What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-15 compared with 2021-02-24 · 453 added, 429 removed, 727 unchanged (55% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 76

Report of Independent Registered Public Accounting Firm—PCAOB ID:

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for the Years ended December 31, 2021, 2020, and 2019

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended December 31, 2020, 2019, and 2018 80

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021, 2020, and 2019

Consolidated Statements of Cash Flows for the Years ended December 31, 2021, 2020, and 2019

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We have audited the accompanying consolidated balance sheets of Upwork Inc.

and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of redeemable convertible preferred stock and stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of stockholders' equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

and (iii) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition – Estimation of Standalone Selling Price of the Freelancer Material Rights and the Period of Time Over Which to Defer and Recognize the Consideration Allocated to the Material Rights

As described in Notes 2 and 14 to the consolidated financial statements, the Company charges freelancers a service fee as a percentage of freelancer billings using a tiered service fee model based on cumulative lifetime billings by the freelancer to each client.

The Company recorded total revenue of $373.6 million for the year ended December 31, 2020, of which $226.7 million related to revenue from freelancers.

Certain of the Company’s contracts with freelancers contain multiple performance obligations in the event management determines a material right exists.

Specifically, the arrangements with freelancers subject to tiered service fees include contract renewal options that represent a material right.

Revenue Recognition – Estimation of Standalone Selling Price of the Talent Material Rights and the Period of Time Over Which to Defer and Recognize the Consideration Allocated to the Material Rights

As described in Notes 2 and 12 to the consolidated financial statements, the Company charges talent a service fee as a percentage of talent billings primarily using a tiered service fee model based on cumulative lifetime billings by talent to each client.

The Company recorded total revenue of $502.8 million for the year ended December 31, 2021, of which $297.0 million related to revenue from talent.

Certain of the Company’s contracts with talent contain multiple performance obligations in the event management determines a material right exists.

Specifically, the arrangements with talent subject to tiered service fees include contract renewal options that represent a material right.

For such arrangements, management allocates revenue to each performance obligation based on its relative standalone selling price by applying the portfolio approach practical expedient.

Standalone selling prices for offerings subject to tiered service fees are estimated based on observable transactions when these services are sold on a standalone basis.

Standalone selling price for a material right is estimated by determining the discount that the freelancer would obtain when exercising the option, adjusted for the likelihood that the option will be exercised.

Standalone selling price for a material right is estimated by determining the discount that the talent would obtain when exercising the option, adjusted for the likelihood that the option will be exercised.

Management applies significant judgment in the application of the portfolio approach practical expedient, which includes estimating the standalone selling price of the material rights and the period of time over which to defer and recognize the consideration allocated to the material rights.

Specifically, management applied significant judgment in assessing the appropriateness of the model for the estimates, which includes assessing the appropriateness of the methodology and relevant data inputs to (i) estimate the standalone selling price of the material rights, which includes the standalone selling price of the services when sold separately and the likelihood of exercise of the material rights, and (ii) estimate the period of time over which to defer and recognize the consideration allocated to the material rights.

Management utilized historical client-freelancer transaction data in developing the estimates.

Management utilized historical client-talent transaction data in developing the estimates.

The Company recognizes revenue related to the material rights based on management’s estimate of when the material rights are exercised.

The principal considerations for our determination that performing procedures relating to revenue recognition, specifically the estimation of standalone selling price of the freelancer material rights and the period of time over which to defer and recognize the consideration allocated to the material rights, is a critical audit matter are the significant judgment by management in assessing the appropriateness of the model, methodology and relevant data inputs to estimate the standalone selling price of the material rights, and the period of time over which to defer and recognize the consideration allocated to the material rights.

The principal considerations for our determination that performing procedures relating to revenue recognition, specifically the estimation of standalone selling price of the talent material rights and the period of time over which to defer and recognize the consideration allocated to the material rights, is a critical audit matter are the significant judgment by management in assessing the appropriateness of the model, methodology and relevant data inputs to estimate the standalone selling price of the material rights, and the period of time over which to defer and recognize the consideration allocated to the material rights.

This in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s determination of the standalone selling price of the services when sold separately, the likelihood of exercise of the material rights, and the period of time over which to defer and recognize the consideration allocated to the material rights.

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These procedures included testing the effectiveness of controls relating to the revenue recognition process, including the assessment of the appropriateness of the model, methodology and relevant data inputs to estimate the material rights standalone selling price and the period of time over which to defer and recognize the consideration allocated to the material rights.

These procedures also included, among others, (i) evaluating the appropriateness of management’s model used in developing the estimates, the reasonableness of the selected methodology and relevant data inputs used in determining the standalone selling price of the services when sold separately and the likelihood of exercise of the material rights, and the period of time over which to defer and recognize the consideration allocated to the material rights, (ii) testing the completeness and accuracy of data inputs, and (iii) testing the mathematical accuracy of the model’s calculations and the amounts recorded for the material rights in the consolidated financial statements.

testing the completeness and accuracy of data inputs, and (iii) testing the mathematical accuracy of the model’s calculations and the amounts recorded for the material rights in the consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

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(In thousands, except per share data) 2021 2020 2019

2020 2019 2018

Revenue $ 502,797 $ 373,628 $ 300,562

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Interest expense 2,180 778 1,306

Other (income) expense, net ( 469 ) ( 3,407 ) 6,142

Other income, net ( 279 ) ( 469 ) ( 3,407 )

Loss before income taxes ( 56,118 ) ( 22,717 ) ( 16,631 )

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

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2021, 2020, and 2019

(In thousands, except share amounts)

Redeemable Convertible Preferred Stock Common Stock Additional

Common Stock Additional

Capital Accumulated

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Stockholders’

Equity (Deficit)

Shares Amount Shares Amount

(In thousands, except share amounts) Shares Amount

Balances as of December 31, 2018 106,454,321 $ 11 $ 387,233 $ ( 143,499 ) $ 243,745

Cumulative effect adjustment from adoption of new accounting pronouncement — — — ( 11,799 ) ( 11,799 )

Issuance of common stock upon exercise of stock options and common stock warrants 6,429,471 — 18,155 — 18,155

Stock-based compensation expense — — 18,616 — 18,616

Issuance of common stock in connection with the initial public offering, net of discounts and commissions — — 7,840,908 1 109,380 — 109,381

Costs related to the initial public offering — — — — ( 6,282 ) — ( 6,282 )

Conversion of redeemable convertible preferred stock warrant in connection with the initial public offering — — — — 7,160 — 7,160

Conversion of redeemable convertible preferred stock in connection with the initial public offering ( 61,279,079 ) ( 166,486 ) 61,279,079 6 166,480 — 166,486

Tides Foundation common stock warrant expense and other — — 975 — 975

Issuance of common stock for settlement of RSUs 163,943 — — — —

Shares withheld related to net share settlement of RSUs — — ( 12,648 ) — ( 247 ) — ( 247 )

Issuance of common stock in connection with employee stock purchase plan 556,663 — 6,391 — 6,391

Net loss — — — ( 16,659 ) ( 16,659 )

Balances as of December 31, 2019 113,604,398 11 431,370 ( 171,957 ) 259,424

Cumulative effect adjustment from adoption of new accounting pronouncement (Note 2) — — — — — ( 11,799 ) ( 11,799 )

Issuance of common stock upon exercise of stock options and common stock warrants 9,115,947 1 31,027 — 31,028

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Issuance of common stock in connection with employee stock purchase plan 384,114 — 4,789 — 4,789

Purchase of capped calls related to convertible senior notes — — ( 49,393 ) — ( 49,393 )

Net loss — — — ( 56,240 ) ( 56,240 )

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(In thousands) 2021 2020 2019

2020 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:

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Amortization of debt issuance costs 1,182 61 52

Amortization of discount on purchases of marketable securities ( 320 ) ( 1,158 ) —

Change in fair value of redeemable convertible preferred stock warrant liability — — 6,056

Amortization of premium (accretion of discount) of purchases of marketable securities, net 298 ( 320 ) ( 1,158 )

Amortization of operating lease asset 3,545 3,860 3,945

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Stock-based compensation expense 53,592 25,508 18,798

Impairment expense 8,741 — —

Loss on disposal of fixed assets — 44 14

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Proceeds from exercises of stock options and common stock warrant 7,177 31,028 18,155

Taxes paid related to net share settlement of restricted stock units — — ( 247 )

Proceeds from employee stock purchase plan 4,789 4,913 6,391

Proceeds from borrowings on debt — 18,000 50,000

Repayment of debt ( 10,750 ) ( 25,621 ) ( 55,679 )

Proceeds from employee stock purchase plan 4,913 6,391 —

Proceeds from the initial public offering, net of discounts and commissions — — 109,381

Payments of costs related to the initial public offering — — ( 6,220 )

Proceeds from issuance of convertible senior notes 575,000 — —

Payment of debt issuance costs ( 14,855 ) — —

Purchases of capped calls related to convertible senior notes ( 49,393 ) — —

Net cash provided by financing activities 537,739 54,641 29,402

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Internal-use software and platform development costs incurred but not yet paid 106 286 684

Conversion of redeemable convertible preferred stock warrant in connection with the initial public offering — — 7,160

Conversion of redeemable convertible preferred stock in connection with the initial public offering — — 166,486

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

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Upwork Inc., which is referred to as the Company or Upwork, operates a work marketplace that connects businesses, which are referred to as clients, with independent talent.

Independent talent on the Company’s work marketplace, which are referred to as freelancers, and, together with clients, as users, include independent professionals and agencies of varying sizes and are an increasingly sought-after, critical, and expanding segment of the global workforce.

Independent talent on the Company’s work marketplace, which are referred to as talent, and, together with clients, as users, include independent professionals and agencies of varying sizes and are an increasingly sought-after, critical, and expanding segment of the global workforce.

The Company was originally incorporated in the state of Delaware in December 2013 prior to and in connection with the combination, which is referred to as the Elance-oDesk Combination, of Elance, Inc., which is referred to as Elance, and oDesk Corporation, which is referred to as oDesk.

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shortly before the Elance-oDesk Combination in March 2014, and later to Upwork Inc.

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 work marketplace.

The Company is currently headquartered in Santa Clara, California.

The Company is currently headquartered in San Francisco, California.

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

Initial Public Offering

In October 2018, the Company completed its initial public offering, which is referred to as the IPO, in which the Company issued and sold an aggregate of 7,840,908 of the Company’s common stock, including 1,022,727 shares pursuant to the exercise of the underwriters’ option to purchase additional shares.

The shares were sold to the underwriters at the IPO price of $ 15.00 per share less an underwriting discount of $ 1.05 per share.

The Company received aggregate net proceeds of $ 109.4 million from the IPO after deducting underwriting discounts and commissions but before deducting offering expenses payable by the Company.

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

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All intercompany balances and transactions have been eliminated in consolidation.

Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topics 606 and 842, while prior period amounts have not been adjusted and continue to be reported under Topics 605 and 840.

Use of Estimates

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liabilities relating to transaction losses;

the valuation of warrants;

stock-based compensation;

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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.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy.

The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities.

Given the Company’s shift to a flexible work model for its workforce, in 2021, the Company subleased the entirety of its former headquarters in Santa Clara, California and subleased a portion of its current headquarters in San Francisco, California.

As a result, during the year ended December 31, 2021, the Company incurred impairment charges of $ 8.7 million related to the associated operating lease assets and property and equipment.

The Company may determine to either close or sublease certain of its other offices, either of which may result in further impairment charges.

See “Note 5—Balance Sheet Components” for additional information regarding these impairments.

Notwithstanding the foregoing, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities.

These estimates may change as new events occur and additional information is obtained.

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Cash and Cash Equivalents

The Company classifies as cash and cash equivalents its cash held in checking and interest-bearing accounts and investments in money market funds and commercial paper with maturities of 90 days or less from the date of purchase.

Notes to Consolidated Financial Statements — Continued

The Company classifies as cash and cash equivalents its cash held in checking and interest-bearing accounts and investments in money market funds, U.S.

government securities, and debt securities with maturities of 90 days or less from the date of purchase.

Restricted Cash

As of December 31, 2021 and 2020, the Company maintained restricted cash of $ 4.0 million and $ 3.3 million, respectively, related to cash reserve requirements under the escrow laws and regulations of the California Department of Financial Protection and Innovation and collateral for letters of credit issued in conjunction with operating leases.

Short-term restricted cash included in prepaid expenses and other current assets was $ 2.3 million and $ 1.7 million as of December 31, 2020 and 2019, respectively, and long-term restricted cash included in other assets, noncurrent was $ 1.0 million and $ 0.8 million as of December 31, 2020 and 2019, respectively.

Short-term restricted cash included in prepaid expenses and other current assets was $ 3.2 million

Notes to Consolidated Financial Statements—Continued

and $ 2.3 million as of December 31, 2021 and 2020, respectively, and long-term restricted cash included in other assets, noncurrent was $ 0.8 million and $ 1.0 million as of December 31, 2021 and 2020, respectively.

Funds Held in Escrow, Including Funds in Transit

The Company maintains its users’ funds held in escrow in demand or checking accounts at U.S.

financial institutions, as well as three California licensed money transmitters.

financial institutions, as well as two California licensed money transmitters.

The balance in these accounts was in excess of federally insured limits as of December 31, 2021 and 2020.

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As of December 31, 2021 and 2020, the Company recorded $ 160.8 million and $ 135.0 million, respectively, as funds held in escrow, including funds in transit.

The below table reconciles cash, cash equivalents, and restricted cash as reported in the consolidated balance sheets to the total of the same amounts shown in the consolidated statements of cash flows for the years ended December 31, 2020, 2019, and 2018 (in thousands):

2020 2019 2018

(In thousands) 2021 2020 2019

Cash and cash equivalents $ 187,205 $ 94,081 $ 48,392

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Marketable Securities

The Company’s marketable securities consist 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 Company's marketable securities consist of commercial paper, corporate debt securities, treasury bills, U.S.

government securities, asset-backed securities, and Yankee debt securities issued by foreign governments or entities and denominated in U.S.

dollars, 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.

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If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses will be recorded through other (income) expense, net, limited by the amount that the fair v alue is less than the amortized cost basis.

Any additional impairment not recorded through an allowance for credit losses is recognized in other comprehensive income.

Any additional impairment not recorded through an allowance for credit losses is recognized in other comprehensive loss.

Cha nges in the allowance for credit losses are reflected as provision for (or reversal of) credit loss expense.

Losses are charged against the allowance when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell are met.

These changes are recorded in other (income) expense, net.

These changes are recorded in other income, net.

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 consolidated statements of operations.

Notes to Consolidated Financial Statements—Continued

For the year ended December 31, 2020, the gross unrealized gains and losses on the Company’s marketable securities were immaterial.

The Company did not record any impairment charges with respect to its marketable securities during the years ended December 31, 2020, 2019, and 2018.

Escrow Funds Payable

Escrow funds payable represent user funds that are held in escrow by the Company on behalf of both freelancers and clients.

Escrow funds payable to freelancers are comprised primarily of funds available to be withdrawn by freelancers for work performed and paid by clients.

Escrow funds payable to clients primarily represent deposits received from certain clients to set up an account or to apply toward future payments to freelancers upon completion of the project defined and agreed between the client and the freelancer.

Escrow funds payable represent user funds that are held in escrow by the Company on behalf of both talent and clients.

Escrow funds payable to talent are comprised primarily of funds available to be withdrawn by talent for work performed and paid by clients.

Escrow funds payable to clients primarily represent deposits received from certain clients to set up an account or to apply toward future payments to talent upon completion of the project defined and agreed between the client and talent.

Concentration of Risk

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These losses, when incurred, have been within the range of the Company’s expectations.

One client accounted for more than 10% of trade and client receivables as of December 31, 2021.

Three clients each accounted for more than 10% of trade and client receivables as of December 31, 2020.

Two clients each accounted for more than 10% of trade and client receivables as of December 31, 2019.

For the year ended December 31, 2020, the Company did not have any clients that accounted for more than 10% of total revenue.

For the years ended December 31, 2019 and 2018, the Company generated $ 32.0 million and $ 29.5 million, respectively, in revenue from one of these clients, which accounted for more than 10% of revenue during the years ended December 31, 2019 and 2018.

For the years ended December 31, 2021 and 2020, the Company did not have any clients that accounted for more than 10% of total revenue.

For the year ended December 31, 2019, the Company generated $ 32.0 million in revenue from one client, which accounted for more than 10% of revenue during the year ended December 31, 2019.

The Company is dependent upon third parties, such as Amazon Web Services, in order to meet the uptime and performance needs of its users.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, funds held in escrow, including funds in transit, marketable securities, trade and client receivables, prepaid and other current assets, escrow funds payable, debt, and the redeemable convertible preferred stock warrant liability.

Prior to the IPO, the redeemable convertible preferred stock warrant liability was remeasured at the end of every period and was carried at fair value.

Upon the IPO, the redeemable convertible preferred stock warrant was converted to a common stock warrant and is no longer remeasured.

The Company believes that the carrying values of the remaining financial instruments approximate their fair values.

Trade and Client Receivables and Related Allowance for Doubtful Accounts

Trade and client receivables are primarily comprised of receivables from the Company’s managed services offering and amounts receivable from clients for completed work, including amounts in transit.

It also includes unbilled amounts due from clients.

Trade and client receivables are primarily comprised of amounts receivable from clients for completed work, including amounts in transit.

It also includes unbilled amounts due from clients primarily through the Company’s managed services offering.

Trade and client receivables are recorded and stated at realizable value, net of an allowance for doubtful accounts.

Credit is extended generally without collateral to the Company’s managed services client and marketplace clients with Upwork Enterprise offerings based on an initial and ongoing evaluation of their financial condition and other factors.

Credit is extended generally without collateral to the Company’s managed services and marketplace clients with Upwork Enterprise offerings based on an initial and ongoing evaluation of their financial condition and other factors.

In aggregate, gross trade receivables were $ 19.7 million and $ 15.9 million and gross client receivables were $ 50.5 million and $ 32.8 million as of December 31, 2021 and 2020, respectively.

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Notes to Consolidated Financial Statements—Continued

The following table presents the changes in the allowance for doubtful accounts as of December 31, 2020, 2019, and 2018 (in thousands):

2020 2019 2018

The following table presents the changes in the allowance for doubtful accounts as of December 31, 2021, 2020, and 2019:

(In thousands) 2021 2020 2019

Allowance for doubtful accounts, beginning balance $ 1,661 $ 2,215 $ 2,832

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When in loss positions, the foreign currency forward contracts are recorded within accrued expenses and other current liabilities in the consolidated balance sheets.

Gains or losses from changes in the fair value of these foreign currency forward contracts not designated as hedging instruments are recorded in other (income) expense, net to offset the changes in the fair value of the underlying assets or liabilities being hedged.

Gains or losses from changes in the fair value of these foreign currency forward contracts not designated as hedging instruments are recorded in other income, net to offset the changes in the fair value of the underlying assets or liabilities being hedged.

The notional amounts associated with the Company’s foreign currency forward contracts at December 31, 2021 and 2020 were $ 7.2 million and $ 7.6 million, respectively, none of which were designated as cash flow hedges.

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Losses on foreign currency forward contracts not designated as hedging instruments were $ 0.5 million for the year ended December 31, 2021.

Gains on foreign currency forward contracts not designated as hedging instruments were $ 0.9 million for the year ended December 31, 2019.

Losses on foreign currency forward contracts not designated as hedging instruments were $ 0.6 million for the year ended December 31, 2020.

Gains on foreign currency forward contracts not designated as hedging instruments were $ 0.9 million for the year ended December 31, 2019.

The Company accounts for leases in accordance with Financial Accounting Standards Board, which is referred to as the FASB, Accounting Standards Update, which is referred to as ASU, No.

2016-02, Leases (Topic 842), which the Company adopted on December 31, 2019 effective as of January 1, 2019 using the effective date method.

Property and Equipment

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Amortization of capitalized internal-use software and platform development costs is allocated to functional expense categories based on headcount and the nature and intended use of the project.

Notes to Consolidated Financial Statements—Continued

Segment Information

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Goodwill is not amortized, but rather is assessed for impairment at least annually, or more frequently if events and changes in circumstances indicate that its carrying amount may not be recoverable.

The Company performs its annual impairment assessment during the fourth quarter of each calendar

Notes to Consolidated Financial Statements — Continued

year based on a single reporting unit structure by comparing the carrying value of the reporting unit to its fair value.

The Company performs its annual impairment assessment during the fourth quarter of each calendar year based on a single reporting unit structure by comparing the carrying value of the reporting unit to its fair value.

An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit.

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There was no impairment of long-lived assets in any of the periods presented.

Deferred Offering Costs

Deferred offering costs, consisting of legal, accounting, and filing fees directly relating to the Company’s IPO, were capitalized and offset against the IPO proceeds upon the completion of the offering.

Upon completion of the Company’s IPO, approximately $ 6.3 million of deferred offering costs were offset against the IPO proceeds in additional paid-in capital.

Convertible Senior Notes

The Company accounts for its convertible senior notes, which are referred to as the Notes, as a single liability measured at amortized cost.

The carrying value of the liability equals the proceeds received from the issuance of the Notes less debt issuance costs.

See “Note 7—Debt” for additional information.

Debt Issuance Costs

Debt issuance costs incurred in connection with securing the Company’s financing arrangements are capitalized and amortized over the term of the respective financing arrangement under the straight-line method as the results obtained are not materially different from those that would result from the use of the effective interest method.

Debt issuance costs are generally presented in the Company’s consolidated balance sheets as a reduction to the carrying amount of the outstanding borrowings.

Revenue Recognition

The Company primarily generates revenue from clients from its marketplace and managed service offerings and from freelancers from its marketplace.

The Company accounts for revenue in accordance with Financial Accounting Standards Board, which is referred to as FASB, Accounting Standards Update, which is referred to as ASU, No.

The Company primarily generates revenue from clients from its marketplace and managed service offerings and from talent from its marketplace.

The Company accounts for revenue in accordance with FASB ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606), which the Company adopted on December 31, 2019 effective as of January 1, 2019 using the modified retrospective method.

Revenue is recognized upon transfer of control of promised services to users in an amount that reflects the consideration the Company expects to receive in exchange for those services.

Revenue is recognized upon transfer of control of

Notes to Consolidated Financial Statements—Continued

promised services to users in an amount that reflects the consideration the Company expects to receive in exchange for those services.

In the ordinary course of business, the Company makes payments to users when those users provide services in their capacity as vendors.

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The Company accounts for the consideration payable to these users in their capacity as vendors as a purchase of services from a vendor and records such payments in either cost of revenue or sales and marketing within the consolidated statements of operations.

The Company’s marketplace revenue is derived from Upwork Basic, Plus, and Enterprise and other premium offerings.

Upwork Basic and Plus

The Company earns fees from freelancers under the Upwork Basic and Plus offerings, which represent a single promise to provide continuous access (i.e.

Marketplace Offerings

The Company’s marketplace revenue, which represents the majority of its revenue, consists primarily of revenue derived from Upwork Basic, Plus, and Enterprise offerings.

The Company generates marketplace revenue from both talent and clients.

Revenue from the Company’s Upwork Basic and Plus offerings are primarily comprised of talent service fees, and to a lesser extent, payment processing and administration fees charged to clients.

Revenue from the Company’s Upwork Enterprise offering, which is referred to as Enterprise Revenue, includes all client fees, subscriptions, and talent service fees.

The Company also generates marketplace revenue from fees for premium offerings associated with its Upwork Basic, Plus, and Enterprise offerings, including talent memberships, purchases of Connects, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S.

dollar, and the Company’s Upwork Payroll offering.

Upwork Basic, Plus, and Other Premium Offerings

The Company earns fees from talent under the Upwork Basic, Plus, and associated premium offerings, which represent a single promise to provide continuous access (i.e.

stand-ready performance obligation) to the Company’s work marketplace and site services.

As each day of providing access to the work marketplace and site services (including, but not limited to, communication, invoicing, reporting, dispute resolution, and payment services) is substantially the same and the freelancer simultaneously receives and consumes the benefits as access is provided, the Company’s single promise under its Upwork Basic and Plus offerings is comprised of a series of distinct service periods.

The Company allocates variable consideration received to each distinct service period within the series and recognizes revenue as each distinct service period is performed.

As each day of providing access to the work marketplace and site services (including, but not limited to, communication, invoicing, reporting, dispute resolution, and payment services) is substantially the same and talent simultaneously receive and consume the benefits as access is provided, the Company’s single promise under its Upwork Basic and Plus offerings is comprised of a series of distinct service periods.

The Company allocates variable consideration to each distinct service period in which it has the contractual right to bill.

The Company’s Upwork Basic and Plus arrangements may include fixed and variable consideration, or a combination of the two, comprised of the following:

Notes to Consolidated Financial Statements — Continued

Service fees.

Freelancers are provided access to the Upwork work marketplace to market their businesses, send proposals to and communicate with prospective clients, and, if engaged by a client, to perform specified services agreed between freelancers and clients, which are referred to as freelancer services.

Freelancers charge clients on an hourly or a milestone basis for services rendered to clients through the Upwork work marketplace, which are referred to as freelancer billings;

billings charged on an hourly basis are variable consideration;

and billings on a milestone basis represent fixed consideration.

The Company charges freelancers a service fee as a percentage of freelancer billings using a tiered service fee model based on cumulative lifetime billings by the freelancer to each client.

Talent are provided access to the Upwork work marketplace to market their businesses, send proposals to and communicate with prospective clients, and, if engaged by a client, to perform specified services agreed between talent and clients, which are referred to as talent services.

Talent charge clients on an hourly or a milestone basis for services rendered to clients through the Upwork work marketplace, which are referred to as talent billings.

The Company charges talent a service fee as a percentage of talent billings primarily using a tiered service fee model based on cumulative lifetime billings by talent to each client.

The arrangements subject to tiered service fees also include contract renewal options that represent a material right.

The Company takes no responsibility for the freelancer services, and therefore, does not control the freelancer services.

Additionally, freelancers and clients negotiate and agree upon the scope and the price for freelancer services directly with each other, and the Company is not a party to those agreements.

The Company takes no responsibility for talent services, and therefore, does not control talent services.

Additionally, talent and clients negotiate and agree upon the scope and the price for talent services directly with each other, and the Company is not a party to those agreements.

Accordingly, for these tiered service fee arrangements, the Company presents revenue on a net basis, as an agent.

The Company recognizes the service fee as services are rendered for each distinct time increment in the series.

The Company recognizes the service fees for each distinct service period when it has the contractual right to bill for the services.

Withdrawal fees .

The Company charges withdrawal fees to freelancers when the freelancers withdraw their escrow funds held by the Company.

The Company charges withdrawal fees to talent when talent withdraw their escrow funds held by the Company.

A withdrawal fee is charged for each withdrawal transaction, which represents variable consideration.

The Company presents revenue from withdrawal fees on a gross basis as a principal and not net of the third-party payment processing costs incurred because the Company controls the payment processing services prior to providing to the Company's freelancers.

The Company recognizes the withdrawal fees when transactions are processed for each distinct time increment in the series.

The Company recognizes the withdrawal fees when transactions are processed, which is when it has the contractual right to bill for the services.

Membership fees.

The Company charges membership fees to freelancers.

The Company charges membership fees to talent.

These fees are fixed consideration and are charged monthly.

The Company recognizes the revenue over the period of the membership consistent with the common measure of progress for the entire performance obligation.

The Company recognizes the revenue over the period of the membership, which is generally monthly, consistent with the common measure of progress for the entire performance obligation.

Connects fees.

The Company charges fees to freelancers for the purchase of Connects, which are virtual tokens that are required for freelancers to bid on projects on the Company’s work marketplace.

These fees represent variable consideration, and the Company recognizes revenue as Connects are used in each distinct time increment in the series.

The Company charges fees to talent for the purchase of Connects, which are virtual tokens that are required for talent to bid on projects on the Company’s work marketplace.

These fees represent variable consideration and are allocated to and recognized in the distinct service period in which the Connects are used .

Notes to Consolidated Financial Statements—Continued

The Company earns fees from clients under the Upwork Basic and Plus offerings, which represent a single promise to provide continuous access (i.e.

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As each day of providing access to the work marketplace and site services is substantially the same and the client simultaneously receives and consumes the benefits as access is provided, the Company’s single promise under its Upwork Basic and Plus offerings is comprised of a series of distinct service periods.

The Company allocates variable consideration received to each distinct service period within the series and recognizes revenue as each distinct service period is performed.

The Company allocates variable consideration to each distinct service period in which it has the contractual right to bill.

The Company’s Upwork Basic and Plus arrangements may include fixed and variable consideration, or a combination of the two, comprised of the following:

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Per-transaction payment processing fees are recognized when the client is charged for the amount due and fees charged on a monthly basis are recognized over the month that payment processing services are provided.

For client payment processing fees, the Company presents revenue on a gross basis as a principal and not net of the third-party payment processing costs incurred because the Company controls the payment processing and administration services prior to providing to the Company’s clients.

The Company recognizes the revenue when a payment from a client is processed in each distinct time increment in the series.

For client payment processing fees, the Company presents revenue on a gross basis as a principal and not net of the third-party payment processing costs incurred because the Co mpany controls the payment processing and administration services prior to providing to the Company’s clients.

The Company recognizes the revenue when a payment from a client is processed, which is when it has the contractual right to bill for the services.

Foreign currency exchange fees.

The Company charges clients a fixed mark-up above foreign currency exchange rates that are charged to the Company when the Company collects amounts denominated in foreign currency.

Foreign currency exchange fees are variable consideration and recognized as they are earned for each transaction processed in each distinct time increment in the series.

The Company charges clients a fixed mark-up above foreign currency exchange rates that are charged to the Company when the Company collects amounts denominated in foreign curr ency.

Foreign currency exchange fees are variable consideration and recognized as they are earned for each transaction processed, which is when the Company has the contractual right to bill for the services.

Membership fees.

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Upwork Payroll service fees.

The Company charges clients using the Upwork Payroll offering when their freelancers are classified as employees for engagements on the Upwork work marketplace.

The Company charges clients using the Upwork Payroll offering when their talent are classified as employees for engagements on the Upwork work marketplace.

The client enters into an Upwork Payroll agreement with the Company, and Upwork separately contracts with unrelated third-party staffing providers that provide employment services to such clients.

In such arrangements, freelancers providing freelancer services to clients become employees of third-party staffing providers.

In arrangements where clients enter into Upwork Payroll agreements, the Company charges Upwork Payroll service fees to clients and does not charge service fees to the freelancers who are employees of the third-party staffing providers.

Such service fees are variable consideration and charged as a fixed percentage of the total freelancer billings.

Under an Upwork Payroll agreement, the Company provides the client access to

Notes to Consolidated Financial Statements — Continued

the Upwork work marketplace to procure and manage freelancer services, as well as access to employment services provided by the third-party staffing providers.

The Company presents Upwork Payroll service fees revenue on a net basis as an agent of the client for providing access to employment services provided by the third-party staffing provider.

The Company does not control these employment services performed by the third-party on behalf of the client or for the services performed by the freelancers that are employed by the third-party staffing provider.

Therefore, the Company is not considered the principal for these services.

The Company recognizes the Upwork payroll service fee as revenue as the services are provided for each distinct time increment in the series.

In such arrangements, talent providing talent services to clients become employees of third-party staffing providers.

In arrangements where clients enter into Upwork Payroll agreements, the Company charges Upwork Payroll service fees to clients and does not charge service fees to talent who are employees of the third-party staffing providers.

Such service fees are variable consideration and charged as a fixed percentage of the total talent billings.

Under an Upwork Payroll agreement, the Company provides the client access to the Upwork work marketplace to procure and manage talent services, as well as access to employment services provided by the third-party staffing providers.

The Company presents Upwork Payroll service fees revenue on a net basis as an agent of the client for providing access to employment services provided by the third-party staffing providers.

The Company does not control these employment services performed by the third-party on behalf of the client or for the services performed by talent that are employed by the third-party staffing providers.

Therefore, the Company is not considered the principal for these serv ices.

The Company recognizes the service fees for each distinct service period when it has the contractual right to bill for the services.

Upwork Enterprise and Other Premium Offerings

The Company earns fees from freelancers under Upwork Enterprise and other premium offerings, which represent a single promise to provide continuous access (i.e.

The Company earns fees from talent under Upwork Enterprise and other associated premium offerings, each of which represent a single promise to provide continuous access (i.e.

stand-ready performance obligation) to the Company’s work marketplace and site services.

As each day of providing access to the work marketplace and site services is substantially the same and the freelancer simultaneously receives and consumes the benefits as access is provided, the Company’s single promise under its Upwork Enterprise and other premium offerings is comprised of a series of distinct service periods.

The Company allocates variable consideration received to each distinct service period within the series and recognizes revenue as each distinct service period is performed.

As each day of providing access to the work marketplace and site services is substantially the same and talent simultaneously receive and consume the benefits as access is provided, the Company’s single promise under its Upwork Enterprise and other premium offerings is comprised of a series of distinct service periods.

The Company allocates variable consideration to each distinct service period in which it has the contractual right to bill.

These arrangements include variable consideration as follows:

Service fees.

The Company provides freelancers access to the Upwork work marketplace to perform freelancer services for clients.

The Company charges freelancers a service fee as a percentage of freelancer billings.

The Company earns service fees based on a fixed percentage of freelancer billings.

For service fees charged to freelancers, the Company presents revenue on a net basis, as an agent, for providing access to the Upwork work marketplace as it does not control the freelancer services provided to clients, and therefore the Company is not considered the principal for the freelancer services.

Additionally, freelancers and clients negotiate and agree upon the scope and the price for freelancer services directly with each other, and the Company is not a party to their agreement.

The Company recognizes the service fee as services are rendered for each distinct time increment in the series.

The Company provides talent access to the Upwork work marketplace to perform talent services for clients.

The Company charges talent a service fee as a percentage of talent billings.

The Company earns service fees based on a fixed percentage of talent billings.

For service fees charged to talent, the Company presents revenue on a net basis, as an agent, for providing access to the Upwork work marketplace as it does not control talent services provided to clients, and therefore the Company is not considered the principal for talent services.

Additionally, talent and clients negotiate and agree upon the scope and the price for talent

Notes to Consolidated Financial Statements—Continued

services directly with each other, and the Company is not a party to their agreement.

The Company recognizes the service fees for each distinct service period in which it has the contractual right to bill for the services.

The Company earns fees from clients under Upwork Enterprise and other premium offerings, each of which represent a single promise to provide continuous access (i.e.

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As each day of providing access to the work marketplace and site services is substantially the same and the client simultaneously receives and consumes the benefits as access is provided, the Company’s single promise under its Upwork Enterprise and other premium offerings is comprised of a series of distinct service periods.

The Company allocates variable consideration received to each distinct service period within the series and recognizes revenue as each distinct service period is performed.

The Company allocates variable consideration to each distinct service period in which it has the contractual right to bill.

These arrangements may include fixed and variable consideration, or a combination of the two, comprised of the following:

Client service fees.

The Company offers clients access to the Company’s work marketplace to source freelancers in exchange for a client service fee calculated as a percentage of freelancer billings;

The Company offers clients access to the Company’s work marketplace to source talent in exchange for a client service fee calculated as a percentage of talent billings;

these fees represent variable consideration.

The Company recognizes the service fee as services are rendered for each distinct time increment in the series.

The Company recognizes the service fees for each distinct service period in which it has the contractual right to bill for the services.

Enterprise compliance service fees.

The Company charges fees to its enterprise compliance service clients that engage the Company to provide services to determine whether a freelancer should be classified as an employee or an independent contractor based on the scope of freelancer services agreed between the client and freelancer and other factors.

The Company charges enterprise compliance service fees as a percentage of freelancer billings;

The Company charges fees to its enterprise compliance service clients that engage the Company to provide services to determine whether talent should be classified as an employee or an independent contractor based on the scope of talent services agreed between the client and talent and other factors.

The Company charges enterprise compliance service fees as a percentage of talent billings;

these fees represent variable consideration.

The Company recognizes the compliance service fee as services are rendered for each distinct time increment in the series.

The Company recognizes the service fees for each distinct service period in which it has the contractual right to bill for the services.

Subscription fees.

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Revenue sharing arrangements

Certain of the Company’s offerings include revenue sharing arrangements under which the Company generates a revenue share as a percentage of the fees charged by certain financial institutions to the freelancers for payment withdrawals.

These arrangements are considered a single performance obligation comprised of variable consideration and are recognized over time based on transactions processed.

Notes to Consolidated Financial Statements — Continued

Managed Services

Under a managed services arrangement, the Company is responsible for providing services and engaging freelancers directly or as employees of third-party staffing providers to perform the services for clients on the Company’s behalf.

Under a managed services arrangement, the Company is responsible for providing services and engaging talent directly or as employees of third-party staffing providers to perform the services for clients on the Company’s behalf.

These arrangements are generally time- and materials-based, and are invoiced on a monthly basis.

These fees represent variable consideration.

The Company controls and directs the services performed on behalf of the freelancers and presents revenue on a gross basis as principal.

The Company controls and directs the services performed on behalf of talent and presents revenue on a gross basis as principal.

As each day of providing managed services is substantially the same and the client simultaneously receives and consumes the benefits as services are provided, the Company’s single promise under its managed services is comprised of a series of distinct service periods.

For managed services arrangements with clients, the Company allocates the variable amounts to each distinct service period within the series and recognizes revenue as each distinct service period is performed.

For managed services arrangements with clients, the Company allocates the variable amounts to each distinct service period within the series in which it has the contractual right to bill and recognizes revenue as each distinct service period is performed.

Arrangements with Multiple Performance Obligations

Certain of the Company’s contracts with freelancers contain multiple performance obligations in the event the Company determines a material right exists.

Specifically, the arrangements with freelancers subject to tiered service fees include contract renewal options that represent a material right.

Certain of the Company’s contracts with talent contain multiple performance obligations in the event the Company determines a material right exists.

Specifically, the arrangements with talent subject to tiered service fees include contract renewal options that represent a material right.

For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price by applying the portfolio approach practical expedient under Topic 606.

Standalone selling prices for offerings subject to tiered service fees are estimated based on observable transactions when these services are sold on a standalone basis.

Standalone selling price for a material right is estimated by determining the discount that talent would obtain when exercising the option, adjusted for the likelihood that the option will be exercised.

Significant judgment is applied in the application of the portfolio approach practical expedient, which includes estimating the standalone selling price of the material rights and the period of time over which to defer and recognize the consideration allocated to the material rights.

Specifically, management applied significant judgment in assessing the appropriateness of the model for the estimates, which include assessing the appropriateness of the methodology and relevant data inputs to (i) estimate the standalone selling price of the material rights, which includes the standalone selling price of the services when sold separately and the likelihood of exercise of the material rights;

Specifically, management applied significant judgment in assessing the appropriateness of the

Notes to Consolidated Financial Statements—Continued

model for the estimates, which include assessing the appropriateness of the methodology and relevant data inputs to (i) estimate the standalone selling price of the material rights, which includes the standalone selling price of the services when sold separately and the likelihood of exercise of the material rights;

and (ii) estimate the period of time over which to defer and recognize the consideration allocated to the material rights.

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Deferred revenue consists of subscription, membership, and Connects fees collected in advance of performing the service.

The Company also recognizes deferred revenue for amounts attributable to unexercised material rights related to arrangements with freelancers that are subject to tiered service fees.

The Company also recognizes deferred revenue for amounts attributable to unexercised material rights related to arrangements with talent that are subject to tiered service fees.

Cost of Revenue

Cost of revenue consists primarily of the cost of payment processing fees, costs of freelancers to deliver services under the Company’s managed services offering, personnel-related costs for the Company’s services and support personnel, third-party hosting fees, and amortization expense associated with acquired intangibles and capitalized internal-use software.

Cost of revenue consists primarily of the cost of payment processing fees, costs of talent to deliver services under the Company’s managed services offering, personnel-related costs for the Company’s services and support personnel, third-party hosting fees, and amortization expense associated with acquired intangibles and capitalized internal-use software.

The Company defines personnel-related costs as salaries, bonuses, benefits, and stock-based compensation costs for employees, and costs related to other service providers the Company engages to provide internal services to the Company.

Research and Development

Research and development expense primarily consists of personnel-related costs and third-party hosting costs related to development.

Research and development expense primarily consists of personnel-related costs.

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 qualify for capitalization.

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The Company incurred $ 90.8 million, $ 51.4 million, and $ 37.4 million in advertising expenses during the years ended December 31, 2021, 2020, and 2019, respectively.

Notes to Consolidated Financial Statements — Continued

Provision for Transaction Losses

Provision for transaction losses consists primarily of losses resulting from fraud on the work marketplace and bad debt expense associated with the Company’s trade and client receivables balance and transaction losses expense related to chargebacks.

Provision for these items represent estimates of losses based on the Company’s actual historical incurred losses and other factors.

Redeemable Convertible Preferred Stock Warrant Liability

The Company accounts for freestanding warrants to purchase shares of its redeemable convertible preferred stock as a liability as the underlying shares of convertible preferred stock are contingently redeemable and, therefore, may obligate the Company to transfer assets at some point in the future.

The redeemable convertible preferred stock warrants are recorded as other liabilities, noncurrent in the consolidated balance sheets at their estimated fair values and are subject to remeasurement at each balance sheet date.

Any change in fair value from remeasurement is recognized as a component of other (income) expense, net in the consolidated statements of operations.

The Company adjusted the liability for changes in fair value through the completion of its IPO in October 2018, at which time the outstanding redeemable convertible preferred stock warrant converted to a common stock warrant and was reclassified to additional paid-in capital.

Provision for these items represents estimates of losses based on the Company’s actual historical incurred losses and other factors.

Stock-Based Compensation

The Company accounts for stock options, restricted stock units, which are referred to as RSUs, and purchase rights granted under the 2018 Employee Stock Purchase Plan, which is referred to as the 2018 ESPP, to employees and directors based on their estimated fair value on the date of grant.

The fair value of each stock option and purchase rights granted under the 2018 ESPP is estimated using the Black-Scholes valuation model.

The model requires the Company to make a number of assumptions, including the value of the Company’s common stock, expected volatility, expected term, risk-free interest rate, and expected dividends.

The Company accounts for stock options with service- and market-based conditions, restricted stock units, which are referred to as RSUs, performance stock units, which are referred to as PSUs, and purchase rights granted under the 2018 Employee Stock Purchase Plan, which is referred to as the 2018 ESPP, to employees and directors based on their estimated fair value on the date of grant.

The fair value and derived service period of stock options with market-based conditions is estimated using the Monte Carlo valuation model.

The Company evaluates the assumptions used to value option awards upon each grant of stock options.

The fair value of RSUs awarded to employees is based on the closing price of the Company’s common stock, as reported on The Nasdaq Global Select Market on the date of grant.

The Company generally recognizes stock-based compensation expense for stock options and RSUs on a straight-line basis over the vesting term.

The grant date fair value of PSUs is determined using the Company’s closing common stock price on the grant date multiplied by the number of PSUs that are probable of being earned as of the grant date.

The fair value of purchase rights granted under the 2018 ESPP is estimated using the Black-Scholes valuation model.

Stock-based compensation expense associated with service- and market-based stock options will be recognized over the longer of the expected achievement period for the service condition and market condition.

The Company generally recognizes stock-based compensation expense for RSUs on a straight-line basis over the vesting term.

Stock-based compensation expense associated with PSUs is recognized over the longer of the expected achievement period for the performance condition and the service condition.

Stock-based compensation for purchase rights granted under the 2018 ESPP is recognized over the offering period.

The Company accounts for forfeitures as they occur.

Notes to Consolidated Financial Statements—Continued

Foreign Currency

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At the end of each reporting period, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet date.

Foreign currency transaction gains and losses are included in other (income) expense, net in the consolidated statements of operations.

The Company recorded net foreign currency transaction losses of $ 0.6 million for the year ended December 31, 2020, net foreign currency transaction gains of $ 0.9 million for the year ended December 31, 2019, and net foreign currency transaction losses of $ 0.4 million for the year ended December 31, 2018.

Foreign currency transaction gains and losses are included in other income, net in the consolidated statements of operations.

The Company recorded net foreign currency transaction losses of $ 0.5 million for the year ended December 31, 2021, net foreign currency transaction losses of $ 0.6 million for the year ended December 31, 2020, and net foreign currency transaction gains of $ 0.9 million for the year ended December 31, 2019.

Comprehensive Loss

For the year ended December 31, 2020, net unrealized losses from the Company’s marketable securities were immaterial.

For the years ended December 31, 2021, 2020, and 2019, net unrealized losses from the Company’s marketable securities were immaterial.

Comprehensive loss approximates net loss for all periods presented.

Accordingly, the consolidated statements of comprehensive loss have been omitted from the consolidated financial statements.

The Company accounts for income taxes in accordance with the liability method.

Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

The Company accounts for income taxes in accordance with the asset and liability method.

Under the asset and liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

The provision for income taxes is comprised of the current tax liability and the change in deferred tax assets and liabilities.

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The realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain.

Accordingly, the net deferred tax assets

Notes to Consolidated Financial Statements — Continued

have been fully offset by a valuation allowance.

Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

If the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.

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Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period.

Diluted net loss is computed by adjusting net loss to reallocate undistributed earnings based on the potential impact of dilutive securities, including outstanding common stock options, RSUs, warrants to purchase common stock, and common stock issuable in connection with the 2018 ESPP.

Diluted net loss is computed by adjusting net loss to reallocate undistributed earnings based on the potential impact of dilutive securities, including outstanding common stock options, RSUs, PSUs, warrants to purchase common stock, common stock issuable in connection with the 2018 ESPP, and common stock issuable in connection with the Notes.

For periods in which the Company has reported net losses, diluted net loss per share is the same as basic net loss per share because dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

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The Company has reviewed all recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on the Company’s consolidated financial statements.

Notes to Consolidated Financial Statements—Continued

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No.

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 No.

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 ASU No.

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 adopted ASU No.

2016-13 and related updates on January 1, 2020.

The adoption did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No.

2017-04, Intangibles—Goodwill and Others (Topic 350):

Simplifying the Test for Goodwill Impairment.

2017-04 eliminates Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.

Under ASU No.

2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss not exceeding the total amount of goodwill allocated to that reporting unit.

The guidance becomes effective for the Company on January 1, 2020 on a prospective basis for its annual or any interim goodwill impairment tests during the 2020 fiscal year.

The Company adopted ASU No.

2017-04 on January 1, 2020.

The adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements.

2018-13 is effective for the Company beginning January 1, 2020.

The Company adopted ASU No.

2018-13 on January 1, 2020.

The adoption did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No.

2019—12 (Topic 740), Simplifying the Accounting for Income Taxes.

This guidance simplifies accounting for income taxes by removing certain exceptions to the general principles and amending existing guidance to improve consistent application.

The Company is required to adopt this guidance in the year ended December 31, 2021.

The Company concluded that there was not a material impact to its consolidated financial statements as a result of the adoption.

In August 2020, the FASB issued ASU No.

2018-15, Intangibles—Goodwill and Other—Internal-Use Software (“Subtopic 350-40”):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement

Notes to Consolidated Financial Statements — Continued

service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license.

2018-15 is effective for the Company beginning January 1, 2020.

The Company adopted ASU No.

2018-15 on January 1, 2020 using the prospective adoption method.

The adoption did not have a material impact on the Company’s consolidated financial statements.

2020—06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible instruments.

This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method.

For public companies, this guidance is effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years.

Early adoption is permitted.

The Company early adopted the standard as of January 1, 2021 and applied this guidance to the Notes issued in August 2021.

Refer to “Note 7—Debt” for additional information.

Note 3— Revenue

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As of December 31, 2021, the Company had approximately $ 28.4 million of remaining performance obligations.

The Company’s remaining performance obligations consist of transaction price that has been allocated to unexercised material rights related to the Company’s arrangements with freelancers subject to tiered service fees, subscriptions, memberships, Connects, and certain incentive payments made to the Company by payment processors.

The Company’s remaining performance obligations consist of transaction price that has been allocated to unexercised material rights related to the Company’s arrangements with talent subject to tiered service fees, subscriptions, memberships, and Connects.

As of December 31, 2021, the Company expects to recognize approximately $ 22.1 million over the next 12 months, with the remaining balance recognized thereafter.

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Contract Balances

The following table provides information about the balances of the Company’s trade and client receivables, net of allowance and contract liabilities included in deferred revenue and other liabilities, noncurrent as of December 31, 2020 and 2019 (in thousands):

(In thousands) 2021 2020

Trade and client receivables, net of allowance $ 66,826 $ 47,018

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Deferred revenue (component of other liabilities, noncurrent) 6,349 4,177

During 2020, changes in the contract liabilities balances were a result of normal business activity, deferral of revenue related to arrangements with freelancers subject to tiered service fees and related allocation of transaction price to material rights, and a change in estimate related to the period of time over which to recognize the consideration allocated to the material rights.

Revenue recognized during the year ended December 31, 2020 that was included in deferred revenue as of December 31, 2019 w as $ 13.0 million.

Reve nue recognized during the year ended December 31, 2019 that was included in deferred revenue as of January 1, 2019 was $ 10.1 million.

Note 4— Fair Value Measurements

During 2021, changes in the contract liabilities balances were a result of normal business activity and deferral, and subsequent recognition, of revenue related to arrangements with talent subject to tiered service fees and related allocation of transaction price to material rights.

Revenue recognized during the year ended December 31, 2021 that was included in deferred revenue as of December 31, 2020 was $ 15.5 million.

Revenue recognized during the year ended December 31, 2020 that was included in deferred revenue as of December 31, 2019 was $ 13.0 million.

Note 4— Fair Value Measurements and Marketable Securities

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.

Valuation techniques used to measure fair value must

Notes to Consolidated Financial Statements—Continued

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:

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• 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;

Notes to Consolidated Financial Statements — Continued

• 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.

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The Company’s financial instruments that are carried at fair value consist of Level I and Level II assets as of December 31, 2021 and 2020.

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):

The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents or marketable securities as of December 31, 2021 and 2020:

(In thousands)

December 31, 2021

Level I Level II Level III Total

Cash equivalents

Cost Unrealized

Gain Unrealized

Value Cash and

Cash Equivalents Marketable

Cash $ 16,596 $ — $ — $ 16,596 $ 16,596 $ —

Money market funds 108,204 — — 108,204 108,204 —

Commercial paper — 5,999 — 5,999

Marketable securities

Commercial paper — 50,965 — 50,965

Treasury bills 89,992 1 — 89,993 15,000 74,993

government securities 94,839 — ( 285 ) 94,554 — 94,554

Total financial assets $ 90,328 $ 56,964 $ — $ 147,292

December 31, 2019

Level I Level II Level III Total

Cash equivalents—money market funds $ 35,286 $ — $ — $ 35,286

Marketable securities

Total Level I 293,035 1 ( 285 ) 292,751 123,204 169,547

Commercial paper 171,918 — — 171,918 29,544 142,374

Corporate bonds 183,303 1 ( 217 ) 183,087 17,861 165,226

Asset-backed securities 13,749 — ( 11 ) 13,738 — 13,738

Yankee bonds 6,693 — ( 12 ) 6,681 — 6,681

Total Level II 375,663 1 ( 240 ) 375,424 47,405 328,019

Total $ 685,294 $ 2 $ ( 525 ) $ 684,771 $ 187,205 $ 497,566

Notes to Consolidated Financial Statements—Continued

(In thousands)

December 31, 2020

Cost Unrealized

Gain Unrealized

Value Cash and

Cash Equivalents Marketable

Cash $ 22,359 $ — $ — $ 22,359 $ 22,359 $ —

Money market funds 65,723 — — 65,723 65,723 —

Treasury bills 4,498 1 — 4,499 — 4,499

government securities 20,082 24 — 20,106 — 20,106

Total financial assets $ 69,973 $ 50,794 $ — $ 120,767

As of December 31, 2020 and 2019, the Company had debt obligations outstanding of $ 10.8 million and $ 18.3 million, respectively, under the Company’s Loan and Security Agreement, as amended, which is referred to as the Loan Agreement.

As of December 31, 2020 and 2019, the carrying value approximated fair value as borrowings under the Loan Agreement bore interest at variable rates, and the Company believes its credit risk quality is consistent with when the debt was originated.

The Company considered the balances outstanding under the Loan Agreement to be Level II liabilities as of December 31, 2020 and 2019.

Total Level I 90,303 25 — 90,328 65,723 24,605

Commercial paper 56,964 — — 56,964 5,999 50,965

Total Level II 56,964 — — 56,964 5,999 50,965

Total $ 169,626 $ 25 $ — $ 169,651 $ 94,081 $ 75,570

The Company did not record any impairment charges with respect to its marketable securities during the years ended December 31, 2021, 2020, and 2019.

As of December 31, 2020, the Company had debt obligations outstanding of $ 10.8 million under the Company’s Loan and Security Agreement, as amended, which is referred to as the Loan Agreement.

As of December 31, 2020, the carrying value approximated fair value as borrowings under the Loan Agreement bore interest at variable rates, and the Company believes its credit risk quality is consistent with when the debt was originated.

The Company considered the balances outstanding under the Loan Agreement to be Level II liabilities as of December 31, 2020.

As of December 31, 2021, the Loan Agreement had been terminated and no amounts thereunder were outstanding.

See “Note 7—Debt.”

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 are unobservable in the market.

The valuation methodology and underlying assumptions are discussed further in Note 9.

For the year ended December 31, 2018, the Company recorded $ 6.1 million related to the revaluation of its redeemable convertible preferred stock warrant liability, which is included in other (income) expense, net in the Company’s 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.

The following table sets forth a summary of the changes in the fair value of the redeemable convertible preferred stock warrant liability (in thousands):

Fair value at December 31, 2017 $ 1,104

Change in fair value 6,056

Conversion to common stock warrant in connection with the initial public offering ( 7,160 )

Fair value at December 31, 2018 $ —

Notes to Consolidated Financial Statements — Continued

Note 5— Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consisted of the following as of December 31, 2020 and 2019 (in thousands):

Property and equipment, net consisted of the following as of December 31, 2021 and 2020:

(In thousands) 2021 2020

Computer equipment and software $ 5,493 $ 4,819

9 unchanged sentences

Amortization expense related to the capitalized internal-use software and platform development costs was $ 3.9 million for the year ended December 31, 2020, of which $ 2.9 million was included in cost of revenue related to developed technology used on the work marketplace.

Amortization expense related to the capitalized internal-use software and platform development costs was $ 0.1 million for the year ended December 31, 2018.

Amortization expense related to the capitalized internal-use software and platform development costs was $ 1.2 million for the year ended December 31, 2019, of which $ 0.9 million was included in cost of revenue related to developed technology used on the work marketplace.

Notes to Consolidated Financial Statements—Continued

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):

As of December 31, 2020

Gross Carrying

Amount Accumulated

Amortization Net Carrying

Trade names $ 2,293 $ 2,293 $ —

User relationships 18,678 18,011 667

Developed technology 10,356 10,356 —

Domain names 529 529 —

Total $ 31,856 $ 31,189 $ 667

All of the Company’s identifiable intangible assets were fully amortized as of December 31, 2021.

Total amortization expense of intangible assets was $ 0.7 million for the year ended December 31, 2021.

Total amortization expense of intangible assets was $ 2.7 million for each of the years ended December 31, 2020 and 2019.

Amortization expense is included in general and administrative expenses.

As of December 31, 2020, intangible assets, net consisted of the following:

As of December 31, 2020

Gross Carrying

(In thousands) Gross Carrying

Amount Accumulated

5 unchanged sentences

Total $ 31,856 $ 31,189 $ 667

Total amortization expense of intangible assets was $ 2.7 million for each of the years ended December 31, 2020, 2019, and 2018.

Amortization expense is included in general and administrative expenses.

As of December 31, 2020, the remaining useful life for user relationships was 0.3 years.

Notes to Consolidated Financial Statements — Continued

As of December 31, 2020, the estimated future amortization expense for the acquired intangible assets is as follows (in thousands):

Year Ended December 31, Estimated

Amortization Expense

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 2020 and 2019 (in thousands):

Accrued expenses and other current liabilities consisted of the following as of December 31, 2021 and 2020:

(In thousands) 2021 2020

Accrued compensation and related benefits $ 23,047 $ 14,007

Accrued freelancer costs 1,235 622

Accrued indirect taxes 3,818 2,401

Accrued vendor expenses 7,728 8,662

Accrued payment processing fees 1,219 832

Operating lease liability, current 6,315 3,725

Accrued indirect taxes 4,137 3,818

Accrued payment processing fees 2,085 1,219

Accrued talent costs 1,417 1,235

Other 1,013 202

15 unchanged sentences

The Company’s leases have remaining lease terms of approximately one year to eight years , which may include the option to extend the lease.

The Company includes lease payments associated with renewal options in its operating lease asset and liability only when it becomes reasonably certain the company will exercise the renewal option.

The Company includes lease payments associated with renewal options in its operating

Notes to Consolidated Financial Statements—Continued

lease asset and liability only when it becomes reasonably certain the company will exercise the renewal option.

The Company has not included renewal options for any of its operating leases in its determination of lease liabilities.

2 unchanged sentences

The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Notes to Consolidated Financial Statements — Continued

The following table summarizes the Company’s operating lease assets and lease liabilities as of December 31, 2020 and 2019 (in thousands):

The following table summarizes the Company’s operating lease assets and lease liabilities as of December 31, 2021 and 2020:

(In thousands)

Balance Sheet Classification 2021 2020

3 unchanged sentences

Total lease liabilities $ 23,068 $ 24,231

For the years ended December 31, 2020 and 2019, operating lease cost, inclusive of variable lease c harges, was $ 6.0 million and $ 5.9 million, respectively, and sublease income recognized was approximately $ 0.3 million and $ 0.4 million, respectively.

For the years ended December 31, 2020 and 2019, charges related to operating leases that are variable, and therefore not included in the measurement of the lease liabilities, were $ 0.7 million and $ 0.6 million, respectively.

The Company made lease payments of $ 3.3 million and $ 3.3 million during the years ended December 31, 2020 and 2019, respectively.

For the years ended December 31, 2021, 2020, and 2019, operating lease cost, inclusive of variable lease c harges, was $ 6.0 million, $ 6.0 million, and $ 5.9 million, respectively, and sublease income recognized was approximately $ 0.5 million, $ 0.3 million , and $ 0.4 million, respectively.

For the years ended December 31, 2021, 2020 , and 2019, charges related to operating leases that are variable, and therefore not included in the measurement of the lease liabilities, were $ 1.2 million , $ 0.7 million, and $ 0.6 million, respectively.

For the years ended December 31, 2021, 2020 , and 2019, t he Company made lease payments of $ 6.4 million , $ 3.3 million, and $ 3.3 million, respectively.

San Francisco Sublease

In December 2021, the Company executed a sublease agreement to sublease one of the two suites the Company is currently leasing as its headquarters in San Francisco, California.

The suite that was not subleased will continue to be utilized by the Company as it was prior to entering into the sublease agreement.

The sublease agreement became effective in December 2021 upon receipt of the consent of the Company’s landlord.

The term of the sublease commences on February 1, 2022 and expires on August 31, 2024, unless terminated earlier in accordance therewith.

Rent payments begin on March 1, 2022 and approximate $ 0.1 million per month.

Rent payments will be recorded within general and administrative expenses within the Company’s consolidated statements of operations.

Neither party has the option to renew or extend the sublease agreement.

Under the sublease agreement, the Company is not relieved of its original obligation with the master lessor, which expires on August 31, 2024.

The Company determined the sublease agreement is an operating lease, which is consistent with the classification of the original sublease with the landlord.

As a result of the execution of the sublease agreement, the Company determined that indicators of impairment existed with respect to the asset group that consisted of the operating lease asset and related leasehold improvements associated with the suite being subleased.

Accordingly, the Company conducted an impairment test to assess whether the fair value of the asset group was lower than its carrying value.

The results of the impairment test indicated that the fair value of the asset group was lower than its carrying value.

The Company determined the fair value of the asset group using the discounted cash flow method.

The assumptions used in the discounted cash flow analysis included projected sublease income over the remaining term of the original lease with the landlord and a discount rate the Company believes reflects the level of risk associated with these future cash flows.

The Company considers these assumptions to be Level III inputs in accordance with the fair value hierarchy described in “Note 4—Fair Value Measurements and Marketable Securities.”

As a result of the partial sublease of its San Francisco office, during the year ended December 31, 2021, the Company recorded an impairment charge of $ 1.4 million, of which $ 1.2 million was allocated to the operating lease asset and $ 0.2 million was allocated to the associated leasehold improvements.

The Company recorded this impairment charge within general and administrative expenses within its consolidated statement of operations for the year ended December 31, 2021.

Notes to Consolidated Financial Statements—Continued

Santa Clara Sub-Sublease

In April 2021, the Company executed a sub-sublease agreement to sublease the entirety of its former headquarters in Santa Clara, California.

The sub-sublease agreement became effective in May 2021 upon receipt of the consent of the Company’s landlord and master lessor.

The term of the sub-sublease commenced on June 1, 2021 and expires on May 31, 2024, unless terminated earlier in accordance therewith.

Rent payments begin on January 1, 2022 and approximate $ 0.1 million per month.

Rent payments will be recorded within general and administrative expenses within the Company’s consolidated statements of operations.

Neither party has the option to renew or extend the sub-sublease agreement.

Under the sub-sublease agreement, the Company is not relieved of its original obligation with the master lessor that expires on October 15, 2028.

The Company determined the sub-sublease agreement is an operating lease, which is consistent with the classification of the original sublease with the master lessor.

As a result of the execution of the sub-sublease agreement, the Company determined that indicators of impairment existed with respect to the asset group that consisted of the Santa Clara office operating lease asset and associated leasehold improvements, furniture and fixtures, and hardware.

Accordingly, the Company conducted an impairment test to assess whether the fair value of the asset group was lower than its carrying value.

The results of the impairment test indicated that the fair value of the asset group was lower than its carrying value.

The Company determined the fair value of the asset group using the discounted cash flow method.

The assumptions used in the discounted cash flow analysis included projected sublease income over the remaining term of the original sublease with the master lessor, expected downtime prior to the commencement of future subleases, and a discount rate the Company believes reflects the level of risk associated with these future cash flows.

The Company considers these assumptions to be Level III inputs in accordance with the fair value hierarchy described in “Note 4—Fair Value Measurements and Marketable Securities.”

As a result of the sublease of its Santa Clara office, during the year ended December 31, 2021, the Company recorded an impairment charge of $ 7.4 million, of which $ 4.3 million was allocated to the Santa Clara office operating lease asset, $ 2.9 million was allocated to the associated leasehold improvements, and $ 0.2 million was allocated to the associated furniture and fixtures and hardware.

The Company recorded this impairment charge within general and administrative expenses within its consolidated statement of operations for the year ended December 31, 2021.

Chicago Lease

On January 1, 2020, the Company commenced an operating lease of one additional floor in its Chicago, Illinois office.

4 unchanged sentences

As of December 31, 2021 and 2020, the Company had no material finance leases.

The following table shows the Company’s future lease commitments due in each of the next five years and thereafter for operating leases (in thousands):

Notes to Consolidated Financial Statements—Continued

The following table shows the Company’s future lease commitments due in each of the next five years and thereafter for operating leases, which excludes amounts received in the form of sublease income discussed above:

(In thousands)

Year Ended December 31, Leases

6 unchanged sentences

Letters of Credit

In conjunction with the operating lease agreements, as of December 31, 2020 and 2019, the Company had three irrevocable letters of credit outstanding in the aggregate amount of $ 1.0 million and $ 0.8 million, respectively.

In conjunction with the Company’s operating lease agreements, as of December 31, 2021 and 2020, the Company had three irrevocable letters of credit outstanding in the aggregate amounts of $ 0.8 million and $ 1.0 million, respectively.

The letters of credit are collateralized by restricted cash in the same amount.

No amounts had been drawn against these letters of credit as of December 31, 2021 and 2020.

Notes to Consolidated Financial Statements — Continued

Contingencies

7 unchanged sentences

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 the Company’s products and services or its acts or omissions.

In addition, subject to the terms of the applicable agreement, as part of the Company’s Upwork Enterprise offering, the Company indemnifies clients that subscribe to worker classification services for losses arising from worker misclassification.

In addition, subject to the terms of the applicable agreement, as part of the Company’s Upwork Enterprise and certain other premium offerings, 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.

The following table presents the carrying value of the Company’s debt obligations as of December 31, 2020 and 2019 (in thousands):

Notes to Consolidated Financial Statements—Continued

The following table presents the carrying value of the Company’s debt obligations as of December 31, 2021 and 2020:

(In thousands) 2021 2020

Convertible senior notes—interest accrues from August 2021 and will be payable semiannually in arrears on February 15 and August 15 of each year, beginning February 2022, maturing August 2026;

interest at 0.25 % per annum

$ 575,000 $ —

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

$ 6,250 $ 11,250

Second term loan— 17 months of interest-only payments ended in March 2019 followed by 42 equal monthly installments of principal plus interest, maturing September 2022;

1 unchanged sentence

Total debt 575,000 10,750

Unamortized debt discount issuance costs ( 27 ) ( 38 )

Unamortized debt issuance costs ( 13,701 ) ( 27 )

Balance 561,299 10,723

2 unchanged sentences

Weighted-average interest rate 0.76 % 5.64 %

In September 2017, the Company entered the Loan Agreement, which was subsequently amended in November 2017, September 2018, March 2019, and August 2020.

Under 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, which is referred to as the First Term Loan, a term loan in the original principal amount of $ 9.0 million, which is referred to as 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.

The Company has granted its lender first-priority liens against substantially all of its assets, as collateral, excluding the Company’s intellectual property (but including proceeds therefrom) and the funds and assets held by the Company’s subsidiary, Upwork Escrow Inc.

The Company has also agreed to a negative pledge on its intellectual property.

The Loan Agreement also requires that the Company maintain an adjusted quick ratio of 1.75 .

The Loan Agreement also includes a restrictive covenant on dividend payments other than dividends paid solely in common stock.

In March 2019, the Company entered into a 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

Notes to Consolidated Financial Statements — Continued

(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 December 31, 2020 and 2019.

In August 2020, the Company entered into a fourth amendment to the Loan Agreement that, among other things, extended the maturity date of the revolving line of credit from September 2020 to September 2022 and eliminated a formula-based restriction that prohibited the Company from borrowing funds under the revolving line of credit in an amount that exceeded a specified percentage of eligible trade and client accounts receivable.

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.

The Company also drew down $ 15.0 million under the revolving line of credit for such purpose in September 2018, which the Company subsequently repaid in October 2018.

Additionally, in October 2018, the Company used part of the net proceeds from the IPO to repay $ 10.0 million of indebtedness owed under the revolving line of credit.

Pursuant to the terms of the Loan Agreement, the Company commenced repayment on the Term Loans in April 2019.

Term and Revolving Loans

The Loan Agreement, which was subsequently amended in November 2017, September 2018, March 2019, and August 2020, was terminated in August 2021.

Under the Loan Agreement, the aggregate amount of the facility was up to $ 49.0 million, consisting of a term loan in the original principal amount of $ 15.0 million, which is referred to as the First Term Loan, a term loan in the original principal amount of $ 9.0 million, which is referred to as the Second Term Loan and, together with the First Term Loan, as the Term Loans, and a revolving line of credit, which permitted borrowings of up to $ 25.0 million subject to customary conditions.

In August 2021, the Company entered into an agreement, which is referred to as the Payoff Agreement, with its lender to fully repay the remaining outstanding principal amounts plus accrued and unpaid interest outstanding under its Term Loans and terminate the Loan Agreement.

There were no amounts outstanding under the Company’s revolving line of credit as of the date of termination.

Pursuant to the Payoff Agreement, the full repayment of the Term Loans amounted to $ 5.8 million, and as of August 5, 2021, the Loan Agreement, including the Term Loans and revolving line of credit, was terminated.

As of December 31, 2021, no amounts remained outstanding under the Loan Agreement.

The Company was in compliance with its covenants under the Loan Agreement as of August 5, 2021 and December 31, 2020.

During the year ended December 31, 2021, the Company repaid $ 6.3 million and $ 4.5 million related to the First Term Loan and the Second Term Loan, respectively.

1 unchanged sentence

Amortization expense related to the debt discount was immaterial for the years ended December 31, 2021, 2020, and 2019.

Future maturities of principal payments, excluding potential early payments, as of December 31, 2020, were expected to be as follows (in thousands):

Year Ended December 31, Principal Payments

Total $ 10,750

Note 8— 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.

The Company completed its IPO in October 2018, in which the Company issued and sold 7,840,908 shares of common stock at a public offering price of $ 15.00 per share, before deducting underwriting discounts and commissions and offering expenses payable by the Company.

As a result, 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 December 31, 2020 and 2019.

Note 9— 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.

Upon completion of the IPO, this warrant converted to a common stock warrant exercisable for the same number of shares and was reclassified to additional paid-in capital.

The common stock warrant was outstanding and exercisable as of December 31, 2018.

In April 2019, this common stock warrant was exercised in full at a total cost of $ 1.2 million.

In lieu of a cash payment, the holder of the warrant surrendered 64,646 shares of common stock to cover the exercise price.

The Company issued 333,685 shares of common stock upon the exercise of this common stock warrant.

Convertible Senior Notes Due 2026

On August 10, 2021, the Company issued, at par value, $ 575.0 million aggregate principal amount of 0.25 % convertible senior notes due 2026.

The issuance included the full exercise of an option granted by the Company to the initial purchasers of the Notes to purchase an additional $ 75.0 million aggregate principal amount of Notes.

The Notes were issued pursuant to and are subject to the terms and conditions of an indenture, which is referred to as the Indenture, between the Company and Wells Fargo Bank, National Association, as trustee.

The Notes were offered and sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

The Notes are senior, unsecured obligations of the Company and will bear interest at a rate of 0.25 % per year.

Interest will accrue from August 10, 2021 and will be payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2022, and the principal amount of the Notes will not accrete.

The Notes will mature on August 15, 2026, unless earlier redeemed, repurchased, or converted in accordance with the terms of the Notes.

Notes to Consolidated Financial Statements—Continued

Prior to the IPO, the Company estimated the fair value of each redeemable convertible preferred stock warrant using the Black-Scholes valuation model.

The following assumptions were used to calculate the estimated fair value of the then-outstanding warrants until the closing date of the Company’s IPO:

Dividend yield 0 %

Expected term (in years) 2.75

Risk-free interest rates 1.8 %

Expected volatility 34.6 %

Common Stock Warrant

As a result of the Elance-oDesk Combination, a common stock warrant that was originally issued by oDesk prior to the Elance-oDesk Combination became exercisable to purchase up to 45,286 shares of common stock at an exercise price of $ 0.06 per share.

In 2018, the Company issued 45,286 shares of common stock upon the exercise of this common stock warrant.

In 2018, the Company established The Upwork Foundation initiative.

The program includes a donor-advised fund created through the Tides Foundation.

In May 2018, the Company issued a warrant to purchase 500,000 shares of its common stock at an exercise price of $ 0.01 per share to the Tides Foundation.

The vesting and exercisability provisions of the warrant became effective upon the Company’s IPO in October 2018.

This warrant is exercisable as to 1/10th of the shares on each anniversary of the IPO, with proceeds from the sale of such shares to be donated in accordance with the Company’s directive.

In 2019, this warrant was exercised as to all 50,000 of the then-vested and exercisable shares.

In lieu of a cash payment, the holder of the warrant surrendered 37 shares of common stock to cover the exercise price.

The Company issued 49,963 shares of common stock upon the exercise of this common stock warrant.

In 2020, this warrant was exercised as to all 50,000 of the then-vested and exercisable shares.

In lieu of a cash payment, the holder of the warrant surrendered 29 shares of common stock to cover the exercise price.

The Company issued 49,971 shares of common stock upon the exercise of this common stock warrant.

For the years ended December 31, 2020, 2019, and 2018, the Company recorded $ 0.8 million, $ 0.7 million, and $ 0.2 million, respectively, of expense related to this warrant, which is included in general and administrative expense in the Company’s consolidated statement of operations.

Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount at the option of the holder (i) prior to the close of business on the business day immediately preceding May 15, 2026, only upon satisfaction of certain conditions and during certain periods specified below, and (ii) on or after May 15, 2026, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date:

• during any calendar quarter commencing after the calendar quarter ending on December 31, 2021, if the last reported sale price of the Company’s common stock is greater than or equal to 130 % of the conversion price for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter of the conversion price on each applicable trading day;

• during the five consecutive business day period after any five consecutive trading day period, which is referred to as the Measurement Period, in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;

• if the Company calls such Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date;

• upon the occurrence of specified corporate events described in the Indenture.

Upon conversion, the Notes may be settled in shares of the Company’s common stock, cash or a combination of cash and shares of the common stock, at the election of the Company.

The Notes have an initial conversion rate of 15.1338 shares of common stock per $1,000 principal amount of Notes, which is subject to adjustment in certain circumstances.

This is equivalent to an initial conversion price of approximately $ 66.08 per share of the Company’s common stock.

The conversion rate is subject to customary adjustments under certain circumstances in accordance with the terms of the Indenture.

In addition, if certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) occur or if the Company issues a notice of redemption with respect to the Notes prior to the maturity date, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The Company may redeem for cash all or any portion of the Notes (subject to a partial redemption limitation), at the Company’s option, on or after August 20, 2024, if the last reported sale price per share of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date.

No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.

Upon the occurrence of a fundamental change (as defined in the Indenture), subject to certain conditions, holders have the right to require the Company to repurchase for cash all or a portion of their Notes at a price equal to 100 % of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest thereon, if any, until, but excluding, the fundamental change repurchase date.

The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes;

equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not so subordinated;

effectively junior in right of payment to any of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness;

and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The net proceeds from the issuance of the Notes were approximately $ 560.1 million, after deducting debt issuance costs.

The total debt issuance costs incurred and recorded by the Company amounted to $ 14.9 million, which were recorded as a reduction to the face amount of the Notes and will be amortized to interest expense on a straight-line basis, which produces a materially consistent amount as the effective interest method over the contractual term of the Notes.

For the year ended December 31, 2021, interest expense was $ 0.6 million and amortization of the issuance costs was $ 1.1 million related to the Notes.

As of December 31, 2021, the if-converted value of the Notes did not exceed the outstanding principal amount.

As of December 31, 2021, the total estimated fair value of the Notes was $ 538.3 million and was determined based on a market approach using actual bids and offers of the Notes in an

Notes to Consolidated Financial Statements—Continued

over-the-counter market on the last trading day of the period.

The Company considers these assumptions to be Level II inputs in accordance with the fair value hierarchy described in “Note 4—Fair Value Measurements and Marketable Securities.”

In connection with the pricing of the Notes on August 5, 2021 and in connection with the full exercise by the initial purchasers on August 9, 2021 of their option to purchase additional Notes, the Company used approximately $ 49.4 million of the net proceeds from the issuance of the Notes to enter into privately negotiated capped call transactions, which are referred to as the Capped Calls, with various financial institutions.

Subject to customary anti-dilution adjustments substantially similar to those applicable to the Notes, the Capped Calls cover the number of shares of the Company’s common stock initially underlying the Notes.

By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event a conversion of the Notes is settled in cash, to reduce its cash payment obligation) in the event that at the time of conversion of the Notes its common stock price per share exceeds the conversion price of the Notes, with such reduction subject to a cap based on the cap price.

If, however, the market price per share of common stock, as measured under the terms of the Capped Calls, exceeds the cap price of the Capped Calls, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of common stock exceeds the cap price of the Capped Calls.

The initial cap price of the Capped Calls is $ 92.74 per share of common stock, which represents a premium of 100 % over the last reported sale price of the common stock of $ 46.37 per share on August 5, 2021, and is subject to certain customary adjustments under the terms of the Capped Calls;

provided that the cap price will not be reduced to an amount less than the strike price of $ 66.08 per share.

The Capped Calls are separate transactions and are not part of the terms of the Notes.

The Capped Calls meet the criteria for classification as equity and, as such, are not remeasured each reporting period and are included as a reduction to additional paid-in-capital within stockholders’ equity.

Note 8— Preferred and Common Stock

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

Notes to Consolidated Financial Statements—Continued

As of December 31, 2021 and 2020, the Company was authorized to issue 490,000,000 shares of common stock.

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Options issued and outstanding 4,264,068 4,858,590

RSUs issued and outstanding 5,568,225 2,503,182

RSUs and PSUs issued and outstanding 4,583,823 5,568,225

Warrant to purchase common stock 350,000 400,000

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Remaining shares reserved for future issuances under 2018 Employee Stock Purchase Plan 3,033,401 2,419,154

Common stock issuable in connection with convertible senior notes 8,701,935 —

Total 43,183,524 31,578,734

Notes to Consolidated Financial Statements — Continued

Common Stock Warrant

In 2018, the Company established The Upwork Foundation initiative.

The program includes a donor-advised fund created through the Tides Foundation.

In 2018, the Company issued a warrant to purchase 500,000 shares of its common stock at an exercise price of $ 0.01 per share to the Tides Foundation.

The vesting and exercisability provisions of the warrant became effective upon the Company’s initial public offering, which is referred to as the IPO, in October 2018.

This warrant is exercisable as to 1/10th of the shares on each anniversary of the IPO, with proceeds from the sale of such shares to be donated in accordance with the Company’s directive.

In each of 2019, 2020, and 2021 this warrant was exercised as to all 50,000 of the then-vested and exercisable shares.

In lieu of a cash payment, the holder of the warrant surrendered shares of common stock to cover the exercise price.

For the years ended December 31, 2021, 2020, and 2019, the Company recorded $ 0.8 million, $ 0.8 million, and $ 0.7 million, respectively, of expense related to this warrant, which is included in general and administrative expense in the Company’s consolidated statement of operations.

Note 9— Stock-Based Compensation

Equity Incentive Plans

Assumed Awards

In connection with the Elance-oDesk Combination, the Company assumed substantially all stock options outstanding under the Elance 1999 Stock Option Plan, which is referred to as the Elance 1999 Plan, and the Elance 2009 Stock Option Plan, which is referred to as the Elance 2009 Plan.

Such assumed options were converted into options to purchase the Company’s common stock.

In addition, all stock options outstanding under the oDesk Corporation 2004 Stock Plan, which is referred to as the oDesk Plan, were converted into options to purchase shares of the Company’s common stock, with the number of shares that could be purchased under each option reduced by approximately 16.14 %.

The exercise price of all options was simultaneously increased such that the then-aggregate exercise price payable by holders did not change.

These options generally vest over a four-year period from the original date of grant and expire ten years from the original grant date.

2014 Equity Incentive Plan

In March 2014, the Company’s board of directors and, in June 2014, the Company’s stockholders approved the 2014 Equity Incentive Plan, which is referred to as the 2014 EIP.

The total number of shares of common stock reserved and available for grant and issuance pursuant to such plan was originally 12,462,985 plus (i) shares that were then subject to outstanding option grants under the oDesk Plan, the Elance 1999 Plan, and the Elance 2009 Plan, which are referred to collectively as the Prior Plans, but subsequently ceased to be subject to an award for any reason other than exercise of a stock option, (ii) shares that had been reserved but not subject to any outstanding awards under the Prior Plans and (iii) shares issued under the Prior Plans that were repurchased, forfeited, or used to pay employee withholding or exercise price obligations.

The number of shares available for grant under the 2014 EIP was increased by 3,001,091 shares, 4,500,000 shares and 100,000 shares in August 2014, October 2017 and August 2018, respectively.

In 2014, the Company’s board of directors and stockholders each adopted the 2014 Equity Incentive Plan, which is referred to as the 2014 EIP.

The total number of shares of common stock reserved and available for grant and issuance pursuant to such plan was originally 12,462,985 plus (i) shares that were then subject to outstanding option grants under the oDesk Corporation 2004 Stock Plan, the Elance 1999 Stock Option Plan, and the Elance 2009 Stock Option Plan, which are referred to collectively as the Prior Plans, but subsequently ceased to be subject to an award for any reason other than exercise of a stock option, (ii) shares that had been reserved but not subject to any outstanding awards under the Prior Plans and (iii) shares issued under the Prior Plans that were repurchased, forfeited, or used to pay employee withholding or exercise price obligations.

Under the terms of the 2014 EIP, incentive stock options may be granted at prices not less than 100 % of the fair value of the Company’s common stock on the date of grant unless determined in writing by the Company’s board of directors.

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Awards granted under the 2018 EIP may be (i) incentive stock options, (ii) nonqualified stock options, (iii) RSUs, (iv) restricted stock awards, or (v) stock appreciation rights, as determined by the Company’s board of directors or compensation committee at the time of grant.

Pursuant to the terms of the 2018 EIP, the number of shares available for grant was increased by 5,680,219 shares in January 2020.

On December 8, 2019, which is referred to as the Modification Date, the Company entered into a transition agreement, which is referred to as the Transition Agreement, with Stephane Kasriel pursuant to which Mr.

Kasriel tendered his resignation as the Company’s President and Chief Executive Officer effective as of December 31, 2019, which is referred to as the Resignation Date.

The Transition Agreement provides that Mr.

Kasriel will be entitled to any amounts that Mr.

Kasriel has earned under the Bonus Plan and that Mr.

Kasriel will become a special advisor to the Board through April 30, 2021 pursuant to an advisory services agreement, which is referred to as the Advisory Agreement.

Among other terms, the Advisory Agreement provides that while he is providing advisory services, (i) the Company will pay Mr.

Kasriel a fee of $ 40,000 per calendar month, beginning January 1, 2020 and ending December 31, 2020, (ii) the vesting terms of certain of Mr.

Kasriel’s outstanding stock options was modified to allow for vesting to continue through the term of the Advisory Agreement, and (iii) the period of time over which Mr.

Kasriel can exercise certain of his outstanding stock options was extended to the later of December 31, 2020 or three months following such date as he ceases to provide services to the Company.

The Company accounted for the modification of any vested non-qualified options as a Type I (probable-to-probable) modification given that the options were already vested.

The incremental fair value, recognized as of the Modification Date, was measured by taking the difference between the fair value of the options immediately before and after the Modification Date.

Additionally, the Company accounted for the modification of any unvested options as a Type III (improbable-to-probable) modification.

Accordingly, the Company reversed the cumulative compensation cost recognized for the original award, and immediately recognized the fair value of the modified award as the Company concluded the services to be provided by Mr.

Kasriel beyond December 31, 2019 were nonsubstantive.

Notes to Consolidated Financial Statements—Continued

As a result, for the year ended December 31, 2019, the Company recorded $ 3.5 million of additional stock-based compensation expense related to the Transition Agreement.

The fair values of the awards modified by the Transition Agreement were estimated using the Black-Scholes valuation model with the following assumptions:

Dividend yield — %

Expected term (in years) 0.3 - 1.3

Risk-free interest rates 1.5 % - 1.6 %

Expected volatility 38 % - 39 %

Determination of Fair Value

The Company did not grant any stock option awards during the years ended December 31, 2020 and 2019.

For the year ended December 31, 2018, the fair value of stock options granted to employees was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:

Dividend yield — %

Expected term (in years) 5.2 - 6.1

Risk-free interest rates 2.5 % - 2.9 %

Expected volatility 38 % - 45 %

Pursuant to the terms of the 2018 EIP, the number of shares available for grant was increased by 6,239,761 shares in January 2021.

Option Awards

The fair value of options with service- and performance-based conditions is determined using the Black-Scholes valuation model as of the grant date using the following assumptions:

Dividend Yield —The dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to do so.

Expected Term —The expected term represents the period that the Company’s stock-based awards are expected to be outstanding.

For awards containing only service conditions, the Company determines the expected term using the simplified method as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

For awards containing only service conditions, the Company determines the expected term using the simplified method as the Company did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior at the time of grant.

The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options.

The Company uses relevant data, including past exercise patterns, if available, to determine the expected term for performance-based awards.

For performance-based awards, the Company uses relevant data, including past exercise patterns, if available, to determine the expected term.

Risk-Free Interest Rate —The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for zero-coupon U.S.

Treasury notes with maturities approximately equal to the option’s expected term.

Expected Volatility —Since the Company does not have a sufficient trading history of its common stock, the expected volatility is derived from the average historical stock volatilities of several unrelated public companies within the Company’s industry that the Company considers to be comparable to its business over a period equivalent to the expected term of the stock option grants.

Expected Volatility —Since the Company did not have a sufficient trading history of its common stock at the time of grant, the expected volatility is derived from the average historical stock volatilities of several unrelated public companies within the Company’s industry that the Company considers to be comparable to its business over a period equivalent to the expected term of the stock option grants.

Fair Value of Common Stock —Given the absence of a public trading market prior to the IPO, the Company’s board of directors considered numerous objective and subjective factors to determine the fair value of its common stock at each grant date.

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(v) developments in the business;

and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions.

and (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions.

Subsequent to the IPO, the fair value of common stock is based on the closing price of the Company’s common stock, as reported on The Nasdaq Global Select Market on the date of grant.

Notes to Consolidated Financial Statements — Continued

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

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Balances at December 31, 2020 4,858,590 $ 3.83 5.80 $ 149,046

Granted 1,500,000 38.80

Exercised ( 2,035,709 ) 3.53

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Vested and expected to vest as of December 31, 2021 4,264,068 16.29 6.37 76,025

Before the IPO, the aggregate intrinsic value represented the difference between the exercise price of the options and the estimated fair value of the Company’s common stock as determined by its board of directors.

Following the IPO, the aggregate intrinsic value represented the difference between the exercise price of the options and the closing price of the Company’s common stock on The Nasdaq Global Select Market on the day prior to the date of exercise.

The intrinsic value of options exercised was $ 124.1 million, $ 73.0 million, and $ 18.0 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Notes to Consolidated Financial Statements—Continued

In 2021, the compensation committee of the Company’s board of directors approved a stock option grant, which is referred to as the CEO Award, exercisable for up to 1,500,000 shares of the Company’s common stock to Hayden Brown, the Company’s President and Chief Executive Officer, under the 2018 EIP.

The CEO Award is subject to a service-based vesting requirement, which is referred to as the Service Condition, and a performance-based vesting requirement, which is referred to as the Market Condition.

In order for any shares subject to the CEO Award to be exercisable, both the Service Condition and the Market Condition must be satisfied with respect to such shares.

The CEO Award vests with respect to the Service Condition in sixteen equal quarterly installments following the grant date, subject to Ms.

Brown’s continuous service to the Company as Chief Executive Officer, Executive Chairperson, or any C-level officer position.

The CEO Award vests with respect to the Market Condition upon the achievement of certain volume weighted-average common stock price targets measured over any consecutive 90-day period between the grant date and April 18, 2026.

The 90-day volume weighted-average common stock price targets, and the number of shares of the CEO Award that become vested with respect to the Market Condition upon the achievement of each such target, are reflected in the following table:

Stock Price Number of Shares Vested

$ 100 500,000

Stock-based compensation expense associated with the CEO Award will be recognized over the longer of the expected achievement period for the Market Condition and the Service Condition.

The Market Condition period and the valuation of each tranche of the CEO Award were determined using a Monte Carlo simulation.

In the event the Market Condition is met prior to the expected achievement period, any then-unrecognized compensation expense associated with the shares that have vested with respect to both the Market Condition and the Service Condition will be recognized immediately in the Company’s consolidated statements of operations.

For the year ended December 31, 2021, the Company recorded stock-based compensation expense of $ 11.3 million related to the CEO Award.

Stock-based compensation expense for the CEO Award is recorded as a component of general and administrative expense in the Company’s consolidated statement of operations.

The Company estimated the fair value of the CEO Award using a Monte Carlo simulation.

The Company estimates the expected term based on a future exercise assumption.

The weighted-average derived service period for the CEO Award is 2.1 years.

The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for zero-coupon U.S.

Treasury notes.

The expected volatility is derived from the average historical stock volatility of the Company over a period equivalent to the expected term of the CEO Award.

The following assumptions were used to estimate the fair value of the CEO Award:

Dividend yield — %

Risk-free interest rates 1.7 %

Expected volatility 65 %

In 2019, the Company entered into a transition agreement, which is referred to as the Transition Agreement, with Stephane Kasriel pursuant to which Mr.

Kasriel tendered his resignation as the Company’s President and Chief Executive Officer effective as of December 31, 2019.

As a result, for the year ended December 31, 2019, the Company recorded $ 3.5 million of additional stock-based compensation expense related to the Transition Agreement.

The fair values of the awards modified by the Transition Agreement were estimated using the Black-Scholes valuation model with the following assumptions:

Dividend yield — %

Expected term (in years) 0.3 - 1.3

Risk-free interest rates 1.5 % - 1.6 %

Expected volatility 38 % - 39 %

For the years ended December 31, 2021, 2020, and 2019, the intrinsic value of options exercised was $ 88.9 million, $ 124.1 million, and $ 73.0 million, respectively.

The aggregate intrinsic value represents the difference between the

Notes to Consolidated Financial Statements—Continued

exercise price of the options and the closing price of the Company’s common stock on The Nasdaq Global Select Market on the day prior to the date of exercise.

For the year ended December 31, 2021, the weighted-average grant-date fair value of options granted was $ 19.19 .

The Company did not grant any stock option awards during the years ended December 31, 2020 and 2019.

As of December 31, 2021, total unrecognized stock-based compensation cost was $ 17.9 million, which is expected to be generally recognized on a straight-line basis over a weighted-average period of 1.8 years.

RSU and PSU Awards

The fair value of RSUs awarded to employees is based on the closing price of the Company’s common stock, as reported on The Nasdaq Global Select Market on the date of grant.

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

RSUs Outstanding Weighted-Average

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

Outstanding Weighted-Average

Grant Date Fair Value

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Unvested balance - December 31, 2021 4,583,823 $ 26.86

During 2018, 35,494 fully vested RSUs were granted to a consultant of the Company, which totaled $ 0.5 million.

The consultant’s estimated tax liability associated with this vesting was $ 0.2 million.

To satisfy this tax liability, the consultant surrendered 12,648 shares of common stock to the Company.

The associated tax liability was paid in full prior to December 31, 2018.

In 2021, the compensation committee of the Company’s board of directors approved PSU grants to certain members of the Company’s leadership team under the 2018 EIP.

The number of PSUs that were earned by the recipients, which are referred to as Earned PSUs, was determined based on the Company’s revenue achievement during the year ended December 31, 2021, which is referred to as the PSU Performance Condition.

The Earned PSUs are subject to a time-based vesting requirement conditioned on the recipient of the PSU Award continuing to provide service to the Company for four years from the PSU Grant Date, which is referred to as the PSU Service Condition.

The Earned PSUs will vest with respect to 25 % of the Earned PSUs on the one-year anniversary of the PSU Grant Date and 1/16th of the Earned PSUs on a quarterly basis thereafter.

Stock-based compensation expense associated with the PSU Awards is a component of operating expenses in the Company’s consolidated statements of operations and will be recognized over the longer of the expected achievement period for the PSU Performance Condition and the PSU Service Condition.

The grant date fair value of the PSU Awards was determined using the Company’s closing common stock price on the PSU Grant Date multiplied by the number of PSUs that were probable of being earned on the PSU Grant Date.

At each interim reporting date prior to the date on which the compensation committee of the Company’s board of directors certifies the PSU Performance Condition, the number of PSUs that are probable of being earned is reassessed and any changes are reflected in the total stock-based compensation expense associated with the PSU Awards.

For the year ended December 31, 2021, the weighted-average grant-date fair value of PSUs granted was $ 56.42 .

During the year ended December 31, 2021, the Company recorded stock-based compensation expense of $ 3.4 million related to the PSUs.

As of December 31, 2021, unrecognized stock-based compensation cost was $ 3.4 million, which is expected to be recognized over a weighted-average period of 1.8 years.

For the years ended December 31, 2021, 2020, and 2019, the weighted-average grant-date fair value of RSUs granted was $ 51.37 , $ 10.96 , and $ 16.15 , respectively.

For the years ended December 31, 2020 and 2019, the fair value of RSUs vested was $ 20.3 million and $ 2.6 million, respectively.

For the year ended December 31, 2018, the fair value of RSUs vested was immaterial.

For the years ended December 31, 2021, 2020, and 2019, the fair value of RSUs vested was $ 30.5 million, $ 20.3 million, and $ 2.6 million, respectively.

As of December 31, 2021, there was $ 108.1 million of unrecognized stock-based compensation expense related to outstanding RSUs to employees that is expected to be recognized over a weighted-average period of 3.1 years.

2018 Employee Stock Purchase Plan

In August 2018, the Company’s board of directors and stockholders each adopted the 2018 ESPP, which became effective prior to the completion of the IPO.

In 2018, the Company’s board of directors and stockholders each adopted the 2018 ESPP.

A total of 1,700,000 shares of common stock was initially reserved for issuance under the 2018 ESPP.

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The 2018 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount of up to 15 % through payroll deductions of their eligible compensation, subject to any plan limitations.

Except for the initial offering period, the 2018 ESPP provides for 24 -month offering periods beginning November 15 and May 15 of each year, and each offering period consists of four 6 -month purchase periods.

Pursuant to the terms of the 2018 ESPP, in January 2020, the number of shares of common stock available for issuance was increased by 908,835 shares.

Except for the initial offering period, the 2018 ESPP provides for 24-month offering periods beginning November 15 and May 15 of each year, and each

Notes to Consolidated Financial Statements—Continued

offering period consists of four 6-month purchase periods.

Pursuant to the terms of the 2018 ESPP, in January 2021, the number of shares of common stock available for issuance was increased by 998,361 shares.

For the years ended December 31, 2021, 2020, and 2019, the assumptions used to determine the fair value of the shares to be awarded was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:

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Stock-Based Compensation

The following table summarizes the components of stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2020, 2019, and 2018 (in thousands):

2020 2019 2018

The following table summarizes the components of stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2021, 2020, and 2019:

(In thousands) 2021 2020 2019

Cost of revenue $ 794 $ 779 $ 456

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Stock-Based Compensation to Employees

Stock-based compensation expense related to employees for the year ended December 31, 2020 was $ 2.5 million, $ 20.0 million, and $ 3.2 million related to stock option grants, RSU grants, and the 2018 ESPP, respectively.

Stock-based compensation expense related to employees for the year ended December 31, 2021 was $ 12.7 million, $ 38.8 million, and $ 2.2 million related to stock option grants, RSU and PSU grants, and the 2018 ESPP, respectively.

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Note 10— Net Loss per Share

The following table sets forth the computation of the Company’s basic and diluted net loss per share for the years ended December 31, 2020, 2019, and 2018 (in thousands, except share and per share data):

2020 2019 2018

The following table sets forth the computation of the Company’s basic and diluted net loss per share for the years ended December 31, 2021, 2020, and 2019:

(In thousands, except share and per share data) 2021 2020 2019

Net loss $ ( 56,240 ) $ ( 22,867 ) $ ( 16,659 )

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Common stock issuable upon exercise of common stock warrants 350,000 400,000 450,000

Common stock issuable upon vesting of restricted stock units 5,568,225 2,503,182 288,460

Common stock issuable upon vesting of RSUs and PSUs 4,583,823 5,568,225 2,503,182

Common stock issuable in connection with employee stock purchase plan 329,650 540,580 1,651,263

Common stock issuable in connection with convertible senior notes 8,701,935 — —

Total 18,229,476 11,367,395 19,745,024

Note 11— Income Taxes

For the years ended December 31, 2020, 2019, and 2018, the loss before income taxes consisted of the following (in thousands):

2020 2019 2018

For the years ended December 31, 2021, 2020, and 2019, the loss before income taxes consisted of the following:

(In thousands) 2021 2020 2019

Domestic $ ( 56,165 ) $ ( 22,748 ) $ ( 16,658 )

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Total loss before income taxes $ ( 56,118 ) $ ( 22,717 ) $ ( 16,631 )

Notes to Consolidated Financial Statements — Continued

For the years ended December 31, 2020, 2019, and 2018, the components of the income tax provision were as follows (in thousands):

2020 2019 2018

For the years ended December 31, 2021, 2020, and 2019, the components of the income tax provision were as follows:

(In thousands) 2021 2020 2019

Federal $ — $ ( 19 ) $ —

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The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2021, 2020, and 2019 were as follows:

Notes to Consolidated Financial Statements—Continued

2021 2020 2019

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Stock-based compensation 44.13 94.02 51.45

Warrant expense — — ( 6.98 )

Other items ( 0.16 ) ( 0.59 ) ( 4.34 )

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Effective tax rate ( 0.21 ) % ( 0.66 ) % ( 0.17 ) %

Notes to Consolidated Financial Statements — Continued

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

As of December 31, 2020 and 2019, the significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):

As of December 31, 2021 and 2020, the significant components of the Company’s deferred tax assets and liabilities were as follows:

(In thousands) 2021 2020

Deferred tax assets:

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Operating lease asset ( 2,452 ) ( 4,523 )

Debt issuance cost ( 75 ) —

Depreciation and amortization ( 1,363 ) ( 2,268 )

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Net deferred tax assets $ — $ —

The change in valuation allowance for deferred tax assets was as follows for the periods presented (in thousands):

Year Ended December 31, Balance at

The change in valuation allowance for deferred tax assets was as follows for the periods presented:

(In thousands)

Year Ended December 31,

Beginning of Year Additions Charged to

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The Company has federal net operating loss, which is referred to as NOL, carryforwards of approximately $ 444.6 million and $ 343.1 million as of December 31, 2021 and 2020, respectively.

The federal NOLs generated in the years ended December 31, 2017 and prior are subject to expiration, including $ 15.1 million that expired in 2020 and $ 21.6 million that will expire in 2021.

The federal NOLs generated in the

Notes to Consolidated Financial Statements—Continued

years ended December 31, 2001 through 2017 began to expire in 2021, including $ 21.6 million that expired in 2021 and $ 23.0 million that will expire in 2022.

NOLs originating before January 1, 2018, are eligible to offset taxable income, if not otherwise limited under Internal Revenue Code, which is referred to as IRC, §382 limitations.

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California Credits have an infinite carryforward period.

Notes to Consolidated Financial Statements — Continued

Utilization of the NOL and Credit carryforwards that were generated prior to January 1, 2018, may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by IRC §382 and §383, as well as similar state provisions.

Utilization of the NOL and Credit carryforwards that were generated prior to January 1, 2018 may be subject to a substantial annual limitation due to ownership changes that may have occurred or that could occur in the future, as required by IRC §382 and §383, as well as similar state provisions.

Uncertain Tax Positions

As of December 31, 2021, the Company’s total amount of unrecognized tax benefits was $ 15.4 million, none of which would impact the Company’s effective tax rate, if recognized.

For the years ended December 31, 2020, 2019, and 2018, the activity related to the unrecognized tax benefits were as follows (in thousands):

2020 2019 2018

For the years ended December 31, 2021, 2020, and 2019, the activity related to the unrecognized tax benefits were as follows:

(In thousands) 2021 2020 2019

Gross unrecognized tax benefits—beginning balance $ 13,338 $ 12,782 $ 10,973

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Increase related to tax positions taken during current year 1,635 608 1,973

Decrease related to tax positions taken during current year — — —

Decrease related to expiration of unrecognized tax benefit ( 131 ) ( 183 ) —

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As of December 31, 2021, the Company was not under examination by the Internal Revenue Service or any state or foreign tax jurisdiction.

Notes to Consolidated Financial Statements — Continued

Note 12— Segment and Geographical Information

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

The following table sets forth total revenue by type of service for the years ended December 31, 2020, 2019, and 2018 (in thousands):

2020 2019 2018

Marketplace $ 338,152 $ 268,284 $ 223,831

The following table sets forth total revenue by type of service for the years ended December 31, 2021, 2020, and 2019:

(In thousands) 2021 2020 2019

Basic, Plus, and other $ 427,476 $ 317,942 $ 253,099

Enterprise 34,864 20,210 15,185

Managed services 40,457 35,476 32,278

Total $ 502,797 $ 373,628 $ 300,562

The Company generates its revenue from freelancers and clients.

The following table sets forth total revenue by geographic area based on the billing address of its freelancers and clients for the years ended December 31, 2020, 2019, and 2018 (in thousands):

2020 2019 2018

Notes to Consolidated Financial Statements—Continued

The Company generates its revenue from talent and clients.

The following table sets forth total revenue by geographic area based on the billing address of its talent and clients for the years ended December 31, 2021, 2020, and 2019:

(In thousands) 2021 2020 2019

United States $ 74,890 $ 60,861 $ 50,154

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Rest of world 146,894 109,805 90,259

Total freelancers 226,699 187,442 163,242

Total talent 296,979 226,699 187,442

United States 153,003 107,359 87,241

9 unchanged sentences

The Company’s total expense for the matching contributions was $ 2.5 million, $ 2.5 million, and $ 2.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Note 16— Subsequent Events

On January 18, 2021, which is referred to as the Grant Date, the compensation committee of the board of directors of the Company approved a stock option grant exercisable for up to 1,500,000 shares of the Company’s common stock to Hayden Brown, the Company’s Chief Executive Officer, under the 2018 EIP, which is referred to as the CEO Award.

The CEO Award will vest in sixteen equal quarterly installments, which is referred to as the service condition, subject to the achievement of certain volume weighted-average common stock price targets, which is referred to as the market condition, conditioned upon Ms.

Brown’s continued employment as the Chief Executive Officer of the Company.

Stock-based compensation expense associated with the CEO Award will be recognized over the longer of the expected achievement period for each of the market condition or service condition.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data