upwk-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

Commission File Number: 001-38678

 

UPWORK INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-4337682

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

441 Logue Avenue

Mountain View, California

94043

(Address of principal executive offices)

(Zip Code)

(650) 316-7500

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 

As of October 31, 2018, the number of shares of the registrant’s common stock outstanding was 106,299,106.

 

 


i


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

1

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

2

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

3

 

Notes to Condensed Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 6.

Exhibits

58

Signatures

59

 


ii


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q (“Form 10-Q”) to “Upwork,” “Company,” “our,” “us,” and “we” refer to Upwork Inc. and where appropriate, its consolidated subsidiaries.

This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Form 10-Q, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:

 

trends in total revenue, cost of revenue, and gross profit or gross margin and other key metrics;

 

our investments in our platform;

 

trends in operating expenses, including research and development expense, sales and marketing expense, and general and administrative expense, and expectations regarding these expenses as a percentage of total revenue;

 

our ability to meet our working capital and capital expenditure needs for at least the next 12 months; and

 

other statements regarding our future operations, financial condition, and prospects and business strategies.

Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties, and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q 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-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Form 10-Q or to conform statements to actual results or revised expectations, except as required by law.

 

 

 

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

UPWORK INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

 

 

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

 

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

 

1


 

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

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

 

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

 

 

 

2


 

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

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

 

 

 

 

 

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

3


 

UPWORK INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1—Organization and Description of Business

Upwork Inc. (the “Company” or “Upwork”) operates an online marketplace 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 of Elance, Inc. and oDesk Corporation (the “Elance-oDesk Combination”). The Company changed its name to Elance-oDesk, Inc. (“Elance-oDesk”) shortly before the Elance-oDesk Combination in March 2014, and later to Upwork Inc. in May 2015. In 2015, the Company relaunched as Upwork and commenced consolidation of its two operating platforms. In 2016, following completion of the platform consolidation, the Company began operating under a single platform. The Company is headquartered in Mountain View, California.

The terms “Upwork” and the “Company” in these notes to the condensed consolidated financial statements refer to Upwork and its wholly-owned subsidiaries taken as a whole.          

Note 2—Basis of Presentation and Summary of Significant Accounting Policies    

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our final prospectus 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”).

The condensed consolidated balance sheet as of December 31, 2017 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP.

The condensed consolidated financial statements include the accounts of Upwork Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2018.

Initial Public Offering

In 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 Taxes

The 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.

4


 

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 Policies

There have been no changes to the Company’s significant accounting policies that are described in the Prospectus.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Such estimates include, but are not limited to, the useful lives of assets; assessment of the recoverability of long-lived assets; goodwill impairment; 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. Actual results could materially differ from these estimates.

Recent Accounting Pronouncements Not Yet Adopted

As an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to 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 issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC 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), 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 new

5


 

standard 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 will require that the amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The new guidance also requires certain disclosures to supplement the statement of cash flows. The guidance becomes effective for the Company for the year ending on 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 January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Others (Topic 350): Simplifying the Test for Goodwill 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. Under ASU No. 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing 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 its 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.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ASU No. 2018-13 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.

In August 2018, the FASB issued ASU No. 2018-15, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 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. 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 Pronouncement

In 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 eliminates 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.

6


 

Additionally, the Company elected to account for forfeitures as they occur rather than estimate expected forfeiture using a modified retrospective transition 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 of 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 no impact on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018.

Note 3—Fair Value Measurements

The Company measures its redeemable convertible preferred stock warrant liability at fair value on a recurring basis. The Company defines fair value as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance describes three levels of inputs that may be used to measure fair value:

 

Level I—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets;

 

Level II—Observable inputs other than Level I prices, such as unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on the Company’s own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.

The categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to its fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the assets or liability.

The Company’s financial instruments that are carried at fair value consist of Level III liabilities. The Company’s redeemable convertible preferred stock warrant liability is classified within Level III because the warrants are valued using a Black-Scholes valuation model, for which some inputs are unobservable in the market. The valuation methodology and underlying assumptions are discussed further in Note 8 – Preferred and Common Stock Warrants.

The following tables set forth the fair value of the Company’s financial liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):

 

 

 

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

 

7


 

The increase in Level III from December 31, 2017 to September 30, 2018 was due solely to the remeasurement of the Company’s redeemable convertible preferred stock warrant liability, which was $3.6 million for the nine months ended September 30, 2018, and is included in other expense, net in the Company’s condensed consolidated statements of operations.

Note 4—Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consisted of the following (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

 

Depreciation expense related to property and equipment was $0.6 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively.

Depreciation expense related to property and equipment was $1.5 million and $1.1 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company capitalized $0.8 million and $0.2 million of internal-use software and platform development costs during the three months ended September 30, 2018 and 2017, respectively, and $2.7 million and $0.4 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 for the three and nine months ended September 30, 2018 was immaterial.

Intangible Assets, Net

All of the Company’s identifiable intangible assets were acquired in March 2014 from the Elance-oDesk Combination. Intangible assets, net consisted of the following (in thousands):

 

 

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

 

Total amortization expense of intangible assets was $0.7 million for the three months ended September 30, 2018 and 2017 and $2.0 million and $2.1 million for the nine months ended September 30, 2018 and 2017, respectively. Amortization expense was 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.

8


 

The estimated future amortization expense for the acquired intangible assets is as follows (in thousands):

 

 

 

September 30, 2018

 

Remainder of 2018

 

$

670

 

2019

 

 

2,668

 

2020

 

 

2,668

 

2021

 

 

665

 

Total

 

$

6,671

 

Accrued Expenses and Other Current Liabilities

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

 

 

 

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

 

 

Note 5—Commitments and Contingencies

Operating Leases

The Company leases office space under four non-cancelable operating lease agreements, which expire from 2019 through 2024. The terms 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 the 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, total minimum lease payments under the lease agreement are $15.7 million, with lease payments ranging from $1.0 million to $2.2 million per year from 2019 to 2024.

Also in September 2018, the Company entered into an agreement for a non-cancellable operating lease for 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-cancelable operating leases were as follows (in thousands):

 

 

 

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

 

Rent expense was $1.1 million and $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.

9


 

Letters of Credit

As of September 30, 2018 and December 31, 2017, in conjunction with the operating lease agreements, the Company had two irrevocable letters of credit outstanding in the aggregate amount of $0.6 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 have been drawn against these letters of credit as of September 30, 2018 and December 31, 2017.

Contingencies

The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. From time to time in the normal course of business, various claims and litigation have been asserted or commenced. Due to uncertainties inherent in litigation and other claims the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability or damages. Any claims or litigation could have an adverse effect on the Company’s business, financial position, results of operations or cash flows in or following the period that claims or litigation are resolved.

As of September 30, 2018 and December 31, 2017, 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 date is neither probable nor reasonably possible.

Indemnification

The Company has indemnification agreements with its officers, directors, and certain key employees to indemnify them while they are serving in good faith in their respective positions. In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to vendors and other parties, including, but not limited to, losses arising out of the Company’s breach of such agreements. 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. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the facts and circumstances involved in each particular provision.

Note 6—Debt

The following table presents the carrying value of the Company’s debt (in thousands):

 

 

 

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

%

In September 2017, the 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 initially of a term loan (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 facility amount of $30.0 million. However, upon the Company achieving adjusted net revenue of at least $49.0 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

10


 

(the “Second Term Loan,” and together with the First Term Loan, the “Term Loans”), which, in turn, increased the aggregate maximum amount of the facility of up to $49.0 million. The Company incurred debt issuance costs of $0.2 million, which was primarily classified as a deduction to the long-term portion of the Term Loan. In November 2017, the Company drew revolving loan borrowings of $10.0 million and Term Loan borrowings of $9.0 million. 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 to the Company maintaining an adjusted quick ratio of 1.30 and achieving minimum EBITDA levels over trailing periods ranging from three to twelve months. The Loan Agreement also includes a restrictive covenant on dividend payments other than dividends paid solely in common stock.

In September 2018, the Company entered into a second amendment (the “Second Amendment”) to the Loan Agreement which expanded the types of eligible trade and client accounts receivable considered for the determination of the 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 offering 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, the Company drew down $15.0 million under the revolving line of credit for such purpose. In October 2018, the Company repaid a total of $25.0 million of indebtedness owed under the Loan Agreement. See Note 14—Subsequent Events.

The amortization expense related to the debt discount was immaterial for the three and nine months ended September 30, 2018 and 2017. 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 Stock

Redeemable convertible preferred stock as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands, except share data):

 

 

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

 

 

Note 8—Preferred and Common Stock Warrants

Redeemable Convertible Preferred Stock Warrants

As a result of the Elance-oDesk Combination, a redeemable convertible preferred stock warrant that was originally issued by Elance prior to the Elance-oDesk Combination became exercisable to purchase up to 26,000 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 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.

11


 

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:

 

 

 

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%

 

Common Stock Warrant

As 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.

Note 9—Common Stock

Holders 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:

 

 

 

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

 

 

12


 

Note 10—Stock-Based Compensation

The following table summarizes activity under the Company’s stock option plans:

 

 

 

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

 

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 Compensation

The following table summarizes the components of stock-based compensation expense recognized in the condensed consolidated statements of operations (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 stock-based compensation

 

$

1,986

 

 

$

1,526

 

 

$

5,667

 

 

$

4,817

 

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 Transactions

Certain 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.

13


 

Note 11—Net Loss per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share data):

 

 

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

)

 

$

 

The following potentially dilutive shares were excluded from the computation of diluted net loss per share attributable to common stockholders because including them would have been anti-dilutive: 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

24,312,203