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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 September 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-38678
________________________________________________
UPWORK INC.
(Exact Name of Registrant as Specified in its Charter)
________________________________________________
Delaware46-4337682
(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)
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, $0.0001 par value per shareUPWKThe 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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No ☒
As of October 31, 2019, there were 112,020,807 shares of the registrant’s common stock outstanding.



TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
PART I—FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
Notes to Condensed Consolidated Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II—OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.Exhibits
Signatures

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.


1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
UPWORK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
September 30, 2019December 31, 2018
ASSETS
Current assets
Cash and cash equivalents$71,160  $129,128  
Marketable securities60,404    
Funds held in escrow, including funds in transit114,593  98,186  
Trade and client receivables – net of allowance of $2,219 and $2,832 as of September 30, 2019 and December 31, 2018, respectively32,034  22,315  
Prepaid expenses and other current assets7,606  6,253  
Total current assets285,797  255,882  
Property and equipment, net20,668  10,815  
Goodwill118,219  118,219  
Intangible assets, net4,002  6,004  
Other assets, noncurrent904  653  
Total assets$429,590  $391,573  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$2,934  $2,073  
Escrow funds payable114,593  98,186  
Debt, current7,579  5,671  
Accrued expenses and other current liabilities21,898  20,948  
Deferred revenue1,587  722  
Total current liabilities148,591  127,600  
Debt, noncurrent12,584  18,239  
Other liabilities, noncurrent5,816  1,989  
Total liabilities166,991  147,828  
Commitments and contingencies (Note 5)
Stockholders’ equity
Common stock, $0.0001 par value; 490,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 111,899,493 and 106,454,321 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively11  11  
Additional paid-in capital415,669  387,233  
Accumulated deficit(153,081) (143,499) 
Total stockholders’ equity262,599  243,745  
Total liabilities and stockholders’ equity$429,590  $391,573  
The accompanying notes are an integral part of these condensed consolidated financial statements.
2


UPWORK INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
Revenue$78,786  $64,113  $221,966  $186,012  
Cost of revenue22,494  20,504  65,207  60,578  
Gross profit56,292  43,609  156,759  125,434  
Operating expenses
Research and development16,209  14,377  47,705  40,680  
Sales and marketing25,322  18,967  70,319  55,054  
General and administrative16,519  11,707  46,309  34,102  
Provision for transaction losses1,214  1,892  2,706  4,612  
Total operating expenses59,264  46,943  167,039  134,448  
Loss from operations(2,972) (3,334) (10,280) (9,014) 
Interest expense317  589  1,047  1,674  
Other (income) expense, net(462) 3,423  (1,773) 3,845  
Loss before income taxes(2,827) (7,346) (9,554) (14,533) 
Income tax provision    (28) (9) 
Net loss$(2,827) $(7,346) $(9,582) $(14,542) 
Net loss per share, basic and diluted$(0.03) $(0.20) $(0.09) $(0.41) 
Weighted-average shares used to compute net loss per share, basic and diluted111,163  36,070  108,844  35,129  

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

3


UPWORK INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
(Unaudited)

Three Months Ended September 30, 2019Redeemable Convertible
Preferred Stock
Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balances as of June 30, 2019  $  110,708,530  $11  $407,876  $(150,254) $257,633  
Issuance of common stock upon exercise of stock options—  1,122,763  —  3,795  —  3,795  
Stock-based compensation expense—  —  —  3,998  —  3,998  
Issuance of common stock for settlement of RSUs—  68,200  —  —  —  —  
Net loss—  —  —  —  —  (2,827) (2,827) 
Balances as of September 30, 2019  $  111,899,493  $11  $415,669  $(153,081) $262,599  


Three Months Ended September 30, 2018Redeemable Convertible
Preferred Stock
Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total
Stockholders’
Deficit
SharesAmountSharesAmount
Balances as of June 30, 201861,279,079  $166,486  35,880,003  $4  $100,173  $(130,788) $(30,611) 
Issuance of common stock upon exercise of stock options—  —  1,065,314  —  2,741  —  2,741  
Stock-based compensation expense—  —  —  —  1,986  —  1,986  
Net loss—  —  —  —  —  (7,346) (7,346) 
Balances as of September 30, 201861,279,079  $166,486  36,945,317  $4  $104,900  $(138,134) $(33,230) 


4


Nine Months Ended September 30, 2019Redeemable Convertible
Preferred Stock
Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmount
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—  5,041,302  —  14,145  —  14,145  
Stock-based compensation expense—  —  —  10,714  —  10,714  
Issuance of common stock for settlement of RSUs—  123,562  —  —  —  —  
Issuance of common stock in connection with employee stock purchase plan—  —  280,308  —  3,577  —  3,577  
Net loss—  —  —  —  (9,582) (9,582) 
Balances as of September 30, 2019  $  111,899,493  $11  $415,669  $(153,081) $262,599  

Nine Months Ended September 30, 2018Redeemable Convertible
Preferred Stock
Common StockAdditional Paid-in CapitalAccumulated
Deficit
Total
Stockholders’
Deficit
SharesAmountSharesAmount
Balances as of December 31, 201761,279,079  $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—  —  3,204,994  1  7,011  —  7,012  
Stock-based compensation expense—  —  —  —  5,667  —  5,667  
Net loss—  —  —  —  —  (14,542) (14,542) 
Balances as of September 30, 201861,279,079  $166,486  36,945,317  $4  $104,900  $(138,134) $(33,230) 

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

5


UPWORK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20192018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss$(9,582) $(14,542) 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for transaction losses2,078  4,612  
Depreciation and amortization4,498  3,542  
Amortization of debt issuance costs39  64  
Amortization of discount on purchases of marketable securities(948)   
Change in fair value of redeemable convertible preferred stock warrant liability  3,610  
Change in fair value of Tides Foundation common stock warrant439    
Stock-based compensation expense10,858  5,667  
Loss on disposal of fixed assets  33  
Changes in operating assets and liabilities:
Trade and client receivables(11,885) (15,137) 
Prepaid expenses and other assets(1,439) (658) 
Accounts payable697  5,006  
Accrued expenses and other liabilities5,814  (490) 
Deferred revenue1,432  103  
Net cash provided by (used in) operating activities2,001  (8,190) 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities(131,950)   
Sale of marketable securities72,500    
Increase in restricted cash  (94) 
Purchases of property and equipment(10,230) (1,598) 
Internal-use software and platform development costs(4,054) (2,670) 
Net cash used in investing activities(73,734) (4,362) 
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in funds held in escrow, including funds in transit(16,407) (20,283) 
Changes in escrow funds payable16,407  20,283  
Proceeds from exercises of stock options and common stock warrants13,974  7,011  
Proceeds from borrowings on debt50,000  15,000  
Repayment of debt(53,786)   
Proceeds from employee stock purchase plan3,577    
Payments of costs related to the initial public offering  (3,999) 
Net cash provided by financing activities13,765  18,012  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(57,968) 5,460  
Cash and cash equivalents, beginning of period129,128  21,595  
Cash and cash equivalents, end of period$71,160  $27,055  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes$31  $7  
Cash paid for interest$1,027  $1,573  
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased but not yet paid$905  $166  
Unpaid deferred offering costs$  $1,583  
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


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 talent solution that enables businesses (“clients”) to find and work with highly-skilled independent professionals (“freelancers,” and, together with clients, “users”). The Company was originally incorporated in the state of Delaware in December 2013 prior to and in connection with the combination (the “Elance-oDesk Combination”) of Elance, Inc. (“Elance”) and oDesk Corporation (“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.

7


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 marketable securities consisting of commercial paper, treasury bills, and U.S. government securities, all of which have contractual maturities within 24 months from the date of purchase. The marketable securities are available for current operations and are classified as available-for-sale. 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.

8


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 was lower than the U.S. federal statutory tax rate for the three and nine months ended September 30, 2019, 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 nine months ended September 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, IntangiblesGoodwill and Others (Topic 350): Simplifying the Test for Goodwill Impairment
For the year ending December 31, 2021For 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, 2019Fiscal years beginning after December 15, 2018
2018-07, CompensationStock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
Fiscal year ending December 31, 2020Fiscal year ending December 31, 2019
2018-13, Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement
Fiscal year ending December 31, 2021Fiscal year ending December 31, 2020
2018-15, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Fiscal year ending December 31, 2021Fiscal year ending 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 CostsContracts 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 will adopt the new revenue standard for the year ending December 31, 2019 during the fourth quarter of 2019, using the modified retrospective method. Interim reporting under the new revenue standard will not be required until 2020.

9


The Company is still finalizing its assessment of the impact of adoption of the new standard and is executing a transition plan, including necessary changes to policies, processes, and internal controls. Based on the analysis completed to date, the Company has concluded that principal agent considerations across the Company’s portfolio of contracts under the new revenue standard will remain largely unchanged. The Company has also concluded that the impact upon adoption related to costs to obtain a contract with a customer related to certain sales commission plans do not meet the capitalization criteria and therefore does not expect a significant impact upon adoption. Additionally, the Company’s tiered pricing program for freelancer service fees will result in a deferral of revenue under the new revenue standard. The Company expects that the adoption of this standard will have a material cumulative effect at the adoption date on accumulated deficit, deferred revenue, and related disclosures. However, the Company does not expect a material impact on the consolidated statements of operations as of and for the year ending December 31, 2019. The Company is currently finalizing the potential impact that the following items will have on its consolidated financial statements:
identification of performance obligations;
timing of revenue recognition for its tiered pricing program for freelancer service fees; and
revenue disclosures which are expected to expand and may require judgment in certain areas.
The Company currently does not expect significant changes to its systems and processes from the adoption of the new revenue standard.
In January 2016, the FASB issued ASU 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 U.S. 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 the year ending December 31, 2019. Interim reporting is not required until 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 lease standard. In 2018, the FASB also approved an amendment that would permit the option to adopt the new lease standard prospectively as of the effective date, without adjusting comparative periods presented. This guidance is effective for the Company for the year ending December 31, 2019. Interim reporting is not required until 2020. 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 has identified its population of leases, selected the practical expedients it will apply upon adoption, and selected the discount rates it will apply in the calculation of the lease liability. The Company is continuing to evaluate the calculations of the lease liability and lease asset which includes the execution of internal controls; however, the Company expects that the adoption of this standard will have a material impact on its assets and liabilities and related disclosures. The Company does not expect significant changes to its current systems and processes as a result of the adoption of this standard.

10


In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). This 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. This guidance is effective January 1, 2020 with early adoption permitted. The standard requires a modified retrospective method of adoption. The Company is currently evaluating the impact to its consolidated financial statements and related disclosures but expects that the most notable impact of these standards may relate to the Company’s processes around the assessment of the adequacy of the allowance on trade and client receivables and the recognition of credit losses.

11


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 liabilities.
The Company’s financial instruments that are carried at fair value consist of Level I and Level II assets as of September 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):

September 30, 2019
Level ILevel IILevel IIITotal
Cash equivalents
Money market funds$56,487  $  $  $56,487  
Marketable securities
Commercial paper  35,802    35,802  
U.S. government securities24,602      24,602  
Total financial assets$81,089  $35,802  $  $116,891  

December 31, 2018
Level ILevel IILevel IIITotal
Cash equivalents—money market funds$117,138  $  $  $117,138  
Total financial assets$117,138  $  $  $117,138  


12


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 nine months ended September 30, 2018, the Company recorded $3.2 million and $3.6 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.

13


Note 4—Balance Sheet Components
Cash and Cash Equivalents
Cash and cash equivalents consisted of the following (in thousands):
September 30, 2019December 31, 2018
Cash$14,673  $11,990  
Money market funds56,487  117,138  
Total cash and cash equivalents$71,160  $129,128  
Marketable Securities
Marketable securities consisted of the following (in thousands):
September 30, 2019
Commercial paper$35,802  
U.S. government securities24,602  
Total marketable securities$60,404  
For the three and nine months ended September 30, 2019, the gross unrealized gains and losses on the Company’s marketable securities were immaterial. As of September 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 nine months ended September 30, 2019.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
September 30, 2019December 31, 2018
Computer equipment and software$4,109  $3,189  
Internal-use software and platform development10,778  6,287  
Leasehold improvements10,457  5,783  
Office furniture and fixtures2,409  2,545  
Total property and equipment27,753  17,804  
Less: accumulated depreciation(7,085) (6,989) 
Property and equipment, net$20,668  $10,815  

For the three months ended September 30, 2019 and 2018, depreciation expense related to property and equipment was $0.7 million and $0.6 million, respectively. For the nine months ended September 30, 2019 and 2018, depreciation expense related to property and equipment was $2.1 million and $1.5 million, respectively.
For the three months ended September 30, 2019 and 2018, the Company capitalized $2.0 million and $0.8 million of internal-use software and platform development costs, respectively. For the nine months ended September 30, 2019 and 2018, the Company capitalized $4.5 million and $2.7 million of internal-use software and platform development costs, respectively.
Amortization expense related to the capitalized internal-use software and platform development costs was $0.3 million and $0.4 million for the three and nine months ended September 30, 2019, respectively. Amortization expense related to the capitalized internal-use software and platform development costs for the three and nine months ended September 30, 2018 was immaterial.

14


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

 September 30, 2019
 Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Trade names$2,293  $2,293  $  
User relationships18,678  14,676  4,002  
Developed technology10,356  10,356    
Domain names529  529    
Total$31,856  $27,854  $4,002  

 December 31, 2018
 Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Trade names$2,293  $2,293  $  
User relationships18,678  12,674  6,004  
Developed technology10,356  10,356    
Domain names529  529    
Total$31,856  $25,852  $6,004  
For the three and nine months ended September 30, 2019 and 2018, amortization expense of intangible assets was $0.7 million and $2.0 million, respectively. Amortization expense is included in general and administrative expenses. As of September 30, 2019, the remaining useful life for user relationships was 1.5 years. As of December 31, 2018, the remaining useful life for user relationships was 2.3 years.
As of September 30, 2019, the estimated future amortization expense for the acquired intangible assets was as follows (in thousands):
 September 30, 2019
Remainder of 2019$667  
20202,668  
2021667  
Total estimated future amortization expense$4,002  

Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 September 30, 2019December 31, 2018
Accrued compensation and related benefits$5,627  $9,314  
Accrued freelancer costs5,293  2,465  
Accrued indirect taxes2,195  1,630  
Accrued vendor expenses7,527  6,002  
Accrued payment processing fees803  715  
Other453  822  
Total accrued expenses and other current liabilities$21,898  $20,948  


15


Note 5—Commitments and Contingencies
Operating Leases
The Company leases office space under four non-cancellable operating lease agreements, which expire from 2020 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 nine months ended September 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 nine months ended September 30, 2019. The expected sublease income from the two sublease agreements is reflected in the future aggregate minimum lease payment table below.
As of September 30, 2019, future aggregate minimum lease payments under the non-cancellable operating leases, net of sublease income, were as follows (in thousands):
 September 30, 2019
Remainder of 2019$1,059  
20205,921  
20216,405  
20226,588  
20236,776  
Thereafter13,137  
Less: sublease income(482) 
Total$39,404  


16


For the three months ended September 30, 2019 and 2018, rent expense was $1.2 million and $1.1 million, respectively. For the nine months ended September 30, 2019 and 2018, rent expense was $3.9 million and $3.0 million, respectively.
Letters of Credit
In conjunction with the operating lease agreements, as of September 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 September 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 September 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 clients, business partners, vendors and other parties, including, but not limited to, losses arising out of the Company’s breach of such agreements, claims related to potential data or information security breaches, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our products and services or our acts or omissions. In addition, subject to the terms of the applicable agreement, as part of the Company’s Upwork Enterprise offering, the Company indemnifies clients that subscribe to worker classification services for losses arising from worker misclassification. 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.

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Note 6—Debt
The following table presents the carrying value of the Company’s debt obligations as of September 30, 2019 and December 31, 2018 (in thousands):
 September 30, 2019December 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
$12,500  $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
7,714  9,000  
Total debt20,214  24,000  
Less: unamortized debt discount issuance costs(51) (90) 
Balance20,163  23,910  
Debt, current(7,579) (5,671) 
Debt, noncurrent$12,584  $18,239  
Weighted-average interest rate6.72 %6.89 %
Under the Company’s Loan and Security Agreement, as amended (the “Loan Agreement”), the aggregate amount of the facility is up to $49.0 million, consisting of a term loan in the original principal amount of $15.0 million (the “First Term Loan”), a term loan in the original principal amount of $9.0 million (the “Second Term Loan” and, together with the First Term Loan, 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 September 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.

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Pursuant to the terms of the Loan Agreement, in April 2019, the Company commenced repayment on the Term Loans. During the three and nine months ended September 30, 2019, the Company repaid $1.3 million and $2.5 million related to the First Term Loan, respectively, and $0.6 million and $1.3 million related to the Second Term Loan, respectively.
Amortization expense related to the debt discount was immaterial for the three and nine months ended September 30, 2019 and 2018.

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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 September 30, 2019 and December 31, 2018.

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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 nine months ended September 30, 2018, the Company recorded $