Upstart Holdings Inc

Previous wording

Out of the total principal of loans transacted on our marketplace during the three months ended March 31, 2024, 44% were purchased by institutional investors, 29% were retained by our lending partners, and 27% were held on our balance sheet. We retain loans on our balance sheet to fill gaps in investor demand, to aid in price discovery, and to hold loans on our balance sheet for research and development purposes (“R&D Loans”), including to test and evaluate our AI models for these loans. R&D Loans are primarily our auto refinance and auto retail loan products, personal loan products issued to new categories of borrowers, and other new loan products. R&D Loans are not yet part of our established capital markets programs or other loan funding programs with institutional investors. The remainder of loans on our balance sheet represent core personal loans, which Upstart would sell to institutional investors.

Current wording

Out of the total principal of loans transacted on our marketplace during the six months ended June 30, 2024, 57% were purchased by institutional investors, 27% were retained by our lending partners, and 16% were held on our balance sheet. We retain loans on our balance sheet to fill gaps in investor demand, to aid in price discovery, and to hold loans on our balance sheet for research and development purposes (“R&D Loans”), including to test and evaluate our AI models for these loans. R&D Loans are primarily our auto refinance and auto retail loan products, personal loan products issued to new categories of borrowers, and other new loan products, including small dollar loans and HELOCs. R&D Loans are not yet part of our fully-established capital markets programs with institutional investors and we continue our work on developing such programs. The remainder of loans on our balance sheet represent core personal loans, which Upstart would sell to institutional investors.

Previous wording

Lending is a cyclical industry, and we believe it is important to take a long-term view of credit performance. An equal investment in all vintages of Upstart-powered core personal loans that originated in the first quarter of 2018 through the fourth quarter of 2023 is currently expected to deliver returns in line with a blended target of 9.1%. At a more granular level, all quarterly vintages of core personal loans that originated in 2018 through the fourth quarter of 2020 are currently forecasted to meet or exceed the target returns set at the time of loan origination. The quarterly vintages of core personal loans that originated in the first quarter 2021 through the third quarter 2023 are currently forecasted to underperform relative to their target returns. The core personal loans that originated in the fourth quarter of 2023 or later are currently forecasted to deliver returns in line with target yields. This reversion in performance was driven by a combination of factors including increased conservatism in underwriting and the relative stabilization of macroeconomic conditions, as reflected in UMI. Refer to section “Factors Affecting Our Performance - Impact of Macroeconomic Environment” for additional details.

Current wording

Lending is a cyclical industry, and we believe it is important to take a long-term view of credit performance. An equal investment in all vintages of Upstart-powered core personal loans that originated in the first quarter of 2018 through the first quarter of 2024 is currently expected to deliver returns in line with a blended target of 9.3%. At a more granular level, all quarterly vintages of core personal loans that originated in 2018 through the fourth quarter of 2020 are currently forecasted to meet or exceed the target returns set at the time of loan origination. The quarterly vintages of core personal loans that originated in the first quarter 2021 through the third quarter 2023 are currently forecasted to underperform relative to their target returns. The core personal loans that originated in the fourth quarter of 2023 or later are currently forecasted to deliver returns in line with target yields. This reversion in performance was driven by a combination of factors including increased conservatism in underwriting and the relative stabilization of macroeconomic conditions, as reflected in UMI. Refer to section “Factors Affecting Our Performance - Impact of Macroeconomic Environment” for additional details.

Previous wording

We measure credit performance of R&D loans, which are a substantial part of the loan portfolio held on our balance sheet (refer to section “Liquidity and Capital Resources - Composition of Retained Loan Portfolio”), using an approach similar to the core personal loans held on our balance sheet. Variances between targeted and actual returns for these loans are expected to be higher, as the underlying risk models are in the early phases of their development cycle. The initial target returns for these products are also generally lower than comparative market benchmarks. The combination of these factors decreases the value of R&D loans on our balance sheet, which negatively impacts our overall financial results. However, this is a required part of our product development cycle, and should be considered alongside other product development costs, such as data science and engineering. These costs collectively are managed as part of overall investment in product development. As our R&D models improve, we expect the difference between target and delivered returns will decrease and converge to market returns. This will allow us to launch these products for our lending partners and institutional investors, at which point they become part of our core product offerings.

Current wording

We measure credit performance of R&D loans, which are a substantial part of the loan portfolio held on our balance sheet (refer to section “Liquidity and Capital Resources - Composition of Retained Loan Portfolio”), using an approach similar to the core personal loans held on our balance sheet. Variances between targeted and actual returns for these loans are expected to be higher, as the underlying risk models are in the earlier phases of their development cycle in comparison to core personal loans. The initial target returns for these products are also generally lower than comparative market benchmarks. The combination of these factors decreases the value of R&D loans on our balance sheet, which negatively impacts our overall financial results. However, this is a required part of our product development cycle, and should be considered alongside other product development costs, such as data science and engineering. These costs collectively are managed as part of overall investment in product development. As our R&D models improve, we expect the difference between target and delivered returns will decrease and converge to market returns. This will allow us to launch these products for our lending partners and institutional investors, at which point they become part of our core product offerings.

Previous wording

Loan funding provided by institutional investors started to become constrained in 2022 and has remained constrained, largely due to concerns about the macroeconomic environment. In response to inflationary pressure, the U.S. Federal Reserve has raised, and may continue to raise, interest rates, leading to more expensive loan offers across borrower categories. At the same time, macroeconomic uncertainty had generally made institutional investors more cautious and caused them to reduce the amount of capital available to fund Upstart-powered loans.

Current wording

Loan funding provided by institutional investors started to become constrained in 2022 and has remained constrained, largely due to concerns about the macroeconomic environment. In response to inflationary pressure, the U.S. Federal Reserve has raised interest rates, leading to more expensive loan offers across borrower categories. At the same time, macroeconomic uncertainty has generally made institutional investors more cautious and caused them to reduce the amount of capital available to fund Upstart-powered loans.

Previous wording

In response to this challenging macroeconomic environment where many lenders and credit investors have significantly reduced or paused investments in Upstart-powered loans, we announced reductions in workforce in January 2023 (“January 2023 Plan”) that resulted in the termination of approximately 20% of our workforce. These steps were designed to reduce operating costs, streamline operations and return Upstart to profitability in the future. Refer to “Note 15. Reorganization Expenses” for more information. Further disruption in financial markets could impair our lending partners and result in further constrained funding, which would adversely impact our business, financial condition and operating results.

Current wording

In response to this challenging macroeconomic environment where many lenders and credit investors have significantly reduced or paused investments in Upstart-powered loans, we announced reductions in workforce in January 2023 (“January 2023 Plan”) that resulted in the termination of approximately 20% of our workforce. To further decrease operating costs, streamline operations, and return Upstart to profitability in the future, during the three months ended June 30, 2024, the Company implemented an additional series of initiatives which reduced the Company’s workforce by approximately 10%. Refer to “Note 15. Reorganization Expenses” for more information. Further disruption in financial markets could impair our lending partners and result in further constrained funding, which would adversely impact our business, financial condition and operating results.

Previous wording

In order to create greater stability for our business, beginning in 2023 we secured several committed capital and co-investment arrangements with institutional investors and other third-parties that contribute loan funding over longer durations. We continue our work on expanding our loan funding capacity and in the interim period, we have utilized and may continue to utilize our balance sheet to support loan funding. While our goal remains to operate as a capital-light marketplace for credit, we will continue to leverage our balance sheet in the short term as we evaluate opportunities to implementa committed capital and co-investment structures.

Current wording

In order to create greater stability for our business, beginning in 2023, we secured several committed capital and co-investment arrangements with institutional investors and other third-parties that contribute loan funding over longer durations. We continue our work on expanding our loan funding capacity and in the interim period, we have utilized and may continue to utilize our balance sheet to support loan funding. While our goal remains to operate as a capital-light marketplace for credit, we will continue to leverage our balance sheet in the short term as we evaluate opportunities to implement committed capital and co-investment structures.

Previous wording

Our credit decisioning process takes into account macroeconomic conditions, such as unemployment levels and personal savings rates, that we receive from third party sources. To respond to macroeconomic changes and provide relevant and up-to-date information to our lending partners, we introduced a new metric, UMI, in 2023. UMI is designed to quantify the level of underlying macroeconomic risk, specific to our borrower base, relative to a benign credit environment. A UMI of 1.0 reflects loan losses at this baseline rate. We subsequently launched an update to UMI which removes seasonal patterns to better describe the underlying macroeconomic effects. As of March 31, 2024, UMI was measured at approximately 1.60, meaning that current macroeconomic conditions contributed an incremental risk of approximately 60% to the repayment performance of an Upstart-powered loan, compared to the baseline.

Current wording

Our credit decisioning process takes into account macroeconomic conditions data, such as unemployment levels and personal savings rates, that we receive from third-party sources. To respond to macroeconomic changes and provide relevant and up-to-date information to our lending partners, we introduced a new metric, UMI, in 2023. UMI is designed to quantify the level of underlying macroeconomic risk, specific to our borrower base, relative to a benign credit environment. A UMI of 1.0 reflects loan losses at this baseline rate. We subsequently launched an update to UMI which removes seasonal patterns to better describe the underlying macroeconomic effects. As of June 30, 2024, UMI was measured at approximately 1.49, meaning that current macroeconomic conditions contributed an incremental risk of approximately 49% to the repayment performance of an Upstart-powered loan, compared to the baseline.

Previous wording

We believe that significant growth opportunities exist to apply our evolving AI technology to additional segments of credit, and we continue to invest in research and development of our products. We introduced a new offering of personal loans for borrowers interested in small dollar loans in 2022 and launched home equity lines of credit (“HELOCs”) in the third quarter of 2023. We may incur expenses to support the launch of new products and fund early loan originations. Monetization prospects for new products are uncertain, and costs associated with integrating, developing and marketing new products might not be recovered, which could weigh on our top-line growth and profitability.

Current wording

We believe that significant growth opportunities exist to apply our evolving AI technology to additional segments of credit, and we continue to invest in research and development of our products. We introduced a new offering of personal loans for borrowers interested in small dollar loans in 2022, launched the HELOC product in the third quarter of 2023, and launched auto secured personal loans in the second quarter of 2024. We may incur expenses to support the launch of new products and fund early loan originations. Monetization prospects for new products are uncertain, and costs associated with integrating, developing and marketing new products might not be recovered, which could weigh on our top-line growth and profitability.

Previous wording

We define Transaction Volume, Dollars as the total principal of loan originations (or committed amounts for HELOCs) facilitated on our marketplace during the periods presented. We define Transaction Volume, Number of Loans as the number of loan originations (or commitments issued for HELOCs) facilitated on our marketplace during the periods presented. Increases in Transaction Volume are dependent on our loan funding programs having sufficient access to capital. Decreases in the availability of funding due to factors such as volatility in the capital markets and macroeconomic conditions will generally cause a decline in Transaction Volume. Transaction Volume is driven by improvements in our AI models and technology, including our ability to streamline and automate the loan application and origination process. Transaction Volume can also be driven by borrower acceptance rates and their sensitivity to the interest rates offered through our platform. We believe these metrics are good proxies for our overall scale and reach as a marketplace. Transaction Volume, Dollars and Transaction Volume, Number of loans increased by 13% and 42%, respectively, in the three months ended March 31, 2024 compared to the same period of 2023. This increase was driven by an increase in funding availability as we have secured committed capital and other loan funding arrangements with institutional investors.

Current wording

We define Transaction Volume, Dollars as the total principal of loan originations (or committed amounts for HELOCs) facilitated on our marketplace during the periods presented. We define Transaction Volume, Number of Loans as the number of loan originations (or commitments issued for HELOCs) facilitated on our marketplace during the periods presented. Increases in Transaction Volume are dependent on our loan funding programs having sufficient access to capital. Decreases in the availability of funding due to factors such as volatility in the capital markets and macroeconomic conditions will generally cause a decline in Transaction Volume. Transaction Volume is driven by improvements in our AI models and technology, including our ability to streamline and automate the loan application and origination process. Transaction Volume can also be driven by several other factors, including borrower acceptance rates and their sensitivity to the interest rates offered through our platform. We believe these metrics are good proxies for our overall scale and reach as a marketplace. Transaction Volume, Dollars decreased 6% in the three months ended June 30, 2024 compared to the same period of 2023, and increased 3% in the six months ended June 30, 2024 compared to the same period of 2023. Transaction Volume, Number of Loans increased 31% and 36% in the three and six months ended June 30, 2024 compared to the same period of 2023, respectively. These increases were primarily due to an increased portion of qualified borrowers obtaining small dollar loans, which, in its turn, decreased the average size of loans originated while keeping total Transaction Volume, Dollars relatively flat.

Previous wording

We define Conversion Rate as the Transaction Volume, Number of Loans in a period divided by the number of rate inquiries received that we estimate to be legitimate, which we record when a borrower requests a loan offer on our platform. We track this metric to understand the impact of improvements to the efficiency of our borrower funnel on our overall growth. Historically, our Conversion Rate has benefited from improvements to our technology, which have made our evaluation of risk more accurate and our verification process more automated, or from the addition of lending partners that have made our offers more competitive. However, our Conversion Rate can be impacted by a variety of internal factors such as changes in the amount of origination fees that we charge or changes in the rate of returns we target for our lending partners and institutional investors. External factors, including shifts in macroeconomic conditions, also impact our Conversion Rate. For example, as the U.S. Federal Reserve raises interest rates, the average interest rates charged to borrowers for Upstart-powered loans also increase, which results in decreases to our Conversion Rate. Our ability to continue to improve our Conversion Rate depends in part on our ability to continue to improve our AI models and Percentage of Loans Fully Automated and the mix of marketing channels in any given period. Our Conversion Rate increased to 14% in the three months ended March 31, 2024 from 8.2% in the same period of 2023 primarily driven by an increase in our marketing efforts, new product initiatives, and a higher portion of repeat borrowers on our platform.

Current wording

We define Conversion Rate as the Transaction Volume, Number of Loans in a period divided by the number of rate inquiries received that we estimate to be legitimate, which we record when a borrower requests a loan offer on our platform. We track this metric to understand the impact of improvements to the efficiency of our borrower funnel on our overall growth. Historically, our Conversion Rate has benefited from improvements to our technology, which have made our evaluation of risk more accurate and our verification process more automated, or from the addition of lending partners that have made our offers more competitive. However, our Conversion Rate can be impacted by a variety of internal factors such as changes in the amount of origination fees that we charge or changes in the rate of returns we target for our lending partners and institutional investors. External factors, including shifts in macroeconomic conditions, also impact our Conversion Rate. For example, as the U.S. Federal Reserve has raised interest rates, the average interest rates charged to borrowers for Upstart-powered loans also increased, which resulted in decreases to our Conversion Rate. Our ability to continue to improve our Conversion Rate depends in part on our ability to continue to improve our AI models and Percentage of Loans Fully Automated and the mix of marketing channels in any given period. Our Conversion Rate increased to 15.2% and 14.6% in the three and six months ended June 30, 2024, respectively, from 9.4% and 8.8% in the same periods of 2023, primarily driven by an increase in our marketing efforts and optimization of our acquisition channel for new personal loan and small dollar loan borrowers as well as new product initiatives.

Previous wording

A driver of our Contribution Margin and operating efficiency is the Percentage of Loans Fully Automated, which is defined as the total number of loans in a given period originated end-to-end (from initial rate request to final funding for personal loans and small dollar loans and from initial rate request to signing of the loan agreement for auto loans) with no human involvement required divided by the Transaction Volume, Number of Loans in the same period. We have been successful in increasing the level of loan automation on the platform over the past few years while simultaneously holding fraud rates constant and at very low levels. We believe our growth over the last several years has been driven in part by our ability to rapidly streamline and automate the loan application and origination process on our platform. We expect growth of the percentage of loans fully automated to subside in the near term. However, the expansion of our loan offerings may cause it to fluctuate from period to period depending on the loan offering mix and other external factors. Our Percentage of Loans Fully Automated increased to 90% in the three months ended March 31, 2024 from 84% in the same period of 2023, driven primarily by increasing the accuracy of our models, by eliminating previously manual processes, and by an increased portion of repeat borrowers on our platform.

Current wording

A driver of our Contribution Margin and operating efficiency is the Percentage of Loans Fully Automated, which is defined as the total number of loans in a given period originated end-to-end (from initial rate request to final funding for personal loans and small dollar loans and from initial rate request to signing of the loan agreement for auto loans) with no human involvement required divided by the Transaction Volume, Number of Loans in the same period. We have been successful in increasing the level of loan automation on the platform over the past few years while simultaneously holding fraud rates constant and at very low levels. We believe our growth over the last several years has been driven in part by our ability to rapidly streamline and automate the loan application and origination process on our platform. We expect growth of the Percentage of Loans Fully Automated to subside in the near term. However, as we expand our loan offerings, this percentage may fluctuate from period to period depending on the loan offering mix and other external factors. Our Percentage of Loans Fully Automated increased to 91% and 90% in the three and six months ended June 30, 2024, respectively, from 87% and 86% in the same periods of 2023, driven primarily by increasing the accuracy of our models and by eliminating previously manual processes.

Previous wording

(1)Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities. These costs do not include reorganization expenses associated with the January 2023 Plan.

Current wording

(1)Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities. These costs do not include reorganization expenses.

Previous wording

(2)Borrower verification and servicing costs consist of payroll and other personnel-related expenses for personnel engaged in loan onboarding, verification and servicing, as well as servicing system costs. It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans. These costs do not include reorganization expenses associated with the January 2023 Plan.

Current wording

(2)Borrower verification and servicing costs consist of payroll and other personnel-related expenses for personnel engaged in loan onboarding, verification and servicing, as well as servicing system costs. It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans. These costs do not include reorganization expenses.

Previous wording

We calculate Adjusted EBITDA as net loss adjusted to exclude stock-based compensation expense and certain payroll tax expenses, depreciation and amortization, expense on convertible notes, provision for income taxes, and reorganization expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenue. Adjusted EBITDA and Adjusted EBITDA Margin includes interest expense from corporate debt and warehouse credit facilities which is incurred in the course of earning corresponding interest income. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net loss to Adjusted EBITDA and Adjusted EBITDA Margin.

Current wording

We calculate Adjusted EBITDA as net income (loss) adjusted to exclude stock-based compensation expense and certain payroll tax expenses, depreciation and amortization, expense on convertible notes, provision for income taxes, and reorganization expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenue. Adjusted EBITDA and Adjusted EBITDA Margin includes interest expense from corporate debt and warehouse credit facilities which is incurred in the course of earning corresponding interest income. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDA Margin.

Previous wording

We define Adjusted Net Loss as net loss exclusive of stock-based compensation expense and certain payroll tax expenses as well as certain items that are not related to core business and ongoing operations, such as reorganization expenses. Adjusted Net Loss Per Share is calculated by dividing Adjusted Net Loss Per Share by the weighted-average common shares outstanding. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net loss to Adjusted Net Loss and Adjusted Net Loss per Share.

Current wording

We define Adjusted Net Income (Loss) as net income (loss) exclusive of stock-based compensation expense and certain payroll tax expenses as well as certain items that are not related to core business and ongoing operations, such as reorganization expenses. Adjusted Net Income (Loss) Per Share is calculated by dividing Adjusted Net Income (Loss) Per Share by the weighted-average common shares outstanding. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income (loss) to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share.

Previous wording

Interest income, interest expense, and fair value adjustments, net is comprised of interest income, interest expense and net changes in the fair value of financial instruments held on our condensed consolidated balance sheets as part of our ongoing operating activities, excluding loan servicing assets and liabilities. Interest income, interest expense, and fair value adjustments, net also includes realized gain (loss) on the sale of loans. Interest income, interest expense, and fair value adjustments, net can fluctuate based on the fair value of financial instruments held on our condensed consolidated balance sheets. This amount has historically been a small percentage of our total revenue, and we do not manage our business with a focus on growing this component of revenue.

Current wording

Interest income, interest expense, and fair value adjustments, net is comprised of interest income, interest expense and net changes in the fair value of financial instruments held on our condensed consolidated balance sheets as part of our ongoing operating activities, excluding loan servicing assets and liabilities. Interest income, interest expense, and fair value adjustments, net also includes realized gain or loss on the sale of loans. Interest income, interest expense, and fair value adjustments, net can fluctuate based on the fair value of financial instruments held on our condensed consolidated balance sheets. This amount has historically been a small percentage of our total revenue, and we do not manage our business with a focus on growing this component of revenue.

Previous wording

In the three months ended March 31, 2023 and 2024, other income, net primarily consists of dividend income earned by the Company on its unrestricted cash balances in addition to coupon interest expense and amortization of the debt discount on our convertible notes.

Current wording

In the six months ended June 30, 2023 and 2024, other income, net primarily consists of dividend income earned by the Company on its unrestricted cash balances in addition to coupon interest expense and amortization of the debt discount on our convertible notes.

Previous wording

Revenue from fees, net increased $20.9 million, or 18%, in the three months ended March 31, 2024, compared to the same period in 2023, which included an increase of $26.2 million in revenue from platform and referral fees, net and a decrease of $5.3 million in servicing fees, net. The increase of the platform and referral fees, net was primarily driven by a 13% increase in the Transaction Volume, Dollars from $997,447 in the three months ended March 31, 2023 to $1,130,799 in the same period in 2024, as well as an increase in prices of our services. The decrease in servicing fees was primarily due to a decrease in outstanding principal of serviced loans, as well as a decrease in net gain related to loan servicing rights upon loan sales.

Current wording

Revenue from fees, net increased $7.8 million, or 3%, in the six months ended June 30, 2024, compared to the same period in 2023, which included an increase of $19.0 million in revenue from platform and referral fees, net and a decrease of $11.3 million in servicing fees, net. The increase of the platform and referral fees, net was primarily driven by a 3% increase in the Transaction Volume, Dollars of Loans from $2,173.2 million in the six months ended June 30, 2023 to $2,240.5 million in the same period in 2024, as well as an increase in prices of our services. The decrease in servicing fees was primarily due to a decrease in outstanding principal of serviced loans, as well as a decrease in net gain related to loan servicing rights upon loan sales.

Previous wording

Interest income, interest expense, and fair value adjustments, net increased $3.9 million, or 28% in the three months ended March 31, 2024, compared to the same period in 2023. The increase was driven by a $5.9 million increase in interest income and a $1.7 million decrease in unfavorable fair value adjustments, partially offset by $3.6 million increase in interest expense. The increase in interest income resulted from $8.6 million of interest income recognized by consolidated securitization entities, which was partially offset by a $2.8 million decrease in interest income recognized by operating entities, consistent with the decrease in outstanding principal of loans held on the condensed consolidated balance sheet excluding those in the consolidated securitization entities. The decrease in unfavorable fair value adjustments is primarily attributable to a $15.0 million decrease in unrealized loss and loan charge-offs and a $0.7 million decrease in realized loss on loan sales, partially offset by a $14.0 million fair value loss on beneficial interests during the three months ended March 31, 2024 compared to the same period in 2023. These increases were partially offset by a $3.6 million increase in interest expense, including $2.8 million recognized by consolidated securitization entities that is payable to securitization note holders.

Current wording

Interest income, interest expense, and fair value adjustments, net increased $5.0 million, or 63% in the three months ended June 30, 2024, compared to the same period in 2023. The increase was driven by a $19.0 million increase in interest income, partially offset by a $7.2 million increase in interest expense and a $6.8 million increase in unfavorable fair value adjustments. The increase in interest income resulted from a $11.3 million increase in interest income recognized by operating entities and a $7.7 million of interest income recognized by consolidated securitization entities, consistent with an increase in the average outstanding principal of loans held on the condensed consolidated balance sheet during the period. The increase was partially offset by an increase in interest expense due to an increase in average borrowings during the period, including payable to securitization noteholders, compared to the same period in 2023, including $2.5 million of interest expense recognized by consolidated securitization entities. The increase in unfavorable fair value adjustments is primarily attributable to a $7.8 million increase in unrealized loss and loan charge-offs and a $5.9 million increase in fair value loss on beneficial interests, partially offset by a $6.9 million decrease in realized loss on loan sales during the three months ended June 30, 2024 compared to the same period in 2023.

Previous wording

Sales and marketing expenses increased by $3.7 million, or 12%, in the three months ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to a $5.1 million increase in advertising and other traffic acquisition cost, offset by a $1.2 million decrease in payroll and other personnel-related expenses and a $0.2 million decrease in marketing operation expenses due to a decrease in headcount. As a percentage of total revenue, sales and marketing expenses decreased from 31% to 28%.

Current wording

Sales and marketing expenses increased by $12.8 million, or 23%, in the six months ended June 30, 2024 compared to the same period in 2023. The increase was primarily due to a $9.3 million increase in advertising and other traffic acquisition cost and a $3.6 million increase in payroll and other-personnel related expenses, offset by a $0.2 million decrease in marketing operation expense. As a percentage of total revenue, sales and marketing expenses increased from 23% to 27%.

Previous wording

Customer operations expenses decreased by $1.2 million, or 3%, in the three months ended March 31, 2024, compared to the same period in 2023. The decrease was primarily due to a $6.7 million decrease in payroll and other personnel-related expenses due to a decrease in headcount, partially offset by a $4.3 million increase in servicing expenses and a $1.2 million removal of an operational contingency reserve in the prior period. As a percentage of total revenue, customer operations expenses decreased from 39% to 31%.

Current wording

Customer operations expenses increased by $0.7 million, or 1%, in the six months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to a $8.1 million increase in other servicing expenses and $1.2 million removal of an operational contingency reserve in the prior period, partially offset by a $8.7 million decrease in payroll and other personnel-related expenses. As a percentage of total revenue, customer operations expenses decreased from 32% to 31%.

Previous wording

Engineering and product development expenses decreased by $47.0 million, or 43%, for the three months ended March 31, 2024, compared to the same period in 2023. The decrease was primarily due to a $44.8 million decrease in payroll and other personnel-related expenses driven by a one-time expense related to the cancellation of unvested PRSUs of $39.0 million recognized in the prior year and a decrease in headcount, as well as a $2.0 million decrease in other engineering operation expenses. As a percentage of total revenue, engineering and product development expenses decreased from 107% to 49%.

Current wording

Engineering and product development expenses decreased by $46.5 million, or 28%, for the six months ended June 30, 2024, compared to the same period in 2023. The decrease was primarily due to a decrease of $43.8 million in payroll and other personnel-related expenses driven by an expense related to the cancellation of PRSUs during the six months ended June 30, 2023, refer to“Note 10. Stockholders' Equity”, and $2.7 million decrease in other engineering operating expenses. As a percentage of total revenue, engineering and product development expenses decreased from 70% to 48%.

Previous wording

General, administrative, and other expenses increased by $5.0 million, or 9%, in the three months ended March 31, 2024, compared to the same period in 2023. The increase was primarily due to an increase of $3.0 million in other personnel-related costs and an increase of $3.7 million in legal and compliance expenses. The increase was partially offset by a decrease of $0.8 million in depreciation and amortization expense, a decrease of $0.6 million in office rent and other facility expenses, and a decrease of $0.4 million in insurance expense. As a percentage of total revenue, general, administrative, and other expenses decreased from 51% to 45%.

Current wording

General, administrative, and other expenses increased by $7.5 million, or 7%, in the six months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to an increase of $6.0 million in legal and compliance expenses, an increase of $1.5 million of professional fees, and an increase of $2.8 million in payroll and personnel-related costs. The increase was partially offset by a $1.6 million decrease in office rent and other facility and administrative operation expenses, a $0.8 million decrease in insurance expenses, and a $0.4 million decrease in depreciation and amortization expense. As a percentage of total revenue, general, administrative, and other expenses increased from 43% to 43%.

Previous wording

In the three months ended March 31, 2024, other income, net increased by $0.3 million, or 11%, compared to the same period in 2023, due to a $0.3 million increase in miscellaneous other income, net.

Current wording

In the three months ended June 30, 2024, other income, net decreased by $4.2 million, or 80%, compared to the same period in 2023, due to a $2.4 million decrease in miscellaneous other income, net and a $1.7 million decrease in dividend income.

Previous wording

To supplement our condensed consolidated financial statements prepared and presented in accordance with GAAP, we use the non-GAAP financial measures of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Loss and Adjusted Net Loss Per Share to provide investors with additional information about our financial performance and to enhance the overall understanding of our past performance and future prospects. We are presenting these non-GAAP financial measures because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple years with the performance of other companies.

Current wording

To supplement our condensed consolidated financial statements prepared and presented in accordance with GAAP, we use the non-GAAP financial measures of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share to provide investors with additional information about our financial performance and to enhance the overall understanding of our past performance and future prospects. We are presenting these non-GAAP financial measures because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple years with the performance of other companies.

Previous wording

To address these limitations, we provide a reconciliation of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Loss and Adjusted Net Loss Per Share to loss from operations and net loss, respectively. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Loss, and Adjusted Net Loss Per Share in conjunction with their respective related GAAP financial measures.

Current wording

To address these limitations, we provide a reconciliation of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share to loss from operations and net loss, respectively. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income (Loss), and Adjusted Net Income (Loss) Per Share in conjunction with their respective related GAAP financial measures.

Previous wording

(1)Borrower acquisition costs were $19.7 million, and $24.8 million for the three months ended March 31, 2023 and 2024, respectively. Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities. These costs do not include reorganization expenses associated with the January 2023 Plan.

Current wording

(1)Borrower acquisition costs were $19.0 million and $23.2 million for the three months ended June 30, 2023 and 2024, respectively, and were $38.8 million, and $48.0 million for the six months ended June 30, 2023 and 2024, respectively. Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities. These costs do not include reorganization expenses.

Previous wording

(2)Borrower verification and servicing costs were $29.8 million, and $32.1 million for the three months ended March 31, 2023 and 2024, respectively. Borrower verification and servicing costs consist of payroll and other personnel-related expenses for personnel engaged in loan onboarding, verification and servicing, as well as servicing system costs. It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans. These costs do not include reorganization expenses associated with the January 2023 Plan.

Current wording

(2)Borrower verification and servicing costs were $28.7 million and $31.2 million for the three months ended June 30, 2023 and 2024, respectively, and were $58.5 million, and $63.3 million for the six months ended June 30, 2023 and 2024, respectively. Borrower verification and servicing costs consist of payroll and other personnel-related expenses for personnel engaged in loan onboarding, verification and servicing, as well as servicing system costs. It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans. These costs do not include reorganization expenses.

Previous wording

We define Adjusted Net Loss as net loss exclusive of stock-based compensation expense and certain payroll tax expense, and reorganization expenses. Adjusted Net Loss Per Share is calculated by dividing Adjusted Net Loss Per Share by the weighted-average common shares outstanding. We believe Adjusted Net Loss and Adjusted Net Loss Per Share are useful measures for investors in evaluating our ability to generate earnings, more readily compare between past and future periods, and provide comparability of our performance with the performance of other companies.

Current wording

We define Adjusted Net Income (Loss) as net loss exclusive of stock-based compensation expense and certain payroll tax expense, and reorganization expenses. Adjusted Net Income (Loss) Per Share is calculated by dividing Adjusted Net Income (Loss) Per Share by the weighted-average common shares outstanding. We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share are useful measures for investors in evaluating our ability to generate earnings, more readily compare between past and future periods, and provide comparability of our performance with the performance of other companies.

Previous wording

As of March 31, 2024, our primary source of liquidity was cash of $300.5 million. We also held $5.0 million of investments in certificates of deposit with maturities greater than three months as of March 31, 2024. Changes in the balance of cash are generally a result of working capital fluctuations and the timing of purchases and sales of loans facilitated through our marketplace. To finance purchases of certain loans facilitated through our lending marketplace, we rely on our warehouse credit facilities through the special-purpose trusts and corporate cash.

Current wording

As of June 30, 2024, our primary source of liquidity was unrestricted cash of $374.8 million. We also held $5.0 million of investments in certificates of deposit with maturities greater than three months as of June 30, 2024. Changes in the balance of cash are generally a result of working capital fluctuations and the timing of purchases and sales of loans facilitated through our marketplace. To finance purchases of certain loans facilitated through our lending marketplace, we rely on our warehouse credit facilities through the special-purpose trusts and corporate cash.

Previous wording

Our ULT Warehouse Credit Facility, which matures in June 2026, allows us to borrow up to $250.0 million to purchase unsecured personal loans. Our UAWT Warehouse Credit Facility, which matures in June 2025, allows us to borrow up to $200.0 million to purchase secured auto loans. As of March 31, 2024, we have drawn an aggregate of $351.5 million on our warehouse credit facilities. Refer to “Note 9. Borrowings” in Part I, Item 1 of this Form 10-Q for further details on our warehouse credit facilities.

Current wording

Our warehouse credit facilities, which mature between December 2025 and June 2028, allow us to borrow up to an aggregate of $425.0 million to purchase unsecured personal loans and up to $50.0 million to purchase auto loans. As of June 14, 2024, the revolving period ended for Upstart Auto Warehouse Trust, and we may no longer draw from the facility. The Upstart Auto Warehouse Trust facility matures in December 2025, by which time all outstanding amounts owed must be repaid. As of June 30, 2024, we have drawn an aggregate of $258.2 million on our warehouse credit facilities. Refer to “Note 9. Borrowings” in Part I, Item 1 of this Form 10-Q for further details on our warehouse credit facilities.

Previous wording

We lease office facilities under operating lease agreements which expire between 2027 and 2029. Our cash requirements related to these lease agreements are $67.1 million, of which $15.1 million is expected to be paid within the next 12 months. Refer to “Note 11. Leases” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our operating lease obligations.

Current wording

We lease office facilities under operating lease agreements which expire between 2027 and 2029. Our cash requirements related to these lease agreements are $63.4 million, of which $15.2 million is expected to be paid within the next 12 months. Refer to “Note 11. Leases” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our operating lease obligations.

Previous wording

We have committed to purchase loans from certain lending partners at the conclusion of the required holding period, which is generally equal to three business days. As of March 31, 2024, the total loan purchase commitment was $32.5 million. See “Note 12. Commitments and Contingencies” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our loan purchase obligations.

Current wording

We have committed to purchase loans from certain lending partners at the conclusion of the required holding period, which is generally equal to three business days. As of June 30, 2024, the total loan purchase commitment was $34.3 million. We have also extended a line of credit in connection with one of our committed capital and other co-investment arrangements. As of June 30, 2024, the Company had unfunded commitments related to the line of credit of $7.5 million. See “Note 12. Commitments and Contingencies” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our commitments.

Previous wording

In connection with our committed capital and other co-investment arrangements we are obligated to put a certain amount of our capital at risk in relation to the credit performance of the underlying loans. As of March 31, 2024, the amount of our capital co-invested at risk is $169.6 million. Refer to “Note 5. Beneficial Interests” for additional information.

Current wording

In connection with our committed capital and other co-investment arrangements, we are obligated to put a certain amount of our assets at risk in relation to the credit performance of the underlying loans. The risk in these arrangements is subject to a dollar cap which represents the Company’s maximum exposure to losses in a particular arrangement. As of June 30, 2024, the Company’s aggregate maximum exposure to losses was approximately $260 million, of which $66.6 million was in a form of restricted cash held on the condensed consolidated balance sheets. Refer to “Note 5. Beneficial Interests” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our committed capital and co-investment arrangements.

Previous wording

Net cash provided by operating activities was $52.6 million for the three months ended March 31, 2024, which primarily consisted of adjustments for non-cash items of $96.6 million, net loss of $64.6 million, and $20.6 million in net changes in operating assets and liabilities. The increase in non-cash adjustments was primarily related to $59.9 million of changes in fair value of financial instruments held on the Company’s balance sheet, $35.8 million of stock-based compensation, and $5.6 million of depreciation and amortization, partially offset by a $2.9 million gain on loan servicing rights and a $2.5 million decrease in other adjustments. The increase in net changes in operating assets and liabilities was primarily related to $52.8 million in principal payments received for loans held-for-sale, $12.3 million in principal payments received for loans held in consolidated securitization, and a $6.9 million increase in amounts payable to investors, partially offset by $23.9 million in net purchases of loans held-for-sale, a $25.8 million decrease in accrued expenses, a $0.8 million decrease in other assets, and $0.7 million decrease in payments on beneficial interest liabilities.

Current wording

Net cash provided by operating activities was $117.9 million for the six months ended June 30, 2024, which consisted of adjustments for non-cash items of $185.1 million, $51.9 million in net changes in operating assets and liabilities, and net loss of $119.1 million. The increase in non-cash adjustments was primarily related to $103.8 million of changes in fair value of loans held on the Company’s balance sheet and $70.0 million of stock-based compensation. The increase in net changes in operating assets and liabilities was primarily related to $115.3 million in principal payments received for loans held-for-sale and $24.7 million in principal payments received for loans held in consolidated securitization, partially offset by $78.0 million in net purchases of loans held-for-sale and a $13.1 million decrease in accrued expenses.

Previous wording

Net cash used in investing activities was $37.5 million for the three months ended March 31, 2024 as a result of $46.2 million purchases and originations of loans held-for-investment, $16.9 million acquisition of beneficial interest assets, partially offset by $27.2 million in principal payments received for loans held-for-investment.

Current wording

Net cash used in investing activities was $113.6 million for the six months ended June 30, 2024 as a result of $110.9 million purchases and originations of loans held-for-investment and $63.2 million acquisition of beneficial interest assets, partially offset by $60.2 million in principal payments received for loans held-for-investment.

Previous wording

As of March 31, 2024, we held $1,080.9 million of loans on our condensed consolidated balance sheet. $394.0 million of these loans were originated for research and development purposes, primarily in support of our auto lending products and expansion of our unsecured personal loan product to new categories of borrowers. We also held $529.6 million of core personal loans which would otherwise be immediately purchased by institutional investors and $157.3 million of core personal loans held by the consolidated securitization. We will continue to utilize our capital to support research and development activities and, at times, as a funding source for core personal loans during periods of marketplace funding constraints. The extent and timing of utilizing our capital as a funding source for loans will largely depend on the availability of capital in our marketplace relative to the demand from qualified borrowers and our business priorities. We plan to sell loans held on our balance sheet to institutional investors over time in the form of secondary sales or securitizations.

Current wording

As of June 30, 2024, we held $820.6 million of loans on our condensed consolidated balance sheet. $396.3 million of these loans were originated for research and development purposes, primarily in support of our auto lending products, HELOCs, and expansion of our unsecured personal loan product to new categories of borrowers. We also held $289.2 million of core personal loans which would otherwise be immediately purchased by institutional investors and $135.1 million of core personal loans held by the consolidated securitization. We will continue to utilize our capital to support research and development activities and, at times, as a funding source for core personal loans during periods of marketplace funding constraints. The extent and timing of utilizing our capital as a funding source for loans will largely depend on the availability of capital in our marketplace relative to the demand from qualified borrowers and our business priorities. We plan to sell loans held on our balance sheet to institutional investors over time in the form of secondary sales or securitizations.

Previous wording

In the ordinary course of business, we engage in activities that are not reflected on our condensed consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities involve transactions with unconsolidated VIEs, including sale of whole loans and sponsored and co-sponsored securitization transactions, which we contractually service. We use these transactions to provide a source of liquidity to finance our business and to diversify our institutional investor base. If we are the retaining sponsor of a securitization transaction, we are required by law to retain at least 5% of the credit risk of the securities issued in these securitizations. We provide additional information regarding transactions with unconsolidated VIEs in “Note 3. Variable Interest Entities” in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Current wording

In the ordinary course of business, we engage in activities that are not reflected on our condensed consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities involve transactions with unconsolidated VIEs, including sale of whole loans, committed capital and other co-investment arrangements, and sponsored and co-sponsored securitization transactions, which we contractually service. We use these transactions to provide a source of liquidity to finance our business and to diversify our institutional investor base. If we are the retaining sponsor of a securitization transaction, we are required by law to retain at least 5% of the credit risk of the securities issued in these securitizations. We provide additional information regarding transactions with unconsolidated VIEs in “Note 3. Variable Interest Entities” in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Previous wording

Our critical accounting policies are described in Part II, Item 7, “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to these policies for the three months ended March 31, 2024.

Current wording

Our critical accounting policies are described in Part II, Item 7, “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to these policies for the six months ended June 30, 2024.