Upstart Holdings, Inc. (UPST)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Upstart applies artificial intelligence (“AI”) models and cloud applications to the process of underwriting consumer credit. Our AI marketplace connects consumers with our lending partners. Consumers can access Upstart-powered loans via Upstart.com, through a lender-branded product on our lending partners’ own websites, and through auto dealerships that use our Upstart Auto Retail software. We enable our lending partners to provide an exceptional digital-first experience to consumers and originate valuable credit products. As our technology continues to improve and additional lending partners adopt our platform, consumers benefit from improved access to affordable and frictionless credit.

We believe that banks and other traditional lenders will continue to be at the forefront of consumer lending in the United States. We believe AI lending will become increasingly critical as this industry continues to undergo a broad digital transformation. Our strategy is to partner with banks and credit unions and provide them with access to an AI lending marketplace that they can configure as they originate consumer loans, according to their own business and regulatory requirements.

Loans issued through our marketplace are retained by our lending partners, purchased by our network of institutional investors, or funded by Upstart’s balance sheet. Investors may also invest in Upstart-powered loans through our pass-through and securitization programs. We believe that institutional investors, often referred to as “private credit,” have played an increasingly large role in financing consumer lending in the United States and we have adapted our strategy to take advantage of this opportunity.

Out of the total principal of loans transacted on our marketplace during the year ended December 31, 2024, 65% were purchased by institutional investors, 25% were retained by our lending partners, and 10% 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.

To improve the loan funding capacity for our marketplace across business and macroeconomic cycles, we have secured multiple committed capital and other co-investment arrangements with institutional investors and lending partners beginning in 2023, which have delivered a significant amount of loan funding to the Upstart marketplace. While these efforts have strengthened the amount and resiliency of our loan funding, we continue to secure additional capital to support the growth of our business and further diversify our sources of capital and institutional investor base to ensure long-term scalability.

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Our Economic Model

Upstart’s revenues are primarily earned in exchange for the use of our platform and for borrower referral services provided to our lending partners through our lending marketplace. Fees for these services can be either fixed or based on a variable price per unit, depending on the contractual arrangement. Platform services result in loan originations by our lending partners using our platform and referral services result in a referral of a borrower obtaining a loan from our lending partners. These fees are combined for accounting purposes as they represent a single performance obligation. We do not charge borrowers on our platform any referral, platform, or other similar fees for loans originated by our lending partners.

We also charge the holder of the loan (either a lending partner or institutional investor) a servicing fee based on the outstanding principal over the lifetime of the loan for ongoing servicing of the loan. In addition, we receive certain ancillary borrower fees inclusive of late payment fees and ACH fail fees as part of loan servicing. Further, we earn a portion of our revenue from interest income for loans held on our balance sheet.

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.

Credit Performance

We consider credit performance of Upstart-powered loans to be one of the most important measures of the effectiveness of our AI models. However, credit performance is impacted by multiple factors, including factors that our models do not predict, such as macroeconomic conditions.

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.

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 third quarter of 2024 is currently expected to deliver returns in line with a blended target of 9.6%.

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.

However, the quarterly vintages of core personal loans that originated in the first quarter of 2021 through the first quarter of 2024 are currently forecasted to underperform relative to their target returns. Even though our underwriting models have over time utilized more variables and data points about borrowers which has improved model performance, they were not designed to predict the severe impact of recent changes to macroeconomic conditions, credit market volatility and interest rate fluctuations that have occurred, all of which were (and still are) beyond our control. The forecasted underperformance for these vintages reflects the impact of a combination of factors that occurred during that period, including the elimination of government stimulus measures and the worsening of the macroeconomic environment, via rising inflation and the resulting sharply higher interest rates.

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The evolving macroeconomic conditions during that period led to more borrowers not making payments on their personal loans than anticipated at the time of underwriting. For example, borrowers likely prioritized repayment of loans that are secured by necessities, such as mortgages or auto loans, over unsecured personal loans. Higher interest rates also likely led to higher payment obligations, which reduced the ability of borrowers to remain current on their obligations. These factors led to increased delinquencies, defaults and bankruptcies declared by borrowers, resulting in more charge-offs and fewer recoveries, all of which had an adverse effect on the credit performance of loans facilitated on our marketplace during that time period.

To respond to macroeconomic changes more rapidly, we introduced the Upstart Macro Index (“UMI”) in 2023, which estimates the impact that observed macroeconomic changes may have on credit performance for Upstart-powered unsecured personal loans.

The core personal loans that originated in the second quarter of 2024 or later are currently forecasted to deliver returns in line with target yields. This reversion in performance, relative to the quarterly vintages of core personal loans that originated in the first quarter 2021 through the first quarter 2024, was driven by a combination of factors including increased conservatism in underwriting and the relative stabilization of macroeconomic conditions, as reflected in the UMI, which has helped credit perform in line with our models’ predictions as there has been less unexpected volatility in macroeconomic factors impacting loan performance. Our most recent AI models also benefited from more data on borrower repayment patterns from the period of significant macroeconomic changes. This resulted in substantive positive changes in observed and expected borrower repayments even for vintages with limited seasoning. This makes our more recent models more accurate than those used in early 2021. Refer to section “Factors Affecting Our Performance - Impact of Macroeconomic Environment” for additional details.

For the core personal loans held on our balance sheet, target returns are set similar to those of our institutional investors. We purchase core personal loans to address fluctuations of supply and demand in our marketplace and periodically sell these loans to institutional investors prior to their maturity. Demonstrated credit performance significantly influences sale prices in these transactions and impacts our overall financial results.

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.

Factors Affecting Our Performance

Continued Improvements to Our AI Models

Much of our historical growth has been driven by improvements to our AI models. These models benefit over time from a flywheel effect that is characteristic of machine learning systems: accumulation of repayment data leads to improved accuracy of risk and fraud predictions, which generally results in higher approval rates and lower interest rates, leading to increased volume, and consequently greater accumulation of repayment data. This virtuous cycle describes an important mechanism by which our business grows simply through model learning and recalibration. We expect to continue to invest significantly in the development of our AI models and platform functionalities.

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Beyond the ongoing accumulation of repayment data used to train our models, we also frequently make discrete improvements to model accuracy by upgrading algorithms and incorporating new variables, both of which have historically resulted in higher approval rates, more competitive loan offers, increased automation, and faster growth. As a second order effect, the impact of these improvements on our conversion funnel also allows us to unlock new marketing channels over time that have previously been unprofitable.

We believe that ongoing improvements to our technology in this manner will allow us to further expand access and lower rates for creditworthy borrowers, which will continue to fuel our growth. Should the pace of these improvements slow down or cease, or should we discover forms of model upgrades which improve accuracy at the expense of volume, our growth rates could be adversely affected.

Impact of Macroeconomic Environment

In an economic downturn, we believe consumer lending will generally contract. Lending partners and institutional investors will generally require higher rates of return, which in turn increases the interest rates offered to borrowers, leading to lower borrower demand. Macroeconomic factors can also cause fluctuations of available capital in our lending marketplace due to shifts in the risk preferences of our lending partners and institutional investors. We expect these dynamics would generally invert in an economic upswing.

For example, loan funding provided by institutional investors started to become constrained in 2022, largely due to concerns about the macroeconomic environment. In response to inflationary pressure, the U.S. Federal Reserve raised interest rates through 2023, leading to more expensive loan offers across borrower categories, which impacted our business. At the same time, macroeconomic uncertainty generally made institutional investors more cautious and caused them to reduce the amount of capital available to fund Upstart-powered loans.

In response to this challenging macroeconomic environment where many lenders and credit investors had 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 year ended December 31, 2024, the Company implemented an additional series of initiatives which reduced the Company’s workforce by approximately 13%. Refer to “Note 16. Reorganization Expenses” for more information. While we believe that the macroeconomic environment started to improve in 2024, disruption in financial markets could impair our lending partners and result in constrained funding, which would adversely impact our business, financial condition and operating results.

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.

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 December 31, 2024, UMI was measured at approximately 1.40, meaning that current macroeconomic conditions contributed an incremental risk of approximately 40% to the repayment performance of an Upstart-powered unsecured personal loan, compared to the baseline.

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UMI impacts interest rates for loans offered on our marketplace and, as a result, affects the pool of qualified potential borrowers and consumer demand for the loans. The elevated level of UMI resulted in higher interest rates for the loans offered on our marketplace and in turn, decreased the size of the pool of qualified potential borrowers and the borrower acceptance rates of such loans. With our investment in UMI, we focus on our ability to better separate risk among borrowers in our credit decisioning process in changing macroeconomic conditions.

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.

Lending Partners and Market Adoption

Lending partners play two key roles in Upstart’s ecosystem: funding loans and acquiring new customers. Traditional lenders, such as banks, tend to enjoy efficient sources of funding due to their expansive base of deposits. As they adopt our technology and fund a growing proportion of our marketplace transactions, offers made to borrowers will typically improve, generally leading to higher conversion rates and faster growth for our platform.

New lending partners also represent additional acquisition channels through which we can reach and source prospective new borrowers, as these lending partners develop and implement their own digital and in-branch campaigns to drive traffic from their existing customer base to our platform. We view this emerging growth channel to be additive to the marketing acquisition programs we currently run at Upstart.

To provide funding support beyond our lending partners, we have built, and continue to expand, a broad network of institutional investors that can fund Upstart-powered loans through secondary loan purchasing and issuance of pass-through certificates and asset-backed securitizations. This diverse network of capital helps to minimize our reliance on any one funding source. However, any trend towards reduced participation by lending partners will generally erode the overall competitiveness of the offers on our platform, and any declining trend in the participation of broader institutional investment markets with respect to funding availability for Upstart-powered loans will adversely affect our business.

We believe that disruptions in the banking sector may limit our ability to attract new lending partners and may cause existing lending partners to reduce loan originations on our platform. In order to address recent funding constraints for our personal loans, Upstart has utilized its balance sheet to support short-term funding requirements of loans that would otherwise be purchased and held by institutional investors or securitized. We have secured several committed capital and co-investment arrangements with institutional investors and lending partners, which have delivered, and are expected to deliver, a significant amount of loan funding to the Upstart marketplace.

We believe that continued focus on improving our AI models and demonstrating strong performance of Upstart-powered loans over time will allow us to further diversify our sources of capital for our lending marketplace and mitigate the volatility in our loan funding supply.

Product Expansion and Innovation

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 unsecured 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. For full-year 2024, new products had not yet achieved positive unit economics.

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Key Operating and Non-GAAP Financial Metrics

We focus on several key operating and Non-GAAP financial metrics to measure the performance of our business and help determine strategic direction. The following presents our key operating and financial metrics:

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(1)Transaction Volume, Number of Loans is shown in ones for the years presented.

(2)Represents a non-GAAP financial measure. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures” for further information.

Transaction Volume

We define Transaction Volume, Dollars as the total principal of loan originations (or committed amounts for HELOCs) facilitated on our marketplace during the years 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 years 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 28% in the year ended December 31, 2024 compared to the prior year and Transaction Volume, Number of Loans increased 59% in the year ended December 31, 2024 compared to the prior year. These increases were primarily due to model improvements and product initiatives, which resulted in an increase in the number of qualified borrowers and more attractive loan offers. 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.

Conversion Rate

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

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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 16.5% in the year ended December 31, 2024 from 9.7% in the year ended December 31, 2023, primarily driven by underwriting model improvements and product initiatives, coupled with continued optimization in our acquisition channels.

Percentage of Loans Fully Automated

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 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 the year ended December 31, 2024 from 87% in the year ended December 31, 2023.

Contribution Profit and Contribution Margin

To derive Contribution Profit, we subtract from revenue from fees, net our borrower acquisition costs as well as our borrower verification and servicing costs. To calculate Contribution Margin we divide Contribution Profit by revenue from fees, net.

The following table provides a calculation of Contribution Profit and Contribution Margin:

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(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.

(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.

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 loss from operations to Contribution Profit.

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Adjusted EBITDA and Adjusted EBITDA Margin

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, net gain on lease modification 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.

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share

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, net gain on lease modification 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.

Components of Results of Operations

Revenue from Fees, Net

Platform and Referral Fees, Net

We charge our lending partners platform fees in exchange for usage of our AI lending marketplace, which includes collection of loan application data, underwriting of credit risk, verification and fraud detection, and the delivery of electronic loan offers and associated documentation. We also charge referral fees to our lending partners in exchange for the referral of borrowers from Upstart.com. Referral fees are charged to lending partners on a per borrower basis upon origination of a loan. These fees are charged net of any fees the lending partner charges Upstart. Upstart pays these lending partners a one-time loan premium fee upon completion of the minimum holding periods. Upstart also pays certain lending partners monthly loan trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans.

The Company also recognizes fees in relation to contracts with auto dealers for the use of Upstart Auto Retail software, a cloud-based solution that facilitates dealership operations and enables them to provide consumers with access to Upstart-powered auto loans. Refer to “Note 2. Revenue” to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.

Servicing and Other Fees, Net

Servicing fees are calculated as a percentage of outstanding principal and are charged monthly to any entities holding loans facilitated through our marketplace, to compensate us for activities we perform throughout the loan term, including collection, processing and reconciliations of payments received, institutional investor reporting and borrower customer support. Servicing fees are recorded net of any gains, losses or changes to fair value recognized in the underlying servicing rights and obligations, which are carried as assets and liabilities on our consolidated balance sheets. Upstart currently acts as loan servicer for substantially all outstanding loans facilitated through the Upstart marketplace. Borrower payment collections for loans that are more than 30 days past due or charged off are generally outsourced to third-party collection agencies. Upstart charges lending partners and

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institutional investors for collection agency fees related to their outstanding loan portfolio. Upstart also receives certain ancillary fees on a per transaction basis inclusive of late payment fees and ACH fail fees.

Interest Income, Interest Expense, and Fair Value Adjustments, Net

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 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 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.

Sales and Marketing

Sales and marketing expenses primarily consist of costs incurred across various advertising channels, including expenses for partnerships with third parties providing borrower referrals, direct mail and digital advertising campaigns, as well as other expenses associated with building overall brand awareness and experiential marketing costs. Sales and marketing expenses also include payroll and other personnel-related costs, including stock-based compensation expense. These costs are recognized in the period incurred. We expect that our sales and marketing expenses will generally fluctuate as a percentage of our total revenue from period to period and may increase as we hire additional sales and marketing personnel, increase our marketing activities and build greater brand awareness.

Customer Operations

Customer operations expenses include payroll and other personnel-related expenses, including stock-based compensation expense, for personnel engaged in borrower onboarding, loan servicing, customer support and other operational teams. These costs also include systems, third-party services and tools we use as part of loan servicing, information verification, fraud detection and payment processing activities. These costs are recognized in the period incurred. We expect that our customer operations expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our portfolio.

Engineering and Product Development

Engineering and product development expenses primarily consist of payroll and other personnel-related expenses, including stock-based compensation expense, for the engineering and product development teams as well as the costs of systems and tools used by these teams. These costs are recognized in the period incurred. We expect that our engineering and product development expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our engineering and product development team to continue to improve our AI models and develop new products and product enhancements.

General, Administrative and Other

General, administrative and other expenses consist primarily of payroll and other personnel-related expenses, including stock-based compensation expense, for legal and compliance, finance and accounting, human resources and facilities teams, as well as depreciation and amortization of property, equipment, software, and intangibles, professional services fees, facilities and travel expenses. These costs are recognized in the period incurred. We expect to increase the size of our general and administrative function to support the further growth of our business. As a result, we expect that our general, administrative and other expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.

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Other Income, Net

Other income, net primarily consists of dividend income earned by the Company on its unrestricted cash and cash equivalents balances.

Expense on Convertible Notes

Expense on convertible notes is comprised of coupon interest expense and amortization of the debt discount on our Notes.

Gain on Debt Extinguishment

Gain on debt extinguishment consists of the gain recognized from the repurchase of a portion of the outstanding 2026 Notes. Refer to “Note 9. Borrowings” in Part II, Item 8 of this Annual Report on Form 10-K for further details on our Notes.

Results of Operations

The following table summarizes our historical consolidated statements of operations and comprehensive loss:

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

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Revenue

Revenue from Fees, Net

The following table sets forth our revenue from fees, net in the years presented:

Revenue from fees, net increased $75.0 million, or 13%, in the year ended December 31, 2024, compared to the prior year, due to an $88.3 million increase in revenue from platform and referral fees, net and a $13.3 million decrease in servicing and other fees, net. The increase of the platform and referral fees, net was primarily driven by a 59% increase in the Transaction Volume, Number of Loans from 437,659 in the year ended December 31, 2023 to 697,092 in the year ended December 31, 2024. The decrease in servicing fees was primarily due to a decrease in the outstanding principal of serviced loans, partially offset by an increase in net gain related to loan servicing rights upon loan sales.

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Interest Income, Interest Expense, and Fair Value Adjustments, Net

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(1)Consists of balances recognized by entities participating in ongoing operating activities of the Company, excluding entities associated with the UPST 2023-2 consolidated securitization.

Interest income, interest expense, and fair value adjustments, net increased $47.9 million, or 102%, in the year ended December 31, 2024, compared to the prior year. The increase was driven by a $36.1 million decrease in unfavorable fair value adjustments, net, and a $17.4 million increase in interest income, partially offset by a $5.5 million increase in interest expense. The decrease in unfavorable fair value adjustments is primarily attributable to a $19.3 million decrease in negative mark-to-market adjustments and loan charge-offs, an $8.8 million decrease in fair value loss on beneficial interests, and an $8.1 million decrease in realized losses on loan sales. The increase in interest income was primarily driven by an increase in the average outstanding principal balance of loans held on the consolidated balance sheets during the period, including $9.3 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 borrowings, including an increase of $2.9 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 two quarters in 2023.

Operating Expenses

Sales and Marketing

Sales and marketing expenses increased by $39.7 million, or 31%, in the year ended December 31, 2024 compared to the prior year. The increase was primarily due to a $34.5 million increase in advertising and other traffic acquisition costs and a $5.2 million increase in payroll and other personnel related expenses. As a percentage of total revenue, sales and marketing expenses increased from 25% to 26%.

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(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Customer Operations

Customer operations expenses increased by $7.6 million, or 5%, in the year ended December 31, 2024, compared to the prior year. The increase was primarily due to a $14.2 million increase in servicing expenses, $2.9 million increase in information verification expenses, and a $1.2 million removal of an operational contingency reserve in the prior year. The increase was partially offset by a $11.3 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 29% to 25%.

Engineering and Product Development

Engineering and product development expenses decreased by $26.5 million, or 9%, for the year ended December 31, 2024, compared to the prior year. The decrease was primarily due to a $26.7 million decrease in payroll and other personnel-related expenses, primarily driven by an expense related to the cancellation of PRSUs during the year ended December 31, 2023, refer to “Note 10. Stockholders' Equity”. As a percentage of total revenue, engineering and product development expenses decreased from 55% to 40%.

General, Administrative, and Other

General, administrative, and other expenses increased by $18.5 million, or 9%, for the year ended December 31, 2024, compared to the prior year. The increase was primarily due to an increase of $15.5 million in payroll and personnel-related costs and an increase of $8.6 million in legal and compliance expenses. The increase was partially offset by a decrease of $4.4 million in depreciation and amortization expenses and a $1.5 million decrease in insurance expense. As a percentage of total revenue, general, administrative, and other expenses decreased from 41% to 36%.

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(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Other Income, Net

Other income, net decreased by $2.4 million, or 11%, in the year ended December 31, 2024 compared to the prior year. The decrease was due to a $1.9 million decrease in dividend income and a $0.5 million decrease in miscellaneous other income, net.

Expense on Convertible Notes

In the year ended December 31, 2024, expense on convertible notes increased by $3.0 million, or 63%, compared to the prior year. The increase was primarily due to higher outstanding convertible debt balances resulting from 2029 Notes and 2030 Notes issued during the year ended December 31, 2024.

Gain on Debt Extinguishment

In the year ended December 31, 2024, gain on debt extinguishment increased by $33.4 million, or 100%, compared to the year ended December 31, 2023. During the third quarter of 2024, the Company repurchased a portion of the outstanding principal amount of the 2026 Notes and recognized a gain on debt extinguishment of $33.4 million during the year ended December 31, 2024.

Reconciliation of Non-GAAP Financial Measures

To supplement our 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.

However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP.

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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.

Contribution Profit and Contribution Margin

We use Contribution Profit and Contribution Margin as part of our overall assessment of performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our Board of Directors concerning our financial performance. We believe Contribution Profit and Contribution Margin are useful to investors for year-to-year comparisons of our business and in evaluating and understanding our operating results and ability to scale. Contribution Profit and Contribution Margin are also useful to investors because our management uses Contribution Profit and Contribution Margin, in conjunction with financial measures prepared in accordance with GAAP, to evaluate our operating results and financial performance and the effectiveness of our strategies.

Contribution Profit and Contribution Margin have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Contribution Profit and Contribution Margin are not GAAP financial measures of, nor do they imply profitability. Even if our revenue exceeds variable expenses over time, we may not be able to achieve or maintain profitability, and the relationship of revenue to variable expenses is not necessarily indicative of future performance. Contribution Profit and Contribution Margin do not reflect all of our variable expenses and involve some judgment and discretion around what costs vary directly with loan volume. Other companies that present contribution profit and contribution margin may calculate it differently and, therefore, similarly titled measures presented by other companies may not be directly comparable to ours.

The following table presents a reconciliation of loss from operations to Contribution Profit and Contribution Margin. We define Operating Margin as our loss from operations divided by revenue from fees, net.

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(1)Borrower acquisition costs were $302.7 million, $90.5 million, and $125.0 million for the years ended December 31, 2022, 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.

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(2)Borrower verification and servicing costs were $157.8 million, $116.6 million, and $128.9 million for the years ended December 31, 2022, 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.

Adjusted EBITDA and Adjusted EBITDA Margin

We believe that Adjusted EBITDA and Adjusted EBITDA Margin are useful for investors to use in comparing our financial performance with the performance of other companies for the following reasons:

•Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation, and interest expense, that can vary substantially from company to company depending upon their financing and capital structures, and the method by which assets were acquired; and

•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, net gain on lease modification and reorganization expenses that may obscure trends in the underlying performance of our business; and

•Adjusted EBITDA and Adjusted EBITDA Margin provide consistency and comparability with our past financial performance, and facilitate comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

Our use of Adjusted EBITDA and Adjusted EBITDA Margin has limitations as an analytical tool, and these measures should not be considered in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:

•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;

•Adjusted EBITDA and Adjusted EBITDA Margin exclude stock-based compensation expense and certain employer payroll taxes on employee stock transactions. Stock-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy. The amount of employer payroll tax-related expense on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business;

•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us; and

•The expenses and other items that we exclude in our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA and adjusted EBITDA margin when they report their operating results.

Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP. The following table provides a reconciliation of net loss and Net Loss Margin to Adjusted EBITDA Margin. We define Net Loss Margin as net loss divided by total revenue.

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(1)Payroll tax expenses include the employer payroll tax-related expense on employee stock transactions, as the amount is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of our business.

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(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share

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, net gain on lease modification, 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.

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(1)Payroll tax expenses include the amount of employer payroll tax-related expense on employee stock transactions, as the amount is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of our business.

Liquidity and Capital Resources

Sources and Uses of Cash and Cash Equivalents

As of December 31, 2024, our primary source of liquidity was unrestricted cash and cash equivalents of $788.4 million. We also held $5.0 million of investments in certificates of deposit with maturities greater than three months as of December 31, 2024. Changes in the balance of cash and cash equivalents 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.

Our convertible senior notes have an aggregate principal balance of $1,230.4 million and bear interest at a rate of 0.25% per year in the case of the 2026 Notes, 2.00% per year in the case of the 2029 Notes, and 1.00% per year in the case of the 2030 Notes, in each case payable semiannually. The 2026 Notes mature on August 15, 2026, the 2029 Notes mature on October 1, 2029, and the 2030 Notes mature on November 15, 2030, in each case unless

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earlier converted, redeemed, or repurchased in accordance with their terms. Refer to “Note 8. Borrowings” in Part II, Item 8 of this Annual Report on Form 10-K for further details on our Notes.

Our warehouse credit facilities, which mature between December 2025 and June 2028, allow us to borrow up to an aggregate of $475.0 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 December 31, 2024, we have drawn an aggregate of $195.6 million on our warehouse credit facilities. Refer to “Note 8. Borrowings” in Part II, Item 8 of this Annual Report on Form 10-K for further details on our warehouse credit facilities.

We lease office facilities under operating lease agreements which expire between 2027 and 2029. Our cash requirements related to these lease agreements are $55.9 million, of which $15.4 million is expected to be paid within the next 12 months. Refer to “Note 11. Leases” in Part II, Item 8 of this Annual Report on Form 10-K for further details on our operating lease obligations.

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 December 31, 2024, the total loan purchase commitment was $72.8 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 December 31, 2024, the Company had unfunded commitments related to the line of credit of $7.6 million. The Company also has commitments to fund future advances on HELOCs. As of December 31, 2024, these commitments were $7.6 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 II, Item 8 of this Annual Report on Form 10-K for further details on our commitments.

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 December 31, 2024, the Company’s aggregate maximum exposure to losses was $459.3 million. Refer to “Note 4. Beneficial Interests” in Part II, Item 8 of this Annual Report on Form 10-K for further details on our committed capital and co-investment arrangements. Our cash requirements for the next 12 months related to investments in these existing arrangements is estimated to be up to $210.0 million.

While we believe that our cash and cash equivalents on hand will be sufficient to meet our liquidity needs for at least the next 12 months, our future capital requirements will depend on multiple factors, including our revenue growth, working capital requirements, volume of loan purchases for product development purposes or during market downturns, and our capital expenditures. We may decide to raise additional capital through the sale of equity, equity-linked or debt securities or other debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. Further, if we are unable to raise additional capital when our cash and cash equivalents balances and cash generated by operations are insufficient to satisfy liquidity needs, our results of operations and financial condition would be materially and adversely impacted.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Cash Flows

The following table summarizes our cash flows during the years indicated:

Net Cash from Operating Activities

Our main sources of cash provided by operating activities are our revenue from fees earned under contracts with lending partners and institutional investors and interest income we receive for loans held on our balance sheet.

Our main uses of cash in our operating activities include payments to marketing partners, vendor payments, payroll and other personnel-related expenses, payments for facilities, and other general business expenditures.

Net cash provided by operating activities was $186.3 million for the year ended December 31, 2024, which consisted of adjustments for non-cash items of $253.4 million, $61.5 million in net changes in operating assets and liabilities, and net loss of $128.6 million. The increase in non-cash adjustments was primarily related to $125.0 million of changes in fair value of loans held on the Company’s balance sheet, $133.4 million of stock-based compensation, $20.5 million of depreciation and amortization, and $16.5 million of changes in fair value of servicing assets, partially offset by $33.4 million of gain on debt extinguishment. The increase in net changes in operating assets and liabilities was primarily related to $192.9 million in principal payments received for loans held-for-sale, $48.0 million in principal payments received for loans held in consolidated securitization, and $44.1 million of changes in accrued expenses and other liabilities, partially offset by $207.3 million of net payments from purchase and sale of loans held-for-sale, $8.7 million of changes in other assets, and $6.7 million of payments on beneficial interest liabilities.

Net Cash from Investing Activities

Net cash used in investing activities was $237.7 million for the year ended December 31, 2024 as a result of $323.1 million purchases and originations of loans held-for-investment and $63.3 million acquisition of beneficial interest assets, partially offset by $145.3 million in principal payments received for loans held-for-investment.

Net Cash from Financing Activities

Net cash provided by financing activities was $559.9 million for the year ended December 31, 2024 primarily due to $909.5 million of proceeds from issuance of the 2029 and 2030 Notes, net of debt issuance costs and $387.3 million of proceeds from warehouse borrowings, partially offset by $357.4 million repayments of warehouse borrowings, $325.3 million of payments for repurchases of convertible notes, and $55.4 million of principal payments made on securitization notes.

Composition of Balance Sheet Loan Portfolio

As of December 31, 2024, we held $806.3 million of loans on our consolidated balance sheet. $455.2 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

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borrowers. We also held $248.2 million of core personal loans which would otherwise be immediately purchased by institutional investors and $102.9 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.

Off-Balance Sheet Arrangements

In the ordinary course of business, we engage in activities that are not reflected on our 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 II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our significant accounting policies are described in “Note 1. Description of Business and Significant Accounting Policies” in Part II, Item 8 of this Annual Report on Form 10-K.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value determination requires the selection and use of valuation techniques and inputs subject to judgments and estimates that can significantly affect the amounts reported in the financial statements.

The Company considers determination of fair value of loans, payable to securitization note holders, and beneficial interests as critical accounting policies. We use a discounted cash flow model to estimate the fair value of these financial instruments based on the present value of estimated future cash flows. The model uses observable and unobservable inputs and reflects our best estimates of the assumptions a market participant would use to calculate fair value. Fair value of loans and payable to securitization note holders is based on inputs, such as discount rates, credit risk rates, and expected prepayment rates. These inputs are based on historical performance of loans facilitated through our platform, as well as the consideration of market participant requirements and use of observable market data for notes payable held in consolidated securitization. Fair value of beneficial interests, which represent the Company’s right to receive cash payments or an obligation to make cash payments as part of its committed capital and other co-investment arrangements with third parties, is based on discount rates and credit risk rate spreads. Credit risk rate spreads are the measurement of estimated credit performance of underlying loan portfolios as of the reporting date against set expectations.

For further information on fair value measurement refer to “Note 5. Fair Value Measurement” in Part II, Item 8 of this Annual Report on Form 10-K.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

Upstart applies artificial intelligence models and cloud applications to the process of underwriting consumer credit. Our AI marketplace connects consumers with our lending partners. Consumers can access Upstart-powered loans via Upstart.com, through a lender-branded product on our lending partners’ own websites, and through auto dealerships that use our Upstart Auto Retail software. We enable our lending partners to provide an exceptional digital-first experience to consumers and originate valuable credit products. As our technology continues to improve and additional lending partners adopt our platform, consumers benefit from improved access to affordable and frictionless credit.

We believe that banks and other traditional lenders will continue to be at the forefront of consumer lending in the United States. We believe AI lending will become increasingly critical as this industry continues to undergo a broad digital transformation. Our strategy is to partner with banks and credit unions and provide them with access to an AI lending marketplace that they can configure as they originate consumer loans under their own brand, according to their own business and regulatory requirements.

Loans issued through our marketplace are retained by our lending partners, purchased by our network of institutional investors, or funded by Upstart’s balance sheet. Investors may also invest in Upstart-powered loans through our pass-through and securitization programs.

As of December 31, 2023, out of the total principal of loans transacted on our marketplace in 2023, 48% were purchased by institutional investors, 32% were retained by our lending partners, 16% were held on our balance sheet, and the remaining 4% were contributed as collateral to the securitization transaction we completed in July 2023, which we have consolidated in our financial statements. Starting in 2022, we increased the utilization of our balance sheet to fund loans 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.

To improve the loan funding capacity for our marketplace across business and macroeconomic cycles, we secured multiple committed capital arrangements with institutional investors in 2023, which delivered a significant amount of loan funding to the Upstart marketplace. We continue our work on expanding committed capital arrangements for our marketplace.

Our Economic Model

Upstart’s revenues are primarily earned in exchange for the use of our platform and for borrower referral services provided to our lending partners through our lending marketplace. Fees for these services can be either fixed or based on a variable price per unit, depending on the contractual arrangement. Platform services result in

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loan originations by our lending partners using our platform and referral services result in a referral of a borrower obtaining a loan from our lending partners. These fees are combined for accounting purposes as they represent a single performance obligation. We do not charge the borrowers on our platform any referral, platform or other similar fees for our loan matching services.

We also charge the holder of the loan (either a lending partner or institutional investor) a servicing fee based on the outstanding principal over the lifetime of the loan for ongoing servicing of the loan. In addition, we earn a smaller portion of our revenue from interest income for loans held on our balance sheet and gain or (loss) generated through our capital markets programs.

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.

Credit Performance

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.

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 third quarter of 2023 is currently expected to deliver returns in line with a blended target of 9.0%. 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 second quarter 2023 are currently forecasted to underperform relative to their target returns. The core personal loans that originated in the third 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.

We have included similar disclosures in our Annual Report on Form 10-K for the year ended December 31, 2022, and in our Quarterly Reports on Form 10-Q starting from the quarter that ended June 30, 2022. We recently identified an error in the calculations that supported some of these statements. This resulted in an overstatement of the expected return of an equal investment in all vintages of Upstart-powered core personal loans that originated in the first quarter of 2018 through the third quarter of 2023 by 0.9 - 1.3% for each disclosure. The error also impacted our forecasts of the performance of certain quarterly loan vintages relative to target returns in the aforementioned reports. After correcting for the error, vintages retained by the hypothetical lending partner that we forecasted to meet or exceed target returns still include those originated from mid-2018 through mid-2021, but no longer include vintages from mid-2021 through mid-2022. Loans purchased by the hypothetical institutional investor would have been expected to experience underperformance relative to target returns through mid-2023 vintages, not through

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mid-2022 vintages. Importantly, the error did not impact any of our financial statements, any forecasts prepared for our actual lending partners or institutional investors, or the overall expected performance trend.

For the core personal loans held on our balance sheet, target returns are set similar to those of our institutional investors. We purchase core personal loans to address fluctuations of supply and demand in our marketplace and periodically sell these loans to institutional investors prior to their maturity. Demonstrated credit performance significantly influences sale prices in these transactions and impacts our overall financial results.

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.

Factors Affecting Our Performance

Continued Improvements to Our AI Models

Much of our historical growth has been driven by improvements to our AI models. These models benefit over time from a flywheel effect that is characteristic of machine learning systems: accumulation of repayment data leads to improved accuracy of risk and fraud predictions, which generally results in higher approval rates and lower interest rates, leading to increased volume, and consequently greater accumulation of repayment data. This virtuous cycle describes an important mechanism by which our business grows simply through model learning and recalibration. We expect to continue to invest significantly in the development of our AI models and platform functionalities.

Beyond the ongoing accumulation of repayment data used to train our models, we also frequently make discrete improvements to model accuracy by upgrading algorithms and incorporating new variables, both of which have historically resulted in higher approval rates, more competitive loan offers, increased automation, and faster growth. As a second order effect, the impact of these improvements on our conversion funnel also allows us to unlock new marketing channels over time that have previously been unprofitable.

We believe that ongoing improvements to our technology in this manner will allow us to further expand access and lower rates for creditworthy borrowers, which will continue to fuel our growth. Should the pace of these improvements slow down or cease, or should we discover forms of model upgrades which improve accuracy at the expense of volume, our growth rates could be adversely affected.

Impact of Macroeconomic Environment

In an economic downturn, we believe consumer lending will generally contract. Lending partners and institutional investors will generally require higher rates of return, which in turn increases the interest rates offered to borrowers, leading to lower borrower demand. Macroeconomic factors can also cause fluctuations of available capital in our lending marketplace due to shifts in the risk preferences of our lending partners and institutional investors. We expect these dynamics would generally invert in an economic upswing.

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Upstart Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Loan funding provided by institutional investors started to become constrained in the second quarter of 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.

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 November 2022 (“November 2022 Plan”) and January 2023 (“January 2023 Plan”) that resulted in the termination of approximately 7% and 20% of our workforce, respectively. These steps were designed to reduce operating costs, streamline operations and return Upstart to profitability in the future. As of December 31, 2023, we have completed both the November 2022 Plan and January 2023 Plan. Refer to “Note 16. Reorganization Expenses” for more information.

Further, several of our lending partners have paused or reduced loan originations in order to limit their exposure in the current macroeconomic environment. 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. In order to create greater stability for our business, in 2023 we secured several committed capital arrangements with institutional investors that contribute loan funding over longer durations. We continue our work on expanding committed capital arrangements 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 a committed capital structure.

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 December 31, 2023, UMI was measured at approximately 1.65, meaning that current macroeconomic conditions contributed an incremental risk of approximately 65% to the repayment performance of an Upstart-powered loan, compared to the baseline.

UMI impacts interest rates for loans offered on our marketplace and, as a result, affects the pool of qualified potential borrowers and consumer demand for the loans. The elevated level of UMI resulted in higher interest rates for the loans offered on our marketplace and in turn, decreased the size of the pool of qualified potential borrowers and the borrower acceptance rates of such loans. With our investment in UMI, we focus on our ability to better separate risk among borrowers in our credit decisioning process in changing macroeconomic conditions.

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

Lending Partner and Market Adoption

Lending partners play two key roles in Upstart’s ecosystem: funding loans and acquiring new customers. Traditional lenders, such as banks, tend to enjoy efficient sources of funding due to their expansive base of deposits. As they adopt our technology and fund a growing proportion of our marketplace transactions, offers made to borrowers will typically improve, generally leading to higher conversion rates and faster growth for our platform.

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Upstart Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

New lending partners also represent additional acquisition channels through which we can reach and source prospective new borrowers, as these lending partners develop and implement their own digital and in-branch campaigns to drive traffic from their existing customer base to our platform. We view this emerging growth channel to be additive to the marketing acquisition programs we currently run at Upstart.

To provide funding support beyond our lending partners, we have built, and continue to expand, a broad network of institutional investors that can fund Upstart-powered loans through secondary loan purchasing and issuance of pass-through certificates and asset-backed securitizations. This diverse network of capital helps to minimize our reliance on any one funding source. However, any trend towards reduced participation by lending partners will generally erode the overall competitiveness of the offers on our platform, and any declining trend in the participation of broader institutional investment markets with respect to funding availability for Upstart-powered loans will adversely affect our business.

We believe that disruptions in the banking sector may limit our ability to attract new lending partners and may cause existing lending partners to reduce loan originations on our platform. In order to address recent funding constraints for our personal loans, Upstart has utilized its balance sheet to support short-term funding requirements of loans that would otherwise be purchased and held by institutional investors or securitized. In 2023, we secured several committed capital arrangements with institutional investors, which have delivered, and are expected to deliver, a significant amount of loan funding to the Upstart marketplace.

We believe that continued focus on improving our AI models and demonstrating strong performance of Upstart-powered loans over time will allow us to further diversify our sources of capital for our lending marketplace and mitigate the volatility in our loan funding supply.

Product Expansion and Innovation

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. In 2022, we introduced a new offering of personal loans for borrowers interested in small dollar loans, and in the third quarter of 2023, we launched a HELOC product on our platform. 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.

In 2020, we announced our entry into the auto lending market and in April 2021, we acquired Prodigy Software, Inc. (“Prodigy”), a leader in automotive commerce software solutions. Prodigy provided a modern multi-channel car buying experience, helping dealerships serve consumers with a holistic software solution that integrates legacy systems. The acquisition enabled the launch of Upstart Auto Retail software, a cloud-based solution that enables dealerships across the country, where the vast majority of auto loans are transacted, to provide consumers with access to Upstart-powered auto loans.

As part of the January 2023 Plan, we suspended development work for small business loans to focus our resources on acceleration of further development of our personal loan, auto loan, and HELOC products.

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Upstart Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Key Operating and Non-GAAP Financial Metrics

We focus on several key operating and Non-GAAP financial metrics to measure the performance of our business and help determine strategic direction. The following presents our key operating and financial metrics:

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(1)Transaction Volume, Number of Loans is shown in ones for the years presented.

(2)Represents a non-GAAP financial measure. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures” for further information.

Transaction Volume

We define Transaction Volume, Dollars as the total principal of loan originations facilitated on our marketplace during the years presented. We define Transaction Volume, Number of Loans as the number of loan originations facilitated on our marketplace during the years 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 decreased by 59% in the year ended December 31, 2023 compared to the prior year and Transaction Volume, Number of Loans decreased by 61% over the same year. This contraction was driven by a reduction in funding availability caused by macroeconomic uncertainty and by elevated consumer risk and cost of funds. These changing macroeconomic conditions required adjustments to our models which resulted in our loans becoming more expensive and decreasing both the pool of qualified potential borrowers and overall consumer demand.

Conversion Rate

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

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Upstart Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

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 decreased to 9.7% in the year ended December 31, 2023 from 14.1% in the year ended December 31, 2022 primarily driven by lower approval rates following the significant increase in interest rates, which were in turn driven by elevated risk and cost of capital. The impact of these factors was partially offset by an increased portion of repeat borrowers on our platform.

Percentage of Loans Fully Automated

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 87% in the year ended December 31, 2023 from 75% in the year ended December 31, 2022 , 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.

Contribution Profit and Contribution Margin

To derive Contribution Profit, we subtract from revenue from fees, net our borrower acquisition costs as well as our borrower verification and servicing costs. To calculate Contribution Margin we divide Contribution Profit by revenue from fees, net.

The following table provides a calculation of Contribution Profit and Contribution Margin:

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(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.

(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.

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Upstart Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

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 income from operations to Contribution Profit.

Adjusted EBITDA and Adjusted EBITDA Margin

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, net gain on a lease modification, 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.

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share

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 and net gain on a lease modification. 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.

Components of Results of Operations

Revenue from Fees, Net

Platform and Referral Fees, Net

We charge our lending partners platform fees in exchange for usage of our AI lending marketplace, which includes collection of loan application data, underwriting of credit risk, verification and fraud detection, and the delivery of electronic loan offers and associated documentation. We also charge referral fees to our lending partners in exchange for the referral of borrowers from Upstart.com. Referral fees are charged to lending partners on a per borrower basis upon origination of a loan. These fees are charged net of any fees the lending partner charges Upstart. Upstart pays these lending partners a one-time loan premium fee upon completion of the minimum holding periods. Upstart also pays lending partners monthly loan trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans.

The Company also recognizes fees in relation to contracts with auto dealers for the use of Upstart Auto Retail software, a cloud-based solution that facilitates dealership operations and enables them to provide consumers with access to Upstart-powered auto loans. Refer to “Note 2. Revenue” to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.

Servicing and Other Fees, Net

Servicing fees are calculated as a percentage of outstanding principal and are charged monthly to any entities holding loans facilitated through our marketplace, to compensate us for activities we perform throughout the loan term, including collection, processing and reconciliations of payments received, institutional investor reporting and borrower customer support. Servicing fees are recorded net of any gains, losses or changes to fair value recognized in the underlying servicing rights and obligations, which are carried as assets and liabilities on our consolidated balance sheets. Upstart currently acts as loan servicer for substantially all outstanding loans facilitated

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Upstart Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

through the Upstart marketplace. Borrower payment collections for loans that are more than 30 days past due or charged off are generally outsourced to third-party collection agencies. Upstart charges lending partners and institutional investors for collection agency fees related to their outstanding loan portfolio. Upstart also receives certain ancillary fees on a per transaction basis inclusive of late payment fees and ACH fail fees.

Interest Income, Interest Expense, and Fair Value Adjustments, Net

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 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 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.

Sales and Marketing

Sales and marketing expenses primarily consist of costs incurred across various advertising channels, including expenses for partnerships with third parties providing borrower referrals, direct mail and digital advertising campaigns, as well as other expenses associated with building overall brand awareness and experiential marketing costs. Sales and marketing expenses also include payroll and other personnel-related costs, including stock-based compensation expense. These costs are recognized in the period incurred. We expect that our sales and marketing expenses will generally fluctuate as a percentage of our total revenue from period to period and may increase as we hire additional sales and marketing personnel, increase our marketing activities and build greater brand awareness.

Customer Operations

Customer operations expenses include payroll and other personnel-related expenses, including stock-based compensation expense, for personnel engaged in borrower onboarding, loan servicing, customer support and other operational teams. These costs also include systems, third-party services and tools we use as part of loan servicing, information verification, fraud detection and payment processing activities. These costs are recognized in the period incurred. We expect that our customer operations expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our portfolio.

Engineering and Product Development

Engineering and product development expenses primarily consist of payroll and other personnel-related expenses, including stock-based compensation expense, for the engineering and product development teams as well as the costs of systems and tools used by these teams. These costs are recognized in the period incurred. We expect that our engineering and product development expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our engineering and product development team to continue to improve our AI models and develop new products and product enhancements.

General, Administrative and Other

General, administrative and other expenses consist primarily of payroll and other personnel-related expenses, including stock-based compensation expense, for legal and compliance, finance and accounting, human resources and facilities teams, as well as depreciation and amortization of property, equipment, software, and intangibles, professional services fees, facilities and travel expenses. These costs are recognized in the period incurred. We expect to increase the size of our general and administrative function to support the further growth of our business. As a result, we expect that our general, administrative and other expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.

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Upstart Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)

Other Income (Expense), Net

For the year ended December 31, 2021, other income (expense), net primarily consists of our voluntarily repayment of proceeds received in the previous year under the Paycheck Protection Program plus related accrued interest. In the year ended December 31, 2022 and 2023, other income (expense), net primarily consists of dividend income earned by the Company on its unrestricted cash balances.

Expense on Convertible Notes

Expense on convertible notes is comprised of coupon interest expense and amortization of the debt discount on our convertible notes.

Results of Operations

The following table summarizes our historical consolidated statements of operations and comprehensive income (loss):