# Upstart Holdings, Inc. (UPST) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Upstart Holdings, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1647639/000164763922000009/upst-20211231.htm
Accession: 0001647639-22-000009
Filing date: 2022-02-18
Report date: 2021-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/UPST/
All MD&A years: /company/UPST/mda/
Next year: /company/UPST/mda/fy2022/ (FY 2022)

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)

Number of Loans on our platform have trended upwards on a period-by-period basis. The continued improvements to our level of automation and Conversion Rate achieved through our increasingly sophisticated risk models and our evolving channel mix contribute to improving loan unit economics over time.

COVID-19 Pandemic Impact

Starting in the second half of March 2020, the COVID-19 pandemic impacted origination volumes on our platform. The rapid rise in unemployment in the United States led to a reduction in originations by bank partners and a temporary pause in loan funding from institutional investors and capital markets. These factors collectively resulted in an 86% reduction in the Transaction Volume, Number of Loans and a 73% reduction in revenue in the second quarter of 2020 compared to the first quarter of 2020.

Beginning in June 2020, origination volumes recovered quickly and have grown since then. For the year ended December 31, 2021, the Transaction Volume, Number of Loans was 1,314,591, representing a 338% increase compared to the Transaction Volume, Number of Loans for the year ended December 31, 2020.

During the peak of the COVID-19 pandemic, we made certain operational changes, including temporary reductions in our marketing activities and certain operational expenses. In order to support borrowers suffering from income loss due to the pandemic, Upstart also worked with its bank partners to offer hardship plans that, among other things, allowed affected borrowers to defer loan payments for up to two months. At the peak, 5.6% of borrowers on our platform had enrolled in a hardship program, less than half the rate of online lending industry benchmarks, and 95% of those impacted borrowers eventually exited the hardship program and resumed making loan payments. Due to the strength of our AI models, the COVID-19 pandemic has had a minimal impact on the credit performance of Upstart-powered loans, including those originated prior to the second quarter of 2020.

Although significant government assistance was provided during the COVID-19 pandemic, the resilience of our bank partner results during this time provides evidence of the benefits that our AI models can offer to bank lending programs. We believe these benefits are even more compelling and valuable during periods of economic downturn.

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 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.

Bank and Market Adoption

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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)

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

New bank partners also represent additional acquisition channels through which we can reach and source prospective new borrowers, as these banks 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 for our bank partners, we have built 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 banks 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 could adversely affect our business.

Product Expansion and Innovation

We intend to continue developing new financial products that address a broader set of consumer needs over time. In the third quarter of 2020, we announced our entry into the auto lending market and in April 2021, we acquired Prodigy Software, Inc. or Prodigy, a leader in automotive commerce software solutions. Prodigy provides a modern multi-channel car buying experience, helping dealerships serve consumers with a holistic software solution that integrates legacy systems. In addition to modernizing the car buying experience, Prodigy is helping bring Upstart's AI enabled auto loans to dealerships across the country where the vast majority of auto loans are transacted. In October 2021, we announced the launch of Upstart Auto Retail software, a cloud-based solution that enables dealerships to provide consumers with access to Upstart-powered auto loans by combining Prodigy Software and Upstart intellectual property.

We believe that significant growth opportunities exist to apply our evolving technology to additional segments of credit, such as auto loans, small business loans, small dollar loans, mortgage loans, and beyond. In addition, we aim to serve a broader role of technology enablement for banks, which we believe will seek more comprehensive technology solutions from their suppliers. We will incur expenses and opportunity cost to develop and launch new products. 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.

Impact of Macroeconomic Cycles

Economic cycles can impact our financial performance and related metrics, including consumer demand for loans, conversion rates and the interest rates our bank partners and institutional investors are willing to accept. In a potential downturn, we believe consumer lending will generally contract, including the volume transacted on our own platform. However, the performance of Upstart-powered loans through an economic downturn, such as that experienced during the COVID-19 pandemic, will be important in further validating our AI models with banks and institutional investors. If we are able to continue demonstrating the resilience of Upstart-powered loans through future macroeconomic cycles relative to general consumer credit, it could strengthen our competitive positioning as we emerge from such downturns.

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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)

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:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","","","2019","","2020","","2021"],["Transaction Volume, Dollars","","","","","","","$","2,725,047","","$","3,444,854","","$","11,751,762"],["Transaction Volume, Number of Loans","","","","","","","215,122","","300,379","","1,314,591"],["Conversion Rate","","","","","","","13.1%","","15.2%","","23.7%(1)"],["Percentage of Loans Fully Automated","","","","","","","66%","","70%","","69%"],["Contribution Profit(2)","","","","","","","$","48,940","","$","105,088","","$","397,880"],["Contribution Margin(2)","","","","","","","31%","","46%","","50%"],["Adjusted EBITDA(2)","","","","","","","$","5,595","","$","31,509","","$","231,946"],["Adjusted EBITDA Margin(2)","","","","","","","3%","","13%","","27%"],["Adjusted Net Income(2)","","","","","","","$","3,340","","$","17,496","","$","224,141"],["Adjusted Net Income per Share:"],["Basic(2)","","","","","","","$","0.23","","$","1.00","","$","2.87"],["Diluted(2)","","","","","","","$","0.05","","$","0.23","","$","2.37"]]
[[/GREPCENT_TABLE]]

_______

(1)In the third quarter of 2021, we modified our calculation of Conversion Rate to remove what we believe to be fraudulent loan requests from the total number of rate inquiries received to better reflect actual borrower behavior. Using the prior methodology for calculating Conversion Rate, which did not exclude estimated fraudulent loan requests, our Conversion Rates for the year ended December 31, 2021 would have been 19.1%. The impact of this change in calculating our Conversion Rate for prior years is insignificant.

(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 loans transacted on our platform between a borrower and the originating bank during the period presented. We define Transaction Volume, Number of Loans as the number of loans facilitated on our platform between a borrower and the originating bank during the period presented. We believe these metrics are good proxies for our overall scale and reach as a platform.

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. Until June 30, 2021, Conversion Rate considered all rate inquiries received on our platform. In the third quarter of 2021, we experienced a large and coordinated fraud attack. While the attack had no significant impact on our financial results, our borrower funnel conversion metrics were distorted by the volume of unsuccessful attempts to access loans. As a result, we modified our calculation of Conversion Rate beginning in the third quarter of 2021 to remove what we believe to be fraudulent rate inquiries from the total number of rate inquiries received to better reflect actual borrower behavior. 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 bank partners that have made our offers more competitive. 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.

Percentage of Loans Fully Automated

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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) with no human involvement 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 the Percentage of Loans Fully Automated to level off and remain relatively stable in the long term. However, the expansion of our loan offerings beyond unsecured personal loans, including auto loans, may cause fluctuations of such percentage from quarter to quarter depending on the loan offering mix.

Contribution Profit and Contribution Margin

To derive Contribution Profit, we subtract from revenue from fees, net from 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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[[/GREPCENT_TABLE]]

_______

(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.

(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.

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 (loss) from operations to Contribution Profit.

Adjusted EBITDA and Adjusted EBITDA Margin

We calculate Adjusted EBITDA as net income (loss) attributable to Upstart Holdings, Inc. common stockholders adjusted to exclude stock-based compensation expense and certain payroll tax expenses, depreciation and amortization, expense on warrants and convertible notes, net, provision for income taxes and acquisition-related costs. 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

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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)

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) attributable to Upstart Holdings, Inc. common stockholders to Adjusted EBITDA and Adjusted EBITDA Margin.

Adjusted Net Income and Adjusted Net Income Per Share

We define Adjusted Net Income as net income (loss) exclusive of stock-based compensation expense and certain payroll tax expenses and acquisition-related costs. Adjusted Net Income Per Share is calculated by dividing Adjusted Net Income 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) attributable to Upstart Holdings, Inc. common stockholders to Adjusted Net Income and Adjusted Net Income per Share.

Components of Results of Operations

Revenue from Fees, Net

Platform and Referral Fees, Net

We charge our bank partners platform fees in exchange for usage of our AI lending platform, 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 bank partners in exchange for the referral of borrowers from Upstart.com. Referral fees are charged to bank partners on a per borrower basis upon origination of a loan. These fees are charged net of any fees the bank partner charges Upstart. Upstart pays these bank partners a one-time loan premium fee upon completion of the minimum holding periods. 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. See “Note 2. Revenue” to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information about loan premium fees and trailing fees.

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 platform, to compensate us for activities we perform throughout the loan term, including collection, processing and reconciliations of payments received, 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 platform. 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 bank partners and institutional investors for collection agency fees related to their outstanding loan portfolio. Upstart also charges fees for the establishment and facilitation of Upstart co-sponsored securitization transactions as well as receives certain ancillary fees on a per transaction basis inclusive of late payment fees and ACH fail 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 on our consolidated balance sheets as part of our ongoing operating activities, excluding loan servicing assets and liabilities. Interest income and fair value adjustments, net also includes income (loss) from our capital market programs and realized gain (loss) on the sale of loans. Interest income and fair value adjustments, net also historically included the full amount of net interest income and expense incurred by consolidated variable interest entities, or VIEs, the majority of which has been historically allocated to

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third parties in the line item net loss attributable to noncontrolling interests on our consolidated statements of operations and comprehensive income (loss). Interest income 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 increase in absolute dollars and may fluctuate as a percentage of our total revenue from period to period 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 increase in absolute dollars and may fluctuate as a percentage of our total revenue over time, as we expand our portfolio and increase the Transaction Volume, Number of Loans.

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 increase in absolute dollars and may increase as a percentage of our total revenue over time, 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.

Other Income (Expense)

Other income (expense) primarily consists of dividend income earned on our unrestricted cash balances. Other income (expense) is recognized in the period earned. In addition, during the year ended December 31, 2021, we voluntarily repaid the funds we received under the Paycheck Protection Program, or PPP, in the year ended December 31, 2020. For additional details, refer to “Note 1. Description of Business and Significant Accounting Policies” of our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

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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)

Expense on Warrants and Convertible Notes, Net

Expense on warrants and convertible notes, net is primarily comprised of the net changes in the fair value of our common and convertible preferred stock warrant liabilities for the year ended December 31, 2020 and interest expense on our convertible notes for the year ended December 31, 2021.

Results of Operations

The following table summarizes our historical consolidated statements of operations data:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

________

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2019","","2020","","2021"],["Sales and marketing","","","","","$","278","","","$","1,562","","","$","6,059"],["Customer operations","","","","","433","","898","","6,251"],["Engineering and product development","","","","","1,803","","4,844","","39,191"],["General, administrative, and other","","","","","1,292","","4,209","","21,685"],["Total stock-based compensation","","","","","$","3,806","","","$","11,513","","","$","73,186"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue from Fees, Net

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

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[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,","","","","","","2020 to 2021"],["","","","","","","","","","","","","","2020","","2021","","","","% change"],["Platform and referral fees, net","","","","","","","","","","","","","$","200,257","","","$","726,161","","","","","","","263","%"],["Servicing and other fees, net","","","","","","","","","","","","","28,343","","","75,114","","","","","","","165","%"],["Total revenue from fees, net","","","","","","","","","","","","","$","228,600","","","$","801,275","","","","","","","251","%"]]
[[/GREPCENT_TABLE]]

Revenue from fees, net increased $572.7 million, or 251%, in the year ended December 31, 2021, compared to the prior year, which included an increase of $525.9 million in revenue from platform and referral fees, net and an increase of $46.8 million in servicing and other fees, net. We recognized $23.6 million of loan premium fees and loan trailing fees as contra-revenue within platform and referral fees, net in the year ended December 31, 2021, which was an increase from $8.3 million recognized in prior year. The increase of the platform and referral fees, net was primarily driven by a 338% increase in the Transaction Volume, Number of Loans from 300,379 in the year ended December 31, 2020 to 1,314,591 in 2021 as well as an increase in prices of our services in response to the market conditions caused by the COVID-19 pandemic. The increase in the servicing and other fees, net was primarily due to an 114% increase in the outstanding principal of serviced loans, as well as a downward revaluation to the net liability of our servicing obligation.

Interest Income and Fair Value Adjustments, Net

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[[/GREPCENT_TABLE]]

________

(1) Consist of balances recognized by entities participating in our ongoing operating activities, including warehouse entities.

(2) Consists of balances recognized by other entities, including securitization entities.

For the year ended December 31, 2021, interest income and fair value adjustments, net increased $42.5 million, or 882%, compared to the prior year. The increase was driven by a $43.5 million increase in fair value adjustments, net partially offset by a $5.8 million decrease in interest income. The increase of the fair value adjustments was primarily attributable to $30.2 million increase of income from capital market programs and $9.5 million increase in realized gains on the sale of loans compared to the prior year. Interest income and interest expense recognized by other consolidated entities decreased due to the deconsolidation of the 2018-1 securitization which occurred in the second quarter of 2020.

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

Operating Expenses

Sales and Marketing

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,","","","","","2020 to 2021"],["","","","","","","","","","","","","","2020","","2021","","","","","","","% change"],["Sales and marketing","","","","","","","","","","","","","$","99,659","","","$","333,453","","","","","","","","235%"]]
[[/GREPCENT_TABLE]]

Sales and marketing expenses increased by $233.8 million, or 235%, in the year ended December 31, 2021 compared to the prior year. The increase was primarily due to a $215.9 million increase in advertising and other traffic acquisition cost, as well as $16.5 million increase in payroll and other personnel-related expenses driven by increased headcount. As a percentage of total revenue, sales and marketing expenses decreased from 43% to 39%.

Customer Operations

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,","","","","","2020 to 2021"],["","","","","","","","","","","","","","2020","","2021","","","","","","","% change"],["Customer operations","","","","","","","","","","","","","$","37,581","","","$117,579","","","","","","","213%"]]
[[/GREPCENT_TABLE]]

Customer operations expenses increased by $80.0 million, or 213%, in the year ended December 31, 2021, compared to the prior year. The increase was primarily due to an increase of $47.6 million in payroll and other personnel-related expenses due to an increase in headcount as well as increased spending of $28.3 million in information verification and platform operations due to a growing volume of loans facilitated through our platform. As a percentage of total revenue, customer operations expenses decreased from 16% to 14%.

Engineering and Product Development 

[[GREPCENT_TABLE]]
[["","","","","","","","","Year Ended December 31,","","","","2020 to 2021"],["","","","","","","","","","","","","","","2020","","2021","","","","% change"],["Engineering and product development","","","","","","","","","","","","","","$","38,802","","","$","133,999","","","","","245%"]]
[[/GREPCENT_TABLE]]

Engineering and product development expenses increased by $95.2 million, or 245%, for the year ended December 31, 2021, compared to the prior year. The increase was primarily due to an increase of $84.2 million in payroll and other personnel-related expenses driven by an increase in headcount, as well as a $10.7 million increase in spending on consultants and other engineering support services. As a percentage of total revenue, engineering and product development expenses decreased from 17% to 16%.

General, Administrative, and Other 

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,","","","","","2020 to 2021"],["","","","","","","","","","","","","","2020","","2021","","","","","","","% change"],["General, administrative, and other","","","","","","","","","","","","","$","45,609","","","$","122,677","","","","","","","","169%"]]
[[/GREPCENT_TABLE]]

General, administrative, and other expenses increased by $77.1 million, or 169%, for the year ended December 31, 2021, compared to the prior year. The increase was primarily due to an increase of $40.7 million in payroll and personnel-related costs as a result of increased headcount; an increase of $9.1 million in office and administrative operation related expenses; an increase of $9.0 million in professional fees; and an increase of $6.3 million in insurance costs. As a percentage of total revenue, general, administrative, and other expenses decreased from 20% to 14%.

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

Other Income (Expense)

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,","","","","","2020 to 2021"],["","","","","","","","","","","","","","2020","","2021","","","","","","","% change"],["Other income (expense)","","","","","","","","","","","","","$","5,549","","","$","(5,174)","","","","","","","","(193)","%"]]
[[/GREPCENT_TABLE]]

In the year ended December 31, 2021, other income (expense) decreased by $10.7 million, or 193%, compared to the prior year. The decrease was primarily due to the receipt of funds under the PPP loan totaling $5.3 million in the year ended December 31, 2020 coupled with our voluntary repayment of proceeds received from the PPP loan during year ended December 31, 2021. We used the loan to mitigate the impact of the COVID-19 pandemic on our business in Q2 2020 and fully complied with the forgiveness requirements, including maintaining full employment through the significant transaction volume decline. Our business experienced a strong recovery in the second half of 2020 and continued growing in the first half of 2021, which brought us to a conclusion that the funds received as part of the program were no longer needed for their original intent and should be repaid. We recognized the loan principal repayment as a reduction to other income (expense) totaling $5.3 million.

Expense on Warrants and Convertible Notes, Net 

[[GREPCENT_TABLE]]
[["","","","","","","","Year Ended December 31,","","","","2020 to 2021"],["","","","","","","","","","","","","","2020","","2021","","","","% change"],["Expense on warrants and convertible notes, net","","","","","","","","","","","","","$","11,364","","","$","1,976","","","","","(83)","%"]]
[[/GREPCENT_TABLE]]

Expense on warrants and convertible notes, net decreased by $9.4 million, or 83%, in the year ended December 31, 2021, compared to the prior year. The decrease was primarily a result of a $11.3 million increase in the fair value of warrants during the year ended December 31, 2020. We have no warrants outstanding as of December 31, 2021. The decrease was partially offset by a $1.9 million increase in interest expense in convertible notes in the year ended December 31, 2021. Our warrants were reclassified to equity in the fourth quarter of 2020 and exercised in January 2021. We had no warrants outstanding as of December 31, 2021.

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 and Adjusted Net Income 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 periods 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.

To address these limitations, we provide a reconciliation of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income and Adjusted Net Income Per Share to income (loss) from operations and net income (loss) attributable to Upstart Holdings, Inc. common stockholders,

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

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, and Adjusted Net Income 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 period-to-period 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 income (loss) from operations to Contribution Profit and Contribution Margin. We define Operating Margin as our income (loss) from operations divided by revenue from fees, net.

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","","","2019","","2020","","2021"],["Revenue from fees, net","","","","","","","$","159,847","","","$","228,600","","","$","801,275"],["Income (loss) from operations","","","","","","","(4,575)","","","11,765","","","140,881"],["Operating Margin","","","","","","","(3)","%","","5","%","","18","%"],["Sales and marketing, net of borrower acquisition costs(1)","","","","","","","$","3,606","","","$","7,959","","","$","25,840"],["Customer operations, net of borrower verification and servicing costs(2)","","","","","","","3,609","","","5,769","","","21,797"],["Engineering and product development","","","","","","","18,777","","","38,802","","","133,999"],["General, administrative, and other","","","","","","","31,865","","","45,609","","","122,677"],["Interest income and fair value adjustments, net","","","","","","","(4,342)","","","(4,816)","","","(47,314)"],["Contribution Profit","","","","","","","$","48,940","","","$","105,088","","","$","397,880"],["Contribution Margin","","","","","","","31","%","","46","%","","50","%"]]
[[/GREPCENT_TABLE]]

_________

(1)Borrower acquisition costs were $89.6 million, $91.7 million and $307.6 million for the year ended December 31, 2019, 2020 and 2021, 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.

(2)Borrower verification and servicing costs were $21.3 million, $31.8 million and $95.8 million for the year ended December 31, 2019, 2020 and 2021, 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.

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

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, warrant expense and acquisition-related costs 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 does 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 which 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 income (loss) attributable to Upstart Holdings, Inc. common stockholders to Adjusted EBITDA and net income margin to Adjusted EBITDA Margin. We define Net Income Margin as net income (loss) attributable to Upstart Holdings, Inc. common stockholders divided by total revenue.

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","","","2019","","2020","","2021"],["Total revenue","","","","","","","$","164,189","","","$","233,416","","","$","848,589"],["Net income (loss) attributable to Upstart Holdings, Inc. common stockholders","","","","","","","(466)","","","5,983","","","135,443"],["Net Income Margin","","","","","","","(0)","%","","3","%","","16","%"],["Adjusted to exclude the following:"],["Stock-based compensation and certain payroll tax expenses(1)","","","","","","","$","3,806","","","$","11,513","","","$","87,461"],["Depreciation and amortization","","","","","","","774","","","2,278","","","7,541"],["Expense on warrants and convertible notes, net(2)","","","","","","","1,407","","","11,364","","","1,976"],["Provision for income taxes","","","","","","","74","","","371","","","(1,712)"],["Acquisition-related costs","","","","","","","\u2014","","","\u2014","","","1,237"],["Adjusted EBITDA","","","","","","","$","5,595","","","$","31,509","","","$","231,946"],["Adjusted EBITDA Margin","","","","","","","3","%","","13","%","","27","%"]]
[[/GREPCENT_TABLE]]

_________

(1)In 2021, we began excluding 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.

(2)Consists of fair value adjustments to our warrant liability for the years ended December 31, 2019 and 2020 and interest expense on convertible notes for the year ended December 31, 2021.

Adjusted Net Income and Adjusted Net Income Per Share

We define Adjusted Net Income as net income exclusive of stock-based compensation expense and certain payroll tax expense and acquisition-related costs. Adjusted Net Income Per Share is calculated by dividing Adjusted Net Income Per Share by the weighted-average common shares outstanding. We believe Adjusted Net Income and Adjusted Net Income 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.

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","","","2019","","2020","","2021"],["Net income (loss) attributable to Upstart Holdings, Inc. common stockholders","","","","","","","$","(466)","","","$","5,983","","","$","135,443"],["Adjusted to exclude the following:"],["Stock-based compensation and certain payroll tax expenses(1)","","","","","","","3,806","","","11,513","","","87,461"],["Acquisition-related costs","","","","","","","\u2014","","","\u2014","","","1,237"],["Adjusted Net Income","","","","","","","$","3,340","","","$","17,496","","","$","224,141"],["Net income (loss) per share:"],["Basic","","","","","","","$","(0.03)","","","$","\u2014","","","$","1.73"],["Diluted","","","","","","","$","(0.03)","","","$","\u2014","","","$","1.43"],["Adjusted Net Income per Share:"],["Basic","","","","","","","$","0.23","","","$","1.00","","","$","2.87"],["Diluted","","","","","","","$","0.05","","","$","0.23","","","$","2.37"],["Weighted-average common shares outstanding:"],["Basic","","","","","","","14,335,611","","","17,513,670","","","78,106,359"],["Diluted","","","","","","","72,336,672","","","76,098,275","","","94,772,641"]]
[[/GREPCENT_TABLE]]

_________

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(1)In 2021, we began excluding 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

Since inception, we have financed our operations, corporate investments, and capital expenditures primarily through the sale of convertible preferred stock, convertible promissory notes, term loans and draws on our revolving credit facilities, and cash generated from operations. For further details related to our warehouse credit facilities, risk retention funding loan, convertible senior notes and capped calls, see “Note 8. Borrowings” in Part II, Item 8 of this Annual Report on Form 10-K.

In December 2020, we completed our IPO which resulted in $167.4 million of proceeds, net of underwriting discounts and commissions, and before deducting deferred offering costs of $7.9 million. In April 2021, we completed a follow-on offering, in which 2,300,000 shares of common stock (including the exercise in full of the underwriters option to purchase 300,000 shares) were issued and sold at $120.00 per share. We received net proceeds of $263.9 million after deducting underwriting discounts and commissions of $11.0 million and offering expenses of $1.0 million. In August 2021, we issued $661.3 million aggregate principal amount of 0.25% convertible senior notes due 2026, or the Notes, (including the exercise in full of the initial purchasers’ option of an additional $86.3 million aggregate principal of additional Notes) in a private placement to qualified institutional buyers. The net proceeds from the sale of the Notes were $645.5 million after deducting debt issuance costs.

As of December 31, 2021, our primary source of liquidity was cash of $986.6 million. Changes in the balance of cash are generally a result of working capital fluctuations or the timing of purchases of loans facilitated through our platform. To finance purchases of certain loans facilitated through our platform, we rely on our warehouse credit facilities, which allows us to borrow up to an aggregate of $200.0 million through the special-purpose trusts, or the warehouse trusts. Loans purchased by these trusts are classified as held-for-sale and can be sold to third-party investors or in securitization transactions to generate additional liquidity.

The following table summarizes our current and long-term material cash requirements as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Total","","Less than 1 year","","1 to 3 years","","3 to 5 years","","More than 5 years"],["Loan purchase obligations(1)","$","111,330","","","$","111,330","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Warehouse credit facilities","48,030","","","\u2014","","","48,030","","","\u2014","","","\u2014"],["Convertible senior notes(2)","669,515","","","1,653","","","3,306","","","664,556","","","\u2014"],["Purchase commitment","34,000","","","7,500","","","16,500","","","10,000","","","\u2014"],["Operating lease obligations","129,067","","","11,202","","","31,315","","","34,596","","","51,954"],["Total contractual obligations","$","991,942","","","$","131,685","","","$","99,151","","","$","709,152","","","$","51,954"]]
[[/GREPCENT_TABLE]]

________

(1)Represents loans facilitated through our platform of which certain of our originating banks retain ownership for the duration of the holding period required by our contracts with the banks. This period is generally equal to three business days. We have committed to purchase the loans for the unpaid principal balance, plus accrued interest, at the conclusion of the required period.

(2)Includes principal and future interest payments related to the convertible senior notes.

For a discussion of our long-term debt obligations, operating lease obligations and loan repurchase agreement as of December 31, 2021, see “Note 8. Borrowings,” “Note 10. Leases,” and “Note 11. Commitments and Contingencies,” respectively, in Part II, Item 8 of this Annual Report on Form 10-K for further information.

While we believe that our cash on hand and our cash flow from operations 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

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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 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.

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 our 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 investor base. When we are the retaining sponsor, 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. Securitizations and Variable Interest Entities” in Part II, Item 8 of this Annual Report on Form 10-K.

Cash Flows

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

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","2020","","2021"],["Net cash provided by operating activities","","","$","15,697","","","$","168,353"],["Net cash (used in) provided by investing activities","","","136,517","","","(143,877)"],["Net cash provided by financing activities","","","79,052","","","855,432"],["Net increase in cash and restricted cash","","","$","231,266","","","$","879,908"]]
[[/GREPCENT_TABLE]]

Net Cash from Operating Activities

Our main sources of cash provided by operating activities are our revenue from fees earned under contracts with bank partners and loan 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 $168.4 million for the year ended December 31, 2021, which primarily consisted of net income before attribution to noncontrolling interests of $135.4 million, adjustments for non-cash items of $75.6 million, and a decrease of $42.7 million increase in net operating assets and liabilities. The decrease in net operating assets and liabilities was primarily related to a $62.0 million increase in operating assets, predominately driven by an increase in servicing fees and other receivables and prepaid expenses.

Net Cash from Investing Activities

Net cash used in investing activities was $143.9 million for the year ended December 31, 2021 as a result of $159.4 million purchase of loans held-for-investment and $40.0 million cash paid for a non-marketable equity security, partially offset by $51.4 million net proceeds from sale of loans held-for-investment and $24.5 million principal payments received for loans held-for-investment.

Net Cash from Financing Activities

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Net cash provided by financing activities was $855.4 million for the year ended December 31, 2021 as a result of $718.4 million proceeds from borrowings, including $661.3 million proceeds from the issuance of convertible debt, and $263.9 million net proceeds from our secondary offering of common stock, which was partially offset by $71.3 million payment on borrowings and $58.5 million purchase of capped calls.

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

We have elected the fair value option for loans, notes receivable and residual certificates. We believe the estimate of fair value of these financial instruments requires significant judgment. 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. This model uses both observable and unobservable inputs and reflects our best estimates of the assumptions a market participant would use to calculate fair value. Primary inputs that require significant judgment include 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.

We have also elected the fair value option for servicing assets and liabilities. We record servicing assets and liabilities at estimated fair value when we transfer loans which qualify as sales under Topic 860, Transfers and Servicing. We use a discounted cash flow model to estimate the fair value of loan servicing assets and liabilities. The cash flows in the valuation model represent the difference between the servicing fees charged to institutional investors and an estimated market servicing fee. Since servicing fees are generally based on the monthly unpaid principal balance of the underlying loans, the expected cash flows in the model incorporate estimated credit risk and expected prepayments on the loans. For further information on fair value measurement refer to “Note 4. Fair Value Measurement” in Part II, Item 8 of this Annual Report on Form 10-K.

Evaluation for Impairment of Goodwill and Acquired Intangible Assets

Assets acquired and liabilities assumed in a business combination are recognized at their estimated fair value as of the acquisition date. The excess purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period, with the corresponding offset to goodwill. For further information on business combinations refer to “Note 5. Acquisitions” in Part II, Item 8 of this Annual Report on Form 10-K.

Goodwill is reviewed for impairment annually, or more frequently if an event or a change in circumstances indicates that goodwill may be impaired. For further information on goodwill, refer to “Note 1. Description of Business and Significant Accounting Policies” and “Note 6. Goodwill and Intangible Assets” in Part II, Item 8 of this Annual Report on Form 10-K.

Stock-Based Compensation

The determination of the amount of stock-based compensation expense to be recorded requires us to develop estimates to be used in the calculation of the grant date fair value of stock options and purchase rights granted under our employee stock purchase plan. We estimate the grant date fair value of stock options and

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employee purchase rights using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires us to make key assumptions such as expected option term and volatility to determine the fair value of a stock option. We estimate the expected term based on the simplified method, which is the weighted-average time to vesting and the contractual maturity. Volatility is estimated based on the average volatility for comparable publicly-traded companies, over a period equal to the expected term of the award grants. For further information on stock-based compensation refer to “Note 9. Equity Incentive Plans” in Part II, Item 8 of this Annual Report on Form 10-K.

Income Taxes

The provision for income taxes consists primarily of federal, state, and local tax. Our effective tax rate fluctuates from period to period due to changes in the mix of income and losses in jurisdictions with a wide range of tax rates, the effect of acquisitions, changes resulting from the amount of recorded valuation allowance, permanent differences between U.S. generally accepted accounting principles and local tax laws, certain one-time items, and changes in tax contingencies.

Significant judgment is required in the determination of our annual income tax provisions, which includes the assessment of deferred tax assets and uncertain tax positions, as well as the interpretation and application of existing and newly enacted tax laws, regulation changes, and new judicial rulings. It is possible that actual results will vary from those recognized in our consolidated financial statements due to changes in the interpretation of applicable guidance or as a result of examinations by taxing authorities. For further information on income taxes refer to “Note 12. Income Taxes” in Part II, Item 8 of this Annual Report on Form 10-K.

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