UPWORK, INC 10-Q

Item 1. Financial Statements. UPWORK INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share data) June 30, 2023 December 31, 2022 ASSETS Current assets Cash and cash equivalents $ 154,106 $ 129,384 Marketable securities 362,561 557,230 Funds held in escrow, including funds in transit 177,655 161,457 Trade and client receivables – net of allowance of $ 6,761 and $ 12,464 as of June 30, 2023 and December 31, 2022, respectively 66,309 64,888 Prepaid expenses and other current assets 19,396 17,947 Total current assets 780,027 930,906 Property and equipment, net 24,867 22,063 Goodwill 118,219 118,219 Operating lease asset 5,992 7,603 Other assets, noncurrent 1,467 1,454 Total assets $ 930,572 $ 1,080,245 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 4,178 $ 7,549 Escrow funds payable 177,655 161,457 Accrued expenses and other current liabilities 48,817 53,611 Deferred revenue 24,079 25,075 Total current liabilities 254,729 247,692 Debt, noncurrent 355,166 564,261 Operating lease liability, noncurrent 8,219 11,177 Other liabilities, noncurrent 5,535 8,236 Total liabilities 623,649 831,366 Commitments and contingencies (Note 6) Stockholders’ equity Common stock, $ 0.0001 par value; 490,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 134,883,597 and 132,368,265 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 13 13 Additional paid-in capital 635,548 592,900 Accumulated other comprehensive loss ( 865 ) ( 3,085 ) Accumulated deficit ( 327,773 ) ( 340,949 ) Total stockholders’ equity 306,923 248,879 Total liabilities and stockholders’ equity $ 930,572 $ 1,080,245 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 UPWORK INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share data) 2023 2022 2023 2022 Revenue $ 168,611 $ 156,898 $ 329,469 $ 298,235 Cost of revenue 40,882 40,857 81,309 78,773 Gross profit 127,729 116,041 248,160 219,462 Operating expenses Research and development 43,246 35,830 87,727 73,991 Sales and marketing 59,069 63,283 124,069 120,925 General and administrative 28,983 33,324 58,270 62,465 Provision for transaction losses 2,547 6,652 9,248 8,781 Total operating expenses 133,845 139,089 279,314 266,162 Loss from operations ( 6,116 ) ( 23,048 ) ( 31,154 ) ( 46,700 ) Interest expense 713 1,120 1,814 2,245 Other income, net ( 4,695 ) ( 375 ) ( 48,796 ) ( 443 ) Income (loss) before income taxes ( 2,134 ) ( 23,793 ) 15,828 ( 48,502 ) Income tax provision ( 1,857 ) ( 27 ) ( 2,652 ) ( 56 ) Net income (loss) $ ( 3,991 ) $ ( 23,820 ) $ 13,176 $ ( 48,558 ) Net income (loss) per share: Basic $ ( 0.03 ) $ ( 0.18 ) $ 0.10 $ ( 0.37 ) Diluted $ ( 0.03 ) $ ( 0.18 ) $ ( 0.18 ) $ ( 0.37 ) Weighted-average shares used to compute net income (loss) per share Basic 134,142 130,061 133,492 129,707 Diluted 134,142 130,061 135,049 129,707 Other comprehensive income (loss), net of tax: Net unrealized holding gain (loss) on marketable securities, net $ 297 $ ( 1,405 ) $ 2,220 $ ( 4,255 ) Total comprehensive income (loss) $ ( 3,694 ) $ ( 25,225 ) $ 15,396 $ ( 52,813 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 UPWORK INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Three Months Ended June 30, 2023 Shares Amount Balances as of March 31, 2023 133,464,264 $ 13 $ 613,887 $ ( 1,162 ) $ ( 323,782 ) $ 288,956 Issuance of common stock upon exercise of stock options 50,842 — 177 — — 177 Stock-based compensation expense — — 18,733 — — 18,733 Issuance of common stock for settlement of RSUs 991,476 — — — — — Tides Foundation common stock warrant expense — — 187 — — 187 Issuance of common stock in connection with employee stock purchase plan 377,015 — 2,564 — — 2,564 Unrealized gain on marketable securities — — — 297 — 297 Net loss — — — — ( 3,991 ) ( 3,991 ) Balances as of June 30, 2023 134,883,597 $ 13 $ 635,548 $ ( 865 ) $ ( 327,773 ) $ 306,923 (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Three Months Ended June 30, 2022 Shares Amount Balances as of March 31, 2022 129,651,218 $ 13 $ 528,516 $ ( 3,378 ) $ ( 275,802 ) $ 249,349 Issuance of common stock upon exercise of stock options 147,127 — 556 — — 556 Stock-based compensation expense — — 18,990 — — 18,990 Issuance of common stock for settlement of RSUs 570,919 — — — — — Tides Foundation common stock warrant expense — — 187 — — 187 Issuance of common stock in connection with employee stock purchase plan 161,625 — 2,462 — — 2,462 Unrealized loss on marketable securities — — — ( 1,405 ) — ( 1,405 ) Net loss — — — — ( 23,820 ) ( 23,820 ) Balances as of June 30, 2022 130,530,889 $ 13 $ 550,711 $ ( 4,783 ) $ ( 299,622 ) $ 246,319 (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Six Months Ended June 30, 2023 Shares Amount Balances as of December 31, 2022 132,368,265 $ 13 $ 592,900 $ ( 3,085 ) $ ( 340,949 ) $ 248,879 Issuance of common stock upon exercise of stock options 274,093 — 935 — — 935 Stock-based compensation expense — — 38,774 — — 38,774 Issuance of common stock for settlement of RSUs 1,864,224 — — — — — Tides Foundation common stock warrant expense — — 375 — — 375 Issuance of common stock in connection with employee stock purchase plan 377,015 — 2,564 — — 2,564 Unrealized gain on marketable securities — — — 2,220 — 2,220 Net income — — — — 13,176 13,176 Balances as of June 30, 2023 134,883,597 $ 13 $ 635,548 $ ( 865 ) $ ( 327,773 ) $ 306,923 (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Deficit Six Months Ended June 30, 2022 Shares Amount Balances as of December 31, 2021 129,130,478 $ 13 $ 511,096 $ ( 528 ) $ ( 251,064 ) $ 259,517 Issuance of common stock upon exercise of stock options 271,221 — 1,044 — — 1,044 Stock-based compensation expense — — 35,734 — — 35,734 Issuance of common stock for settlement of RSUs 967,565 — — — — — Tides Foundation common stock warrant expense — — 375 — — 375 Issuance of common stock in connection with employee stock purchase plan 161,625 — 2,462 — — 2,462 Unrealized loss on marketable securities — — — ( 4,255 ) — ( 4,255 ) Net loss — — — — ( 48,558 ) ( 48,558 ) Balances as of June 30, 2022 130,530,889 $ 13 $ 550,711 $ ( 4,783 ) $ ( 299,622 ) $ 246,319 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 UPWORK INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In thousands) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 13,176 $ ( 48,558 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision for transaction losses 5,442 8,310 Depreciation 3,878 4,025 Amortization of debt issuance costs 1,177 1,481 Amortization of premium (accretion of discount) of purchases of marketable securities, net ( 6,154 ) 800 Amortization of operating lease asset 1,611 1,518 Tides Foundation common stock warrant expense 375 375 Stock-based compensation expense 38,337 35,715 Gain on early extinguishment of debt ( 38,945 ) — Changes in operating assets and liabilities: Trade and client receivables ( 6,957 ) ( 10,861 ) Prepaid expenses and other assets ( 1,464 ) ( 1,206 ) Operating lease liability ( 2,866 ) ( 2,614 ) Accounts payable ( 3,371 ) 280 Accrued expenses and other liabilities ( 5,141 ) ( 3,465 ) Deferred revenue ( 3,490 ) 2,278 Net cash used in operating activities ( 4,392 ) ( 11,922 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities ( 254,119 ) ( 231,350 ) Proceeds from maturities of marketable securities 307,410 191,607 Proceeds from sale of marketable securities 149,859 — Purchases of property and equipment ( 135 ) ( 602 ) Internal-use software and platform development costs ( 6,072 ) ( 2,824 ) Net cash provided by (used in) investing activities 196,943 ( 43,169 ) CASH FLOWS FROM FINANCING ACTIVITIES: Changes in escrow funds payable 16,197 27,632 Proceeds from exercises of stock options 935 1,044 Proceeds from employee stock purchase plan 2,564 2,462 Net cash paid for early extinguishment of debt ( 171,327 ) — Net cash provided by (used in) financing activities ( 151,631 ) 31,138 NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 40,920 ( 23,953 ) Cash, cash equivalents, and restricted cash—beginning of period 295,231 352,058 Cash, cash equivalents, and restricted cash—end of period $ 336,151 $ 328,105 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 837 $ 785 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES: Property and equipment purchased but not yet paid $ 124 $ 46 Internal-use software and platform development costs incurred but not yet paid $ 93 $ 157 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 UPWORK INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1— Description of Business 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 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 is 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 condensed consolidated financial statements refer to Upwork and its wholly owned subsidiaries. Note 2— Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, which is referred to as U.S. GAAP, and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, which is referred to as the Annual Report, filed with the SEC on February 16, 2023. The condensed consolidated balance sheet as of December 31, 2022 included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by U.S. GAAP. The condensed consolidated financial statements include the accounts of Upwork and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the financial position, results of operations, changes in stockholders’ equity and cash flows for the interim periods, but do not purport to be indicative of the results of operations or financial condition to be anticipated for the full year ending December 31, 2023. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Such estimates include, but are not limited to: the useful lives of assets; assessment of the recoverability of long-lived assets; goodwill impairment; standalone selling price of material rights and the period of time over which to defer and recognize the consideration allocated to the material rights; allowance for expected credit losses; liabilities relating to transaction losses; stock-based compensation; and accounting for income taxes. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The Company evaluates its estimates, assumptions, and judgments on an ongoing basis using historical experience and other factors and revises them when facts and circumstances dictate. 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 6 change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. Summary of Significant Accounting Policies The significant accounting policies applied in the Company’s audited consolidated financial statements, as disclosed in the Annual Report, are applied consistently in these unaudited interim condensed consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted The Company has reviewed the accounting pronouncements issued during the six months ended June 30, 2023 and concluded they were either not applicable or not expected to have a material impact on the Company’s condensed consolidated financial statements. Note 3— Revenue Disaggregation of Revenue See “Note 9 —Segment and Geographical Information” for the Company’s revenue disaggregated by type of service and geographic area. Remaining Performance Obligations As of June 30, 2023, the Company had $ 29.2 million of remaining performance obligations. The Company’s remaining performance obligations primarily consist of the transaction price that has been allocated to unexercised material rights related to the Company’s arrangements with talent subject to tiered service fees. During the three months ended June 30, 2023, the Company retired its tiered service fee structure for talent and introduced a flat fee of 10 %. This change took effect in May 2023 for new contracts and existing contracts that would have otherwise been subject to a 20 % fee under the former tiered service fee model. Contracts with a 5 % fee under the former tiered service fee model will retain that rate for those contracts through the end of 2023. With this change to the Company’s tiered service fee structure, the Company no longer allocates a portion of the transaction price to unexercised material rights. As of June 30, 2023, the Company expects to recognize $ 24.1 million over the next 12 months, with the remaining balance recognized thereafter. The remaining transaction price allocated to other performance obligations is immaterial. The Company has applied the practical expedients and exemptions and does not disclose the value of remaining performance obligations for: (i) contracts with an original expected length of one year or less; and (ii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation under the series guidance. 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: (In thousands) June 30, 2023 December 31, 2022 Trade and client receivables, net of allowance $ 66,309 $ 64,888 Contract liabilities Deferred revenue 24,079 25,075 Deferred revenue (component of other liabilities, noncurrent) 5,120 7,614 During the three and six months ended June 30, 2023, 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. 7 Revenue recognized during the three and six months ended June 30, 2023 that was included in deferred revenue as of March 31, 2023 and December 31, 2022 wa s $ 9.8 million and $ 15.2 million , respectively. Revenue recognized during the three and six months ended June 30, 2022 that was included in deferred revenue as of March 31, 2022 and December 31, 2021 was $ 8.6 million and $ 13.1 million, respectively. Note 4— Fair Value Measurements The Company defines fair value as the exchange price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance describes three levels of inputs that may be used to measure fair value: • Level I—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets; • Level II—Observable inputs other than Level I prices, such as unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on the Company’s own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation. The categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to its fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the assets or liabilities. The Company’s financial instruments that are carried at fair value consist of Level I and Level II assets as of June 30, 2023 and December 31, 2022. The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, 8 and fair value by significant investment category reported as cash and cash equivalents or marketable securities as of June 30, 2023 and December 31, 2022: (In thousands) June 30, 2023 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and Cash Equivalents Marketable Securities Cash $ 40,679 $ — $ — $ 40,679 $ 40,679 $ — Level I Money market funds 88,721 — — 88,721 88,721 — Treasury bills 214,666 28 ( 29 ) 214,665 24,706 189,959 U.S. government securities 58,411 — ( 575 ) 57,836 — 57,836 Total Level I 361,798 28 ( 604 ) 361,222 113,427 247,795 Level II Commercial paper 40,075 — — 40,075 — 40,075 Corporate bonds 10,919 6 ( 41 ) 10,884 — 10,884 Commercial deposits 15,197 — — 15,197 — 15,197 Asset-backed securities 29,790 — ( 182 ) 29,608 — 29,608 Foreign government and agency securities 2,099 — ( 1 ) 2,098 — 2,098 U.S. agency securities 16,945 — ( 41 ) 16,904 — 16,904 Total Level II 115,025 6 ( 265 ) 114,766 — 114,766 Total $ 517,502 $ 34 $ ( 869 ) $ 516,667 $ 154,106 $ 362,561 (In thousands) December 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash and Cash Equivalents Marketable Securities Cash $ 27,528 $ — $ — $ 27,528 $ 27,528 $ — Level I Money market funds 85,302 — — 85,302 85,302 — Treasury bills 172,500 13 ( 131 ) 172,382 5,096 167,286 U.S. government securities 106,167 — ( 2,025 ) 104,142 — 104,142 Total Level I 363,969 13 ( 2,156 ) 361,826 90,398 271,428 Level II Commercial paper 120,360 — — 120,360 8,038 112,322 Corporate bonds 85,639 3 ( 639 ) 85,003 3,420 81,583 Commercial deposits 28,945 — — 28,945 — 28,945 Asset-backed securities 33,261 31 ( 306 ) 32,986 — 32,986 Foreign government and agency securities (1) 8,176 — ( 10 ) 8,166 — 8,166 U.S. agency securities (1) 21,785 38 ( 23 ) 21,800 — 21,800 Total Level II 298,166 72 ( 978 ) 297,260 11,458 285,802 Total $ 689,663 $ 85 $ ( 3,134 ) $ 686,614 $ 129,384 $ 557,230 (1) Prior period has been reclassified to conform to the current period presentation as of June 30, 2023. 9 Unrealized Investment Losses The following tables summarize, for all debt securities classified as available for sale in an unrealized loss position as of June 30, 2023 and December 31, 2022, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. (In thousands) Less Than 12 Months 12 Months or Longer Total Duration of unrealized losses June 30, 2023 Fair Value Unrealized loss Fair Value Unrealized loss Fair Value Unrealized loss Commercial paper $ 999 $ — $ — $ — $ 999 $ — Treasury bills 51,964 ( 29 ) — — 51,964 ( 29 ) U.S. government securities 13,352 ( 86 ) 44,483 ( 489 ) 57,835 ( 575 ) Corporate bonds 6,780 ( 39 ) 316 ( 2 ) 7,096 ( 41 ) Asset-backed securities 21,398 ( 109 ) 8,134 ( 73 ) 29,532 ( 182 ) Foreign government and agency securities 2,098 ( 1 ) — — 2,098 ( 1 ) U.S. agency securities 16,904 ( 41 ) — — 16,904 ( 41 ) Total $ 113,495 $ ( 305 ) $ 52,933 $ ( 564 ) $ 166,428 $ ( 869 ) (In thousands) Less Than 12 Months 12 Months or Longer Total Duration of unrealized losses December 31, 2022 Fair Value Unrealized loss Fair Value Unrealized loss Fair Value Unrealized loss Treasury bills $ 132,995 $ ( 131 ) $ — $ — $ 132,995 $ ( 131 ) U.S. government securities 21,214 ( 63 ) 82,927 ( 1,963 ) 104,141 ( 2,026 ) Corporate bonds 18,274 ( 120 ) 58,235 ( 519 ) 76,509 ( 639 ) Asset-backed securities 23,515 ( 285 ) 1,707 ( 20 ) 25,222 ( 305 ) Foreign government and agency securities (1) 5,576 ( 8 ) 2,591 ( 2 ) 8,167 ( 10 ) U.S. agency securities (1) 9,478 ( 23 ) — — 9,478 ( 23 ) Total $ 211,052 $ ( 630 ) $ 145,460 $ ( 2,504 ) $ 356,512 $ ( 3,134 ) (1) Prior period has been reclassified to conform to the current period presentation as of June 30, 2023. For available-for-sale marketable debt securities with unrealized loss positions, the Company does not intend to sell these securities, nor does it anticipate that it will need to or be required to sell the securities. As of June 30, 2023 and December 31, 2022, the decline in fair value of these securities was due to increases in interest rates and not due to credit-related factors. As of June 30, 2023 and 2022, the Company considered any decreases in market value to be temporary in nature and did not consider any of the Company’s marketable securities to be impaired. The Company did not record any impairment charges with respect to its marketable securities during each of the three and six months ended June 30, 2023 and 2022. In March 2023, the Company sold $ 138.2 million of available-for-sale marketable securities to enable the repurchase of a portion of the Company’s outstanding 0.25 % convertible senior notes due 2026, which are referred to as the Notes. For additional information regarding the Notes, refer to “Note 7—Debt.” Note 5— Balance Sheet Components Cash and Cash Equivalents, Restricted Cash, and Funds Held In Escrow, Including Funds In Transit The following table reconciles cash and cash equivalents, restricted cash, and funds held in escrow that are restricted as reported in the condensed consolidated balance sheets as of June 30, 2023 and 10 December 31, 2022 to the total of the same amounts shown in the condensed consolidated statement of cash flows for the six months ended June 30, 2023: (In thousands) June 30, 2023 December 31, 2022 Cash and cash equivalents $ 154,106 $ 129,384 Restricted cash 4,390 4,390 Funds held in escrow, including funds in transit 177,655 161,457 Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statement of cash flows $ 336,151 $ 295,231 Property and Equipment, Net Property and equipment, net consisted of the following: (In thousands) June 30, 2023 December 31, 2022 Internal-use software and platform development $ 39,699 $ 33,273 Leasehold improvements 11,644 11,644 Computer equipment and software 6,640 6,514 Office furniture and fixtures 3,475 3,475 Total property and equipment 61,458 54,906 Less: accumulated depreciation ( 36,591 ) ( 32,843 ) Property and equipment, net $ 24,867 $ 22,063 For the three months ended June 30, 2023 and 2022, depreciation expense related to property and equipment was $ 0.8 million and $ 0.8 million, respectively. For the six months ended June 30, 2023 and 2022, depreciation expense related to property and equipment was $ 1.5 million and $ 1.6 million, respectively. For the three months ended June 30, 2023 and 2022, the Company capitalized $ 3.6 million and $ 1.7 million of internal-use software and platform development costs, respectively. For the six months ended June 30, 2023 and 2022, the Company capitalized $ 6.4 million and $ 2.9 million of internal-use software and platform development costs, respectively. For the three months ended June 30, 2023 and 2022, amortization expense related to the capitalized internal-use software and platform development costs was $ 1.1 million and $ 1.2 million, respectively. For the six months ended June 30, 2023 and 2022, amortization expense related to the capitalized internal-use software and platform development costs was $ 2.3 million and $ 2.4 million, respectively. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: (In thousands) June 30, 2023 December 31, 2022 Accrued compensation and related benefits $ 11,295 $ 17,239 Accrued indirect taxes 13,196 14,102 Accrued vendor expenses 11,545 8,858 Operating lease liability, current 6,593 6,502 Accrued payment processing fees 2,494 2,425 Accrued talent costs 1,856 2,352 Other 1,838 2,133 Total accrued expenses and other current liabilities $ 48,817 $ 53,611 11 Note 6— Commitments and Contingencies Letters of Credit In conjunction with the Company’s operating lease agreements, as of both June 30, 2023 and December 31, 2022, the Company had irrevocable letters of credit outstanding in the aggregate amount of $ 0.8 million. 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 June 30, 2023 and December 31, 2022. Contingencies The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Potential contingencies may include various claims and litigation or non-income tax matters that arise from time to time in the normal course of business. Due to uncertainties inherent in such contingencies, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability or damages. Any claims, litigation, or other contingencies could have an adverse effect on the Company’s business, financial position, results of operations, or cash flows in or following the period that claims, litigation, or other contingencies are resolved. As of June 30, 2023 and December 31, 2022, the Company was not a party to any material legal proceedings or claims, nor is the Company aware of any pending or threatened litigation or claims, including non-income tax matters, that could reasonably be expected to have a material adverse effect on its business, operating results, cash flows, or financial condition. Accordingly, the amounts accrued for contingencies for which the Company believes a loss is probable were not material as of June 30, 2023 and December 31, 2022. Indemnification The Company has indemnification agreements with its officers, directors, and certain key employees to indemnify them while they are serving in good faith in their respective positions. In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to clients, business partners, vendors, and other parties, including, but not limited to, losses arising out of the Company’s breach of such agreements, claims related to potential data or information security breaches, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from 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 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. 12 Note 7— Debt The following table presents the carrying value of the Company’s debt obligations as of June 30, 2023 and December 31, 2022: (In thousands) June 30, 2023 December 31, 2022 Convertible senior notes $ 360,998 $ 575,000 Total debt 360,998 575,000 Less: unamortized debt issuance costs ( 5,832 ) ( 10,739 ) Debt, noncurrent $ 355,166 $ 564,261 Weighted-average interest rate 0.76 % 0.76 % Convertible Senior Notes Due 2026 In August 2021, the Company issued, at par value, $ 575.0 million aggregate principal amount of the Notes. 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 between the Company and Computershare Trust Company, National Association (as successor in interest to Wells Fargo Bank, National Association), as trustee, which is referred to as the Indenture. 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. In March 2023, the Company entered into separate, privately negotiated repurchase agreements with a limited number of institutional holders of the Notes to repurchase for cash an aggregate of $ 214.0 million principal amount of the Notes, which are collectively referred to as the Repurchases. The Company paid $ 170.8 million in cash to consummate the Repurchases. As a result, during the six months ended June 30, 2023, the Company recognized a gain on the early extinguishment of debt of $ 38.9 million, which is net of $ 3.7 million related to the pro-rata write-off of unamortized issuance costs associated with the sale of the Notes in August 2021, and $ 0.6 million of other fees incurred to effect the Repurchases. The resulting gain on early extinguishment of debt is included in other income, net in the Company’s condensed consolidated statement of operations and comprehensive income (loss). As of June 30, 2023, $ 361.0 million aggregate principal amount of the Notes remain outstanding. The Notes are senior, unsecured obligations of the Company and bear interest at a rate of 0.25 % per year. Interest will accrue from August 10, 2021 and is 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. Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount at the option of the holder (i) 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, and (ii) 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 as follows: • 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 13 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; and • 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 three months ended June 30, 2023, interest expense was $ 0.2 million and amortization of the issuance costs was $ 0.5 million related to the Notes. For the three months ended June 30, 2022, interest expense was $ 0.4 million and amortization of the issuance costs was $ 0.7 million related to the Notes. For the six months ended June 30, 2023, interest expense was $ 0.6 million and amortization of the issuance costs was $ 1.2 million related to the Notes. For the six months ended June 30, 2022, interest expense was $ 0.7 million and amortization of the issuance costs was $ 1.5 million related to the Notes. As of June 30, 2023, the if-converted value of the Notes did not exceed the outstanding principal amount. As of June 30, 2023, the total estimated fair value of the Notes was $ 291.1 million and was determined based on a market approach using actual bids and offers of the Notes in an over-the-counter market on 14 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.” Capped Calls 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. The Capped Calls remain in effect notwithstanding the Repurchases. 15 Note 8— Net Loss per Share The following table sets forth the computation of the Company’s basic and diluted net loss per share for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (In thousands, except share and per share data) 2023 2022 2023 2022 Numerator: Basic: net income (loss) $ ( 3,991 ) $ ( 23,820 ) $ 13,176 $ ( 48,558 ) Gain on early extinguishment of debt, net of tax — — ( 38,525 ) — Interest expense related to convertible senior notes, net of tax — — 638 — Diluted $ ( 3,991 ) $ ( 23,820 ) $ ( 24,711 ) $ ( 48,558 ) Denominator: Weighted-average shares used to compute net income (loss) per share, basic and diluted Basic 134,141,525 130,060,694 133,492,087 129,707,197 Common stock issuable in connection with convertible senior notes — — 1,556,641 — Diluted 134,141,525 130,060,694 135,048,728 129,707,197 Net income (loss) per share: Basic $ ( 0.03 ) $ ( 0.18 ) $ 0.10 $ ( 0.37 ) Diluted $ ( 0.03 ) $ ( 0.18 ) $ ( 0.18 ) $ ( 0.37 ) The following potentially dilutive shares were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive: As of June 30, 2023 2022 Options to purchase common stock 3,577,554 3,992,597 Common stock issuable upon exercise of common stock warrants 350,000 350,000 Common stock issuable upon vesting of restricted stock units and performance stock units 10,332,782 7,695,246 Common stock issuable in connection with employee stock purchase plan 1,821,635 1,149,219 Common stock issuable in connection with convertible senior notes 5,463,045 8,701,935 Total 21,545,016 21,888,997 Note 9— Segment and Geographical Information The Company operates as one operating and reportable segment for purposes of allocating resources and evaluating financial performance. 16 The following table sets forth total revenue by type of service for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Marketplace Basic, Plus, Client Marketplace (1) and other $ 142,308 $ 132,029 $ 278,984 $ 250,696 Enterprise 14,323 12,296 25,735 23,054 Managed services 11,980 12,573 24,750 24,485 Total revenue $ 168,611 $ 156,898 $ 329,469 $ 298,235 (1) In April 2022, the Company combined its Upwork Basic and Upwork Plus client offerings into its Client Marketplace offering. In April 2023, the Company introduced a contract initiation fee for clients on the Client Marketplace offering—up to $ 4.95 per contract. 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 periods presented: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Talent United States $ 21,983 $ 21,916 $ 44,443 $ 42,679 India 12,041 12,006 23,469 23,427 Philippines 10,818 10,051 21,184 19,687 Rest of world (1) 43,655 41,746 85,057 82,569 Total talent revenue 88,497 85,719 174,153 168,362 Clients United States 59,423 52,633 114,874 96,472 Rest of world (1) 20,691 18,546 40,442 33,401 Total clients revenue 80,114 71,179 155,316 129,873 Total revenue $ 168,611 $ 156,898 $ 329,469 $ 298,235 (1) During the three and six months ended June 30, 2023 and 2022, no single country included in the Rest of world category had revenue that exceeded 10% of Total talent revenue, Total clients revenue, or Total revenue. Substantially all of the Company’s long-lived assets were located in the United States as of June 30, 2023 and December 31, 2022. 17