SEC Filing | Upwork Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

________________________________________________

FORM 10-Q

________________________________________________

(Mark One)



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

For the quarterly period ended June 30, 2019



¨	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.)
2625 Augustine Drive, Suite 601 Santa Clara, California	95054
(Address of principal executive offices)	(Zip Code)

(650) 316-7500

(Registrant’s telephone number, including area code)

441 Logue Avenue, Mountain View, California 94043

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share	UPWK	The Nasdaq Stock Market LLC

_______________________________________________

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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 July 31, 2019, there were 110,803,709 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS



		Page
Special Note Regarding Forward-Looking Statements		1

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018	3
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 6.	Exhibits	80
Signatures		81

Unless otherwise expressly stated or the context otherwise requires, references in this Quarterly Report on Form 10-Q (this “Quarterly Report” or “report”) to “Upwork,” “Company,” “our,” “us,” and “we” and similar references refer to Upwork Inc. and its wholly-owned subsidiaries.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

We have based these forward-looking statements largely on our current expectations and projections as of the date of this filing about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly 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 Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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

You should read this Quarterly Report and the documents that we reference herein and have filed with the SEC as exhibits to this Quarterly Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

UPWORK INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)



	June 30, 2019			December 31, 2018
ASSETS
Current assets
Cash and cash equivalents	$	67,092		$	129,128
Marketable securities	62,442			—
Funds held in escrow, including funds in transit	118,302			98,186
Trade and client receivables – net of allowance of $2,195 and $2,832 as of June 30, 2019 and December 31, 2018, respectively	51,447			22,315
Prepaid expenses and other current assets	6,554			6,253
Total current assets	305,837			255,882
Property and equipment, net	19,207			10,815
Goodwill	118,219			118,219
Intangible assets, net	4,670			6,004
Other assets, noncurrent	976			653
Total assets	$	448,909		$	391,573

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	1,521		$	2,073
Escrow funds payable	118,302			98,186
Debt, current	32,574			5,671
Accrued expenses and other current liabilities	19,132			20,948
Deferred revenue	1,130			722
Total current liabilities	172,659			127,600
Debt, noncurrent	14,469			18,239
Other liabilities, noncurrent	4,148			1,989
Total liabilities	191,276			147,828

Commitments and contingencies (Note 5)

Stockholders’ equity
Common stock, $0.0001 par value; 490,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 110,708,530 and 106,454,321 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	11			11
Additional paid-in capital	407,876			387,233
Accumulated deficit	(150,254		)	(143,499		)
Total stockholders' equity	257,633			243,745
Total liabilities and stockholders' equity	$	448,909		$	391,573

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

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue	$	74,256		$	62,681		$	143,180		$	121,899
Cost of revenue	21,588			20,457			42,713			40,074
Gross profit	52,668			42,224			100,467			81,825
Operating expenses
Research and development	15,696			12,812			31,496			26,303
Sales and marketing	24,479			16,414			44,997			36,087
General and administrative	14,113			11,219			29,790			22,395
Provision for transaction losses	855			1,450			1,492			2,720
Total operating expenses	55,143			41,895			107,775			87,505
Income (loss) from operations	(2,475		)	329			(7,308		)	(5,680		)
Interest expense	357			556			730			1,085
Other (income) expense, net	(832		)	173			(1,311		)	422
Loss before income taxes	(2,000		)	(400		)	(6,727		)	(7,187		)
Income tax provision	(27		)	(12		)	(28		)	(9		)
Net loss	$	(2,027	)	$	(412	)	$	(6,755	)	$	(7,196	)

Net loss per share, basic and diluted	$	(0.02	)	$	(0.01	)	$	(0.06	)	$	(0.21	)
Weighted-average shares used to compute net loss per share, basic and diluted	108,683			35,105			107,665			34,651

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

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)



Three Months Ended June 30, 2019	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
Balances as of March 31, 2019	—	$	—	106,729,758	$	11	$	392,188	$	(148,227	)	$	243,972
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	—	—		—	—		—		(2,027		)	(2,027		)
Balances as of June 30, 2019	—	$	—	110,708,530	$	11	$	407,876	$	(150,254	)	$	257,633



Three Months Ended June 30, 2018	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Deficit
Balances as of March 31, 2018	61,279,079	$	166,486	34,654,360	$	4	$	95,327	$	(130,376	)	$	(35,045	)
Issuance of common stock upon exercise of stock options and common stock warrants	—	—		1,225,643	—		3,053		—			3,053
Stock-based compensation expense	—	—		—	—		1,793		—			1,793
Net loss	—	—		—	—		—		(412		)	(412		)
Balances as of June 30, 2018	61,279,079	$	166,486	35,880,003	$	4	$	100,173	$	(130,788	)	$	(30,611	)



Six Months Ended June 30, 2019	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
Balances as of December 31, 2018	—	$	—	106,454,321	$	11	$	387,233	$	(143,499	)	$	243,745
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	—	—		—	—		—		(6,755		)	(6,755		)
Balances as of June 30, 2019	—	$	—	110,708,530	$	11	$	407,876	$	(150,254	)	$	257,633



Six Months Ended June 30, 2018	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Deficit
Balances as of December 31, 2017	61,279,079	$	166,486	33,740,323	$	3	$	92,222	$	(123,592	)	$	(31,367	)
Issuance of common stock upon exercise of stock options and common stock warrants	—	—		2,139,680	1		4,270		—			4,271
Stock-based compensation expense	—	—		—	—		3,681		—			3,681
Net loss	—	—		—	—		—		(7,196		)	(7,196		)
Balances as of June 30, 2018	61,279,079	$	166,486	35,880,003	$	4	$	100,173	$	(130,788	)	$	(30,611	)

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

UPWORK INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,755	)	$	(7,196	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for transaction losses	1,038			2,720
Depreciation and amortization	2,827			2,255
Amortization of debt issuance costs	26			51
Amortization of discount on purchases of marketable securities	(665		)	—
Change in fair value of redeemable convertible preferred stock warrant liability	—			359
Change in fair value of Tides Foundation common stock warrant	377			—
Stock-based compensation expense	6,926			3,681
Loss on disposal of fixed assets	—			33
Changes in operating assets and liabilities:
Trade and client receivables	(30,288		)	(8,620		)
Prepaid expenses and other assets	(701		)	(572		)
Accounts payable	(589		)	261
Accrued expenses and other liabilities	(430		)	17,333
Deferred revenue	408			98
Net cash provided by (used in) operating activities	(27,826		)	10,403
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(86,567		)	—
Sale of marketable securities	24,800			—
Decrease (increase) in restricted cash	150			(100		)
Purchases of property and equipment	(7,435		)	(1,297		)
Internal-use software and platform development costs	(2,182		)	(1,945		)
Net cash used in investing activities	(71,234		)	(3,342		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in funds held in escrow, including funds in transit	(20,116		)	5,694
Changes in escrow funds payable	20,116			(5,694		)
Proceeds from exercises of stock options and common stock warrants	10,340			4,271
Proceeds from borrowings on debt	50,000			—
Repayment of debt	(26,893		)	—
Proceeds from employee stock purchase plan	3,577			—
Payments of costs related to the initial public offering	—			(1,596		)
Net cash provided by financing activities	37,024			2,675
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(62,036		)	9,736
Cash and cash equivalents, beginning of period	129,128			21,595
Cash and cash equivalents, end of period	$	67,092		$	31,331
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	714		$	1,053
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased but not yet paid	$	3,140		$	355
Unpaid deferred offering costs	$	—		$	1,505

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

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

Unless otherwise expressly stated or the context otherwise requires, the terms “Upwork” and the “Company” in these notes to the condensed consolidated financial statements refer to Upwork and its wholly-owned subsidiaries.

Initial Public Offering

In October 2018, the Company completed its initial public offering (“IPO”), in which the Company issued and sold an aggregate of 7,840,908 of the Company’s common stock, including 1,022,727 shares pursuant to the exercise of the underwriters’ option to purchase additional shares. The shares were sold to the underwriters at the IPO price of $15.00 per share less an underwriting discount of $1.05 per share. The Company received aggregate net proceeds of $109.4 million from the IPO after deducting underwriting discounts and commissions but before deducting offering expenses payable by the Company.

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 Quarterly Report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”), filed with the SEC on March 7, 2019.

The condensed consolidated balance sheet as of December 31, 2018 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, changes in stockholders’ equity and cash flows for the interim periods, but do not purport to be indicative of the results of operations or financial condition to be anticipated for the full year ending December 31, 2019.

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.

Significant Accounting Policies

The significant accounting policies applied in the Company’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.

Marketable Securities

Beginning in 2019, the Company purchased various short-term, marketable securities consisting of commercial paper, treasury bills, and U.S. government securities, all of which have contractual maturities within 12 months from the date of purchase and are classified as available-for-sale marketable securities. These marketable securities are carried at estimated fair value with unrealized gains and losses, net of taxes, included within the stockholders’ equity section of the Company’s condensed consolidated balance sheet. The Company periodically reviews its available-for-sale marketable securities for other-than-temporary impairments. The Company considers factors such as the duration, severity, and the reason for any decline in value, the potential recovery period, and its intent to sell. For debt securities, the Company also considers whether (i) it is more likely than not that the Company will be required to sell the debt securities before recovery of their amortized cost basis and (ii) the amortized cost basis cannot be recovered as a result of credit losses. Unrealized losses are charged against other (income) expense, net when a decline in fair value is determined to be other-than-temporary. The Company determines realized gains or losses from the sale of marketable securities on a specific identification method and records such gains or losses as other (income) expense, net within the Company’s condensed consolidated statements of operations.

Income Taxes

The Company’s income tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in the quarter. The Company’s effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on the deferred tax assets as it is more likely than not that some, or all, of the Company’s deferred tax assets will not be realized. The Company continues to maintain a full valuation allowance against its net deferred tax assets. Due to tax losses and the offsetting valuation allowance, the income tax provision for the three and six months ended June 30, 2019 and 2018, respectively, was immaterial to the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

As an emerging growth company (“EGC”), the Company is permitted by the Jumpstart Our Business Startups Act (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. The Company has elected to use this extended transition period under the JOBS Act. As a result, so long as it remains an EGC, the Company’s financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

Effective as of December 31, 2019, the Company will cease to qualify as an EGC. As a result, the Company will be required to comply with the requirements for adoption of new or revised accounting pronouncements applicable to public companies. Specifically, the Company will be required to accelerate the adoption of certain accounting standards previously disclosed in its Annual Report as follows:



Accounting Pronouncement	Previously Disclosed Effective Date	Accelerated Effective Date
2017-04, Intangibles—Goodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment	For the year ending December 31, 2021	For the year ending December 31, 2020
2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities	Fiscal years beginning after December 15, 2019	Fiscal years beginning after December 15, 2018
2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting	Fiscal year ending on December 31, 2020	Fiscal year ending on December 31, 2019
2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement	Fiscal year ending on December 31, 2021	Fiscal year ending on December 31, 2020
2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract	Fiscal year ending on December 31, 2021	Fiscal year ending on December 31, 2020

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. Accounting Standards Codification 606—Revenue from Contracts with Customers (“ASC 606”) supersedes the revenue recognition requirements in ASC 605—Revenue Recognition, 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 (“full retrospective method”) or retrospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”).

The Company plans to adopt the new standard for the year ending December 31, 2019 during the fourth quarter of 2019, using the modified retrospective method. Interim reporting under the new standard will not be required until 2020. The Company is continuing to evaluate the potential impact that the implementation of this standard will have on its consolidated financial statements, specifically related to the following items:


•	identification of performance obligations;


•	principal agent considerations;


•	whether costs to obtain a contract with a customer will be capitalized or expensed, as well as the timing of recording such capitalization or expense;


•	timing of revenue recognition; and


•	revenue disclosures which are expected to expand and may require judgment in certain areas.

The Company has concluded that the discounts offered under the Company’s tiered pricing program for freelancer service fees will result in a deferral of revenue under ASC 606. However, the Company has not yet determined the potential adjustment amount. The Company currently does not expect significant changes to its systems and processes from the adoption of the new standard.

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 makes targeted improvements to GAAP regarding financial instruments. ASU 2016-01 eliminates the requirement to classify investments in equity securities with readily determinable fair values into trading or available-for-sale categories and requires those equity securities to be measured at fair value with changes in fair value recognized in net earnings rather than in other comprehensive income. ASU 2016-01 also revises certain presentation and disclosure requirements. Under ASU 2016-01, accounting for investments in debt securities remains essentially unchanged. The guidance is effective for the Company for fiscal year 2019 and interim periods beginning fiscal year 2020. Early adoption is not permitted. The Company has not yet evaluated the impact of adopting this guidance on its consolidated financial statements and related disclosures.

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 standard prospectively as of the effective date, without adjusting comparative periods presented. Since the Company will no longer qualify as an EGC as of December 31, 2019, it expects to adopt the new lease standard for its annual results for the period ending December 31, 2019. The Company anticipates the effect of adopting this update will be recognizing right-of-use assets and corresponding lease liabilities for leases where the Company is the lessee, primarily comprised of leases for facilities. The Company is currently evaluating the impact to its condensed consolidated financial statements and related disclosures but expects the adoption of this standard to have a material impact on assets and liabilities related to leases.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update represent changes to clarify, correct errors in, or improve the Codification. In May 2019, the FASB issued 2019-05, Financial Instruments—Credit Losses (Topic 326). The amendments in this update provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The guidance is effective for the Company for fiscal year 2020 with early adoption permitted. The standard requires a modified retrospective method of adoption. The Company has not yet evaluated the impact of these standard updates on its consolidated financial statements and related disclosures.

Note 3—Fair Value Measurements

The Company defines fair value as the exchange price that would be received from the 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 I and Level II assets as of June 30, 2019 and December 31, 2018. The following tables set forth the fair value of the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):



	June 30, 2019
	Level I		Level II		Level III		Total
Cash equivalents
Money market funds	$	51,169	$	—	$	—	$	51,169
Commercial paper	—		2,498		—		2,498
Marketable securities
Commercial paper	—		42,481		—		42,481
Treasury bills	4,991		—		—		4,991
U.S. government securities	14,970		—		—		14,970
Total financial assets	$	71,130	$	44,979	$	—	$	116,109



	December 31, 2018
	Level I		Level II		Level III		Total
Cash equivalents—money market funds	$	117,138	$	—	$	—	$	117,138
Total financial assets	$	117,138	$	—	$	—	$	117,138

Prior to the IPO, the Company measured its redeemable convertible preferred stock warrant liability at fair value on a recurring basis, and it was classified within Level III because the warrants were valued using a Black-Scholes valuation model, for which some inputs were unobservable in the market. For the three and six months ended June 30, 2018, the Company recorded $0.1 million and $0.4 million, respectively, related to the revaluation of its redeemable convertible preferred stock warrant liability, which is included in other (income) expense, net in the Company’s condensed consolidated statement of operations.

Upon the closing of the IPO in October 2018, the redeemable convertible preferred stock warrant converted to a common stock warrant. As such, the Company reclassified its redeemable convertible preferred stock warrant liability to additional paid-in capital.

Note 4—Balance Sheet Components

Cash and Cash Equivalents

Cash and cash equivalents consisted of the following (in thousands):



	June 30, 2019		December 31, 2018
Cash	$	13,425	$	11,990
Money market funds	51,169		117,138
Commercial paper	2,498		—
Total cash and cash equivalents	$	67,092	$	129,128

Marketable Securities

Marketable securities consisted of the following (in thousands):



	June 30, 2019
Commercial paper	$	42,481
Treasury bills	4,991
U.S. government securities	14,970
Total marketable securities	$	62,442

For the three and six months ended June 30, 2019, the gross unrealized gains and losses on the Company’s marketable securities were immaterial. As of June 30, 2019, the Company considered any decreases in market value to be temporary in nature and did not consider any of the Company’s marketable securities to be other-than-temporarily impaired. As such, the Company did not record any impairment charges with respect to its marketable securities during the three and six months ended June 30, 2019.

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):



	June 30, 2019			December 31, 2018
Computer equipment and software	$	3,750		$	3,189
Internal-use software and platform development	8,820			6,287
Leasehold improvements	10,433			5,783
Office furniture and fixtures	2,291			2,545
Total property and equipment	25,294			17,804
Less: accumulated depreciation	(6,087		)	(6,989		)
Property and equipment, net	$	19,207		$	10,815

For the three months ended June 30, 2019 and 2018, depreciation expense related to property and equipment was $0.6 million and $0.5 million, respectively. For the six months ended June 30, 2019 and 2018, depreciation expense related to property and equipment was $1.4 million and $0.9 million, respectively.

For the three months ended June 30, 2019 and 2018, the Company capitalized $1.4 million and $1.3 million of internal-use software and platform development costs, respectively. For the six months ended June 30, 2019 and 2018, the Company capitalized $2.5 million and $1.9 million of internal-use software and platform development costs, respectively.

Amortization expense related to the capitalized internal-use software and platform development costs was immaterial for the three and six months ended June 30, 2019. For the three and six months ended June 30, 2018, there was no amortization expense related to the internal-use software and platform development costs as the underlying assets had not been placed into service as of June 30, 2018.

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):



	June 30, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Trade names	$	2,293	$	2,293	$	—
User relationships	18,678		14,008		4,670
Developed technology	10,356		10,356		—
Domain names	529		529		—
Total	$	31,856	$	27,186	$	4,670



	December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Trade names	$	2,293	$	2,293	$	—
User relationships	18,678		12,674		6,004
Developed technology	10,356		10,356		—
Domain names	529		529		—
Total	$	31,856	$	25,852	$	6,004

For each of the three and six months ended June 30, 2019 and 2018, amortization expense of intangible assets was $0.7 million and $1.3 million, respectively. Amortization expense is included in general and administrative expenses. As of June 30, 2019, the remaining useful life for user relationships was 1.8 years. As of December 31, 2018, the remaining useful life for user relationships was 2.3 years.

As of June 30, 2019, the estimated future amortization expense for the acquired intangible assets was as follows (in thousands):



	June 30, 2019
Remainder of 2019	$	1,334
2020	2,668
2021	668
Total estimated future amortization expense	$	4,670

Accrued Expenses and Other Current Liabilities

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



	June 30, 2019		December 31, 2018
Accrued compensation and related benefits	$	3,712	$	9,314
Accrued freelancer costs	799		2,465
Accrued indirect taxes	2,192		1,630
Accrued vendor expenses	11,150		6,002
Accrued payment processing fees	776		715
Other	503		822
Total accrued expenses and other current liabilities	$	19,132	$	20,948

Note 5—Commitments and Contingencies

Operating Leases

The Company leases office space under five non-cancellable operating lease agreements, which expire from 2019 through 2028. The terms of the office leases contain rent escalation clauses, rent holidays, and/or tenant improvement allowances. The Company recognizes rent expense on a straight-line basis over the non-cancellable 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, and/or tenant improvement allowances, the Company applies them in the determination of straight-line rent expense over the lease term.

In February 2019, the Company entered into an agreement for a non-cancellable operating lease for new office space in Santa Clara, California. From June 1, 2019 through October 15, 2028, total minimum lease payments under the lease agreement are $14.3 million, with lease payments ranging from $1.4 million to $1.8 million per year. The Company took possession of the Santa Clara office space for its corporate headquarters during the first quarter of 2019 and moved its corporate headquarters and related operations in the second quarter of 2019 shortly after the termination of its Mountain View, California office lease. As a result, the Company accelerated the depreciation expense of its leasehold improvements and furniture and fixtures on the cease-use date for the space exited in May 2019, which was immaterial for the three and six months ended June 30, 2019.

In 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 2018, the Company entered into an agreement for a non-cancellable operating lease for new office space in Chicago through October 2024. In December 2018, the Company amended this agreement (the “First Amendment”) to extend the term of the original lease from October 2024 to April 2025 and to lease additional office space to accommodate continued headcount growth. From June 1, 2019 through April 30, 2025, total minimum lease payments under the original lease agreement and the First Amendment are $10.3 million, with lease payments ranging from $0.5 million to $2.0 million per year from 2019 to 2025. The Company moved its Chicago-based operations to this new office space in January 2019. In connection with this move, the Company entered into two sublease agreements that provided for the sublease of the two office spaces the Company occupied prior to its execution of the new operating lease. The Company exited the two spaces in December 2018 and January 2019, respectively. As a result, the Company accelerated the depreciation expense of its leasehold improvements and furniture and fixtures on the cease-use date for the space exited in January 2019 and accordingly recorded $0.3 million of accelerated depreciation expense during the three months ended March 31, 2019. The expected sublease income from the two sublease agreements is reflected in the future aggregate minimum lease payment table below.

As of June 30, 2019, future aggregate minimum lease payments under the non-cancellable operating leases, net of sublease income, were as follows (in thousands):



	June 30, 2019
Remainder of 2019	$	1,722
2020	5,921
2021	6,405
2022	6,588
2023	6,776
Thereafter	13,137
Less: sublease income	(656		)
Total	$	39,893

For the three months ended June 30, 2019 and 2018, rent expense was $1.5 million and $0.9 million, respectively. For the six months ended June 30, 2019 and 2018, rent expense was $2.7 million and $1.9 million, respectively.

Letters of Credit

In conjunction with the operating lease agreements, as of June 30, 2019 and December 31, 2018, the Company had four and three irrevocable letters of credit outstanding, respectively, in the aggregate amount of $1.1 million and $0.8 million, respectively. The letters of credit are collateralized by restricted cash in the same respective amounts and begin to expire in 2019. No amounts had been drawn against these letters of credit as of June 30, 2019 and December 31, 2018.

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 June 30, 2019 and December 31, 2018, 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. The Company also indemnifies clients utilizing its Upwork Business offering for losses arising from intellectual property claims made by third parties relating to the use of the Company’s platform, subject to the terms of the applicable agreement. 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 obligations as of June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019			December 31, 2018
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	$	13,750		$	15,000
Second Term Loan—11 months of interest-only payments ended 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. As a result of the IPO, the interest rate was reduced to prime plus 0.25% per annum in the fourth quarter of 2018	8,357			9,000
Line of credit—interest at prime with accrued interest due monthly; matures September 2020	25,000			—
Total debt	47,107			24,000
Less: unamortized debt discount issuance costs	(64		)	(90		)
Balance	47,043			23,910
Debt, current	(32,574		)	(5,671		)
Debt, noncurrent	$	14,469		$	18,239
Weighted-average interest rate	5.96		%	6.89		%

Under the Company’s Loan and Security Agreement, as amended (the “Loan Agreement”), the aggregate amount of the facility was up to $49.0 million, consisting of a term loan in the original principal amount of $15.0 million (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, the “Term Loans”) and a revolving line of credit, which permits borrowings of up to $25.0 million subject to customary conditions. Among other things, the Company 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.

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 the prime rate plus 5.25% per annum to the prime rate plus 0.25% per annum, from and after the occurrence of an initial public offering by the Company with net proceeds of more than $50.0 million. This reduction became effective following the completion of the IPO in October 2018.

In March 2019, the Company entered into a third amendment (the “Third Amendment”) to the Loan Agreement, which, among other changes, (i) amended the adjusted quick ratio financial covenant to provide that the Company will maintain an adjusted quick ratio of 1.75 to 1.00 (previously 1.30 to 1.00), (ii) reduced the frequency with which the Company is required to provide certain financial information to the lender during periods in which it maintains an adjusted quick ratio of 2.50 to 1.00, and (iii) eliminated the minimum EBITDA covenant with which the Company was required to comply. The Company was in compliance with its covenants under the Loan Agreement as of June 30, 2019 and December 31, 2018.

To the extent the Company has not yet collected funds for hourly billings from clients that are in-transit due to timing differences in receipt of cash from clients, the Company may utilize the revolving line of credit to satisfy customary escrow funding requirements. The Company drew down $25.0 million under the revolving line of credit for such purpose in each of March and June 2019, which the Company subsequently repaid in April and July 2019, respectively. See “Note 14—Subsequent Events.”

Pursuant to the terms of the Loan Agreement, in April 2019, the Company commenced repayment on the Term Loans. During the three months ended June 30, 2019, the Company repaid $1.3 million related to the First Term Loan and $0.6 million related to the Second Term Loan.

Amortization expense related to the debt discount was immaterial for the three and six months ended June 30, 2019 and 2018.

Note 7—Redeemable Convertible Preferred Stock

Prior to the IPO, the Company financed its operations and capital expenditures primarily through sales of convertible preferred stock, bank borrowings, and utilization of cash generated from operations in the periods in which the Company generated cash flows from operations.

As a result of the IPO, all of the Company’s 61,279,079 shares of then-outstanding redeemable convertible preferred stock automatically converted into shares of common stock on a one-for-one basis. Therefore, there were no issued or outstanding shares of redeemable convertible preferred stock as of June 30, 2019 and December 31, 2018.

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 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.

Prior to the IPO, the Company estimated the fair value of its redeemable convertible preferred stock warrant using the Black-Scholes valuation model. For the three and six months ended June 30, 2018, the Company recorded $0.1 million and $0.4 million, respectively, related to the revaluation of its redeemable convertible preferred stock warrant liability, which is included in other (income) expense, net in the Company’s condensed consolidated statement of operations.

Upon completion of the IPO, this warrant converted to a common stock warrant exercisable for the same number of shares and was reclassified to additional paid-in capital. The common stock warrant was outstanding and exercisable as of December 31, 2018. In April 2019, this common stock warrant was exercised in full at a total cost of $1.2 million. In lieu of a cash payment, the holder of the warrant surrendered 64,646 shares of common stock to cover the exercise price. The Company issued 333,685 shares of common stock upon the exercise of this common stock warrant.

Common Stock Warrant

In 2018, the Company established The Upwork Foundation initiative. The program includes 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. The vesting and exercisability provisions of the warrant became effective upon the IPO in October 2018.

This warrant is exercisable as to 1/10^th 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. For the three and six months ended June 30, 2019, the Company recorded $0.2 million and $0.4 million of expense, respectively, related to the revaluation of this warrant, which is included in general and administrative expense in the Company’s condensed consolidated statement of operations.

Note 9—Common Stock

Holders of common stock are entitled to one vote per share and are entitled to receive dividends, if any, on a pro rata basis whenever funds are legally available and when, as, and if declared by the Company’s board of directors.

As of June 30, 2019 and December 31, 2018, the Company was authorized to issue 490,000,000 shares of common stock. As of June 30, 2019 and December 31, 2018, the Company had reserved shares of common stock for future issuance as follows:



	June 30, 2019	December 31, 2018
Options issued and outstanding	19,771,277	23,774,279
RSUs issued and outstanding	1,213,337	288,460
Warrant to purchase common stock	500,000	898,331
Remaining shares reserved for future issuances under 2018 Equity Incentive Plan	15,320,498	10,558,306
Remaining shares reserved for futures issuances under 2018 Employee Stock Purchase Plan	2,271,326	1,700,000
Total	39,076,438	37,219,376

Note 10—Stock-Based Compensation

Equity Incentive Plans

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



	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, 2018	23,774,279		$	3.71	7.10	$	342,262
Exercised	(3,584,854	)	2.89
Forfeited and canceled	(418,148	)	4.78
Balances at June 30, 2019	19,771,277		$	3.84	6.81	$	241,977

In 2018, the Company’s board of directors and stockholders each adopted the 2018 Equity Incentive Plan (the “2018 EIP”), which became effective on the date immediately prior to the date of the IPO. Awards granted under the 2018 EIP may be (i) incentive stock options, (ii) nonqualified stock options, (iii) restricted stock units (“RSUs”), (iv) restricted stock awards, or (v) stock appreciation rights, as determined by the Company’s board of directors at the time of grant.

The following table summarizes the RSU activity and related information under the 2018 EIP:



	Number of RSUs Outstanding		Weighted-Average Grant Date Fair Value
Unvested balance at December 31, 2018	288,460		$	15.00
Granted	1,025,786		19.16
Vested	(55,362	)	15.30
Forfeited and canceled	(45,547	)	18.22
Unvested balance at June 30, 2019	1,213,337		$	18.38

Pursuant to the terms of the 2018 EIP, in January 2019, the number of shares available for grant was increased by 5,322,716 shares.

In July 2018, the Company’s board of directors granted an option exercisable for up to 1,860,000 shares of common stock to the Company’s Chief Executive Officer under the 2018 EIP (the “CEO Award”). The vesting and exercisability of the CEO Award is contingent upon the recipient’s continuous service as the Chief Executive Officer and the achievement of certain measurement objectives during three separate measurement periods within the period of time beginning on January 1, 2019 and ending on December 31, 2023. Each reporting period, the Company assesses the probability that the performance criteria will be met and records expense for those shares that are probable of vesting. As of June 30, 2019, the Company determined that vesting of the CEO Award was not probable. As a result, the Company reversed the full amount of previously recorded expense related to the CEO Award, which amounted to $1.4 million and $0.9 million for the three and six months ended June 30, 2019, respectively.

In February 2019, the Company’s board of directors approved the omnibus Performance Bonus Plan along with the performance criteria and bonus pool for 2019 (the “Bonus Plan”), which provides for the payment of bonus compensation to selected employees of the Company, including the Company’s executive officers, upon the achievement of certain performance criteria. In lieu of a cash payment, bonus payments to certain of the Company’s management team will be paid in the form of fully vested RSUs issued from the 2018 EIP. The ultimate number of fully vested RSUs to be granted will be determined by dividing (A) the total dollar value of the bonus that would be delivered in cash by (B) the closing stock price on the day prior to the award grant date, which is expected to occur in the first quarter of 2020. The payment of the bonus in fully vested RSUs requires accounting as a stock-based award under U.S. GAAP. Because the number of fully vested RSUs to be granted is dependent upon the future closing price of the Company’s common stock, the Company has classified this award as a liability within its condensed consolidated balance sheet as of June 30, 2019. Each reporting period, the Company assesses the probability that the performance criteria will be met and records expense for those shares that are probable of vesting.

Employee Stock Purchase Plan

In 2018, the Company’s board of directors and stockholders each adopted the 2018 Employee Stock Purchase Plan (the “2018 ESPP”), which became effective upon the completion of the IPO. Pursuant to the terms of the 2018 ESPP, in January 2019, the number of shares of common stock available for issuance was increased by 851,634 shares.

During the three months ended June 30, 2019, the Company issued 280,308 shares of common stock under the 2018 ESPP.

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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of revenue	$	73	$	53	$	217	$	105
Research and development	1,686		538		3,066		1,088
Sales and marketing	583		331		1,225		671
General and administrative	289		871		2,418		1,817
Total stock-based compensation	$	2,631	$	1,793	$	6,926	$	3,681

Stock-based compensation expense related to non-employee stock option grants was immaterial for the three and six months ended June 30, 2019 and 2018.

The amount of stock-based compensation capitalized to internal-use software and platform development costs for the three and six months ended June 30, 2019 and 2018 was immaterial

Prior to the IPO, certain common stockholders (who were employees or former employees of the Company) sold shares of the Company’s common stock in secondary market transactions. In 2018, one such transaction occurred. The incremental value between the sale price and the fair value of the common stock at the date of sale aggregated to an immaterial amount of stock-based compensation expense for the three and six months ended June 30, 2018.

Note 11—Net Loss per Share

The following table sets forth the computation of the Company’s basic and diluted net loss per share for the periods presented (in thousands, except share and per share data):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Numerator:
Net loss	$	(2,027	)	$	(412	)	$	(6,755	)	$	(7,196	)
Denominator:
Weighted-average shares used to compute net loss per share, basic and diluted	108,683,099			35,104,769			107,665,492			34,651,331

Net loss per share, basic and diluted	$	(0.02	)	$	(0.01	)	$	(0.06	)	$	(0.21	)

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



	As of June 30,
	2019	2018
Options to purchase common stock	19,771,277	22,932,222
Common stock issuable upon conversion of redeemable convertible preferred stock	—	61,279,079
Common stock issuable upon exercise of common stock warrants	500,000	500,000
Common stock issuable upon exercise and redeemable conversion of preferred stock warrants	—	398,331
Common stock issuable upon vesting of restricted stock units	1,213,337	—
Common stock issuable in connection with employee stock purchase plan	802,389	—
Total	22,287,003	85,109,632

Note 12—Segment and Geographical Information

The Company operates as one operating and reportable segment for purposes of allocating resources and evaluating financial performance.

The following table sets forth total revenue by type of service for the periods presented (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Marketplace	$	66,201	$	55,454	$	127,104	$	107,413
Managed services	8,055		7,227		16,076		14,486
Total revenue	$	74,256	$	62,681	$	143,180	$	121,899

The Company generates its revenue from freelancers and clients. 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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Freelancers
United States	$	12,486	$	9,554	$	24,374	$	18,657
India	6,904		6,467		13,534		12,573
Philippines	4,929		4,203		9,506		8,158
Rest of world	22,588		20,159		44,283		39,184
Total freelancers	46,907		40,383		91,697		78,572
Clients
United States	21,431		18,187		39,105		33,649
Rest of world	5,918		4,111		12,378		9,678
Total clients	27,349		22,298		51,483		43,327
Total revenue	$	74,256	$	62,681	$	143,180	$	121,899

Substantially all of the Company’s long-lived assets were located in the United States as of June 30, 2019 and December 31, 2018.

Note 13—401(k) Plan

The Company offers the Upwork Retirement Savings Plan (the “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 contribution. The Company makes matching contributions equal to 50% of each dollar contributed, subject to a maximum contribution of $5,000 annually per participant. The Company’s total expense for the matching contributions was $0.5 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively. The Company’s total expense for the matching contributions was $1.4 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively.

Note 14—Subsequent Events

In July 2019, the Company repaid $25.0 million outstanding under the Company’s line of credit that was drawn down in June in order to satisfy the Company’s escrow funding requirements as of June 30, 2019.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Risk Factors” and the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, as well as assumptions that they may never materialize or that may be proven incorrect. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors,” and in other parts of this Quarterly Report.

Overview

We operate the largest online marketplace that enables businesses to find and work with highly-skilled freelancers, 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 both 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 500 companies. In over 180 countries, our platform enabled $0.5 billion and $0.4 billion of GSV for the three months ended June 30, 2019 and 2018, respectively, and $1.0 billion and $0.8 billion of GSV for the six months ended June 30, 2019 and 2018, 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.

We generate a majority of our revenue from fees charged to freelancers. We also generate revenue through fees charged to clients for transacting payments through our platform and fees for premium offerings, as well as foreign currency exchange fees and Upwork Payroll service fees. In addition, we provide a managed services offering where we engage freelancers to complete projects, directly invoice the client, and assume responsibility for work performed by the freelancers. For the three months ended June 30, 2019 and 2018, we generated total revenue of $74.3 million and $62.7 million, respectively, representing a period-over-period increase of 18%. For the six months ended June 30, 2019 and 2018, we generated total revenue of $143.2 million and $121.9 million, respectively, representing a period-over-period increase of 17%.

For the three months ended June 30, 2019, we generated a net loss of $2.0 million and our adjusted EBITDA was $1.6 million, compared to a net loss of $0.4 million and adjusted EBITDA of $3.3 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, we generated a net loss of $6.8 million and our adjusted EBITDA was $2.8 million, compared to a net loss of $7.2 million and adjusted EBITDA of $0.3 million for the six months ended June 30, 2018. Adjusted EBITDA is a financial measure that is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with 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 net loss to adjusted EBITDA.

Key Financial and Operational Metrics

We monitor the following key financial and operational metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Our key metrics were as follows as of or for the periods presented:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018

	(in thousands)
GSV	$	518,761	$	432,284	$	1,005,690	$	834,532
Marketplace revenue	66,201		55,454		127,104		107,413
Adjusted EBITDA ⁽¹⁾	1,576		3,313		2,822		256

⁽¹⁾

Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. See “—Non-GAAP Financial Measures” below for a definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure prepared under U.S. GAAP.



	As of June 30,
	2019		2018

	(in thousands, except percentages)
Core clients	115.7		95.7
Client spend retention	105	%	106	%

We believe these key financial and operational metrics are useful to evaluate period-over-period comparisons of our business and in understanding our operating results. The number of core clients in any given period drives both GSV, which represents the amount of business transacted through our platform, and client spend retention. Client spend retention impacts the growth rate of GSV. We believe our marketplace revenue, which represents a majority of our revenue, will grow as GSV grows, although they could grow at different rates. For a discussion of limitations in the measurement of core clients, GSV, and client spend retention, 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” in Part II of this Quarterly Report.

Core Clients

We define a core client as a client that has spent in the aggregate at least $5,000 since it began using our platform and also had spend-activity on our platform during the twelve months preceding the date of measurement. This includes the total amount spent by the client on both the Elance and oDesk platforms for the periods prior to the consolidation of the two platforms as described in “Note 1—Organization and Description of Business” of our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. We believe $5,000 is an important spend milestone as it indicates that the client is actively using our platform. Historically, these core clients have been more likely to continue using our platform. We continue to see businesses of all sizes use our platform in a recurring way for larger, more complex projects, and we expect the number of core clients to continue to increase over time. We believe that the number of core clients is a key indicator of our growth and the overall health of our business because core clients are a primary driver of GSV, and, therefore, marketplace revenue.

Gross Services Volume

GSV includes both client spend and additional fees charged for other services. Client spend, which we define as the total amount that clients spend on both our marketplace offerings and our managed services offering, is the primary component of GSV. GSV also includes additional fees charged to both clients and freelancers for other services, such as freelancer withdrawals and foreign currency exchange.

GSV is an important metric because it represents the amount of business transacted through our platform. Growth in the number of core clients and increased client spend retention are the primary drivers of GSV growth. In addition, 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. Therefore, marketplace revenue is correlated to GSV, and we believe that our marketplace revenue will grow as GSV grows, although they could grow at different rates. We expect our GSV 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, such as size, duration, pricing, and other factors.

Client Spend Retention

We calculate client spend retention by dividing our recurring client spend by our base client spend. We define base client spend as the aggregate client spend from all clients during the four quarters ended one year prior to the date of measurement. We define our recurring client spend as the aggregate client spend during the four quarters ended on the date of measurement from the same clients included in our measure of base client spend. Our business is recurring in nature even though clients are not contractually required to spend on a recurring basis. We believe that client spend retention is a key indicator of the value of our platform and the overall health of our business because it impacts the growth rate of GSV, and, therefore, marketplace revenue. As of June 30, 2019, client spend retention was 105%, down slightly from 106% as of June 30, 2018. We believe that this decline in client spend retention—from its historically highest levels in 2018 and the first quarter of 2019—follows an acceleration in client spend retention subsequent to the launch of our U.S.-to-U.S. domestic offering in the second half of 2017. Client spend retention will continue to vary from period to period due to client behavior.

Marketplace Revenue

Marketplace revenue, which represents the majority of our revenue, consists of revenue derived from our Upwork Basic, Plus, Business, and 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, and to a lesser extent, payment processing and administration fees charged to clients. We also generate marketplace revenue from fees for premium offerings and for other services, such as foreign currency exchange fees and Upwork Payroll service fees. Marketplace revenue is an important metric because it is the primary driver of our business model, and we believe it provides greater comparability to other online marketplaces. The growth rate of marketplace revenue fluctuates in relation to the growth rate of GSV. Therefore, marketplace revenue is correlated to GSV, and we believe that our marketplace revenue will grow as GSV grows, although they could grow at different rates.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. GAAP, adjusted EBITDA is a non-GAAP measure that we believe is useful in evaluating our operating performance.

We define adjusted EBITDA as net income (loss) adjusted for stock-based compensation expense, depreciation and amortization, interest expense, other (income) expense, net, income tax (benefit) provision, the change in fair value of our Tides Foundation common stock warrant, 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.

The following table presents a reconciliation of net loss, the most directly comparable financial measure prepared in accordance with U.S. GAAP, to adjusted EBITDA for each of the periods indicated (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net Loss	$	(2,027	)	$	(412	)	$	(6,755	)	$	(7,196	)
Add back (deduct):
Stock-based compensation expense	2,631			1,793			6,926			3,681
Depreciation and amortization	1,295			1,191			2,827			2,255
Interest expense	357			556			730			1,085
Other (income) expense, net	(832		)	173			(1,311		)	422
Income tax provision	27			12			28			9
Change in fair value of Tides Foundation common stock warrant	125			—			377			—
Adjusted EBITDA	$	1,576		$	3,313		$	2,822		$	256

We use adjusted EBITDA as a measure of operational efficiency. We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:

•

adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as stock-based compensation expense, depreciation and amortization, interest expense, other (income) expense, net, income tax (benefit) provision, the change in fair value of our Tides Foundation common stock warrant, and, if applicable, other non-cash transactions that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;


•	our management uses adjusted EBITDA in conjunction with financial measures prepared in accordance with U.S. GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and


•	adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our core operating results, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results.

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows:


•	adjusted EBITDA excludes stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;


•	although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;


•	adjusted EBITDA does not reflect: (a) changes in, or cash requirements for, our working capital needs; (b) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (c) tax payments that may represent a reduction in cash available to us; and


•	other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of this measure for comparative purposes.

Because of these and other limitations, you should consider adjusted EBITDA along with other financial performance measures, including net loss and our other financial results prepared in accordance with U.S. GAAP.

Components of Our Results of Operations

Revenue

Marketplace Revenue. Marketplace revenue is generated from our Upwork Basic, Plus, Business, and Enterprise offerings, and other premium offerings. Under 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 and, to a lesser extent, payment processing and administration fees paid by clients.

https://cdn.kscope.io/592a1f6d6e33f7acee71c8931cd0e865-mdaimage.jpg

Our Upwork Basic and Plus offerings provide 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 Basic and Plus offerings, we have a tiered freelancer service fee schedule based on cumulative lifetime billings by the freelancer to each client. Freelancers 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 Basic and Plus offerings by charging clients a payment processing and administration fee. Clients using our Upwork Basic offering pay a fee equal to 3% of their client spend. Clients using our Upwork Plus offering pay a flat fee of about $50 per month for additional features and pay a fee equal to 3% of their client spend unless they pay via ACH. We also generate revenue from foreign currency exchange fees from clients, which are currently immaterial.

Our Upwork Business and Enterprise offerings 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 Business offering, we charge either an annual or monthly 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. 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 subscribe to a compliance offering that includes worker classification services for an additional fee. Upwork Business and Enterprise clients may also choose to use our platform to engage freelancers that were not sourced through our platform for a lower fee percentage.

One of our premium offerings, Upwork Payroll, is available to clients when freelancers are classified as employees for engagements on our online marketplace. The client enters into an Upwork Payroll agreement with us, and we separately contract with unrelated third-party staffing providers who provide employment services to such clients. Revenue from Upwork Payroll is currently immaterial.

Managed Services Revenue. Through our managed services offering, we are responsible for providing services and engaging freelancers directly or as employees of third-party staffing providers to perform services for clients on our behalf. The freelancers delivering 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.

Cost of Revenue and Gross Profit

Cost of Revenue. Cost of revenue consists primarily of the cost of payment processing fees, amounts paid to freelancers to deliver services for clients under our managed services offering, personnel-related costs for our services and support personnel, third-party hosting fees for our use of Amazon Web Services (“AWS”), and the amortization expense associated with acquired intangibles and capitalized internal-use software and platform development. We define personnel-related costs as salaries, bonuses, benefits, travel and entertainment, and stock-based compensation costs for employees and the costs related to other service providers we engage.

We expect cost of revenue to increase in absolute dollars in future periods due to higher payment processing fees, third-party hosting fees, and personnel-related costs in order to support growth on our platform. Amounts paid to freelancers to deliver services under our managed services offering are tied to the volume of managed services used by our clients. The level and timing of all of these items could fluctuate and affect our cost of revenue in the future.

Gross Profit and Gross Margin. Our gross profit and gross margin may fluctuate from period-to-period. Such fluctuations may be influenced by our revenue, the mix of payment methods that our clients choose, the timing and amount of investments to expand hosting capacity, our continued investments in our services and support teams, the timing and amount of services freelancers deliver for clients under our managed services offering, and the amortization expense associated with acquired intangibles and capitalized internal-use software and platform development cost. In addition, gross margin will be impacted by fluctuations in our revenue mix between marketplace revenue and our managed services revenue.

Operating Expenses

Research and Development. Research and development expense primarily consists of personnel-related costs and third-party hosting costs related to development. Research and development costs are expensed as incurred, except to the extent that such costs are associated with internal-use software and platform development that qualifies for capitalization. We believe continued investments in research and development are important to attain our strategic objectives and expect research and development expense to increase in absolute dollars for the foreseeable future, although this expense, expressed as a percentage of total revenue, may vary from period to period.

Sales and Marketing. Sales and marketing expense consists primarily of expenses related to personnel-related costs, including sales commissions, which we expense as they are incurred, and advertising and marketing activities. We continue to invest in our sales and marketing capabilities and expect this expense to increase in absolute dollars in future periods, although this expense expressed as a percentage of total revenue may vary from period-to-period.

General and Administrative. General and administrative expense consists primarily of personnel-related costs for our executive, finance, legal, human resources, and operations functions, and also includes outside consulting, legal and accounting services, insurance, and the change in fair market value of our outstanding Tides Foundation common stock warrant. For further information regarding this charitable donation, see “Note 8—Preferred and Common Stock Warrants” of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report. We expect to continue to invest in corporate infrastructure and incur additional expenses associated with operating as a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums, and compliance costs, including costs to comply with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), particularly since we will no longer qualify as an “emerging growth company” as of December 31, 2019. As a result,

we expect general and administrative expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.

Provision for Transaction Losses. Provision for transaction losses consists primarily of losses resulting from fraud and bad debt expense associated with our trade and client receivables balance and transaction losses associated with chargebacks. Provisions for these items represent estimates of losses based on our actual historical incurred losses and other factors. As a result, we expect provision for transaction losses to increase in absolute dollars in future periods although this expense expressed as a percentage of total revenue may vary from period to period.

Interest Expense

Interest expense consists of interest on our outstanding borrowings.

Other (Income) Expense, Net

Other (income) expense, net consists primarily of gains and losses from foreign currency exchange transactions, interest income that we earn from our deposits in money market funds and investments in marketable securities, and, prior to October 2018, expenses resulting from the revaluation of our redeemable convertible preferred stock warrant liability. Our redeemable convertible preferred stock warrant was converted to a common stock warrant exercisable for the same number of shares, and our redeemable convertible preferred stock warrant liability was reclassified to additional paid-in capital upon the completion of our initial public offering (“IPO”), which occurred in October 2018.

Income Tax Benefit (Provision)

We account for income taxes in accordance with the liability method. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax liability and the change in deferred tax assets and liabilities. We establish a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income.

Deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the realization criteria set forth in the relevant authoritative guidance. To the extent that we believe any amounts are less likely than not to be realized, we record a valuation allowance to reduce our deferred tax assets. The realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.

In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize potential liabilities based on an estimate of whether, and the extent to which, additional taxes will be due. We account for uncertain tax positions in accordance with the relevant guidance, which prescribes a recognition threshold and measurement approach for uncertain tax positions taken or expected to be taken in our income tax return, and also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The guidance utilizes a two-step approach for evaluation of uncertain tax positions. The first step is to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit. The second step is to measure the tax benefit as the largest amount, which is more likely than not to be realized on ultimate settlement. A liability is reported for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any interest and penalties related to unrecognized tax benefits are recorded as income tax expense.

Results of Operations

The following table sets forth our consolidated results of operations for the periods presented (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue
Marketplace	$	66,201		$	55,454		$	127,104		$	107,413
Managed services	8,055			7,227			16,076			14,486
Total revenue	74,256			62,681			143,180			121,899
Cost of revenue ⁽¹⁾	21,588			20,457			42,713			40,074
Gross profit	52,668			42,224			100,467			81,825
Operating expenses
Research and development ⁽¹⁾	15,696			12,812			31,496			26,303
Sales and marketing ⁽¹⁾	24,479			16,414			44,997			36,087
General and administrative ⁽¹⁾	14,113			11,219			29,790			22,395
Provision for transaction losses	855			1,450			1,492			2,720
Total operating expenses	55,143			41,895			107,775			87,505
Income (loss) from operations	(2,475		)	329			(7,308		)	(5,680		)
Interest expense	357			556			730			1,085
Other (income) expense, net	(832		)	173			(1,311		)	422
Loss before income taxes	(2,000		)	(400		)	(6,727		)	(7,187		)
Income tax provision	(27		)	(12		)	(28		)	(9		)
Net loss	$	(2,027	)	$	(412	)	$	(6,755	)	$	(7,196	)

⁽¹⁾ Includes stock-based compensation expense as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of revenue	$	73	$	53	$	217	$	105
Research and development	1,686		538		3,066		1,088
Sales and marketing	583		331		1,225		671
General and administrative	289		871		2,418		1,817
Total stock-based compensation	$	2,631	$	1,793	$	6,926	$	3,681

Comparison of the Three and Six Months Ended June 30, 2019 and 2018

Revenue



(in thousands, except percentages)	Three Months Ended June 30,										Six Months Ended June 30,
	2019			2018			Change				2019			2018			Change
Marketplace	$	66,201		$	55,454		$	10,747	19	%	$	127,104		$	107,413		$	19,691	18	%
Percentage of total revenue	89		%	88		%					89		%	88		%
Managed services	$	8,055		$	7,227		828		11	%	$	16,076		$	14,486		1,590		11	%
Percentage of total revenue	11		%	12		%					11		%	12		%
Total revenue	$	74,256		$	62,681		$	11,575	18	%	$	143,180		$	121,899		$	21,281	17	%

For the three months ended June 30, 2019, total revenue was $74.3 million, an increase of $11.6 million, or 18%, as compared to the same period in 2018.

Marketplace revenue represented 89% of total revenue for the three months ended June 30, 2019, an increase of $10.7 million, or 19%, compared to the same period in 2018. Marketplace revenue increased primarily due to an increase in GSV. GSV grew by 20% in the three months ended June 30, 2019, as compared to the same period in 2018, primarily driven by a 21% increase in the number of core clients as of June 30, 2019 compared to June 30, 2018. We believe these increases were primarily due to investments in sales and marketing to acquire new clients and drive brand awareness and research and development to build new product features. Freelancer service fees generated $42.9 million and $36.8 million of marketplace revenue during the three months ended June 30, 2019 and 2018, respectively. Client payment processing and administration fees generated $10.6 million and $8.7 million of marketplace revenue during the three months ended June 30, 2019 and 2018, respectively.

Managed services revenue represented 11% and 12% of total revenue for the three months ended June 30, 2019 and 2018, respectively. Managed services revenue increased $0.8 million, or 11%, for the three months ended June 30, 2019 compared to the same period in 2018, primarily due to an increase in the amount of freelancer services engaged through our managed services offering. Managed services revenue grew at a slower rate than our marketplace revenue in the three months ended June 30, 2019 compared to the same period in 2018, and we anticipate this trend to continue.

For the six months ended June 30, 2019, total revenue was $143.2 million, an increase of $21.3 million, or 17%, as compared to the same period in 2018.

Marketplace revenue represented 89% of total revenue for the six months ended June 30, 2019, an increase of $19.7 million, or 18%, compared to the same period in 2018. Marketplace revenue increased primarily due to an increase in GSV. GSV grew by 21% in the six months ended June 30, 2019, as compared to the same period in 2018, primarily driven by a 21% increase in the number of core clients as of June 30, 2019 compared to June 30, 2018. Freelancer service fees generated $84.0 million and $72.0 million of marketplace revenue during the six months ended June 30, 2019 and 2018, respectively. Client payment processing and administration fees generated $19.9 million and $16.8 million of marketplace revenue during the six months ended June 30, 2019 and 2018, respectively.

Managed services revenue represented 11% and 12% of total revenue for the six months ended June 30, 2019 and 2018, respectively. Managed services revenue increased $1.6 million, or 11%, for the six months ended June 30, 2019 compared to the same period in 2018, primarily due to an increase in the amount of freelancer services engaged through our managed services offering. Managed services revenue grew at a slower rate than our marketplace revenue in the six months ended June 30, 2019 compared to the same period in 2018, and we anticipate this trend to continue.

Cost of Revenue and Gross Margin



(in thousands, except percentages)	Three Months Ended June 30,										Six Months Ended June 30,
	2019			2018			Change				2019			2018			Change
Cost of revenue	$	21,588		$	20,457		$	1,131	6	%	$	42,713		$	40,074		$	2,639	7	%
Components of cost of revenue:
Cost of freelancer services to deliver managed services	6,635			6,056			579		10	%	13,398			12,052			1,346		11	%
Other components of cost of revenue	14,953			14,401			552		4	%	29,315			28,022			1,293		5	%
Total gross margin	71		%	67		%					70		%	67		%

For the three months ended June 30, 2019, cost of revenue increased by $1.1 million, or 6%, compared to the same period in 2018. The increase was partially due to a $0.6 million, or 10%, increase in cost of freelancer services to deliver managed services, which was driven by a corresponding increase of $0.8 million in managed services revenue for the three months ended June 30, 2019 compared to the same period in 2018. In general, the cost of freelancer services to deliver managed services is directly correlated to our managed services revenue. Other components of cost of revenue increased by $0.5 million, which included an increase of $1.6 million in payment processing fees due to an increase in client spend on our platform, partially offset by a $0.4 million reduction in third-party hosting costs due to additional expense in the first quarter of 2018 related to our migration to AWS.

For the six months ended June 30, 2019, cost of revenue increased by $2.6 million, or 7%, compared to the same period in 2018. The increase was partially due to a $1.3 million, or 11%, increase in cost of freelancer services to deliver managed services, which was driven by a corresponding increase of $1.6 million in managed services revenue for the six months ended June 30, 2019 compared to the same period in 2018. Other components of cost of revenue increased by $1.3 million, which included an increase of $2.9 million in payment processing fees due to an increase in client spend on our platform, partially offset by a $1.0 million reduction in third-party hosting costs due to additional expense in the first half of 2018 related to our migration to AWS.

Research and Development



(in thousands, except percentages)	Three Months Ended June 30,										Six Months Ended June 30,
	2019			2018			Change				2019			2018			Change
Research and development	$	15,696		$	12,812		$	2,884	23	%	$	31,496		$	26,303		$	5,193	20	%
Percentage of total revenue	21		%	20		%					22		%	22		%

For the three months ended June 30, 2019, research and development expense increased by $2.9 million, or 23%, as compared to the same period in 2018. The increase was primarily due to an increase in personnel-related costs of $2.4 million and an increase of $0.6 million in amortization of licensed software, partially offset by the capitalization of $0.1 million of additional internal-use software and platform development costs during the three months ended June 30, 2019.

For the six months ended June 30, 2019, research and development expense increased by $5.2 million, or 20%, as compared to the same period in 2018. The increase was primarily due to an increase in personnel-related costs of $4.5 million, an increase of $1.1 million in amortization of licensed software, and an increase of $0.2 million in facilities-related and other costs, partially offset by the capitalization of $0.6 million of additional internal-use software and platform development costs during the six months ended June 30, 2019.

Sales and Marketing



(in thousands, except percentages)	Three Months Ended June 30,										Six Months Ended June 30,
	2019			2018			Change				2019			2018			Change
Sales and marketing	$	24,479		$	16,414		$	8,065	49	%	$	44,997		$	36,087		$	8,910	25	%
Percentage of total revenue	33		%	26		%					31		%	30		%

For the three months ended June 30, 2019, sales and marketing expense increased by $8.1 million, or 49%, as compared to the same period in 2018. This increase was primarily due to period over period increases of $6.3 million in marketing and advertising costs due to our national TV and radio ad campaign in the second quarter of 2019, $1.1 million in personnel-related costs to build out our enterprise sales team, including sales commissions that we expense as incurred, and $0.7 million of software costs, facilities-related and other costs resulting from ongoing business growth.

For the six months ended June 30, 2019, sales and marketing expense increased by $8.9 million, or 25%, as compared to the same period in 2018. This increase was primarily due to period over period increases of $5.7 million in marketing and advertising costs due to our national TV and radio ad campaign in the second quarter of 2019, $1.9 million in personnel-related costs to build out our enterprise sales team, including sales commissions that we expense as incurred, and $1.3 million of software costs, facilities-related and other costs resulting from ongoing business growth.

General and Administrative

(in thousands, except percentages)

Three Months Ended June 30,