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    UPWK   US91688F1049

UPWORK INC.

(UPWK)
  Report
Delayed Quote. Delayed Nasdaq - 09/17 04:00:01 pm
49.7 USD   +4.61%
09/14UPWORK : Wins Multiple 2021 Stevie Awards
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UPWORK : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

07/29/2021 | 04:49pm EDT
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 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
Independent talent is an increasingly sought-after, critical, and expanding
segment of the global workforce. We operate the world's largest work marketplace
that connects businesses, which we refer to as clients, with independent talent,
as measured by gross services volume, which we refer to as GSV. We define
freelancers as users that advertise and provide services to clients through our
work marketplace, and we define clients as users that work with freelancers
through our work marketplace. Freelancers on our work marketplace include
independent professionals and agencies of varying sizes. The clients on our work
marketplace range in size from small businesses to Fortune 100 companies.
Impact of the COVID-19 Pandemic on Our Business
The COVID-19 pandemic and the resulting restrictions intended to prevent its
spread have accelerated the secular shift toward remote and independent work. We
derive a substantial portion of our GSV and revenue from small- and medium-sized
businesses, but we continue to see businesses of all sizes use our work
marketplace in a recurring way for larger, more complex projects. We expect our
business to continue to grow over time, and while we have not incurred
significant disruptions to our business thus far from the COVID-19 pandemic, we
continue to monitor the potential impact it could have on our business as well
as various uncertainties, which include, but are not limited to, the duration of
the pandemic, its effect on the economy, its impact on our users, including
their demand for talent on our work marketplace as the pandemic subsides, and
other factors identified in Part II, Item 1A "Risk Factors" in this Quarterly
Report, including the risk factor titled "Our business experienced, and may
again experience, an adverse impact from the ongoing COVID-19 pandemic. In
addition, users may reduce their use of our work marketplace as the pandemic
continues to subside and the restrictions intended to prevent its spread are
relaxed or lifted."
Key Financial and Operational Metrics
As of and for the three and six months ended June 30, 2021, our key financial
and operating metrics are as follows:

                             Three Months Ended                                   Six Months Ended
                                  June 30,                       %                    June 30,                         %
                            2021            2020               Change          2021              2020                Change

                                        (in thousands, except percentages)
GSV                     $ 875,806       $ 581,950                50  %    $ 1,662,583       $ 1,141,444                46  %
Marketplace revenue     $ 114,460       $  78,464                46  %    $   219,130       $   153,246                43  %
Marketplace take rate        13.2  %         13.7  %           (0.5) %           13.3  %           13.6  %           (0.3) %
Net loss                $ (16,538)      $ (11,024)              (50) %    $   (24,373)      $   (21,045)              (16) %
Adjusted EBITDA1        $   7,269       $  (1,184)              714  %    $    14,180       $    (2,202)              744  %



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 "Key Financial
and Operational Metrics-Non-GAAP Financial Measures" below for a definition of
adjusted EBITDA and for information regarding our use of adjusted EBITDA and a
reconciliation of adjusted EBITDA to net loss, the most directly comparable
financial measure prepared under U.S. GAAP.
                                       16
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                                                                   As of June 30,                                %
                                                              2021                   2020                     Change

                                                           (active and core clients are in
                                                                     thousands)
Active clients                                                   725                    570                        27  %
GSV per active client                                  $       4,198            $     3,897                         8  %

Core clients                                                     162                    133                        21  %
Client spend retention                                           114    %               100  %                     14  %


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. For a discussion of
limitations in the measurement of our key financial and operational metrics, see
"Risk Factors-We track certain performance metrics with internal tools and do
not independently verify such metrics. Certain of our performance metrics may
not accurately reflect certain details of our business, are subject to inherent
challenges in measurement, and real or perceived inaccuracies in such metrics
may harm our reputation and negatively affect our business" in Part II, Item 1A
of this Quarterly Report.
In order to provide better insight into our business and a better understanding
of its performance, on a quarterly basis, we will report the number of active
clients and GSV per active client and will no longer be reporting core clients
and client spend retention as operating metrics following this filing. We
believe active clients and GSV per active client provide more relevant insight
into our current business performance and align with how management views the
business.
Gross Services Volume (GSV)
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 is an important metric because it represents the amount of
business transacted through our work marketplace.
Active Clients and GSV per Active Client
We define an active client as a client that has had spend activity on our work
marketplace during the 12 months preceding the date of measurement. GSV per
active client is calculated by dividing total GSV during the four quarters ended
on the date of measurement by the number of active clients at the date of
measurement. We believe that the number of active clients and GSV per active
client are indicators of the growth and overall health of our business. The
number of active clients is a primary driver of GSV and, therefore, marketplace
revenue.
Marketplace Revenue
Marketplace revenue, which represents the majority of our revenue, is the
primary driver of our business and provides comparability to other online
marketplaces. Marketplace revenue is generated from our Upwork Basic, Plus, and
Enterprise and other premium offerings and is primarily comprised of both the
service fees paid by freelancers as a percentage of the total amount that
freelancers charge clients for services accessed through our work marketplace
and, to a lesser extent, payment processing and administration fees paid by
clients.
Marketplace Take Rate
Marketplace take rate measures the correlation between marketplace revenue and
GSV from our marketplace offerings and is a key indicator of how well we
monetize spend from our Upwork Basic, Plus, and Enterprise and other premium
offerings on our work marketplace. Marketplace take rate is calculated by
dividing marketplace revenue by GSV from our marketplace offerings.
Core Clients
We define a core client as a client that has spent at least $5,000 in the
aggregate since it began using our work marketplace and had spend activity on
our work marketplace during the 12 months preceding the date of measurement. In
order to provide more relevant insight into our current business performance and
align with how
                                       17
--------------------------------------------------------------------------------

management views the business, we will no longer report the number of core
clients and will instead report the number of active clients in our future
filings.
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. In order to provide more relevant
insight into our current business performance and align with how management
views the business, we will no longer report client spend retention and will
instead report GSV per active client in our future filings.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, adjusted
EBITDA is a non-GAAP measure that we believe is useful in evaluating our
operating performance.
We define adjusted EBITDA as net income (loss) adjusted for stock-based
compensation expense, depreciation and amortization, interest expense, other
(income) expense, net, income tax (benefit) provision, and, if applicable, other
non-cash transactions. For the three and six months ended June 30, 2021, other
non-cash transactions included an impairment charge of $7.4 million related to
certain of our operating lease assets and associated property and equipment.
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                         Six Months Ended
                                                      June 30,                                  June 30,
                                              2021                 2020                 2021                 2020
Net Loss                                 $   (16,538)         $   (11,024)         $   (24,373)         $   (21,045)
Add back (deduct):
Stock-based compensation expense              13,534                7,134               24,760               12,671
Depreciation and amortization                  2,554                2,478                5,748                4,786
Interest expense                                 110                  258                  309                  488
Other (income) expense, net                       17                 (248)                 (61)                 483
Income tax provision                              16                   30                   33                   39
Tides Foundation common stock warrant
expense                                          187                  188                  375                  376
Impairment expense                             7,389                    -                7,389                    -
Adjusted EBITDA                          $     7,269          $    (1,184)         $    14,180          $    (2,202)


We use adjusted EBITDA as a measure of operational efficiency. We believe that
this non-GAAP financial measure is useful to investors for period-to-period
comparisons of our business and in understanding and evaluating our operating
results for the following reasons:
•adjusted EBITDA is widely used by investors and securities analysts to measure
a company's operating performance without regard to items such as stock-based
compensation expense, depreciation and amortization, interest expense, other
(income) expense, net, income tax (benefit) provision, and, if applicable, other
non-cash transactions that can vary substantially from company to company
depending upon their financing, capital structures, and the method by which
assets were acquired;
•our management uses adjusted EBITDA in conjunction with financial measures
prepared in accordance with U.S. GAAP for planning purposes, including the
preparation of our annual operating budget, as a measure of our core operating
results and the effectiveness of our business strategy, and in evaluating our
financial performance; and
                                       18
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•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
Marketplace Revenue. Marketplace revenue represents the majority of our revenue
and is generated from our Upwork Basic, Plus, and Enterprise and other premium
offerings. Under these marketplace offerings, we generate revenue from both
freelancers and clients.
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. 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. 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, and the amortization expense
associated with capitalized internal-use software and platform development
costs. We define personnel-related costs as salaries, bonuses, benefits, travel
and entertainment, and stock-based compensation costs for employees and the
costs related to other service providers we engage.
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.
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.
General and Administrative. General and administrative expense consists
primarily of personnel-related costs for our executive, finance, legal, human
resources, corporate development, and operations functions; outside consulting,
legal, and accounting services; impairment expense; and insurance.
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
                                       19
--------------------------------------------------------------------------------

chargebacks. Provisions for these items represent estimates of losses based on
our actual historical incurred losses and other factors.
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 and interest income that we earn from our
deposits in money market funds and investments in marketable securities.
Results of Operations
The following table sets forth our condensed consolidated results of operations
for the periods presented (in thousands):
                                       Three Months Ended             Six Months Ended
                                            June 30,                      June 30,
                                      2021           2020           2021           2020
Revenue
Marketplace                        $ 114,460      $  78,464      $ 219,130      $ 153,246
Managed services                       9,721          9,067         18,670         17,481
Total revenue                        124,181         87,531        237,800        170,727
Cost of revenue(1)                    33,083         25,408         63,524         48,893
Gross profit                          91,098         62,123        174,276        121,834
Operating expenses
Research and development(1)           28,124         20,547         54,737         39,895
Sales and marketing(1)                45,817         34,440         85,421         65,118

General and administrative(1) 32,355 17,102 55,886

34,926

Provision for transaction losses 1,197 1,018 2,324

        1,930
Total operating expenses             107,493         73,107        198,368        141,869
Loss from operations                 (16,395)       (10,984)       (24,092)       (20,035)
Interest expense                         110            258            309            488
Other (income) expense, net               17           (248)           (61)           483
Loss before income taxes             (16,522)       (10,994)       (24,340)       (21,006)
Income tax provision                     (16)           (30)           (33)           (39)
Net loss                           $ (16,538)     $ (11,024)     $ (24,373)     $ (21,045)

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

                                     Three Months Ended            Six Months Ended
                                          June 30,                     June 30,
                                     2021           2020          2021          2020
Cost of revenue                  $       179      $   202      $    380      $    376
Research and development               3,988        2,769         7,285         4,719
Sales and marketing                    1,613        1,312         2,891         2,240
General and administrative             7,754        2,851        14,204         5,336

Total stock-based compensation $ 13,534 $ 7,134 $ 24,760

$ 12,671

                                       20
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Comparison of the Three and Six Months Ended June 30, 2021 and 2020
Revenue
(in thousands, except
percentages)                             Three Months Ended June 30,                                            Six Months Ended June 30,
                            2021              2020                    Change                     2021               2020                    Change
Marketplace             $ 114,460          $ 78,464          $ 35,996            46  %       $ 219,130          $ 153,246          $ 65,884            43  %
Percentage of total
revenue                        92  %             90  %                                              92  %              90  %
Managed services        $   9,721          $  9,067               654             7  %       $  18,670          $  17,481             1,189             7  %
Percentage of total
revenue                         8  %             10  %                                               8  %              10  %
Total revenue           $ 124,181          $ 87,531          $ 36,650            42  %       $ 237,800          $ 170,727          $ 67,073            39  %


In the second quarter of 2021, we experienced strong client acquisition as we
continue to execute on our strategic initiatives, including prioritizing our
advertising efforts to reach new and existing clients seeking to engage with
independent talent, investing in marketing to accelerate the acquisition of new
clients and drive brand awareness, and investing in research and development to
build new product features. Strong client acquisition in the second quarter, as
well as in the preceding three quarters, contributed to the increase in active
clients of 27% and contributed to the growth of GSV and marketplace revenue. For
the three and six months ended June 30, 2021, GSV increased 50% and 46%,
respectively, as compared to the same periods in 2020. Marketplace revenue was
fueled by client spend, which for the three and six months ended June 30, 2021,
drove increases in freelancer service fees of 44% and 43%, respectively, as
compared to the same periods in 2020, and client payment processing and
administrative fees of 50% and 46%, respectively, as compared to the same
periods in 2020.
Marketplace revenue grew more slowly than GSV from our marketplace offerings,
and for the three and six months ended June 30, 2021, our marketplace take rate
was 13.2% and 13.3%, respectively, as compared to 13.7% and 13.6%, respectively,
for the same periods in 2020. This trend was the result of a few factors. In
particular, we have seen the initial client cohorts following the start of the
COVID-19 pandemic mature into higher value clients and continue to increase
their spend with particular freelancers, which resulted in a higher mix of
freelancers at the lower rates of our tiered service fee structure.
Additionally, in the fourth quarter of 2020, to drive GSV, we increased the
number of free "Connects" (virtual tokens that allow freelancers to bid on
projects on the Company's platform) issued to freelancers, which drove revenue
and GSV, but resulted in slightly lower revenue as a percentage of GSV during
the three and six months ended June 30, 2021. We anticipate these trends to
continue in the near term.
For the three and six months ended June 30, 2021, managed services revenue grew
at a slower rate than our marketplace revenue, and we anticipate this trend will
continue as we primarily focus on increasing client usage of and spend on our
marketplace offerings.
Cost of Revenue and Gross Margin
(in thousands, except
percentages)                             Three Months Ended June 30,                                          Six Months Ended June 30,
                            2021              2020                    Change                   2021              2020                    Change
Cost of revenue         $  33,083          $ 25,408          $ 7,675            30  %       $ 63,524          $ 48,893          $ 14,631            30  %
Components of cost of
revenue:
Cost of freelancer
services to deliver
managed services            7,796             7,272              524       
     7  %         15,003            14,234               769             5  %
Other components of
cost of revenue            25,287            18,136            7,151            39  %         48,521            34,659            13,862            40  %
Total gross margin             73  %             71  %                                            73  %             71  %


For the three and six months ended June 30, 2021, cost of revenue increased
primarily as a result of increases in payment processing fees of $6.4 million
and $11.3 million, respectively, as compared to the same periods in 2020,
primarily due to increased client spend. Additionally, for the six months ended
June 30, 2021, third-party hosting
                                       21
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costs increased $1.1 million and personnel-related costs increased $0.9 million,
as compared to the same period in 2020.
We expect cost of revenue to increase in absolute dollars in future periods as
we continue to support growth on our work marketplace. Amounts paid to
freelancers in connection with our managed services offering are tied to the
volume of managed services used by our clients. The level and timing of these
items could fluctuate and affect our cost of revenue in the future. Because our
managed services revenue and marketplace revenue grow at different rates, we
expect gross profit to increase in absolute dollars in future periods, although
gross margin, expressed as a percentage of total revenue, may vary from period
to period.
Research and Development
(in thousands, except
percentages)                              Three Months Ended June 30,                                          Six Months Ended June 30,
                             2021              2020                    Change                   2021              2020                    Change

Research and development $ 28,124 $ 20,547 $ 7,577

     37  %       $ 54,737          $ 39,895          $ 14,842            37  %
Percentage of total
revenue                         23  %             23  %                                            23  %             23  %


For the three and six months ended June 30, 2021, research and development
expense increased due to our ongoing and significant investments to build new
product features and launch new offerings. Specifically, investments we made to
increase the size of our research and development workforce resulted in
increases in personnel-related costs of $5.4 million and $11.2 million,
respectively, as compared to the same periods in 2020, as well as increases in
software licenses and other costs of $0.8 million and $1.0 million,
respectively, and outside consulting costs of $0.4 million and $0.9 million,
respectively.
We believe continued investments in research and development are important to
attain our strategic objectives, and we expect research and development expense
to increase in absolute dollars in future periods, although this expense,
expressed as a percentage of total revenue, may vary from period to period.
Sales and Marketing
(in thousands, except
percentages)                              Three Months Ended June 30,                                          Six Months Ended June 30,
                            2021              2020                    Change                    2021              2020                    Change
Sales and marketing      $ 45,817          $ 34,440          $ 11,377      
     33  %       $ 85,421          $ 65,118          $ 20,303            31  %
Percentage of total
revenue                        37  %             39  %                                             36  %             38  %


For the three and six months ended June 30, 2021, sales and marketing expense
increased due to increases in marketing and brand awareness campaigns of $9.5
million and $16.5 million, respectively, as compared to the same periods in
2020, as well as increases in personnel-related costs of $1.1 million and $3.4
million, respectively.
In an effort to further our acquisition of, and achieve increased spend from,
clients, we will continue to invest in marketing and brand awareness. In
particular, we expect to increase our investment in brand marketing beginning in
the second half of 2021.
General and Administrative
(in thousands, except
percentages)                               Three Months Ended June 30,                                          Six Months Ended June 30,
                             2021              2020                    Change                    2021              2020                    Change
General and
administrative            $ 32,355          $ 17,102          $ 15,253            89  %       $ 55,886          $ 34,926          $ 20,960            60  %
Percentage of total
revenue                         26  %             20  %                                             24  %             20  %


For the three and six months ended June 30, 2021, general and administrative
expense increased due to increases in personnel-related costs of $7.5 million
and $13.0 million, respectively, as compared to the same periods in 2020,
primarily because of increased stock-based compensation expense related to
executive compensation arrangements. Additionally, in the second quarter of
2021, we incurred an impairment charge of $7.4 million related to certain of our
operating lease assets and associated property and equipment.
                                       22
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We expect to continue to invest in corporate infrastructure, including increased
stock-based compensation expense related to executive compensation arrangements,
legal and accounting costs, insurance premiums, and compliance costs.
Additionally, we shifted to a flexible work model for our workforce and are
evaluating our current need for office space. As a result, we may determine to
either close or sublease certain of our other offices, either of which could
result in further impairment charges being recognized in general and
administrative expense.
Provision for Transaction Losses
(in thousands, except
percentages)                                Three Months Ended June 30,                                             Six Months Ended June 30,
                              2021                   2020                   Change                    2021               2020                   Change
Provision for
transaction losses       $    1,197               $ 1,018          $  179             18  %       $   2,324           $ 1,930          $  394             20  %
Percentage of total
revenue                           1   %                 1  %                                              1   %             1  %


For the three and six months ended June 30, 2021, provision for transaction
losses represented 1% of total revenue. We expect provision for transaction
losses to approximate 1% of revenue and to increase proportionally as GSV grows.
Interest Expense and Other (Income) Expense, Net
(in thousands, except
percentages)                             Three Months Ended June 30,                                         Six Months Ended June 30,
                             2021             2020                   Change                    2021             2020                   Change
Interest expense         $     110          $  258          $ (148)            (57) %       $    309          $  488          $ (179)            (37) %
Other (income) expense,
net                             17            (248)            265            (107) %            (61)            483            (544)           (113) %


For the three and six months ended June 30, 2021, interest expense decreased as
a result of lower outstanding principal balances in 2021. For the three and six
months ended June 30, 2021, other income, net was driven by net foreign currency
transaction gains.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, marketable
securities, and amounts available for borrowing under our Loan and Security
Agreement, as amended, which we refer to as the Loan Agreement, referred to
below under "-Term and Revolving Loans." Our cash equivalents and marketable
securities primarily consist of money market funds, commercial paper, treasury
bills, and U.S. government securities. As of June 30, 2021 and December 31,
2020, we had $131.4 million and $94.1 million in cash and cash equivalents,
respectively. As of June 30, 2021 and December 31, 2020, we had $41.0 million
and $75.6 million in marketable securities, respectively.
We believe our existing cash and cash equivalents, marketable securities, cash
flow from operations (in periods in which we generate cash flow from
operations), and amounts available for borrowing under the Loan Agreement will
be sufficient to meet our working capital requirements for at least the next 12
months. To the extent existing cash and cash equivalents, cash from marketable
securities, cash from operations (in periods in which we generate cash flow from
operations), and amounts available for borrowing under the Loan Agreement are
insufficient to fund our working capital requirements, or should we require
additional cash for other purposes, we will need to raise additional funds. In
the future, we may attempt to raise additional capital through the sale of
equity securities or through equity-linked or debt financing arrangements. If we
raise additional funds by issuing equity or equity-linked securities, the
ownership and economic interests of our existing stockholders will be diluted.
If we raise additional financing by incurring additional indebtedness, we will
be subject to additional debt service requirements and could also be subject to
additional restrictive covenants, such as limitations on our ability to incur
additional debt, and other operating restrictions that could adversely impact
our ability to conduct our business. Any future indebtedness we incur may result
in terms that could also be unfavorable to our equity investors. There can be no
assurances that we will be able to raise additional capital on terms we deem
acceptable, or at all. The inability to raise additional capital as and when
required would have an adverse effect, which could be material, on our results
of operations, financial condition and ability to achieve our business
objectives.
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We also believe that our principal sources of liquidity will allow us to manage
the impact of the COVID-19 pandemic on our business operations for the
foreseeable future, which could include reductions in revenue and delays in
payments from users, as further described below in "Risk Factors-Our business
experienced, and may again experience, an adverse impact from the ongoing
COVID-19 pandemic. In addition, users may reduce their use of our work
marketplace as the pandemic continues to subside and the restrictions intended
to prevent its spread are relaxed or lifted." in Part II, Item 1A in this
Quarterly Report. The challenges posed by the COVID-19 pandemic on our business
are expected to continue to evolve. Consequently, we will continue to evaluate
our financial position in light of future developments, particularly those
relating to the COVID-19 pandemic.
Escrow Funding Requirements
As a licensed internet escrow agent, we offer escrow services to users of our
work marketplace and, as such, we are required to hold our users' escrowed cash
and in-transit cash in trust as an asset and record a corresponding liability
for escrow funds held on behalf of freelancers and clients on our balance sheet.
We expect the balances of our funds held in escrow, including funds held in
transit, and the related liability to grow as GSV grows and may vary from period
to period. Escrow regulations require us to fund the trust with our operating
cash to cover shortages due to the timing of cash receipts from clients for
completed hourly billings. Freelancers submit their billings for hourly
contracts to their clients on a weekly basis every Sunday, and the aggregate
amount of such billings is added to escrow funds payable to freelancers on the
same day. As of each Sunday of each week, we have not yet collected funds for
hourly billings from clients as these funds are in transit. Therefore, in order
to satisfy escrow funding requirements, every Sunday we fund the shortage of
cash in trust with our own operating cash and typically collect this cash
shortage from clients within the next several days. As a result, we expect our
total cash and cash flows from operating activities to be impacted when a
quarter ends on a Sunday. As of June 30, 2021 and December 31, 2020, funds held
in escrow were $165.1 million and $135.0 million, respectively. To the extent we
have not yet collected funds for hourly billings from clients which are in
transit due to timing differences in receipt of cash from clients and payments
of cash to freelancers, we may, from time to time, utilize the revolving line of
credit under our Loan Agreement to satisfy escrow funding requirements.
Term and Revolving Loans
Under our 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, which we refer to as the First Term Loan, a term loan in the original
principal amount of $9.0 million, which we refer to as the Second Term Loan,
and, together with the First Term Loan, as the Term Loans, and a revolving line
of credit, which permits borrowings of up to $25.0 million subject to customary
conditions. The First Term Loan matures in March 2022, and the Second Term Loan
and revolving line of credit mature in September 2022. All borrowings under the
Loan Agreement bear interest at floating rates, and, therefore, our borrowing
costs are affected by changes in market interest rates.
Our obligations under the Loan Agreement are secured by first priority liens on
substantially all of our assets excluding our intellectual property (but
including proceeds therefrom) and the funds and assets held by our subsidiary
Upwork Escrow Inc., which we refer to as Upwork Escrow. The Loan Agreement
prohibits us from pledging our intellectual property. The Loan Agreement also
includes a restriction on dividend payments, other than dividends payable solely
in common stock. The Loan Agreement contains affirmative covenants, including a
covenant requiring that we maintain an adjusted quick ratio, and also contains
certain non-financial covenants. We were in compliance with our covenants under
the Loan Agreement as of June 30, 2021 and December 31, 2020.
During the three and six months ended June 30, 2021, we 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. During the three and
six months ended June 30, 2020, we 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. As of June 30, 2021 and December 31,
2020, no amounts were outstanding on our revolving line of credit.
                                       24
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Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
                                                                           Six Months Ended
                                                                               June 30,
                                                                      2021                  2020
Net cash provided by operating activities                        $      2,420          $      6,662
Net cash provided by investing activities                              30,618                 7,066
Net cash provided by financing activities                              34,669                35,717
Net increase in cash, cash equivalents, and restricted cash(1)   $     67,707          $     49,445
(1) Includes increases in funds held in escrow, including funds in transit of $30.0 million and $20.8
million during the six months ended June 30, 2021 and 2020, respectively.


Operating Activities
Our largest source of cash from operating activities is revenue generated from
our work marketplace. Our primary uses of cash from operating activities are for
personnel-related expenditures, marketing activities, including advertising,
payment processing fees, amounts paid to freelancers to deliver services for
clients under our managed services offering, and third-party hosting costs. In
addition, because we are licensed as an internet escrow agent, our total cash
and cash provided by (used in) operating activities may be impacted by the
timing of the end of our fiscal quarter as discussed in the section titled
"-Liquidity and Capital Resources-Escrow Funding Requirements."
For the six months ended June 30, 2021, net cash provided by operating
activities was $2.4 million, which resulted from non-cash charges of $42.0
million, offset by a net loss of $24.4 million and net cash outflows of $15.2
million from changes in operating assets and liabilities. The change in
operating assets and liabilities primarily resulted from the increase in trade
and client receivables of $16.8 million.
For the six months ended June 30, 2020, net cash provided by operating
activities was $6.7 million, which resulted from non-cash charges of $21.2
million and net cash inflows of $6.5 million from changes in operating assets
and liabilities, partially offset by a net loss of $21.0 million. The change in
operating assets and liabilities primarily resulted from the increase in
accounts payable of $4.4 million, which was a result of the timing of payments
of invoices, and the increase in accrued expenses and other current liabilities
of $7.2 million, which was a result of additional accruals related to our
ongoing marketing and brand awareness and other efforts, partially offset by a
reduction in trade and client receivables of $4.8 million.
Investing Activities
For the six months ended June 30, 2021, net cash provided by investing
activities was $30.6 million, which was primarily a result of proceeds from
maturities of marketable securities of $64.5 million, offset by investing $30.0
million in various marketable securities, as well as $3.6 million of
internal-use software and platform development costs that we paid during the
period.
For the six months ended June 30, 2020, net cash provided by investing
activities was $7.1 million, which was primarily a result of proceeds from
maturities of marketable securities of $64.0 million, partially offset by
investing $47.7 million in various marketable securities, as well as $3.6
million of internal-use software and platform development costs that we paid
during the period and purchases of property and equipment of $5.6 million
primarily for leasehold improvements and furniture related to our office lease
in Chicago, Illinois.
Financing Activities
For the six months ended June 30, 2021, net cash provided by financing
activities was $34.7 million, which resulted primarily from an increase in
escrow funds payable of $30.0 million, cash received from stock option exercises
of $5.7 million, and proceeds received from our employee stock purchase plan of
$2.7 million, partially offset by repayments of borrowings on debt of $3.8
million.
                                       25
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For the six months ended June 30, 2020, net cash provided by financing
activities was $35.7 million, which resulted primarily from an increase in
escrow funds payable of $20.8 million, cash received from stock option exercises
of $16.0 million, and proceeds received from our employee stock purchase plan of
$2.7 million, partially offset by net repayments of borrowings on debt of $3.8
million.
Obligations and Other Commitments
Our principal commitments consist of obligations under
our non-cancellable operating leases for office space and the Loan Agreement.
The following table summarizes our contractual obligations as of June 30, 2021
(in thousands):
                                                Less than       1 - 3         3 - 5       More Than
                                   Total         1 Year         Years         Years        5 Years
Leases(1)                        $ 29,745      $   6,496      $ 13,553      $ 5,613      $    4,083
Debt principal                      6,964          6,321           643            -               -

Total contractual obligations $ 36,709 $ 12,817 $ 14,196 $ 5,613 $ 4,083



(1)Represents minimum operating lease payments under operating leases for office
facilities, excluding potential lease renewals and tenant improvement
allowances.
In the ordinary course of business, we enter into contracts and agreements that
contain a variety of representations and warranties and provide for
indemnification. In addition, we have entered into indemnification agreements
with our directors and executive officers and certain key employees that require
us, among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as our directors, executive officers,
or employees. The terms of such obligations may vary. To date, we have not paid
any material claims or been required to defend any actions related to our
indemnification obligations.
As of June 30, 2021 and December 31, 2020, we had accrued liabilities related to
uncertain non-income tax positions based on management's best estimate of its
liability, which are reflected on our condensed consolidated balance sheets. We
could be subject to examination in various jurisdictions related to income
and non-income tax matters. The resolution of these types of matters, giving
recognition to the recorded reserve, could have an adverse impact on our
business.
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any relationships with other entities or
financial partnerships such as entities often referred to as structured finance
or special purpose entities that have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
U.S. GAAP. The preparation of the condensed consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, expenses, and related disclosures. We evaluate
our estimates and assumptions on an ongoing basis using historical experience
and other factors and adjust those estimates and assumptions when facts and
circumstances dictate. Actual results could materially differ from these
estimates and assumptions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, if different estimates reasonably could have
been used, or if changes in the estimate that are reasonably possible could
materially impact the financial statements. We believe estimates and assumptions
associated with the evaluation of revenue recognition criteria, including the
determination of revenue reporting as gross versus net in our revenue
arrangements, internal-use software and platform development costs, the fair
values of stock-based awards, and income taxes have the greatest potential
impact on our condensed consolidated financial statements. Therefore, we
consider these to be our critical accounting policies and estimates.
Except as otherwise disclosed in "Note 2-Basis of Presentation and Summary of
Significant Accounting Policies" of the notes to our condensed consolidated
financial statements included elsewhere in this Quarterly Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," there have been no
                                       26
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material changes to our critical accounting policies and estimates as compared
to the critical accounting policies and estimates described in our Annual Report
on Form 10-K for the year ended December 31, 2020, which we refer to as our
Annual Report.
Recent Accounting Pronouncements
See "Note 2-Basis of Presentation and Summary of Significant Accounting
Policies" of the notes to our condensed consolidated financial statements
included elsewhere in this Quarterly Report for recently issued accounting
pronouncements not yet adopted as of the date of this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We have operations both within the United States and internationally, and we are
exposed to market risks in the ordinary course of our business. These risks
primarily include interest rate and foreign currency exchange rates.
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while maximizing income without significantly increasing risk. We do not make
investments for trading or speculative purposes. Because our cash and cash
equivalents have a relatively short maturity, our portfolio's fair value is
relatively insensitive to interest rate changes. Borrowings under our Loan
Agreement have variable interest rates. We had $7.0 million and $10.8 million
aggregate principal amount of borrowings outstanding under our Loan Agreement as
of June 30, 2021 and December 31, 2020, respectively. We do not believe that a
hypothetical increase or decrease in interest rates of 100 basis points would
have a material impact on our operating results or financial condition.
Foreign Currency Risk
Our operating results and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. In addition to the U.S. dollar, we offer
clients the option to settle invoices denominated in the U.S. dollar in the
following currencies: Euro, British Pound, Australian dollar, Canadian dollar,
Singapore dollar, South African rand, New Zealand dollar, Polish zloty, Swiss
franc, Norwegian krone, Danish krone, Swedish krona, Turkish lira, Japanese yen,
and Hong Kong dollar. When clients make payments in one of these currencies, we
are exposed to foreign currency risk during the period between when payment is
made and when the payment amounts settle. To mitigate this risk, we have entered
into forward contracts. As such, the impact of foreign currency exchange rate
fluctuations to our operating results have been insignificant to date.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, which we refer to as the Exchange Act, as of
June 30, 2021. Our disclosure controls and procedures are designed to ensure
that information we are required to disclose in the reports we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures, and is
recorded, processed, summarized, and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, which we refer
to as the SEC. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2021, our disclosure controls
and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that
occurred during the quarter ended June 30, 2021 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
                                       27

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