketplace offerings, with mostbrand and reputation in a cost-effective manner are important to achieving widespread acceptance and use of our marketplace revenue derived fromplatform and are important elements in attracting new users and retaining existing users. Successful promotion and positioning of our Upwork Standard offering, our inability to generate revenue from our marketplace offerings would adversely affectbrand, products, and our business operating results, financial condition, and growth prospects.Currently, we derive and expect to continue to derive, inmodel depends on, among other things, the near future, the substantial majorityeffectiveness 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 developmentmarketing efforts and release of new products and services by our competitors,brand messaging, our ability to respondprovide a reliable, trustworthy,technological changeprovide quality support. In order to reach the brand awareness and acceptance levels of some of our competitors, we will need to continuously invest in marketing programs that may not be successful in achieving meaningful awareness and acceptance levels, particularly during early phases of expansion into newer customer awareness segments. Further, brand promotion activities may not resonate with existing or potential users or yield increased revenue, including any brand promotion efforts in response to the COVID-19 pandemic, 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, we invested heavily in advertising in the United States in 2019, and have continued that investment in 2020, to increase our brand awareness, and it is not certain that these investments have had or will have sufficient positive impact on our brand to be cost effective. We have also recently evolved our marketing and brand positioning efforts to expand our focus on mid-market, larger enterprise, global account, and other clients, with larger, longer-term talent and contracting needs and may not be successful in achieving the brand awareness and acceptance levels with this market segment, in a cost-effective manner, or without harming other areas of our business.innovate and grow, contraction in our market, andprevent others from using the other risks identified herein. Ifsame or substantially similar marks. Despite these efforts, we are unablenot always successful in registering, maintaining, opposing cancellation actions, and preventing misappropriation of our own marks and other intellectual property or preventing registration of confusingly similar marks, or we may choose for business reasons to continuenot take such actions, and we may suffer dilution, loss of reputation, genericization, or other harm to meet user demands,our brand. We also rely on our community of users in a variety of ways, including their willingness to expand the categoriesgive us feedback regarding our platform, and failure of services offeredour users to provide feedback on their experience on our platform or our failure to achieve more widespread market acceptanceadequately address any concerns could negatively impact the willingness of them or prospective users to use our marketplace offerings,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 operations,and financial results, and growth prospects couldcondition may be adversely affected. 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, unfair competition, terms of service, website accessibility, background checks (such as the Fair Credit Reporting Act, 15 U.S.C. § 1681), escheatment, and escheatment,federal contracting may also be adopted, implemented, or interpreted to apply to us and other online services marketplaces. marketplaces or our users. Likewise, these laws affect our users, and their application, or uncertainty around their application, may affect demand for our marketplace.geographicalgeographic 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, eitherservices.services, or that we are otherwise required to change our business practices. It is also possible that certain provisions in agreements with our users or service providers, or between freelancers and clients, or the fees we charge, may be found to be unenforceable or not compliant with applicable law.Recent financial, political, and other events may increase thepaymentspersonal information in particular. Regulatory agenciesparticular has increased significantly recently and may continue to do so. Legislators may enact new laws or regulatory agencies may promulgate new rules or 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 legislative or regulatory scrutiny or action may create or enhance different or conflicting obligations on us from one jurisdiction to another.businessesthird parties that view our business model to be a threat, or otherwise problematic, to raise concerns about our business model to local policymakers and regulators. These businessesthird parties and their trade associationAs 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.condition, and operating results.users.users and expand our share of user spend. 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, Allegis Group, and Robert Half International;•traditional contingent workforce and staffing service providers and other outsourcing providers, such as The Adecco Group, Randstad, Recruit, ManpowerGroup, 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;•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;•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, such as Workday;•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;•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•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.•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.and social media platforms, such as Facebook, 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. For example, in 2016, LinkedIn launched ProFinder its servicein 2016 and Open for Business in 2019, both of which are services to connect LinkedIn members with one another for freelance service relationships.recruiters, and staffing businesses.In the future, we mayrecruiters.scale. However,scale; however, we may face increased competition should these companies andor services, succeed. These competitors may offer products and services that may, among other things, provide automated alternatives to the services that freelancers provide on our platform or change the way that businesses engage or pay service providers so as to make our platform less attractive to users.histories,histories; greater financial, technical, and other resources,resources; more users; and, in some cases, the ability to rapidly combine online platforms with traditional staffing and contingent worker solutions. Some of our current and potential competitors have recently undertaken, or may in the future undertake, an initial public offering or another equity or convertible debt issuance, which could improve their competitive position due to 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.If we fail to develop, maintain,enhanceon the economic health of current and prospective clients that use our brandplatform. Any significant weakening of the economy in the United States or Europe or of the global economy, including the macroeconomic downturn caused by the COVID-19 pandemic and reputation cost-effectively,the resulting increase in unemployment rates, 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, trade wars and higher tariffs, 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. In addition, small- and medium-sized businesses have been disproportionately impacted by the macroeconomic downturn resulting from the COVID-19 pandemic and have reduced their spend on our platform. These adverse conditions have resulted, and may continue to 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 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, including the macroeconomic downturn caused by the COVID-19 pandemic, or any subsequent recovery generally. If the conditions in the general economy continue to deteriorate as a result of the COVID-19 pandemic or otherwise, our business, financial condition, and operating results could continue to be adversely affected.affected.The Upwork brand did not exist before 2015, but impacted. In addition, bad actors around thebelievemay 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 California Department of Business Oversight (the “DBO”) may require us to hold larger cash reserves;developing, maintaining, and enhancing awareness and integrityprovide services to us, misappropriate our banking or other information or user information for their own gain or facilitate the fraudulent use of such information;brand and reputation in a cost-effective manner are important to achieving widespread acceptance andplatform, decrease or cease use of our platform, seek to obtain damages and are important elementscosts, publicize their experience, or impose fines and penalties;attracting new users and retaining existing users. Successful promotionour platform, may decrease or cease use of our brandplatform, or seek to obtain damages and costs;model depends on, among other things,as a result of the effectivenessoccurrence of our marketing efforts, our abilityany of the above.provide a reliable, trustworthy,detect, prevent, and useful platform at competitive prices, the perceived valuemitigate these risks, we do not have control over users of our platform and our ability to provide quality support. In order to reach brand awareness levelscannot ensure that any of our competitors, wemeasures will needstop or minimize the use of our platform for, or 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,further, illegal or improper purposes. We have received in the nine months ended September 30, 2018past, and 2017, weare likely to continue to receive in the future, increased investment in offline advertising in certain markets to increase our brand awareness,complaints 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 othersinquiries 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 marksclients, freelancers, and other intellectual property or preventing registrationthird parties, including law enforcement, administrative agencies, and the press, concerning misuse of confusingly similar marks, and we may suffer dilution, loss of reputation, 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 failurewrongful conduct of other users, especially as a result of increased fraudulent activity related to the COVID-19 pandemic. We have also brought claims against clients and other third parties for their misuse of our usersplatform, and may be required to provide positive feedbackbring 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 attention and resources of our management and adversely affect our business and operating results.their experienceour platform is information technology services, a decline in freelancers offering or the market for information technology service providers on our platform could adversely affect our business.willingnessvalue propositions of prospective usersour platform generally. Despite our efforts in familiarizing potential mid-market, large enterprise, and global account clients with the benefits of our platform, these potential clients may decide not to use our platform.platform if, among other reasons, they do not feel that their procurement or compliance needs are or will be met. In addition, sales opportunities with mid-market, large enterprise, and global account companies 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.we faila client negotiates pricing terms that are not favorable to promoteus, does not engage freelancers on our platform, or uses freelancers for few projects or projects of low value, our revenue from the relationship may be minimal.maintain our brand successfullymay in the future agree, to take on additional risk for worker classification, privacy, security, work product, payments, or other matters for mid-market, larger enterprise, and global account clients, or to maintain loyalty among our users,other terms that are unfavorable to us in order to secure a client’s business or if we incur substantial expensesincrease its spend, as discussed further 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 conditionthe risk factors titled “There may be adversely affected.theour terms of our user agreement.service. Some clients opt to classify freelancers as employees for certain assignments,work, while many freelancers are classified as independent contractors.forthrough which service 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.another with confidence they will receive the value for which they pay. 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 orand for our managed services offering. In general, wereany time a court or administrative agency to determinedetermines that we or our 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, weWe may be subject to administrative inquiries and audits concerning the taxation and classification of our workers and the users of our platform. We cannot be certain that ourany insurance coverage that we have or may obtain 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.allegationaudit creates potential exposure for users and for us, including but not limited to reputational harm and 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 wageunemployment;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, injunctive relief, or settlement. These types of claims have become more frequent in light of deteriorating macroeconomic conditions as a result of the COVID-19 pandemic, more prone to agency error in light of overwhelmed agencies, and more difficult to oppose due to COVID-19 related delays. Claims naming our company may also have become and may continue to be more prevalent in light of legislative and regulatory responses to the COVID-19 pandemic, such as the Pandemic Unemployment Assistance (“PUA”) program and state programssuch indemnification agreementsany limitations or obligations that we include in our contracts with clients to limit our exposure to claims could be determined to be unenforceable, could be costly to enforce or ineffective, or indemnification may otherwise prove inadequate.Becausesubstantial portionsufficient number of qualified sales personnel. Furthermore, hiring sales personnel, particularly in new markets, requires additional costs that we may not recover if the sales personnel fail to achieve full productivity. 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. In addition, new sales personnel do not always achieve productivity milestones within the timelines that we have projected, negatively impacting our ability to achieve our long-term financial projections associated with such personnel. Not all of our recent hires and planned hires have or will become productive as quickly as we expect and when 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. The productivity of our sales force may also be diminished by the effects of the services offered onCOVID-19 pandemic and governmental restrictions intended to prevent its spread, which many of 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, includingemployees are currently subject, and training new hires may be more difficult as a result of global economic conditions, automation, increased usesuch governmental restrictions. If we are unable to hire and train a sufficient number of artificial intelligence, or otherwise,effective sales personnel, or if needour sales personnel are not successful in obtaining new business or increasing sales to our existing user base, our business and results of operations will be adversely affected.thesefreelancers and the services slows or businesses satisfy their needs for these services through alternative means, thethey offer develops more slowly than we expect, our growth in the number of users of our platform may slow or declinestall, and our operating results could be adversely affected.ourin decreased revenue and our business maycould be adversely impacted.Future changesaffected.hasfor a period of time following the pricing change, contributed to GSV having growngrowing at a faster rate than revenue in recent periods, and we may fromrevenue. From time to time decidewe have made other changes, including in 2019 when we launched new paid membership types for clients and new Connects pricing forand could lead to a loss of users on our platform, and couldresult in a change to the way we recognize revenue, reduce the amount of revenue we generate as a percentage of GSV, reduce the rate or size of projects that get posted or completed on our platform, or otherwise negatively impact our operating results, financial condition, and cash flows.Adversechanging economic conditionsour third-party partners experience a security breach, other hacking or phishing attack, or other data privacy or security incident, whether intentionally or unintentionally caused by us or by third parties, our platform may negatively impactbe perceived as not being secure, our business.Our business depends on the overallreputation may be harmed, 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 regulatorybe reduced, our operations may be disrupted, we may incur significant legal costs or liabilities, 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 impactedadversely affected.decreased demand for freelancers. We cannot predictcrisis, such as the timing, strength,COVID-19 pandemic, to try to take advantage of us, our users, and our vendors by using social engineering and other methods to persuade their victims to make fraudulent payments, or durationto download viruses or malware. 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 techniques or to implement adequate preventative measures. If an actual or perceived breach of any economic slowdownour or any subsequent recovery generally. Ifour vendors’ or third-party partners’ security or privacy or other data privacy or security incident occurs, public perception of the conditions in the general economy significantly deviate from present levels,effectiveness of our business, financial condition,security measures and operating resultsbrand could be adversely affected.Usersharmed, and we could lose users and business. Data security breaches and other data privacy and security incidents may circumventalso result from non-technical means, such as, for example, actions taken by employees or contractors, such as freelancers that we engage on our platform whichto perform services for us. Any compromise of our security or the security of our vendors or third-party partners could result in a violation of applicable privacy and other laws, regulatory or other governmental investigations, enforcement actions, litigation, and legal and financial exposure, including potential contractual liability. These liabilities may exceed the amounts covered by our 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, or at all. Any such compromise could also result in damage to our reputation and a loss of confidence in our security measures. Any of these effects could adversely impact our business.depends onrelationships, and other liabilities. In addition, significant unavailability of our platform due to security breaches and other privacy and security incidents could cause users transacting through our platform. Despite our efforts to prevent them from doing so, users may circumventdecrease their use of or cease using our platform and engageadversely affect our business. Although we maintain cyber liability insurance, we cannot be certain our coverage will extend to or be adequate for liabilities actually incurred or will continue to be available to us on reasonable terms, or at all.pay eachour privacy policies, could adversely affect our business.throughuser 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 meanscontent. The scope of these laws and regulations is changing, subject to avoiddiffering interpretations, and may be inconsistent among countries, or conflict with other laws and regulations. We are also subject to the feesterms of our privacy policies and obligations to third parties related to privacy, data protection, and information security. 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 charge ondo not anticipate or that is inconsistent from one jurisdiction to another and may conflict with other rules or our platform. The losspractices. Further, any significant change to applicable laws, regulations, or industry practices regarding the collection, use, retention, security, or disclosure of revenue associated with circumventionthe data of our platformusers, employees, contractors, or others, or their interpretation or enforcement, or any changes regarding the manner in which the express or implied consent of users for the collection, use, retention, or disclosure of such data must be obtained, including in response to the COVID-19 pandemic, could increase our costs and require us to 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 user data or develop new services and features.cash flows,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.face payment and fraud risks that could adversely impact our business.Requirementshave users on our platform relating to user authenticationlocated in over 180 countries, including some markets where we have limited experience, where challenges can be significantly different from those we have faced in more developed markets, and fraud detectionwhere business practices may create greater internal control risks. Further, certain skills and services are complex. If our security measures do not succeed, our business may be adversely impacted.offered by freelancers concentrated in countries with higher risks of instability and geopolitical uncertainty, such as Russia and Ukraine. In addition, bad actors around the world use increasingly sophisticated methodswe engage freelancers located in many countries 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 detailsprovide services for our managed services offering 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 impactto us for internal projects. Because 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 requiredwebsite is generally accessible 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 California Department of Business Oversight (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 who 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 illegal or improper uses of our platform. Weworldwide, we have received in the past, and may continue to receive, notices from jurisdictions claiming that we or our users are required to comply with their laws. Laws outside of the United States regulating the internet, payments, escrow, data protection, data residency, privacy, taxation, terms of service, website accessibility, consumer protection, intellectual property ownership, services intermediaries, payment intermediaries, labor and employment, wage and hour, worker classification, worker health, 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 product 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.complaintsbe, 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:clients, freelancers,rapid growth or higher volume or those which relate to local jurisdictions;other third parties concerning misuselaws, regulations, or rules governing electronic funds transfers to which we are subject change or are interpreted to make it difficult or impossible for us to comply.platform. Wepayment partners to issue prepaid cards to our users, filed for insolvency and was ordered by the UK Financial Conduct Authority to cease all licensed activity. As a result, our non-U.S. users who previously chose to withdraw their funds to a prepaid card could not access their funds for several days. The order was eventually lifted, allowing those customers to access their funds. This incident or any similar future incident concerning our payment partners or their respective vendors could cause our customers to lose trust in our platform and could have also brought claims against clientsan adverse impact on our business.third parties for their misuseperformance problems with our platform or infrastructure, including disruptions caused by the COVID-19 pandemic or responses to the pandemic, could harm our brand and reputation and may damage the businesses of users. As the usage of our platform grows, we will need an increasing amount of technicalbring similar claimsexpend additional resources in order to help resolve the issue. Accordingly, any errors, defects, or disruptions in our platform could adversely impact our brand and reputation, revenue, and operating results.future. Evenfuture, 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 incorrect or change, or if these claimswe do not result in litigation or are resolved inaddress these risks successfully, our favor, these claims,financial condition and the timeoperating results could differ materially from our expectations, our growth rates may slow, and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results. Inc., 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. As of September 30, 2018, there have been two instances in whichWhile 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(which is now Upwork Global Inc. (“Upwork Global”)), whichthese inquiries were resolved in our favor and did not require us to obtain a license in the applicable jurisdiction. In April 2013, we received an inquiry from the Washington Department of Financial Institutions, which was resolved in our favor in December 2013. In July 2013, oDesk received an inquiry from the DBO, which was favorably resolved in connection with the combination of Elance and oDesk in 2014. and 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 other U.S. states or other jurisdictions or may choose to obtain such a license even if nototherobtain 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,money; material changes to the mandate, purview or regulatory approach at the DBO; or increased scrutiny of our business may lead to additional compliance costs and administrative overhead.liability or criminal liability and our business, operating results, and financial condition, reputation, and brand 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, 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;•organizing or similar activity by local unions, works councils, or similar labor organizations;•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;•our ability to adapt to sales practices and client requirements in different cultures;•fluctuations in foreign currency exchange rates;•compliance with U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;•corporate or state-sponsored espionage or cyberterrorism;•macroeconomic conditions in certain foreign jurisdictions; and•political instability and security risks 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 maintaincompliance 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 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 we are unable to enter into new agreements with new payment partners, 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; or•we may be forced to cease doing business with payment processors if card association operating rules, certification requirements and laws, regulations, or rules governing electronic funds transfers to which we are subject change or are interpreted to make it difficult or impossible for us to comply.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 nine months ended September 30, 2018 was $186.0 million, representing a period-over-period growth rate of 26% over the same period in 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, our business, operating results, financial condition, and ability to successfully market our platform and serve our users could be adversely affected.Our recent and historical growth should not be considered indicative of our future performance. We have encountered in the past, 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 incorrect 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 rates may slow, and our business would be adversely impacted.Our sales efforts are increasingly targeted at large enterprise clients, and as a result we may encounter greater pricing, implementation, and customization challenges, and we may have to delay revenue recognition for more complicated transactions, all of which could adversely impact our business and operating results.Our sales efforts are increasingly targeted at large enterprise clients, and 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 of 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 ourefforts 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. It is more 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. 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 services 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 knowledge 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 not 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 impactour 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 who 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 or our third-party partners experience a security breach and unauthorized parties obtain access to our users’ data, our data, or our platform, networks, or other systems, our platform may be perceived as not being secure, our reputation may be harmed, demand for our platform may be reduced, our operations may be disrupted, we may incur significant legal liabilities, and our business could be adversely affected.Our business involves the storage, processing, and transmission of users’ proprietary, confidential, and personal information as well as the use of third-party partners who store, process, and transmit users’ proprietary, confidential, and personal information. We also maintain certain other proprietary and confidential information relating to our business and personal information of our personnel. Any security breach or incident that we experience could result in unauthorized access to, misuse of, or unauthorized acquisition of our or our users’ data, the loss, corruption, or alteration of this data, interruptions in our operations, or damage to our computers or systems or those of our users. Any of these could expose us to claims, litigation, fines, potential liability, and reputational harm. An increasing number of online services have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their services. 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 third-party partners may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our or our third-party partners’ security occurs, public perception of the effectiveness of our security measures and brand could be harmed, and we could lose users and business. Data security breaches and other data security incidents may also result from non-technical means, for example, actions by employees or contractors, such as freelancers that we engage on 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. Any of these effects could adversely impact our business.Our and our third-party partners’ systems 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 may need to expend significant resources to protect against, and to address issues created by, security breaches and other incidents. Security breaches and other security incidents, including any breaches of 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, we cannot be certain our coverage will be adequate for liabilities actually incurred or will continue to be available to us on reasonable terms, or at all.We rely on Amazon Web Services to deliver our platform to our users, and any disruption of service from Amazon Web Services or material change to our arrangement with Amazon Web Services could adversely affect our business. We are also subject to litigation as a result of our use of Amazon Web 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 over the operations of the facilities 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 a natural disaster or an act of terrorism, 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 subject to the same risks. Sustained or repeated system failures would reduce the attractiveness of our platform to users, thereby reducing revenue. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely impactuse of our platform. We may not carry sufficient business interruption insurance to compensate us for losses that may occur 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, 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, we may experience costs 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 platform 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 failed to indemnify us, it may adversely impact our operating results.FCPAU.S. 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.andor other illicit activity. We also have policies, procedures, and sophisticated technology designed to allow us to comply with U.S. economic sanctions laws and prevent our platform from being used to facilitate business in countries 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”) and equivalent foreign authorities. Although we have a program that we believe is reasonably designed to allow us to comply with applicable laws, rules, and regulations, weWe may still be subject to fines or other penalties 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, whileRegulators continue to increase their scrutiny of compliance with these obligations, which may require us to further revise or expand our compliance program, including the procedures that we have implementeduse to verify the identity of our users and to monitor our platform for potential illegal activity. In addition, any policies and procedures for compliancethat we implement to comply with OFAC regulations may not be effective, including among others, internet protocol-blocking logic designed to preventin preventing users from using our services within the OFAC-sanctioned countries of North Korea, Syria, and Iran, and the Crimea region of Ukraine, givenUkraine. Attempts by individuals or entities that have been designated by OFAC or are located in a country subject to an embargo by the United States to utilize our service or take advantage of us or our users may also be exacerbated during a macroeconomic downturn, such as the one currently being caused by the COVID-19 pandemic. Given the technical limitations in developing controls to prevent, among other things, the ability of users to placepublish on our platform false or deliberately misleading information or to develop sanctions evasionsanctions-evasion methods, it is possible that we may inadvertently and without our knowledge provide services to individuals or entities that have been designated by OFAC 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 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,United States Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”),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. 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, andor private-sector recipients for the purpose of obtaining or retaining business, directing business to any person, or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in 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, and agents, as well as those contractors to which we outsource certain of our businessandor other applicableanti-bribery, anti-money laundering, or sanctions laws, could result in investigations 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. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.Errors, defects, or disruptions in our platform could diminish demand, adversely impact our financial results, and subject us to liability.Our users utilize our platform for important aspects of their businesses, and any errors, defects, or disruptions in our platform,performance problems with our platform could harm our brand and reputation and may damage the businesses of users. We are also reliant on third-party software and infrastructure, including the infrastructure of the internet,channels that we utilize to provide our platform. Any failure of or disruption to this software and infrastructure could also make our platform unavailabledirect traffic to our users.website are modified to our disadvantage, or our search result page rankings decline for other reasons, our user growth could decline.platformability to maintain the number of visitors directed to our website is constantly changing with new updates, whichnot entirely within our control. For example, our competitors’ search engine optimization and other efforts such as paid search may contain undetected errors when first introduced or released. Any errors, defects, disruptionsresult in service,their websites receiving a higher search result page ranking than ours, internet search engines or other performance or stability problems withchannels that we utilize to direct traffic to our platformwebsite could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position, our inability to timely and accurately maintain our financial records, inaccurate or delayed invoicing of clients, delay of payment to us or freelancers, or claims by users for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help resolve the issue. Accordingly, any errors, defects, or disruptions in our platform could adversely impact our brand and reputation, revenue, and operating results.Changes in laws or regulations relating to privacy or the protection or transfer of personal data, or any actual or perceived failure by us to comply with such laws and regulations or our privacy policies, could adversely affect our business.We receive, collect, store, process, transfer, and use personal information and other user 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. We are also subject to the terms of our privacy policies and 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 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 appliedrevise their methodologies in a manner that we do not anticipateadversely impacts traffic to our website, or that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Further, any significant change to applicable laws, regulations, or industry practices regarding 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 disclosure of such data must be obtained, could increase our costs and require us to modify our services and features, possibly in a material manner, which 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 unableprominent enough to completedrive sufficient traffic to our website, and we may not be able to influence the results.cost-effective manner,drop in our search ranking, or at all, and may limithave other adverse impacts that negatively affect our ability to storemaintain and process user datagrow 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 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 created 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 finesorganic ranking decreases. Any of up to 4% of global annual turnover for the preceding financial year or €20 million, whichever is higher, for the most serious violations. 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 andthese changes could have an adverse impact on our business. Asbusiness, user acquisition, and operating results.result,range of mobile devices, technologies, systems, networks, and standards that we do not control. We may need to modify the way we treat such information. Further, the United Kingdom initiating a process to leave the European Union has created uncertaintynot be successful in developing relationships with regard to the regulation of data protectionkey participants in the United Kingdom.mobile industry or in developing products that operate effectively with these devices, technologies, systems, networks, or standards. In particular, although the United Kingdom has proposedevent that it is more difficult for our users to access and use our platform on their mobile devices, our users find our mobile offering is not cost-effective, our users find our mobile offering does not meet their needs, our competitors develop products and services that are perceived to operate more effectively on mobile devices, or 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.Data Protection Billprovider of cloud infrastructure services. We do not have control over the operations of the facilities of AWS that wouldwe 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 or could be substantially consistent withsubject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. The occurrence of any of these events, a decision to close the GDPR, this bill remains in the legislative process in the United Kingdom and it remains unclear whether it will be enactedfacilities or what it will provide for if enacted.Any failurecease or perceived failure bylimit providing services to us to comply with our posted privacy policies, our privacy-related obligations to userswithout adequate notice, 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 andunanticipated problems could result in significant liability,interruptions to our platform, including lengthy interruptions. Our platform’s continuing and uninterrupted performance is critical to our success and 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 subject to the same risks. Sustained or repeated system failures could reduce the attractiveness of our platform to users, cause our users to lose trust in us, and otherwise have an adverse effect on ourreputation 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 users may limit the adoption anddecrease their use of or cease using our platform, and reduce the overall demand for,adversely affect our platform.Additionally, if third parties we work with violate applicable laws, regulations, or agreements, such violations may put our users’ data at risk,business. Moreover, negative publicity arising from these types of disruptions 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, cause our users to lose trust in us, and otherwise have an adverse effect ondamage our reputation and business. Further, public scrutinymay adversely impact use of our platform. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any events that cause interruptions in our service and we cannot be certain that insurance will continue to be available to us on economically reasonable terms, or complaints about technology companiesat all.handling or data protection practices, even if unrelatedfacilities at one time during the transition period.our business, industry, or operations, may leadlitigation by third parties claiming that AWS and basic HTTP functions infringe their patents. Although we expect Amazon to increased scrutinyindemnify us with respect to at least a portion of technology companies, including us,such claims, the litigation has been, and may cause government agenciescontinue to enact additional regulatory requirements, orbe, time consuming, and may divert management’s attention and, if Amazon fails to modify their enforcement or investigation activities, which may disrupt the conduct offully indemnify us, adversely impact our business and increase our costs and risks.and could be applied solely or disproportionately to services provided over the internet, could target certain products and services offered on our platform, or could otherwise affect our or our users’ tax obligations or financial position and operating results. Many countries in the European Union,EU, as well as the United Kingdom, India, and a number of other countries and organizations, such as the OrganizationOrganisation 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, tax reform legislation commonly referred to as the Tax Act was enacted in the United States in December 2017. We continue to review theThe impact and burden of these tax reformsregulations and proposed regulations on our business. There are many transactions that occur duringbusiness and the ordinary coursebusinesses of business for which the ultimate tax determinationour users is uncertain.may also be subject to non-income taxes, such as payroll, sales, use, value-added, and goods and services taxes in the United States and various foreign jurisdictions. In certain jurisdictions, wecurrently collect and remit indirect taxes on our fees. However,fees in a number of jurisdictions and from time to time we may begin collecting and remitting indirect taxes in additional jurisdictions. 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. 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 or liabilities, the effectiveness of our tax planning strategies, or changes in tax laws or their interpretation. Such changes could have an adverse impact on our operating results and financial condition.or the indemnification obligation may be deemed unenforceable.unenforceable, or the functionality and indemnification provisions may cause users to seek out other platforms. 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.owedwe owe 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 estimates of our tax obligations or in which the ultimate tax outcome is determined.couldwould adversely impact our operating results.and/orand 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 or other intellectual property rights against certain third parties, including government agencies or government contractors. In these countries, patents or other intellectual property rights 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 such rights and the uncertainty involved in obtaining adequate protection from such applications and registrations. 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.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 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 employees of third-party staffing providers or other contractors, the employer entersagrees to enter into these agreements with individual workers. We also take other measures to protect our information and data, including implementing acceptable use policies, limiting access to our information and data through technological means, and monitoring and limiting the dissemination of 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, and distribution of our proprietary information or in effectively securing and maintaining exclusive ownership of intellectual property developed by our current or former employees and contractors. For example, when workingMost of our employees and all of the contractors with contractors, particularly those whowhich we work are off-site, itwhich may bemake it 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. 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 hasmay have 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, and may in the future be, 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.marks, or use of technologies that infringe on our intellectual property. 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. Our 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.
Litigation could have a material adverse impact on our operating results and financial condition.Successful intellectualIntellectual 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 are now, 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. Companies, including non-practicing entities, have also sent us demand letters alleging that we infringe their intellectual property and proposing that we license certain of their patents. 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, 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,infringe; make substantial payments for legal fees, settlement payments, or other costs or damages,all,all; or redesign the allegedly infringing products and services to avoid infringement, which could be costly, time-consuming, distracting to management, 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 ourwould require us to expend additional resources. Some of our infringement indemnification obligations related to intellectual property are contractually capped at a very high amount or not capped at all.resulting fromrelating to allegations of intellectual property infringement, including current disputes, could subject us to significant legal costs and liability for damages and invalidate our proprietary rights. Any current or 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;•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;•stop using the name “Upwork” or other trademarks in some or all jurisdictions;
•incur significant legal expenses;•incur significant legal expenses;
•pay substantial damages to the party whose intellectual property rights we may be found to be infringing;•pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
•pay substantial amounts in settlement to a party that asserts allegations of intellectual property infringement;•make expensive changes in our methods of doing business; or
•make expensive changes to our platform or 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.further exhaust ourrequire us to expend additional 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, werenewintegrate acquired businesses and technologies successfully or replaceto 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.agreements on comparable terms,types of transactions. Any acquisition, investment, or at all.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, if expected synergies fail to materialize, 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 cannot guarantee thatmay be exposed to unknown or additional risks and liabilities.partiesfuture seek to acquire or invest in additional businesses, products, technologies, or other assets. We also may enter into relationships with which we have strategic relationships will continue to devote the resources necessaryother businesses to expand our reach, increaseplatform or our distributionability to provide our platform in foreign jurisdictions, which could involve preferred or support an increased numberexclusive licenses, additional channels of usersdistribution,associated 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:cases. Further, somecash that we may need in the future to operate our business;our strategic partners offer,the acquired business, products, technologies, or could offer, competing productsother assets, or become subject to more stringent scrutiny or differing applications of laws and services or also work with our competitors. Asregulations to which we are currently subject as a result of these factors, many of our third-party partners may choosesuch transactions;develop alternative products and services in addition to,us or in lieu of, our platform, either on their own or in collaboration with others, including our competitors. Ifthat we are unsuccessfulunable to repay;establishingassimilating acquired operations and development cultures or maintainingotherwise fail to realize the anticipated benefits of such transactions;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 maintainingexisting, accounting policies.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 supportrisks could adversely impact our business operating results, and financial condition.Our ability to attract and retain users is dependent in part on the ease 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 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 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. 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 individuals 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 will 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. We also expect that being a public company and the associated rules and regulations will make 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 will 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 are 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 second annual report on Form 10-K. 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, we identified a number of adjustments to our consolidated financial statements that resulted in a revision to previously issued financial statements. 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 condensed consolidated financial statements would not be prevented or detected on a timely basis. This deficiency could result in additional misstatements to our condensed consolidated financial statements that would be material and would not be prevented or detected on a timely basis.We have begun 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, 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 September 30, 2018, we had 26 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. Despite this, there was insufficient time to remediate this material weakness. 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.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.Operations.”Operations” included elsewhere in this Quarterly Report. 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 condensed 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.new or amendedcurrent 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.U.S. federal income tax reform could adversely affect us.In December 2017, the Tax Act was enacted, which significantly reforms the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The Tax Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and the use of net operating losses generated in tax years beginning after December 31, 2017, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. The Tax Act could have material adverse impacts on our business, cash flows, operating results or financial conditions, and we continue to examine the impact such reform may have.2017,2019, we had net operating loss carryforwards for U.S. federal income tax purposes and state income tax purposes of $172.9$220 million and $38.5$50 million, respectively, available to offset future taxable income. If not utilized, theOur federal net operating loss carryforward amounts will beginbegan to expire in 2019, including $14.5 million that expired in 2019 and the$21.6 million that will expire in 2020, and will continue to expire in 2021 and future years. 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.We have not yet determined the consequencesbusinessUpwork Enterprise and Business offerings, and for certain legacy clients, we advance payments to freelancers for invoiced services on behalf of the Tax Act,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. From time to time, clients fail to pay for these services rendered by a freelancer, and as a result, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the applicable agreement or our terms of service, including through arbitration or litigation. We may experience an increase in the failure of clients to pay for services in the event of a macroeconomic downturn, such as a downturn resulting from the COVID-19 pandemic, as clients become unable or unwilling to pay for services rendered. 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 have a material impact onadversely affect our operating results, financial position, and cash flow. All of these risks are made more likely by the value of our deferred tax assetsCOVID-19 pandemic and the resulting macroeconomic downturn, and could increaseresult in increased costs to us as we advance payments to freelancers and seek to compel payment from our future U.S. tax expense. However, we anticipate that any adjustment to provisional amounts recorded would be fully offset by a corresponding change to our valuation allowance.source codesource-code form subject to certain conditions. Some open source licenses contain conditions that any person who distributes a modification or derivative work of software that was subject to an open source license 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 platform 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 platform in source code form, the interpretation of open source licenses is legally 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.the sale ofoffering our platform 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.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.and client spend retention, and marketplace take rate 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 algorithmalgorithmic 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, 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.
Our loan and security agreement provides our lender with a first-priority lien against substantially all of our assets (excluding our intellectual property), and contains financial covenants and other restrictions on our actions, which could limit our operational flexibility and otherwise adversely affect our financial condition.be unablerequire additional capital to integrate acquired businessesfund our business and technologies successfullysupport our growth, including in connection with any future acquisitions or strategic investments, and any inability to achieve the expected benefits ofgenerate or obtain such acquisitions. Wecapital may acquireadversely affect our operating results and financial condition.invest in additional companies, which may divert our management’s attention, result in additional dilutionenhancements to our stockholders,platform, acquiring new technologies, and consume resources that are necessaryimproving our infrastructure, we have made significant financial investments in our business and we intend to sustain our business.Our business strategycontinue to make such investments. In addition, we may, from time to time, include acquiringseek to acquire or strategically invest in other complementary products, technologies, or businesses. An acquisition, investment, or business relationship mayAs a result, in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilatingneed to engage in equity or integratingdebt financings, in lieu of or in addition to borrowing funds under our Loan Agreement, to obtain the businesses, technologies, products, services, personnel,funds required for these investments, acquisitions, and other business endeavors. If we raise additional funds through equity or operationsconvertible debt issuances, our existing stockholders may suffer significant dilution and these securities could have rights, preferences, and privileges that are superior to those 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 developmentholders of our business. Moreover, the anticipated benefits of any acquisition, investment, or business relationshipcommon stock. If we obtain additional funds through debt financing, we may not be realizedable 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 and strategic investments. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be exposedadversely affected, requiring us to unknown liabilities.Wedelay, reduce, or eliminate some or all of our operations. Moreover, the COVID-19 pandemic has caused, and may continue to cause, significant disruptions of global financial markets, which may impact our ability to access capital now and in the future, seekand capital may be available only on terms less favorable 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.Future litigation could have a material adverse impact on our operating results and financial condition.From time to time, we have been subject to litigation. The outcome of any litigation (including class actions and individual lawsuits), regardless of its merits, is inherently uncertain. Regardless of the merits of any claims that may be brought against us, 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 against 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 a settlement agreement. 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. Any adverse determination related to litigation or a settlement agreement could require us to change our technology or our business practices in costly ways, prevent us from offering certain products 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 operating results and cash flows, harm our reputation, or otherwise negatively impact our business.Our Loan Agreement provides our lender with a first-priority lien against substantially all of our assets (excluding our intellectual property), and contains financial covenants and other restrictions on our actions, which could limit our operational flexibility and otherwise adversely affect our financial condition.Our Loan Agreement restricts our ability to, among other things:•incur additional indebtedness;•sell certain assets;•declare dividends or make certain distributions; and•undergo a merger or consolidation or other transactions.In addition, the interest rates we pay under our Loan Agreement are derived from the prime rate, which has increased recently, and may increase in the future. Interest rate increases will result in us having to make higher interest payments and reduce the amount 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 upon 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.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 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, acquiring new technologies, and improving our infrastructure, we have made significant financial investments in our business and we intend to continue to make such investments. As a result, we may need to engage in equity or debt financings, in addition to our Loan Agreement, to provide the funds required for these investments 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 that 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. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, 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 ormore; (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.”We cannot predict if investors will find our common stock less attractive or our company less comparable to certain other public companies because we will 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.FASB,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.ASC 606,ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Accounting Standards Codification (Topic 605),Recognition.Recognition (Topic 605). The core principle of ASCTopic 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 ASCOn December 31, 2019, Topic 606 which will result in ASC 606 becomingbecame effective for us forretroactive to January 1, 2019. Under Topic 606, more estimates, judgments, and assumptions are required within the year ending December 31, 2019.revenue recognition process than were previously required. This includes more enhanced disclosures in our condensed consolidated financial statements to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with our users. Under Topic 606, we are required to estimate the standalone selling price of certain performance obligations that represents a material right, which requires significant judgment. Our reported financial position and financial results may be harmed if our estimates or judgments prove to be wrong, assumptions change, or actual circumstances differ from those in our assumptions. Any difficulties in implementing these pronouncementsapplying Topic 606 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 evaluating ASC 606 and have not determined the impact it may have on our financial reporting. If, for example, we were required to recognize revenue differently with respect to our subscriptions or professional services, the differential revenue recognition may cause variability in our reported operating results due to periodic or long-term changes in the mix among our subscription offerings.Euro, the British Pound, the Australian dollar, or the Canadian dollar,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.andincluding the current COVID-19 pandemic, by man-made problems such as terrorism, or failures of technology, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.or flood, or other catastrophic events,event, such as a power loss or telecommunications failure, or other technological failure resulting in the permanent destruction of data, 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 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, public health pandemics (including the COVID-19 pandemic), 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.volatile.volatile, particularly in light of the macroeconomic uncertainty created by the COVID-19 pandemic. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control and some of which will be impacted by the COVID-19 pandemic and the resulting governmental restrictions intended to prevent its spread and macroeconomic downturn, including:
•actual or anticipated fluctuations in our revenue and other operating results;•overall performance of the equity markets;
•changes in the financial projections we may provide to the public or our failure to meet these projections;•actual or anticipated fluctuations in our revenue and other operating results;
•overall performance of the equity markets;•changes in the financial projections we may provide to the public or our failure to meet these projections;
•the economy as a whole and market conditions in our industry;•failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•recruitment or departure of key personnel;•recruitment or departure of key personnel;
•failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;•the economy as a whole and market conditions in our industry;
•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;•negative publicity related to the real or perceived quality of our platform, as well as the failure to timely launch new products and services that gain market acceptance;
•acquisitions, strategic partnerships, joint ventures, or capital commitments;•rumors and market speculation involving us or other companies 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;•announcements by us or our competitors of new products or services, commercial relationships, or significant technical innovations;
•rumors and market speculation involving us or other companies in our industry and/or other industries;•acquisitions, strategic partnerships, joint ventures, or capital commitments;
•announcements by us or our competitors of new or terminated products or services, commercial relationships, or significant technical innovations;•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business, including those governing worker classification, taxation of workers, or withholding and remitting taxes on income or earnings;•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;
81•changes in accounting standards, policies, guidelines, interpretations, or principles;•other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;
•lawsuits threatened or filed against us or our key personnel, litigation involving our industry, or both, or lawsuits threatened or filed against our users relating to their use of our platform;•the expiration of contractual lock-up or market stand-off agreements; and
•developments or disputes concerning our or other parties’ products, services, or intellectual property rights;•sales of shares of our common stock by us or our stockholders.companies.companies and are attributable, in part, to outside factors such as the COVID-19 pandemic and its impact on the global economy. 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.36,945,317119,267,694 shares of our common stock and 61,279,079 sharesoutstanding as of our convertible preferred stock (which shares converted into an equivalent number ofJune 30, 2020. All shares of our common stock in the IPO) outstanding as of September 30, 2018, all of which converted to common stock in connection with our IPO. 14,348,196 shares of common stock sold in the IPO are freely tradable, exceptgenerally without restrictions or further registration under the Securities Act of 1933, as amended (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 ourshares 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.SeptemberJune 30, 2018,2020, we had outstanding (i) stock options outstanding that, if fully exercised, would result in the issuance of 24,312,2039,878,333 shares of common stock.stock and (ii) 6,191,541 unvested RSUs. We have filed a registration statementstatements 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, theThe shares issued upon exercise of outstanding stock options or settlement or outstanding RSUs will be available for immediate resale in the United States on the open market.somecertain 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.will likelycould limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.October 31, 2018,June 30, 2020, our executive officers, directors, current 5% or greater stockholders, and affiliated entities together beneficially owned approximately 61%a significant portion of our common stock. As a result, these stockholders, acting together, willcould have controlsubstantial influence 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.few securities analysts commence coverage of us, or if industry analysts cease coverage of us or fail to publish reports on us regularly, the trading price and trading volume for our common stock would be negatively affected. As of June 30, 2020, there were six securities analysts that cover us and publish reports on us regularly. 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, which has occurred previously, 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.•provide that our board of directors will be 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-created directorships;
•provide that 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-created directorships;•require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;
•require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws;•authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
•authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;•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 be authorized to call a special meeting of stockholders;
•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 be 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;
•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 bylaws; and
•provide that the board of directors is expressly authorized to make, alter, or repeal our 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. (thewill also provide that the federal district courts of the United States willwould be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.Act (the “Federal Forum Provision”). 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. If a court were to find the choice of forum provision contained in our restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely impact our business, operating results, and financial condition. Unregistered Sales of Equity SecuritiesFrom July 1, 2018 through October 3, 2018 (the date of the filing of our registration statement on Form S-8), we issued and sold to our employees, consultants and other services providers an aggregate of 1,208,907 unregistered shares of common stock upon the exercise of stock options under our 2014 Equity Incentive Plan. From July 1, 2018 through October 3, 2018 (the date of the filing of our registration statement on Form S-8), we granted options to our employees, directors, consultants and other services providers to purchase an aggregate of 2,693,123 shares of common stock under our 2014 Equity Incentive Plan, with a per share exercise price ranging from $6.61 to $8.18. These shares were issued pursuant to benefit plans and contracts related to compensation in reliance upon the exemption from registration requirements of Rule 701 of the Securities Act. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions.Use of ProceedsIn October 2018, we completed our initial public offering in which we issued and sold an aggregate of 7,840,908 shares of common stock, including 1,022,727 shares pursuant to exercise of the underwriters’ option to purchase additional shares, and selling stockholders sold 6,507,288 shares of our common stock, including 848,776 shares pursuant to the exercise of the underwriters’ option to purchase additional shares. The shares were sold at the IPO price to the public of $15.00 per share, less the underwriting discounts and commissions. 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. We raised aggregate net proceeds of $109.4 million from the IPO, after the underwriting discounts and commissions. As described in our Prospectus, we used approximately $10.0 million of net proceeds from the IPO to repay indebtedness under our Loan Agreement. There has been no material change in the planned use of proceeds from our IPO as described in our Prospectus. The managing underwriters of our IPO were Citigroup Global Markets Inc., Jefferies LLC and RBC Capital Markets, LLC. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors pursuant to our director compensation policy.
None.Exhibits.Exhibits.Incorporated by Reference Filed or
Furnished HerewithExhibit Number Description Form File No. Exhibit Filing Date 10.1 X 10.2 X 31.1 X 31.2 X 32.1* X 32.2* X 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). X 101.SCH Inline XBRL Taxonomy Extension Schema Document. X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). X UPWORK INC.UPWORK INC. Date: November 8, 2018By:/s/ Stephane KasrielDate: August 4, 2020 By: Stephane KasrielNovember 8, 201859