UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
| (Mark One) | |||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended | |||||
| OR | |||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from_________to ________
Commission File Number: 001-39797
(Exact name of registrant as specified in its charter)
_________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| Upstart Holdings, Inc. | ||||||||||||||
| (Address of principal executive offices, including zip code) | ||||||||||||||
( | ||||||||||||||
| (Registrant’s telephone number, including area code) | ||||||||||||||
_________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of July 29, 2022 there were 81,348,003 shares of the registrant’s common stock outstanding.
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Upstart Holdings, Inc.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | Other Information | |||||||
| Item 6. | ||||||||
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws about us and our industry, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “seek,” “could,” “intend,” “target,” “aim,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include statements about:
•our future financial performance, including our expectations regarding our revenue, our operating expenses, our ability to determine reserves and our ability to achieve and maintain profitability;
•our ability to improve the effectiveness and predictiveness of our AI models and our expectations that improvements in our AI models can lead to higher approval rates and lower interest rates;
•our ability to increase the volume of loans facilitated through our AI lending marketplace;
•our ability to successfully maintain a diversified loan funding strategy, including bank partnerships and whole loan sales and securitization transactions;
•our capital allocation plans, including expectations regarding funding loans through our balance sheet and allocations of cash and timing for any share repurchases and other investments;
•our ability to maintain competitive interest rates offered to borrowers on our platform, while enabling our bank partners and institutional investors to achieve an adequate return over their cost of funding;
•our ability to successfully build our brand and protect our reputation from negative publicity;
•our ability to increase the effectiveness of our marketing strategies, including our direct consumer marketing initiatives;
•our expectations regarding macroeconomic events, including rising interest and inflation rates and monetary policy changes;
•the impact of the COVID-19 pandemic and any associated economic downturn on our business and results of operations;
•our expectations and management of future growth, including expanding the number of potential borrowers;
•our ability to successfully adjust our proprietary AI models, products and services in a timely manner in response to changing macroeconomic conditions and fluctuations in the credit market;
•our compliance with applicable local, state and federal laws;
•our ability to comply with and successfully adapt to complex and evolving regulatory environments, including regulation of artificial intelligence and machine learning technology;
•our expectations regarding regulatory support of our approach to AI-based lending;
•our expectations regarding the success of our strategic investments and acquisitions, including the integration of acquired operations, products, technology, internal controls and personnel;
•our expectations regarding new and evolving markets and our ability to enter into new markets and introduce new products and services, such as our introduction of auto loans, small dollar loans and small business loans;
•our expectations concerning relationships with third parties;
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•our ability to protect against increasingly sophisticated fraudulent borrowing and online theft;
•our ability to service loans and the ability of third-party collection agents, to pursue collection of delinquent and defaulted loans;
•our ability to successfully compete with companies that are currently in, or may in the future enter, the markets in which we operate;
•our ability to effectively secure and maintain the confidentiality of the information received, accessed, stored, provided and used across our systems;
•our ability to successfully obtain and maintain corporate funding and liquidity to support continued growth and for general corporate purposes;
•our ability to attract, integrate and retain qualified employees;
•our ability to maintain an effective system of disclosure controls and internal control over financial reporting and operations;
•our ability to effectively manage and expand the capabilities of our operations teams, outsourcing relationships and other business operations;
•our ability to maintain, protect and enhance our intellectual property;
•our expectations regarding outstanding litigation and regulatory investigations; and
•our ability to manage the increased expenses associated with being a public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this report.
Forward-looking statements should not be relied upon as predictions of future events. We have based the forward-looking statements contained in this report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made in this report and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. Undue reliance should not be placed on our forward-looking statements as we may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or
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review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
Each of the terms the “Company,” “we,” “our,” “us” and similar terms used herein refer collectively to Upstart Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries, unless otherwise stated.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Upstart Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
| December 31, | June 30, | ||||||||||
| 2021 | 2022 | ||||||||||
| Assets | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Loans (at fair value) | |||||||||||
| Property, equipment, and software, net | |||||||||||
| Operating lease right of use assets | |||||||||||
| Non-marketable equity securities | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
Other assets (includes $ | |||||||||||
Total assets(a) | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Payable to investors | |||||||||||
| Borrowings | |||||||||||
Accrued expenses and other liabilities (includes $ | |||||||||||
| Operating lease liabilities | |||||||||||
Total liabilities(a) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
____________
(a)The following table presents information on assets and liabilities related to variable interest entities (“VIEs”) that are consolidated by Upstart Holdings, Inc. at December 31, 2021 and June 30, 2022. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. The holders of the beneficial interests do not have recourse to the general credit of Upstart Holdings, Inc. The assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs and exclude intercompany balances that eliminate in consolidation.
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Upstart Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
| December 31, | June 30, | ||||||||||
| 2021 | 2022 | ||||||||||
| Assets | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Loans (at fair value) | |||||||||||
Other assets (includes $ | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Borrowings | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Total net assets | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Revenue from fees, net | $ | $ | $ | $ | |||||||||||||||||||
| Interest income and fair value adjustments, net | ( | ( | |||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Customer operations | |||||||||||||||||||||||
| Engineering and product development | |||||||||||||||||||||||
| General, administrative, and other | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income (loss) from operations | ( | ||||||||||||||||||||||
| Other income (expense) | ( | ||||||||||||||||||||||
| Net income (loss) before income taxes | ( | ||||||||||||||||||||||
| (Benefit) provision for income taxes | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ||||||||||||||||||
| Net income (loss) per share, basic | $ | $ | ( | $ | $ | ||||||||||||||||||
| Net income (loss) per share, diluted | $ | $ | ( | $ | $ | ||||||||||||||||||
| Weighted-average number of shares outstanding used in computing net income (loss) per share, basic | |||||||||||||||||||||||
| Weighted-average number of shares outstanding used in computing net income (loss) per share, diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | |||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Issuance of common stock in connection with acquisition | — | — | |||||||||||||||||||||||||||
| Issuance of common stock in connection with follow-on offering, net of underwriting discounts, commissions, and offering costs | — | ||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | |||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Exercise of common stock warrants | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock units | ( | — | ( | — | ( | ||||||||||||||||||||||||
| Issuance of common stock in connection with acquisition | — | — | |||||||||||||||||||||||||||
| Issuance of common stock in connection with follow-on offering, net of underwriting discounts, commissions, and offering costs | — | ||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | |||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Repurchases of stock | ( | ( | ( | — | ( | ||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | ||||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||
| Repurchases of stock | ( | ( | ( | — | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2021 | 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Change in fair value of financial instruments | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Gain on loan servicing arrangement, net | ( | ( | |||||||||
| Depreciation and amortization | |||||||||||
| Non-cash interest expense | |||||||||||
| Net changes in operating assets and liabilities: | |||||||||||
| Purchase of loans for immediate resale | ( | ( | |||||||||
| Proceeds from immediate resale of loans | |||||||||||
| Purchase of loans held-for-sale | ( | ( | |||||||||
| Principal payments received for loans held-for-sale | |||||||||||
| Proceeds from sale of loans held-for-sale | |||||||||||
| Other assets | ( | ||||||||||
| Operating lease liability and right-of-use asset | |||||||||||
| Accounts payable | |||||||||||
| Payable to investors | ( | ||||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of loans held-for-investment | ( | ( | |||||||||
| Proceeds from sale of loans held-for-investment | |||||||||||
| Principal payments received for loans held-for-investment | |||||||||||
| Principal payments received for notes receivable and repayments of residual certificates | |||||||||||
| Purchase of non-marketable equity security | ( | ||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Capitalized software costs | ( | ( | |||||||||
| Acquisition, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Repurchases of common stock | ( | ||||||||||
| Proceeds from secondary offering, net of underwriting discounts, commissions, and offering costs | |||||||||||
| Proceeds from borrowings | |||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ||||||||||
| Repayments of borrowings | ( | ( | |||||||||
| Proceeds from issuance of common stock under employee stock purchase plan | |||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Change in cash and restricted cash | ( | ||||||||||
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Upstart Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2021 | 2022 | ||||||||||
| Cash and restricted cash at beginning of period | |||||||||||
| Cash and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||
| Supplemental disclosures of non-cash investing and financing activities | |||||||||||
| Issuance of common stock in connection with acquisition | $ | $ | |||||||||
| Capitalized stock-based compensation expense | |||||||||||
The following presents cash and restricted cash by category within the condensed consolidated balance sheet:
| December 31, | June 30, | ||||||||||
| 2021 | 2022 | ||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash and restricted cash | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
1. Description of Business and Significant Accounting Policies
Description of Business
Upstart Holdings, Inc. and its subsidiaries (together “Upstart”, the “Company”, “we”, or “our”) apply modern data science and technology to the process of originating consumer credit. The Company helps originate credit, including personal and auto loans, by providing bank partners with access to a proprietary, cloud-based, artificial intelligence lending marketplace. As the Company’s technology continues to improve and additional banks adopt the Upstart platform, consumers benefit from improved access to affordable and frictionless credit. The Company currently operates in the United States and is headquartered in San Mateo, California and Columbus, Ohio. The Company’s fiscal year ends on December 31.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements included in our Annual Report on Form 10-K and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated of any future annual or interim periods.
Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Stock-Based Compensation
The Company issues stock options, restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”), and restricted stock to employees and non-employees, including directors and third-party service providers, and employee stock purchase rights granted under the Company’s employee stock purchase plan (“ESPP”). Stock options and employee stock purchase rights granted under the ESPP are initially measured at fair value at the date of grant using the Black-Scholes option-pricing model. RSUs and restricted stock are measured at the fair market value of our common stock at the grant date. PRSUs are initially measured at fair value using a Monte Carlo simulation model. Stock-based compensation expenses are recognized based on their respective grant-
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
Recently Adopted Accounting Pronouncements
The Company did not adopt any new accounting standards during the six months ended June 30, 2022.
Recently Issued Accounting Pronouncements
In March 2020 the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting followed by ASU 2021-01, Reference Rate Reform, Scope issued in January 2021. ASU 2020-04 and ASU 2021-01 provide temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. The optional guidance in ASU 2020-04 and ASU 2021-01 is effective for a limited period of time through December 31, 2022 and may be applied prospectively to contract modifications and hedging relationships. The Company does not expect the adoption of this guidance will have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The ASU is to be applied prospectively to business combinations occurring on or after the effective date of the amendment (or if adopted early as of an interim period, as of the beginning of the fiscal year that includes the interim period of early application). This standard has no impact on acquired contract assets or liabilities from business combinations occurring prior to the effective date of adoption. The Company is currently assessing the impact the standard will have on its condensed consolidated financial statements and related disclosures.
2. Revenue
Revenue from fees, net
The Company disaggregates revenue from fees by type of service for the periods presented as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Revenue from fees, net: | |||||||||||||||||||||||
| Platform and referral fees, net | $ | $ | $ | $ | |||||||||||||||||||
| Servicing and other fees, net | |||||||||||||||||||||||
| Total revenue from fees, net | $ | $ | $ | $ | |||||||||||||||||||
Platform and referral fees, net
The Company enters into contracts with bank partners to provide access to a cloud-based artificial intelligence lending marketplace developed by the Company (the “Upstart platform”) to enable banks to originate
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Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
unsecured personal and secured auto loans. The Upstart platform includes a cloud-based application (through Upstart.com or a bank-branded program) for submitting loan applications, verifying information provided within submitted applications, risk underwriting (through a series of proprietary technology solutions), delivery of electronic loan offers, and if the offer is accepted by the borrower, electronic loan documentation signed by the borrower. Bank partners can specify certain parameters of loans they are willing to originate. Under these contracts, bank partners can choose to use Upstart’s referral services, which allow them to access new borrowers through Upstart’s marketing channels. The Company’s contracts with bank partners are non-cancelable and generally have 12-month terms that automatically renew.
After origination, Upstart-powered loans are either retained by bank partners, purchased by the Company for immediate resale to institutional investors under loan sale agreements, or purchased and held by the Company. For loans purchased by the Company, Upstart pays bank partners a one-time loan premium fee upon completion of the minimum contractual holding period. Upstart also pays bank partners monthly loan trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans. Both the loan premium fees and loan trailing fees are consideration payable to customers and are recorded as a reduction to platform and referral fees, net, which is part of revenue from fees, net, in the condensed consolidated statements of operations and comprehensive income (loss). The Company recognized $6.0 million and $9.6 million of loan premium fees and loan trailing fees as contra-revenue within platform and referral fees, net during the three and six months ended June 30, 2021, respectively, and $6.1 million and $14.8 million during the three and six months ended June 30, 2022, respectively.
As of December 31, 2021 and June 30, 2022, the Company recognized $4.3 million and $5.4 million of loan trailing fee liability, respectively, which is recorded at fair value and included within accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets. Refer to “Note 4. Fair Value Measurement” for additional information on changes in fair value associated with trailing fee liabilities.
The Company’s arrangements for platform and referral services typically consist of an obligation to provide one or both of these services to customers, which are our bank partners, on a when and if needed basis (a stand-ready obligation), and revenue is recognized as such services are performed. Additionally, the services have the same pattern and period of transfer, and when provided individually or together, are accounted for as a single combined performance obligation representing a series of distinct services.
Platform and referral services are typically provided under a fixed or variable price per unit based on a percentage of the value of loans originated each period with certain bank partners subject to minimum fees; however, pricing for these services may also be based on usage fees, calculated as a percentage of each loan originated. The nature of the Company’s promise is to stand-ready and provide continuous access to and process transactions through the platform. Platform and referral fees represent variable consideration as loan origination volume is not known at contract inception. These fees are determined each time a loan is originated. Fees for platform and referral services are typically billed and paid on either a daily or monthly basis. As such, the Company’s contracts with customers do not include a significant financing component.
The Company did no 44.8 million and $37.0 million of accounts receivable that are included in other assets on the condensed consolidated balance sheets related to contracts with customers as of December 31, 2021 and June 30, 2022, respectively. The standard payment terms on accounts receivable are 30 days. The Company’s allowance for bad debt and bad debt expense were immaterial for the periods presented.
The Company capitalizes incremental costs of obtaining a contract with a customer, which are certain sales commissions paid to employees in connection with the acquisition of bank partners. Capitalized costs are amortized over the expected period of benefit, which we have determined, based on an analysis, to be three years . The
16
Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
Company applies the practical expedient to expense costs to obtain contracts with customers if the amortization period is one year or less. As of December 31, 2021 and June 30, 2022, the Company had an immaterial amount of contract costs capitalized within other assets on the condensed consolidated balance sheets. The Company amortized an immaterial amount of capitalized contracts costs to sales and marketing in the condensed consolidated statements of operations and comprehensive income (loss) for the periods presented.
Customers accounting for greater than 10% of total revenue were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Customer A | |||||||||||||||||||||||
| Customer B | |||||||||||||||||||||||
Customers accounting for greater than 10% of accounts receivable were as follows:
| December 31, | June 30, | ||||||||||
| 2021 | 2022 | ||||||||||
| Customer C | * | ||||||||||
| Customer D | |||||||||||
* Less than 10%
Servicing and other fees, net
The Company also enters into contracts with bank partners and institutional investors to provide loan servicing for the life of Upstart-powered loans. These services commence upon origination of these loans by bank partners and include collection, processing and reconciliations of payments received, investor reporting and borrower customer support as well as distribution of funds to the holders of the loans. The Company charges the loan holder a monthly servicing fee calculated based on a predetermined percentage of the outstanding principal balance. Servicing fees also include certain ancillary fees charged on a per transaction basis for processing late payments and payments declined due to insufficient funds. Servicing fees are recognized in the period the services are provided. Loan servicing fees are not within the scope of ASC 606 and are accounted for under ASC 860, Transfers and Servicing.
Servicing and other fees, net also include gains and losses on assets and liabilities recognized under loan servicing arrangements for loans retained by bank partners or loans sold to institutional investors. Such gains or losses are recognized based on whether the benefits of servicing are expected to be more or less than adequate compensation for servicing obligations performed by the Company. Servicing fees also include changes in fair value of loan servicing assets and liabilities in the periods presented. Refer to “Note 4. Fair Value Measurement” for additional information on changes in fair value associated with servicing assets and liabilities.
The Company recognized a net gain related to loan servicing rights upon loan sales for the periods presented as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Net gain related to loan servicing rights | $ | $ | $ | $ | |||||||||||||||||||
The Company generally outsources borrower payment collections for loans that are more than 30 days past due or charged off to third-party collection agencies. The Company charges bank partners and institutional investors
17
Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
for collection agency fees related to their outstanding loan portfolio. The Company has discretion in hiring the collection agencies and determining the scope of their work. As the principal in the arrangement, the Company recognizes gross revenue from collection agency fees in the period that the services are provided. Upstart also receives certain ancillary fees inclusive of late payment fees and ACH fail fees. Revenue from collection agency fees and borrower fees are included in servicing and other fees, net as part of revenue from fees, net in the Company’s condensed consolidated statements of operations and comprehensive income (loss). The total fees charged by collection agencies are also recognized in the period incurred and reported as part of customer operations expenses.
The Company recognized collection agency fees and borrower fees, which are included in servicing and other fees, net for the periods presented as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Collection agency fees | $ | $ | $ | $ | |||||||||||||||||||
| Borrower fees | $ | $ | $ | $ | |||||||||||||||||||
Interest Income and Fair Value Adjustments, Net
Interest income and fair value adjustments, net is comprised of interest income, interest expense and net changes in the fair value of financial instruments, held in the Company’s normal course of business at fair value, including loans and notes receivable and residual certificates.
The table below presents components of the interest income and fair value adjustments, net presented in the Company’s condensed consolidated statements of operations and comprehensive income:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Interest income and fair value adjustments, net: | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | |||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
Fair value and other adjustments, net(1)(2) | ( | ( | |||||||||||||||||||||
| Total interest income and fair value adjustments, net | $ | $ | ( | $ | $ | ( | |||||||||||||||||
1.Includes $1.4 million and $4.3 million of realized gains on sale of loans for the three and six months ended June 30, 2021, respectively, and $(25.4 ) million and $(24.1 ) million of realized losses on sale of loans for the three and six months ended June 30, 2022, respectively.
2.Includes $1.4 million and $2.5 million of income from capital market programs, net for the three and six months ended June 30, 2021, respectively. Income from capital market programs was immaterial for both the three and six months ended June 30, 2022.
Interest income
Interest income is recognized based on the terms of the underlying agreements with borrowers for loans held on the Company’s condensed consolidated balance sheets and is earned over the life of a loan.
Interest income also includes accrued interest earned on outstanding loans but not collected. Loans that have reached a delinquency of over 120 days are classified as non-accrual status and any accrued interest recorded in relation to these loans is reversed in the respective period. The Company does not record an allowance for credit
18
Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
losses on accrued interest receivable. As of December 31, 2021 and June 30, 2022, the Company has recorded $2.6 million and $7.0 million of accrued interest income in loans on the condensed consolidated balance sheets, respectively.
Interest expense
Interest expense is primarily related to interest recorded on the Company’s borrowings on warehouse credit facilities. Interest expense includes accrued interest incurred but not paid. Accrued interest expenses were immaterial as of December 31, 2021 and June 30, 2022.
Fair value and other adjustments, net
Fair value and other adjustments, net include changes in fair value of financial instruments, other than loan servicing assets and liabilities. These adjustments are recorded in the Company’s condensed consolidated statements of operations and comprehensive income (loss) and include both realized and unrealized changes to the value of related assets and liabilities. Refer to “Note 4. Fair Value Measurement” for additional information.
3. Variable Interest Entities
Consolidated VIEs
The Company consolidates VIEs in which the Company has a variable interest and is determined to be the primary beneficiary. This determination is based on whether the Company has a variable interest (or combination of variable interests) that provides the Company with (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or right to receive benefits that could be potentially significant to the VIE. The Company continually reassesses whether it is the primary beneficiary of a VIE throughout the entire period the Company is involved with the VIE.
The Company also determines whether decision-maker or service-provider fees are variable interests. Decision-maker or service-provider fees are not considered variable interests when the arrangement does not expose the Company to risks of loss that a potential VIE was designed to pass on to its variable interest holders, the fees are commensurate, the arrangement is at market, and the Company does not have any other interests (including direct interests and certain indirect interests held through related parties) that absorb more than an insignificant amount of a VIE’s potential variability. This determination can have a significant impact on the Company’s consolidation analysis, as it could affect whether a legal entity is a VIE and whether the Company is the primary beneficiary of a VIE. When the Company’s decision-maker or service-provider fee is not a variable interest, the Company is viewed as acting as a fiduciary for the potential VIE.
Warehouse Entities
The Company established Upstart Loan Trust and Upstart Auto Warehouse Trust to enter into warehouse credit facilities for the purpose of purchasing Upstart-powered loans. See “Note 8. Borrowings” for additional information. The entities are Delaware statutory trusts that are structured to be bankruptcy-remote, with third-party banks operating as trustees.
Other Consolidated VIE
19
Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
Upstart Loan Trust 2, a Delaware statutory trust, holds personal and auto loans facilitated through the Upstart platform. These loans include, but are not limited to, loans not pledged or eligible to be pledged to the Company’s warehouse credit facilities or loans that were the result of the Company’s repurchases of loans for breaches of representations and warranties made to institutional investors.
The following tables present a summary of financial assets and liabilities from the Company’s involvement with consolidated VIEs:
| Assets | Liabilities | Net Assets | |||||||||||||||
| December 31, 2021 | |||||||||||||||||
| Total consolidated VIEs | $ | $ | $ | ||||||||||||||
| Assets | Liabilities | Net Assets | |||||||||||||||
| June 30, 2022 | |||||||||||||||||
| Total consolidated VIEs | $ | $ | $ | ||||||||||||||
The Company’s continued involvement in all of its securitizations in which it is the sponsor includes loan servicing rights and obligations for which it receives servicing fees over the life of the underlying loans. The Company monitors its status as the primary beneficiary and in case of reconsideration events, updates the analysis accordingly.
Unconsolidated VIEs
The Company’s transactions with unconsolidated VIEs include securitizations of unsecured personal whole loans and sales of whole loans to VIEs. While the Company continues to be involved with the unconsolidated VIEs in its role as the sponsor and the servicer of these transactions, the Company does not hold a significant economic interest in these entities and has determined that it is not the primary beneficiary of these entities. The Company’s unconsolidated VIEs include entities established as the issuers and grantor trusts for the 2018-2, 2019-1, and 2019-2 securitization transactions.
In cases where the VIEs are not consolidated and the transfer of the loans from the Company to the securitization trust meets sale accounting criteria, the Company recognizes a gain or loss on sales of loans. The net proceeds of the sale represent the fair value of any assets obtained or liabilities incurred as part of the transaction. The assets are transferred into a trust such that the assets are legally isolated from the creditors of the Company and are not available to satisfy obligations of the Company. These assets can only be used to settle obligations of the underlying securitization trusts.
The following tables summarize the aggregate value of assets and liabilities of unconsolidated VIEs in which the Company holds a variable interest but is not the primary beneficiary:
| Assets | Liabilities | Net Assets | Maximum Exposure to Losses | ||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Securitizations and other | $ | $ | $ | $ | |||||||||||||||||||
20
Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
| Assets | Liabilities | Net Assets | Maximum Exposure to Losses | ||||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||
| Securitizations and other | $ | $ | $ | $ | |||||||||||||||||||
The carrying value of assets that relate to variable interests in unconsolidated VIEs consists of $8.3 million and $4.7 million of securitization notes and residual certificates which are included in other assets on the condensed consolidated balance sheets as of December 31, 2021 and June 30, 2022, respectively. The Company also had $7.2
The Company’s maximum exposure to loss from its involvement with unconsolidated VIEs represents the estimated loss that would be incurred under severe, hypothetical circumstances, for which the Company believes the possibility is remote, such as where the value of securitization notes and senior and residual certificates the Company holds as part of the risk retention requirement declines to zero.
Retained Interest in Unconsolidated VIEs
Off-Balance Sheet Loans
Off-balance sheet loans relate to securitization transactions for which the Company has some form of continuing involvement, including as servicer. For a loan related to securitization transactions where servicing is the only form of continuing involvement, the Company would only experience a loss if it were required to repurchase such a loan due to a breach in representations and warranties associated with its loan sale or servicing contracts. Additionally, in the unlikely event principal payments on the loans backing a securitization are insufficient to pay senior note holders, any amounts the Company contributed to the securitization reserve accounts may be depleted.
4. Fair Value Measurement
21
Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
| December 31, | June 30, | ||||||||||
| 2021 | 2022 | ||||||||||
| Assets | |||||||||||
| Loans | $ | $ | |||||||||
| Notes receivable and residual certificates | |||||||||||
| Loan servicing assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Loan servicing liabilities | $ | $ | |||||||||
| Trailing fee liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
Financial instruments are categorized in the fair value hierarchy based on the significance of unobservable factors in the overall fair value measurement. Since the Company’s loans, notes receivable and residual certificates, loan servicing assets and liabilities, and trailing fee liabilities do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities.
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented.
Loans
Loans included in the Company’s condensed consolidated balance sheets are classified as either held-for-sale or held-for-investment based on the Company’s intent and ability to sell the loans prior to maturity. From time to time the Company transfers loans between classifications based on changes in the Company’s intent. As of December 31, 2021, $142.7 million and $109.8 million of loans held on the Company’s condensed consolidated balance sheets were classified as held-for-sale and held-for-investment, respectively. As of June 30, 2022, $605.3 million and $18.4 million of loans held on the Company’s condensed consolidated balance sheets were classified as held-for-sale and held-for-investment, respectively.
Valuation Methodology
Loans held-for-sale and held-for-investment are measured at estimated fair value using a discounted cash flow model. The fair valuation methodology considers projected prepayments and historical defaults, losses and recoveries to project future losses and net cash flows on loans. Net cash flows are discounted using an estimate of market rates of return. The fair value of these loans also includes accrued interest.
Significant Inputs and Assumptions
22
Upstart Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted)
(Unaudited)
| December 31, 2021 | June 30, 2022 | ||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Weighted-Average (2) | Minimum | Maximum | Weighted-Average (2) | ||||||||||||||||||||||||||||||
| Discount rate | % | % | |||||||||||||||||||||||||||||||||