Upstart Holdings Inc

Previous 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.

Current wording

Out of the total principal of loans transacted on our marketplace during the nine months ended September 30, 2024, 67% were purchased by institutional investors, 25% were retained by our lending partners, and 8% 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 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

Loans on our platform today are predominantly sourced from Upstart.com. For these loans, we incur variable costs in the form of borrower acquisition costs and borrower verification and servicing costs. Borrower acquisition, verification and servicing costs are highly correlated with Transaction Volume, which fluctuates on a quarter by quarter basis. We continue to focus on improvements to our level of automation and Conversion Rate (as defined below) through our increasingly sophisticated risk models and our evolving channel mix which have contributed to improving our loan unit economics over time.

Current wording

Loans on our platform today are predominantly sourced from Upstart.com. For these loans, we incur variable costs in the form of borrower acquisition costs and borrower verification and servicing costs. Borrower acquisition, verification and servicing costs are highly correlated with Transaction Volume (as defined below), which fluctuates on a quarter by quarter basis. We continue to focus on improvements to our level of automation and Conversion Rate (as defined below) through our increasingly sophisticated risk models and our evolving channel mix which have contributed to improving our loan unit economics over time.

Previous wording

While the credit performance of Upstart-powered loans can be impacted by a variety of macroeconomic and other factors, we consider credit performance to be one of the most important measures of the effectiveness of our AI models. We evaluate the credit performance of core personal loans by comparing the target returns expected at the time of origination to the returns received by our lending partners and institutional investors. The target return, a critical component of our loan pricing, is calculated using estimated cash flows, which are developed based on a number of factors, including credit losses and prepayment rates. While target returns across our lending partners and institutional investors vary depending on their programs’ objectives and risk tolerance, overall performance is calculated based on the variance between the initially expected returns and the actual return on capital invested in Upstart-powered loans.

Current wording

We evaluate the credit performance of core personal loans by comparing the target returns expected at the time of origination to the returns received by our lending partners and institutional investors. The target return, a critical component of our loan pricing, is calculated using estimated cash flows, which are developed based on a number of factors, including credit losses and prepayment rates. While target returns across our lending partners and institutional investors vary depending on their programs’ objectives and risk tolerance, overall performance is calculated based on the variance between the initially expected returns and the actual return on capital invested in Upstart-powered loans.

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 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.

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 9.5%.

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. 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.

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 thenine months ended September 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 implement 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 provide 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 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.

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 September 30, 2024, UMI was measured at approximately 1.52, meaning that current macroeconomic conditions contributed an incremental risk of approximately 52% to the repayment performance of an Upstart-powered unsecured personal loan, compared to the baseline.

Previous wording

We continuously monitor the direct and indirect impacts of the current macroeconomic conditions on our business, financial condition, and results of operations.

Current wording

We continuously monitor the direct and indirect impacts of the current macroeconomic conditions, including interest rate changes, on our business, financial condition, and results of operations.

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, 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.

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 our 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 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.

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 increased 30% in the three months ended September 30, 2024 compared to the same period of 2023, and increased 13% in thenine months ended September 30, 2024 compared to the same period of 2023. Transaction Volume, Number of Loans increased 64% and 47% in the three and nine months ended September 30, 2024 compared tothe same period of 2023, respectively. These increases were primarily due to model improvements and product initiatives, resulting in an increase in the number of qualified borrowers. The increase in Transaction Volume, Number of Loans was higher than the increase in Transaction Volume, Dollars due to the decrease in average loan size, primarily due to the increase in small dollar loans.

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 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.

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 such as shifts in macroeconomic conditions, including interest rate changes, also impact 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 16.3% and 15.3% in the three and nine months ended September 30, 2024, respectively, from 9.5% and 9.1% in the same periods of 2023, primarily driven by underwriting model improvements and new product initiatives, coupled with continued optimization in our acquisition channels.

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, 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.

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 by the Company 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% in both three and nine months ended September 30, 2024, respectively, from 88% and 87% in the same periods of 2023.

Previous 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.

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, gain on debt extinguishment, 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 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.

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 gain on debt extinguishment 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. 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

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.

Current wording

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 Notes.

Previous wording

Revenue from fees, net decreased $13.2 million, or 9%, in the three months ended June 30, 2024, compared to the same period in 2023, which included a decrease of $7.2 million in revenue from platform and referral fees, net and a decrease of $6.0 million in servicing fees, net. The decrease of the platform and referral fees, net was primarily driven by a 6% decrease in the Transaction Volume, Dollars from $1,175.7 million in the three months ended June 30, 2023 to $1,109.7 million in the same period in 2024. The decrease in servicing fees was primarily due to a decrease in outstanding principal of serviced loans.

Current wording

Revenue from fees, net increased $20.8 million, or 14%, in the three months ended September 30, 2024, compared to the same period in 2023, which included an increase of $21.8 million in revenue from platform and referral fees, net, and a decrease of $0.9 million in servicing fees, net. The increase of the platform and referral fees, net was primarily driven by a 30% increase in the Transaction Volume, Dollars from $1,219.3 million in the three months ended September 30, 2023 to $1,582.3 million in the same period in 2024, partially offset by a decrease in prices of our services over the same period. The decrease in servicing fees was primarily due to a decrease in outstanding principal of serviced loans.

Previous 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.

Current wording

Revenue from fees, net increased $28.6 million, or 7%, in the nine months ended September 30, 2024, compared to the same period in 2023, which included an increase of $40.8 million in revenue from platform and referral fees, net, and a decrease of $12.2 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 of Loans from $3,392.4 million in the nine months ended September 30, 2023 to $3,822.8 million in the same period in 2024, partially offset by a decrease in prices of our services. The decrease in servicing fees was primarily due to a decrease in outstanding principal of serviced loans, partially offset by a decrease in net loss related to loan servicing rights upon loan sales and fair value adjustments.

Previous 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.

Current wording

Interest income, interest expense, and fair value adjustments, net increased $6.7 million, or 55% in the three months ended September 30, 2024, compared to the same period in 2023. The increase was driven by a $5.0 million decrease in unfavorable fair value adjustments and a $3.2 million increase in interest income, partially offset by a $1.4 million increase in interest expense. The decrease in unfavorable fair value adjustments is primarily attributable to a $6.2 million decrease in fair value loss on beneficial interests, partially offset by a $1.2 million increase in unrealized loss and loan charge-offs during the three months ended September 30, 2024 compared to the same period in 2023. The increase in interest income resulted from a $6.5 million increase in interest income recognized by operating entities, partially offset by a $3.3 million decrease in 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 by operating entities during the period and a decrease in the outstanding principal of loans held in the consolidated securitization during the period. The increase in interest income and decrease in unfavorable fair value adjustments was partially offset by an increase in interest expense due to the decrease in the fair value of our interest rate caps, and a $1.5 million decrease in interest expense recognized by consolidated securitization entities due to lower payable to securitization noteholders in the period.

Previous wording

Interest income, interest expense, and fair value adjustments, net increased $9.0 million, or 40% in the six months ended June 30, 2024, compared to the same period in 2023. The increase was primarily driven by an increase in the average outstanding principal balance of loans held on the condensed consolidated balance sheets during the period resulting in a $24.8 million increase in interest income, including $16.3 million of interest income recognized by consolidated securitization entities. 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 an increase of $10.8 million recognized by consolidated securitization entities. The increase of unfavorable fair value adjustments, net is primarily attributable to a $19.9 million increase in fair value losses on beneficial interest assets, partially offset by a $7.7 million decrease in realized loss on loan sales and $7.2 million decrease in unrealized loss on loan sales during the six months ended June 30, 2024 compared to the same period in 2023.

Current wording

Interest income, interest expense, and fair value adjustments, net increased $15.7 million, or 46% in the nine months ended September 30, 2024, compared to the same period in 2023. The increase was primarily driven by an increase in the average outstanding principal balance of loans held on the condensed consolidated balance sheets during the period resulting in a $28.0 million increase in interest income, including $13.0 million of interest income recognized by consolidated securitization entities. The increase was partially offset by an increase in interest expense due to an increase in average borrowings during the period compared to the same period in 2023, including an increase of $3.8 million recognized by consolidated securitization entities. The increase in interest income and interest expense recognized by consolidated securitization entities was due to the timing of the transaction, resulting in full year of income and expense recognized in 2024 compared to one quarter in 2023. Unfavorable fair value adjustments, net remained flat during the nine months ended September 30, 2024 compared to the same period in 2023.

Previous wording

Sales and marketing expenses increased by $9.1 million, or 38%, in the three months ended June 30, 2024 compared to the same period in 2023. The increase was primarily due to a a $4.8 million increase in payroll and other personnel-related expenses and a $4.2 million increase in advertising and other traffic acquisition cost. As a percentage of total revenue, sales and marketing expenses increased from 18% to 26%.

Current wording

Sales and marketing expenses increased by $10.2 million, or 31%, in the three months ended September 30, 2024 compared to the same period in 2023. The increase was primarily due to a $9.2 million increase in advertising and other traffic acquisition cost and a $0.8 million increase in payroll and other personnel-related expenses. As a percentage of total revenue, sales and marketing expenses increased from 25% to 27%.

Previous 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%.

Current wording

Sales and marketing expenses increased by $23.0 million, or 26%, in the nine months ended September 30, 2024 compared to the same period in 2023. The increase was primarily due to a $18.4 million increase in advertising and other traffic acquisition cost and a $4.4 million increase in payroll and other-personnel related expenses. As a percentage of total revenue, sales and marketing expenses increased from 24% to 27%.

Previous wording

Customer operations expenses increased by $1.9 million, or 5%, in the three months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to a $3.7 million increase in servicing expenses and a $0.4 million increase in information verification expenses. The increase was partially offset by a $2.1 million decrease in payroll and other personnel-related expenses due to a decrease in headcount and a $0.2 million decrease in backup servicer fees. As a percentage of total revenue, customer operations expenses increased from 27% to 30%.

Current wording

Customer operations expenses increased by $2.4 million, or 6%, in the three months ended September 30, 2024, compared to the same period in 2023. The increase was primarily due to a $3.3 million increase in servicing expenses, $0.8 million increase in information verification expenses, and $0.6 million increase in systems expenses. The increase was partially offset by a $2.2 million decrease in payroll and other personnel-related expenses due to a decrease in headcount. As a percentage of total revenue, customer operations expenses decreased from 27% to 24%.

Previous 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%.

Current wording

Customer operations expenses increased by $3.1 million, or 3%, in the nine months ended September 30, 2024, compared to the same period in 2023. The increase was primarily due to a $11.4 million increase in servicing expenses, $1.9 million increase in information verification expenses, and a $1.2 million removal of an operational contingency reserve in the prior period. The increase was partially offset by a $11.1 million decrease in payroll and other personnel-related expenses and a $0.2 million decrease in backup servicing fees. As a percentage of total revenue, customer operations expenses decreased from 31% to 28%.

Previous wording

Engineering and product development expenses increased by $0.5 million, or 1%, for the three months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to a $1.3 million increase in payroll and other personnel-related expenses, partially offset by a $0.8 million decrease in other engineering operating expenses. As a percentage of total revenue, engineering and product development expenses increased from 43% to 46%.

Current wording

Engineering and product development expenses increased by $9.9 million, or 18%, for the three months ended September 30, 2024, compared to the same period in 2023. The increase was primarily due to a $8.7 million increase in payroll and other personnel-related expenses and a $1.2 million increase in other engineering operating expenses. As a percentage of total revenue, engineering and product development expenses decreased from 41% to 40%.

Previous 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%.

Current wording

Engineering and product development expenses decreased by $36.6 million, or 16%, for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease was primarily due to a decrease of $35.1 million in payroll and other personnel-related expenses driven by an expense related to the cancellation of PRSUs during the nine months ended September 30, 2023, refer to“Note 10. Stockholders' Equity”, and $1.5 million decrease in other engineering operating expenses. As a percentage of total revenue, engineering and product development expenses decreased from 60% to 45%.

Previous 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%.

Current wording

General, administrative, and other expenses increased by $6.4 million, or 12%, in the three months ended September 30, 2024, compared to the same period in 2023. The increase was primarily due to an increase of $4.5 million in payroll and other personnel-related expenses and an increase of $2.2 million in legal and compliance expenses, partially offset by a decrease of $0.7 million in office rent and other facility expenses. As a percentage of total revenue, general, administrative, and other expenses decreased from 40% to 37%.

Previous wording

General, administrative, and other expenses increased by $2.6 million, or 5%, in the three months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to an increase of $1.0 million in professional fees and an increase of $2.3 million in legal and compliance expenses. The increase was partially offset by 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 increased from 37% to 42%.

Current wording

General, administrative, and other expenses increased by $13.9 million, or 9%, in the nine months ended September 30, 2024, compared to the same period in 2023. The increase was primarily due to an increase of $8.2 million in legal and compliance expenses and an increase of $7.2 million in payroll and personnel-related costs. The increase was partially offset by a $1.9 million decrease in office rent and other facility expenses. As a percentage of total revenue, general, administrative, and other expenses decreased from 42% to 41%.

Previous wording

In the six months ended June 30, 2024, other income, net decreased by $3.9 million, or (50)%, compared to the same period in 2023, due to a $2.1 million decrease in miscellaneous other income, net and a $1.7 million decrease in dividend income.

Current wording

In the three months ended September 30, 2024, other income, net increased by $1.5 million, or 43%, compared to the same period in 2023, due to a $2.7 million increase in miscellaneous other income, net, partially offset by a $1.0 million decrease in dividend income.

Previous 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.

Current wording

In the nine months ended September 30, 2024, other income, net decreased by $2.3 million, or 21%, compared to the same period in 2023, due to a $2.7 million decrease in dividend income, partially offset by a $0.5 million decrease in miscellaneous other income, net.

Previous 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.

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 income (loss) from operations and net income (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 $19.0 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.

Current wording

(1)Borrower acquisition costs were $23.6 million and$32.7 million for the three months ended September 30, 2023 and 2024, respectively, and were $62.4 million, and$80.8 million for the nine months ended September 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 $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.

Current wording

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

•Adjusted EBITDA and Adjusted EBITDA Margin eliminate the impact of certain items such as stock-based compensation expense and certain payroll tax expense, expense on convertible notes, and reorganization expenses that may obscure trends in the underlying performance of our business; and

Current wording

•Adjusted EBITDA and Adjusted EBITDA Margin eliminate the impact of certain items such as stock-based compensation expense and certain payroll tax expense, expense on convertible notes, gain on debt extinguishment, and reorganization expenses that may obscure trends in the underlying performance of our business; and

Previous wording

•Although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA Margin does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

Current wording

•Although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

Previous 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.

Current wording

We define Adjusted Net Income (Loss) as net income (loss) exclusive of stock-based compensation expense and certain payroll tax expense, gain on debt extinguishment, 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 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.

Current wording

As of September 30, 2024, our primary source of liquidity was unrestricted cash of $445.3 million. We also held $5.0 million of investments in certificates of deposit with maturities greater than three months as of September 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 convertible senior notes have a principal balance of $661.3 million and bear interest at a rate of 0.25% per year, payable semiannually in arrears on February 15 and August 15 of each year. The Notes mature on August 15, 2026 unless earlier converted, redeemed, or repurchased in accordance with their terms. Refer to “Note 9. Borrowings” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our Notes.

Current wording

Our convertible senior notes have an aggregate principal balance of $730.4 million and bear interest at a rate of 0.25% per year, in the case of the 2026 Notes, and 2.00% per year, in the case of the 2029 Notes, in each case payable semiannually. The 2026 Notes mature on August 15, 2026 and the 2029 Notes mature on October 1, 2029, in each case unless earlier converted, redeemed, or repurchased in accordance with their terms. Refer to “Note 9. Borrowings” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our Notes.

Previous 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.

Current wording

Our warehouse credit facilities, which mature between December 2025 and June 2028, allow us to borrow up to an aggregate of $325.0 million to purchase unsecured personal loans, $100.0 million to purchase small dollar 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 September 30, 2024, we have drawn an aggregate of $170.1 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 $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.

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 $59.6 million, of which $15.3 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 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.

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 September 30, 2024, the total loan purchase commitment was $66.8 million. We have also extended a line of credit to a third-party in connection with one of our committed capital and other co-investment arrangements. As of September 30, 2024, the Company had unfunded commitments related to the line of credit of $8.0 million. The Company also has commitments to fund future advances on HELOCs. As of September 30, 2024, these commitments were $2.8 million, however since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. 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.