S-1/A 1 c88906_s1a.htm 3B2 EDGAR HTML -- c88906_s1a.htm

As filed with the Securities and Exchange Commission on May 14, 2018.

Registration No. 333-224505

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 2
to

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

GreenSky, Inc.
(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

7389
(Primary Standard Industrial
Classification Code Number)

 

82-2135346
(I.R.S. Employer
Identification No.)

5565 Glenridge Connector, Suite 700
Atlanta, Georgia 30342
(678) 264-6105

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Steven E. Fox
Executive Vice President and Chief Legal Officer
GreenSky, Inc.
5565 Glenridge Connector, Suite 700
Atlanta, Georgia 30342
(678) 264-6105

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

 

 

Brinkley Dickerson
Troutman Sanders LLP
600 Peachtree Street NE, Suite 5200
Atlanta, Georgia 30308
Tel: (404) 885-3822
Fax: (404) 962-6743

 

Gregory A. Fernicola
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Tel: (212) 735-2918
Fax: (917) 777-2918

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

 

 

 

 

 

 

 

Large accelerated filer

 

o

 

Accelerated filer

 

o

Non-accelerated filer

 

þ (Do not check if a smaller reporting company)

 

Smaller reporting company

 

o

 

 

 

 

Emerging growth company

 

þ

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 to Section 7(a)(2)(B) of the Securities Act. þ

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

 

 

 

Title of Each Class of
Securities to be Registered

 

Amount to be
Registered
(1)

 

Proposed
Maximum Offering
Price per Share
(2)

 

Proposed
Maximum Aggregate
Offering Price
(1)(2)

 

Amount of
Registration
Fee
(3)

 

Class A common stock, $0.01 par value per share

 

39,204,545

 

$23.00

 

$901,704,535

 

$112,262.21

 

 

(1)

 

Includes 5,113,636 shares of Class A common stock that may be sold if the underwriters’ option to purchase additional shares granted by the Registrant is exercised.

 

(2)

 

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

 

(3)

 

The Registrant previously paid $12,450 in connection with a prior filing of this Registration Statement on April 27, 2018, and the additional amount of $99,812.21 is being paid herewith.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell, nor does it seek an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MAY 14, 2018

PRELIMINARY PROSPECTUS

34,090,909 Shares

GreenSky, Inc.
Class A Common Stock

 

This is an initial public offering of shares of Class A common stock of GreenSky, Inc.

We will use the net proceeds from this offering to purchase common membership interests of GreenSky Holdings, LLC (“GS Holdings”), which we refer to as “Holdco Units,” from certain holders (which we refer to as the “Exchanging Members”), including our Chief Executive Officer and certain of our other officers and directors; to redeem shares of our Class A common stock from equity holders of the Former Corporate Investors (as defined herein); and to redeem shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings.

Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price per share is expected to be between $21.00 and $23.00. We have applied to list our Class A common stock on The NASDAQ Global Select Market (“NASDAQ”) under the symbol “GSKY.”

We will have two authorized classes of common stock: Class A and Class B. Holders of our Class A common stock are entitled to one vote per share, holders of our Class B common stock are entitled to ten votes per share, and all holders generally will vote together as a single class. Holders of our Class B common stock will not have any of the economic rights provided to holders of Class A common stock. Our Class B common stock will be held by the Continuing LLC Members (as defined herein) on a one-share-per-one-Holdco Unit basis. Each Holdco Unit is exchangeable (with automatic cancellation of an equal number of shares of Class B common stock) for one share of Class A common stock or cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors).

We will be a holding company, and our sole material asset will be an equity interest in GS Holdings. Immediately following this offering, the holders of our Class A common stock collectively will own 100% of the economic interests (as defined herein) in GreenSky, Inc. (which will own 22.2% of the economic interests in GS Holdings) and will hold 2.8% of the voting power of the outstanding capital stock of GreenSky, Inc. The holders of our Class B common stock collectively will own 77.8% of the economic interests (by virtue of their Holdco Units) in GS Holdings and will hold 97.2% of the voting power of the outstanding capital stock of GreenSky, Inc. Although we will have a minority economic interest in GS Holdings, because we will be its managing member, we will control all of its business and affairs.

We are an “emerging growth company,” as that term is defined under the federal securities laws, and will be subject to reduced public company reporting requirements.

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 26.

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

 

 

 

 

Per Share

 

Total

Initial public offering price

 

 

$

 

 

 

 

 

$

 

 

 

Underwriting discounts and commissions(1)

 

 

$

 

 

 

 

 

$

 

 

 

Proceeds, before expenses, to us(2)

 

 

$

 

 

 

 

 

$

 

 

 

 

 

(1)

 

See “Underwriting” for a full description of compensation payable to the underwriters in connection with this offering.

 

(2)

 

We will use the net proceeds from the sale of our Class A common stock to purchase Holdco Units from the Exchanging Members; to redeem shares of our Class A common stock from equity holders of the Former Corporate Investors; and to redeem shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings. The purchase price for each Holdco Unit surrendered, and share of Class A common stock redeemed, will equal the price per share of our Class A common stock in this offering, less underwriting discounts and commissions.

The underwriters have an option to purchase up to 5,113,636 additional shares of Class A common stock from us at the initial public offering price, less the underwriting discounts and commissions. The underwriters can exercise this option at any time and from time to time within 30 days from the date of this prospectus.

If the underwriters exercise in full their option to purchase additional shares, we intend to use the net proceeds to purchase an additional 4,823,759 Holdco Units (with automatic cancellation of an equal number of shares of our Class B common stock) from the Exchanging Members at the same price per Holdco Unit as set forth in note 2 above; redeem an additional 257,414 shares of our Class A common stock from equity holders of the Former Corporate Investors; and redeem an additional 32,463 shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings. See “Use of Proceeds.”

The underwriters expect to deliver securities entitlements with respect to the shares of Class A common stock against payment therefor in New York, New York on or about  , 2018.

 

 

 

 

 

Goldman Sachs & Co. LLC

 

J.P. Morgan

 

Morgan Stanley

 

 

 

 

 

 

 

BofA Merrill Lynch

 

Citigroup

 

Credit Suisse

 

SunTrust Robinson Humphrey

 

 

 

 

 

 

 

Raymond James

 

Sandler O’Neill + Partners, L.P.

 

Fifth Third Securities

 

Guggenheim Securities

 

The date of this prospectus is  , 2018


 


 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

BASIS OF PRESENTATION

 

 

 

ii

 

MARKET, INDUSTRY AND OTHER DATA

 

 

 

iv

 

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

 

 

 

iv

 

PROSPECTUS SUMMARY

 

 

 

1

 

RISK FACTORS

 

 

 

26

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

 

 

62

 

ORGANIZATIONAL STRUCTURE

 

 

 

63

 

USE OF PROCEEDS

 

 

 

69

 

DIVIDEND POLICY

 

 

 

70

 

CAPITALIZATION

 

 

 

71

 

DILUTION

 

 

 

72

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

 

 

74

 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

 

 

 

76

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

83

 

BUSINESS

 

 

 

113

 

MANAGEMENT

 

 

 

126

 

EXECUTIVE COMPENSATION

 

 

 

132

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

 

 

145

 

PRINCIPAL STOCKHOLDERS

 

 

 

153

 

DESCRIPTION OF CAPITAL STOCK

 

 

 

156

 

SHARES ELIGIBLE FOR FUTURE SALE

 

 

 

162

 

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

 

 

 

164

 

UNDERWRITING

 

 

 

168

 

LEGAL MATTERS

 

 

 

177

 

EXPERTS

 

 

 

177

 

WHERE YOU CAN FIND MORE INFORMATION

 

 

 

177

 


 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we nor the underwriters take any responsibility for, nor do we or they provide any assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, prospects, financial condition and results of operations may have changed since that date.

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our shares of Class A common stock and the distribution of this prospectus outside the United States. See “Underwriting.”

BASIS OF PRESENTATION

In connection with the consummation of this offering, we will effect certain reorganizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the reorganizational transactions, which we refer to collectively as the “Reorganization Transactions,” and the consummation of this offering. See “Organizational Structure” for a description of the Reorganization Transactions and a diagram depicting our organizational structure after giving effect to the Reorganization Transactions and the consummation of this offering.

As used in this prospectus, unless the context otherwise requires, references to:

 

 

“we,” “us,” “our,” the “Company,” “GreenSky” and similar references refer, unless otherwise indicated or the context otherwise requires: (i) prior to the consummation of the Reorganization Transactions and the consummation of this offering, to GS Holdings and GSLLC, as applicable, and their consolidated subsidiaries; and (ii) following the consummation of the Reorganization Transactions and the consummation of this offering, to GreenSky, Inc., the issuer of the Class A common stock offered hereby, and its consolidated subsidiaries, including GS Holdings and GSLLC.

 

 

“Bank Partners” refers to federally insured banks that originate loans under the GreenSky program and any other lenders with respect to those loans.

 

 

“Continuing LLC Members” refers to those Original GS Equity Owners and Original Profits Interests Holders who will continue to own Holdco Units after the Reorganization Transactions and who may, following the consummation of this offering, exchange their Holdco Units (with automatic cancellation of an equal number of shares of our Class B common stock) for shares of our Class A common stock or cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors), as described in “Certain Relationships and Related Party Transactions—Operating Agreement of GS Holdings.”

 

 

“Economic interest” means the right to receive any distributions or dividends, whether cash or stock, in connection with common stock.

 

 

“Exchange Agreement” refers to the agreement pursuant to which the Exchange Agreement parties will have the right to exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for stock splits, stock dividends and reclassifications, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors). In the event that there are multiple Exchange Agreements, “Exchange Agreement” refers to all of the Exchange Agreements collectively.

ii


 

 

 

“Exchange Agreement parties” refers to the Continuing LLC Members and any other holders of Holdco Units (including Holdco Units issued upon exercise of warrants) that may become parties to the Exchange Agreement from time to time.

 

 

“Exchanging Members” refers to those Original GS Equity Owners and Original Profits Interests Holders who will receive from us a portion of the net proceeds from this offering in exchange for Holdco Units in connection with the consummation of this offering.

 

 

Former Corporate Investors” refers to certain Original GS Equity Owners that will merge with and into one or more subsidiaries of GreenSky, Inc. in connection with the Reorganization Transactions.

 

 

“GreenSky program” or “program” refers to a consumer financing and payments program that we administer for merchants and on behalf of, and at the direction and under the control of, our Bank Partners in connection with which we provide point-of-sale financing and payments technology and related marketing, servicing, collection and other services.

 

 

“GSLLC” refers to GreenSky, LLC, the original operator of our Company’s business and a wholly-owned subsidiary of GS Holdings.

 

 

“GS Holdings” refers to GreenSky Holdings, LLC, which was formed as the holding company of GSLLC.

 

 

“Holdco Units” refers to the single class of common membership interests of GS Holdings initially issued in connection with the Reorganization Transactions.

 

 

“Original GS Equity Owners” refers to the owners of units of GS Holdings prior to the Reorganization Transactions.

 

 

“Original Profits Interests Holders” refers to the owners of profits interests in GS Holdings prior to the Reorganization Transactions. The “smaller Original Profits Interests Holders” refers to certain of the Original Profits Interests Holders that will contribute Holdco Units to GreenSky, Inc. in exchange for shares of Class A common stock in connection with the Reorganization Transactions.

 

 

“Platform” refers to our technology platform through which we administer the GreenSky program.

 

 

“Sponsors” refers to manufacturers, their captive and franchised showroom operations, and trade associations with which we partner to onboard merchants.

 

 

“Tax Receivable Agreement” refers to the agreement between GreenSky, Inc., GS Holdings and the TRA Parties, pursuant to which GreenSky, Inc. will agree to pay those parties 85% of certain cash tax savings, if any, in United States federal, state and local taxes that GreenSky, Inc. realizes or is deemed to realize in connection with the Reorganization Transactions, the offering-related transactions and any future exchanges of Holdco Units for our Class A common stock pursuant to the Exchange Agreement.

 

 

TRA Parties” refers to the equity holders of the Former Corporate Investors, the Exchanging Members, the Continuing LLC Members and any other parties receiving benefits under the Tax Receivable Agreement.

We will be a holding company and will be the managing member of GS Holdings. Upon the consummation of this offering and the application of proceeds therefrom, our sole material asset will be an equity interest in GS Holdings. Following the formation of GS Holdings, effective August 2017 the equity holders of GSLLC exchanged their equity interests in GSLLC for equity interests in GS Holdings in proportion to their existing ownership interests. In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, the exchange was accounted for as a common control transaction resulting in a change in the reporting entity. As the entities were always under common control, we retrospectively adjusted the historical consolidated financial statements of GS Holdings as if the common control transaction had occurred as of the earliest period presented. As such, GS Holdings is the predecessor of the issuer, GreenSky, Inc., for financial

iii


 

reporting purposes, and GreenSky, Inc. will be the audited financial reporting entity following this offering. This prospectus contains the following historical financial statements:

 

 

GreenSky, Inc. Balance sheets as of December 31, 2017 and March 31, 2018, which reflect the initial capitalization of the entity by GSLLC. Separate statements of operations, changes in stockholders’ equity and cash flows have not been presented because GreenSky, Inc. has not engaged in any business or other activities except in connection with its formation and initial capitalization.

 

 

GS Holdings. Because we will have no interest in any operations other than the operations of GS Holdings and its subsidiaries, including GSLLC, the historical consolidated financial information included in this prospectus is that of GS Holdings and its consolidated subsidiaries as if the common control transaction had occurred at the earliest date presented.

The unaudited pro forma financial information of GreenSky, Inc. presented in this prospectus has been derived by the application of pro forma adjustments to the historical consolidated financial statements of GS Holdings and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to the Reorganization Transactions and the consummation of this offering as if they had occurred on January 1, 2017, in the case of the unaudited pro forma consolidated statement of operations data, and as of March 31, 2018, in the case of the unaudited pro forma consolidated balance sheet. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

Except as otherwise indicated, units and per unit data in this prospectus are presented after adjustment for the Forward Split (as defined under “Organizational Structure”).

Numerical figures included in this prospectus may have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

All references to years in this prospectus, unless otherwise noted or indicated by the context, refer to our fiscal years, which end on December 31.

MARKET, INDUSTRY AND OTHER DATA

This prospectus contains statistical data and estimates, including those relating to market size, competitive position and growth rates of the markets in which we participate, that we obtained from our own internal estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to any of this data or to these estimates. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market or industry data from third-party sources. We also believe our internal company research is reliable and the definitions of our market and industry are appropriate, though neither this research nor these definitions have been verified by any independent source.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or license the trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. This prospectus also may contain trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this prospectus are listed without the TM, SM, Ó and ® symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors, if any, to these trademarks, service marks, trade names and copyrights.

iv


 

PROSPECTUS SUMMARY

This summary highlights material information about our business and the offering of our Class A common stock. This is a summary of material information contained elsewhere in this prospectus and is not complete and does not contain all of the information that you should consider before deciding to invest in our Class A common stock. For a more complete understanding of our business and this offering, you should read this entire prospectus, including the section entitled “Risk Factors,” as well as the consolidated financial statements and the related notes thereto, before making an investment decision.

GreenSky, Inc.

Company Overview

We are a leading technology company that powers commerce at the point of sale. Our platform facilitates merchant sales, while reducing the friction, and improving the economics, associated with a consumer making a purchase and a bank extending financing for that purchase. We had approximately 12,000 active merchants on our platform as of March 31, 2018 and, from our inception through March 31, 2018, merchants used our platform to enable approximately 1.7 million consumers to finance over $12 billion of transactions with our Bank Partners.

Our market opportunity is significant. In 2017, there was approximately $315 billion of spending volume in the home improvement market, which historically has represented substantially all of our transaction volume, and substantial opportunities in the elective healthcare market, which we entered in 2016. In addition, at year end 2017, according to the Federal Reserve System, there was approximately $3.8 trillion of U.S. consumer credit outstanding across a fragmented landscape of lenders, providing a significant opportunity for us to extend our platform to other markets where transactions are financed at the point of sale.

Over the past decade, we have developed and have been advancing and refining our proprietary, purpose-built platform to provide significant benefits to our growing ecosystem of merchants, consumers and banks:

 

 

Merchants. Merchants using our platform, which presently range from small, owner-operated home improvement contractors and healthcare providers to large national home improvement brands and retailers, rely on us to facilitate low or deferred interest promotional point-of-sale financing and payments solutions that enable higher sales volume. Our platform is designed to provide a seamless experience for our merchants with a mobile-native design that is intuitive and easy to use. Our technology integrates effortlessly with merchants’ existing payments systems, while also allowing merchants to access funds faster.

 

 

Consumers. Consumers on our platform, who to date primarily have super-prime or prime credit scores, find financing with promotional terms to be an attractive alternative to paying with cash, check, credit card, or general purpose revolving credit, particularly in the case of larger purchases. We provide a completely paperless, mobile-enabled experience that typically permits a consumer to apply and be approved for financing in less than 60 seconds at the point of sale.

 

 

Banks. We provide our Bank Partners with access to our proprietary technology solution and merchant network, enabling them to build a diversified portfolio of high quality consumer loans with attractive risk-adjusted yields. Our platform delivers significant loan volume, while requiring minimal upfront investment by our Bank Partners. Furthermore, our program is designed to adhere to the regulatory and compliance standards of our Bank Partners, which has helped us to gain their confidence, allowing them to outsource both loan facilitation and servicing functions to us.

Our platform is powered by a proprietary technology infrastructure that delivers stability, speed, scalability and security. It supports the full transaction lifecycle, including credit application, underwriting, real-time allocation to our Bank Partners, document distribution, funding, settlement,

1


 

and servicing, and it can be easily expanded to additional industry verticals as we scale our business. We have cultivated strong relationships with manufacturers and trade associations (which we refer to as Sponsors) to amplify the reach of our technology, enabling us to efficiently and cost-effectively onboard large numbers of potential merchants underlying each Sponsor. We offer potential merchants a platform that they can adopt without friction—including no upfront fees, capital expenditure, or onerous systems integration. When our merchants offer our solution at the point of sale, they provide our Bank Partners with cost-effective access to a vast number of consumers. This ecosystem of merchants, consumers and Bank Partners allows us to generate recurring revenues with minimal customer acquisition and marketing costs, resulting in attractive unit economics and strong margins.

As we scale, network effects reinforce and support the growth of our ecosystem. As our solution becomes integral to the manner by which our merchants regularly drive sales, these merchants and their sales associates become more deeply engaged and frequent users. As more sales associates, merchants and consumers benefit from our solution and develop affinity for our brand, we believe they promote GreenSky to other merchants and generate further organic interest. As more merchants and consumers become satisfied users of the GreenSky program, we are able to grow volume to support relationships with new Bank Partners and negotiate larger commitments from our existing Bank Partners. We believe these network effects reinforce an attractive virtuous cycle, whereby larger bank commitments allow us to facilitate more financing, which in turn enables us to serve more merchants and consumers.

We have a strong recurring revenue model built upon repeat and growing usage by merchants. We derive most of our revenue and profitability from upfront transaction fees that merchants pay us every time they facilitate a transaction using our platform. Thus, our profitability is strongly correlated with merchant transaction volume. The transaction fee rate depends on the terms of financing selected by a consumer. In addition, we collect servicing fees on the loan portfolios we service for our Bank Partners.

We have achieved significant growth in active merchants, transaction volume, total revenue, net income and Adjusted EBITDA. Our low-cost go-to-market strategy, coupled with our recurring revenue model, has helped us generate strong margins. Transaction volume (which we define as the dollar value of loans facilitated on our platform during a given period) was $3.8 billion in 2017, representing an increase of 31% from $2.9 billion in 2016. Further, transaction volume was $1.0 billion in the three months ended March 31, 2018, representing an increase of 47% from $0.7 billion in the three months ended March 31, 2017. Active merchants (which we define as home improvement merchants and healthcare providers that have submitted at least one consumer application during the 12 months ended at the date of measurement) totaled 12,231 as of March 31, 2018, representing an increase of 52% from 8,048 as of March 31, 2017. Our total revenue grew 23% from $264 million in 2016 to $326 million in 2017, net income grew 12% from $124 million in 2016 to $139 million in 2017, and Adjusted EBITDA grew 21% from $131 million in 2016 to $159 million in 2017. For the period ended March 31, 2018, total revenue was $85 million, net income was $19 million and Adjusted EBITDA was $27 million. For information regarding our use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, see “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial Data.”

2


 

Our Market Opportunity

We believe technology is transforming and streamlining commerce, reducing the traditional transaction frictions that merchants and consumers face and opening new payments and financing channels for banks. Payments and consumer financing are vast markets in the United States with $13.4 trillion of personal consumption expenditure in 2017, according to the U.S. Bureau of Economic Analysis, and $3.8 trillion of consumer loans outstanding at the end of 2017, according to the Federal Reserve System. We believe the following trends define the U.S. consumer finance market, and other core markets, today.

Our Existing Markets—Home Improvement and Elective Healthcare—are Sizeable and Growing

The home improvement market is large, fragmented and growing, representing approximately $315 billion in spending volume in 2017, according to the Joint Center for Housing Studies of Harvard University, although not all home improvement projects are of a size suitable for financing. Merchants in this market range from small, owner-operated contractors to large national brands and retailers. From our inception through March 31, 2018, our Bank Partners have used our program to extend over $12 billion of financing, primarily including loans for home improvement sales and projects involving, among other things, windows, doors, roofing and siding; kitchen and bath remodeling; and heating, ventilation and air conditioning units. We believe that spending on home improvement goods and services will continue to increase as the national housing stock ages and existing home sales increase.

In 2016, we began expanding into elective healthcare, which, like the home improvement market, is a large, fragmented market featuring creditworthy consumers who make large-ticket purchases. We believe the elective healthcare market rivals in size the home improvement market in terms of annual spending volume, based on the number and cost of annual procedures performed. Elective healthcare providers include doctors, dentists, outpatient surgery centers and clinics providing orthodontics, cosmetic and aesthetic dentistry, vision correction, bariatric surgery, cosmetic surgery, hair replacement, reproductive medicine, veterinary medicine and hearing aid devices. We believe that because of population aging, innovations in medical technology and ongoing healthcare cost inflation, we are well-positioned to increase volume in the growing elective healthcare industry vertical.

3


 

We continually evaluate opportunities for expansion into new industry verticals. For example, we have identified significant opportunities within verticals such as online retail, power sports, auto repair and jewelry. These markets are also large and fragmented, and they similarly feature attractive consumers who make large ticket purchases.

Banks Seek Consumer Credit Exposure but are Not Well-Positioned to Lend at the Point of Sale

We believe that banks seek attractive risk-adjusted yields and portfolio diversification through exposure to consumer credit. Banks’ traditional consumer lending advantages have included physical branch networks and trusted brands. However, our experience has demonstrated that consumers are increasingly comfortable using mobile devices to shop, make payments and manage finances. This has provided an opening at the point of sale for a new lending channel, but it is one that many banks to date have had a difficult time accessing.

Legacy Financing Solutions are Less Attractive to Consumers

Providers of installment loan financing to consumers traditionally have required paper-based applications for which consumers are required to gather burdensome amounts of information. Accordingly, there often has been a substantial time lag between a consumer deciding to apply for a loan and receiving approval, and then from approval to funding. Meanwhile, revolving credit alternatives such as credit cards are faster and more convenient but are characterized by high rates and restrictive credit limits for large-ticket purchases. Consequently, prime consumers tend to use credit cards as payment, rather than financing, solutions. Absent a simple, fast and cost-effective alternative to finance large-ticket purchases, many consumers resort to paying with cash, debit card or check, or avoiding purchases altogether.

Our Ecosystem

We have built an entrenched ecosystem of merchants, consumers and Bank Partners. Our platform enables each of these constituents to benefit from enhanced access to each other and to our technology, resulting in a virtuous cycle of increasing engagement and value creation. We believe our ecosystem grows stronger with scale.

4


 

Value Proposition to Merchants

 

 

Increased sales volume. Promotional payment plans and financing solutions make it easier for merchants to sell more goods and services. We have observed that our customizable solution helps merchants increase ticket size and conversion of sales.

 

 

Seamless integration. We design our solution to deliver instant value, enabling our merchants’ sales associates to use their existing mobile devices to facilitate loans through our platform. We settle payments through a national credit card payment network or through the Automated Clearing House (“ACH”) network, meaning merchants that already accept these types of payments require no systems integration to adopt our platform. This frictionless onboarding makes consumer point-of-sale financing available for merchants of all sizes.

 

 

Accelerated funding. Our merchants typically receive a sizeable portion of their funding faster than they would if they were paid in installments in a more traditional 30-day billing cycle.

 

 

Superior customer service. We work creatively and collaboratively to design promotional financing offers that fulfill the needs of our merchants while continuing to improve our solution to appeal to their customers.

Value Proposition to Consumers

 

 

Superior experience. Because we are able to process an application and approve financing at the point of sale with limited burden on the consumer, our platform enables consumers to “apply and buy” in most cases in less than a minute, utilizing an intuitive mobile interface and paperless loan agreement.

 

 

Promotional interest rates and terms. The majority of the loans facilitated by our platform carry promotional financing with deferred interest or low-rate terms, an attractive alternative relative to the rates on credit card balances.

 

 

Enables larger purchases. By allowing merchants to market to their customers by focusing on the monthly cost of their purchases rather than the one-time upfront cash outlays, consumers are able to better budget for larger purchases.

 

 

Preserves revolving credit availability. Rather than utilizing revolving credit for large purchases, which results in available credit lines being reduced, the loans we facilitate preserve credit card availability for everyday purchases.

Value Proposition to Banks

 

 

Consumer credit exposure at attractive risk-adjusted yields. We believe loans originated on our platform offer strong net interest margin, credit performance, and duration characteristics relative to banks’ other unsecured consumer lending opportunities.

 

 

Nationally-diversified, small-balance loans. While many of our Bank Partners may traditionally focus on lending opportunities within their geographic footprints, our platform enables them to originate loans in all 50 states and at an average loan size of less than $10,000, thus creating an efficient mechanism to aggregate a granular, diversified national portfolio.

 

 

Access to our proprietary technology and merchant network. Over the past decade, we have built and refined our technology platform to deliver significant value to merchants and consumers. We also have cultivated strong relationships with Sponsors and merchants, resulting in 12,231 active merchants as of March 31, 2018. We believe our Bank Partners would require significant time and investment to build such a technology solution and merchant network themselves.

 

 

No customer acquisition cost and limited operating expenses. Our platform alleviates the need for our Bank Partners to bear any marketing, software development or technology infrastructure costs to originate loans.

5


 

 

 

Robust compliance framework. We continually refine and upgrade our platform, risk management and servicing capabilities to meet the compliance, documentation and vendor management requirements of our Bank Partners and their regulators.

Our Platform

Our Business Model

Efficient Go to Market Strategy

 

 

Technology led, simple and affordable. Our digital offering enables an efficient, low-cost distribution model and offers frictionless setup at no upfront fee to merchants.

 

 

Sponsor driven. We leverage our Sponsor relationships to access a large network of home improvement merchants at a minimal cost. Our track record demonstrates that Sponsors are attracted to working with GreenSky because they believe our promotional financing and payments platform is a valuable tool for their affiliated merchants.

 

 

Organic and expansive. As merchants and their sales associates observe the competitive and other advantages that our program provides, we expect to experience greater demand. We have started to experience the impact of word-of-mouth marketing as sales associates who have used the program have begun working with new merchants and advocated joining the program. With over 43,000 sales associates having downloaded and used the GreenSky mobile application as of the date hereof, they are expected to serve as a strong organic customer acquisition channel.

Visible and Recurring Revenue Streams

Although we offer our technology at no upfront cost, we monetize through an upfront transaction fee every time a merchant receives a payment using our platform. This creates stable, recurring revenues, aligns our incentives with the interests of our merchants, and enables us to grow along with our ecosystem. In 2017, 93% of our transaction volume was generated from merchants that were enrolled on our technology platform as of December 31, 2016. In addition, our Bank Partners pay us a recurring servicing fee over the lives of their loans.

6


 

Attractive Unit Economics

Our low-cost go to market strategy, combined with our visible and recurring revenue model, provides for a fast payback period and strong dollar-based retention:

 

 

Fast payback period. “Payback period” refers to the number of months it takes for the cumulative transaction fees we earn from merchants acquired during a given month to exceed our total sales and marketing spend in that same month. For merchant groups acquired during 2017 for which payback was completed, the average payback period was approximately five months.

 

 

Strong dollar-based retention. We measure “dollar-based retention” on an annual cohort basis and define a cohort as the merchants that enroll for the first time on our platform within a given year. Our dollar-based retention calculation is adjusted to exclude Home Depot, which we count as a single merchant despite it having approximately 2,000 locations, and to exclude solar panel merchants, as we actively reduced our transaction volume with such merchants in 2017. “Dollar-based retention” refers to the transaction volume generated during a given year by each cohort of merchants relative to the transaction volume generated by that same merchant cohort in the prior year, and the calculation is adjusted for a two quarter seasoning period. Our dollar-based retention has exceeded 100% on our platform for each annual cohort in the past three years.

We believe our fast payback period, combined with our strong dollar-based retention, indicates that our merchants will generate significant lifetime value for us relative to our cost of acquiring them. For illustration, we measured the cumulative transaction fee revenues generated by merchants acquired during 2014 through the period ended March 31, 2018 by aggregating the total transaction volume for each calendar year and for the three months ended March 31, 2018 for the 2014 merchant cohort and multiplying each of the respective periods’ total transaction volume by each period’s respective average transaction fee rate. We compared this amount to our total sales and marketing costs in 2014, inclusive of compensation costs for sales and marketing personnel. Merchants acquired during 2014 have generated approximately 44 times more transaction fee revenues, to date, than our cost of acquiring them.

Business Metrics

We review a number of operating and financial metrics, including the following, to evaluate our business, measure our performance, identify trends, formulate plans and make strategic decisions.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended
December 31,

 

Three months ended
March 31,

 

2017

 

2016

 

2015

 

2018

 

2017

Active Merchants

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

10,891

 

 

 

 

7,361

 

 

 

 

5,076

 

 

 

 

12,231

 

 

 

 

8,048

 

Percentage Increase

 

 

 

48%

 

 

 

 

45%

 

 

 

 

 

 

52%

 

 

 

Transaction Volume

 

 

 

 

 

 

 

 

 

 

Dollars (millions)

 

 

$

 

3,767

 

 

 

$

 

2,882

 

 

 

$

 

2,076

 

 

 

$

 

1,033

 

 

 

$

 

705

 

Percentage Increase

 

 

 

31%

 

 

 

 

39%

 

 

 

 

 

 

47%

 

 

 

Loan Servicing Portfolio

 

 

 

 

 

 

 

 

 

 

Dollars (millions)

 

 

$

 

5,390

 

 

 

$

 

3,832

 

 

 

$

 

2,561

 

 

 

$

 

5,693

 

 

 

$

 

4,018

 

Percentage Increase

 

 

 

41%

 

 

 

 

50%

 

 

 

 

 

 

42%

 

 

 

Cumulative Consumer Accounts

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

1,565,166

 

 

 

 

1,077,400

 

 

 

 

692,428

 

 

 

 

1,709,364

 

 

 

 

1,181,230

 

Active Merchants. Since our transaction volume is a function of the size, engagement and growth of our merchant network, active merchants (as defined above), in aggregate, are an indicator of future revenue and profitability, although they are not directly correlated. As of March 31, 2018, we

7


 

had 12,231 active merchants on our platform, representing an increase of 52% over 8,048 as of March 31, 2017.

Transaction Volume. Transaction volume (as defined above) is an indicator of revenue and overall platform profitability and has grown substantially in the past several years. For the three months ended March 31, 2018, transaction volume was $1.0 billion, which represented an increase of 47% over $0.7 billion for the same period in 2017.

Loan Servicing Portfolio. We define our loan servicing portfolio as the aggregate outstanding consumer loan balance (principal plus accrued interest and fees) facilitated and serviced by our platform at the date of measurement. Our loan servicing portfolio is an indicator of our servicing activities. As of March 31, 2018, we had a loan servicing portfolio of $5.7 billion, representing an increase of 42% over $4.0 billion as of March 31, 2017. Our average loan servicing portfolio was $5.5 billion for the three months ended March 31, 2018 and $3.9 billion for the same period in 2017.

Cumulative Consumer Accounts. We define cumulative consumer accounts as the aggregate number of consumer accounts approved on our platform since our inception, including both existing and prior accounts. Although not directly correlated to revenue, cumulative consumer accounts is a measure of our brand awareness among consumers, as well as the value of the data we have been collecting from those consumers since our inception. We may use this data to support future growth by cross-marketing products and delivering potential additional customers to merchants who may not have been able to source those customers themselves. As of March 31, 2018, we had 1.7 million cumulative consumer accounts compared to 1.2 million as of March 31, 2017.

Our Strengths and Competitive Advantages

Differentiated Technology Platform and Customer Experience

We believe that our proprietary, patent-pending technology is unique because it can deliver:

 

 

Frictionless setup and multiple promotional financing alternatives for our merchants

 

 

An intuitive, mobile-native user interface, and real-time “apply and buy” capabilities, for consumers

 

 

Instant digital loan underwriting and distribution mechanisms for our Bank Partners

We believe these capabilities will help us deepen our existing relationships and provide a competitive advantage in winning new business.

Large, Entrenched Ecosystem

As of March 31, 2018, we had 12,231 active merchants. From our inception through March 31, 2018, our Bank Partners have used our technology and network of merchants to provide over $12 billion of financing to approximately 1.7 million consumers. The powerful network effects of our platform strengthen this ecosystem, providing increasing value to GreenSky and each of our constituents as we scale.

Trusted Relationship with our Bank Partners

We have continually refined and upgraded our compliance, control, servicing and collections functions to meet the regulatory requirements, documentation and operating standards applicable to our Bank Partners, which include several of the largest banks in the United States, and to us.

Asset-Light Model

Our Bank Partners originate and own the loans that they facilitate through our platform. We derive a substantial majority of our revenue and profitability from upfront transaction fees every time a merchant facilitates a transaction and receives a payment using our platform.

8


 

Attractive Consumer Profile

Consumers using our platform live in all 50 states and typically are or have been homeowners with super-prime or prime credit scores. For all loans originated on our platform during the three months ended March 31, 2018, the credit-line weighted average consumer credit score was 769.

Efficient Go To Market Strategy and Recurring Revenue Model Drive Strong Operating Leverage

We leverage our proprietary technology and strong Sponsor relationships to efficiently access and onboard a large network of merchants. Our merchants, once acquired, allow us to reach an even larger universe of consumers and facilitate repeat transactions at very low cost relative to the transaction fee we receive. Coupled with the highly scalable technology anchoring our platform, we deliver strong operating margins.

Our Growth Opportunities

We have significant opportunities to expand our business. Our growth strategy focuses on the following efforts to continue to deliver value for our constituents and expand our ecosystem.

Grow Our Merchant Community

We intend to continue building relationships with large Sponsors and independent, high-sales volume merchants in our existing core markets.

Expand into New Industry Verticals, Including Online Retail and Traditional Store-Based Merchants

We recently expanded into the elective healthcare industry vertical and intend to explore other large, fragmented markets with creditworthy consumers who tend to make large-ticket purchases online and in-store. For example, online retail represents an attractive and low cost acquisition channel ripe for penetration that fits synergistically with our existing point-of-sale mobile platform. In 2017, domestic retail sales through the e-commerce platform exceeded $453 billion, growing by almost 16% over the prior year, according to the U.S. Census Bureau. We expect to seek out additional attractive industry verticals (whether online or in-store) based on our ability to efficiently go to market, grow market share, generate attractive risk-adjusted yields for our Bank Partners and continue to maximize value for our constituents.

Widen Our Spectrum of Consumers and Funding Partners

We continue to evaluate opportunities to assist our merchants to drive more sales by extending financing to a wider range of consumer credit profiles. To facilitate this extension of our platform, we may work with our Bank Partners to offer near-prime and non-prime financing, leveraging our technology platform to offer merchants and consumers a “single application” user experience that is designed to be superior to the user experience offered by our competitors in traditional “second-look” programs. We may expand our universe of Bank Partners to undertake these opportunities.

Leverage Our Current Customer Base and Bank Partner Relationships to Deliver New Solutions

We believe we have a substantial opportunity to cross-market value-enhancing solutions to consumers and to our merchants. We believe that, as the number of transactions we facilitate increases, the data we accumulate from our technology platform will enable us to broaden our monetization model and leverage this data to attract incremental customers whom merchants may not have been able to source otherwise. We also believe that we can leverage our platform to efficiently connect consumers, including existing retail customers of our Bank Partners, with merchant-driven promotions, expanding GreenSky’s brand and driving incremental revenue in each of our industry verticals.

9


 

Risk Factors Summary

An investment in our Class A common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy and could materially adversely affect our business. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our Class A common stock. Some of these risks include that:

 

 

We operate in a highly regulated industry, and a failure to comply with applicable laws and regulations could subject us to lawsuits or governmental actions, which could adversely affect our business.

 

 

Our agreements with our Bank Partners are non-exclusive, short-term and subject to termination; any termination would negatively affect our business.

 

 

Our results of operations and growth depend on our ability to retain existing, and attract new, merchants and Bank Partners.

 

 

We derive a large percentage of our revenue from our top ten merchants. The loss of a significant merchant or Sponsor could have a negative impact on our business.

 

 

Our results depend, to a significant extent, on the active and effective promotion and support of the GreenSky program by our Sponsors and merchants.

 

 

We rely heavily on credit decisioning and scoring models as well as information from third parties and customers, all of which could contain misrepresentations, errors or inaccuracies that could adversely affect our business.

 

 

Security breaches, fraudulent activity and interruptions in our computer systems affecting our business could have an adverse effect on our business.

 

 

Our relationships with third-party vendors subject us to a variety of regulatory, financial and reputational risks.

 

 

Our revenues are highly dependent on macroeconomic and U.S. real estate market conditions as well as prevailing interest rates.

 

 

As a holding company, we are entirely dependent upon the operations of GSLLC and its ability to make distributions to provide cash flow to us to pay taxes and other expenses.

 

 

The Continuing LLC Members will control our Company, and their interests may conflict with yours in the future.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we remain an emerging growth company, we may take advantage of certain limited exemptions from various reporting requirements that are applicable to other public companies. These provisions include:

 

 

a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

 

an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

 

 

an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation;

 

 

reduced disclosure about executive compensation in our periodic reports and proxy statements; and

10


 

 

 

no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

We have chosen to present three years of audited financial statements and related selected financial data and management’s discussion and analysis of financial condition and results of operations. Further, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and to comply with new or revised accounting standards as required of publicly-traded companies generally. This decision to opt out of the extended transition period is irrevocable.

We have elected to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may result in a less active trading market for our common stock and more volatility in our stock price.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth anniversary of the consummation of this offering, (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our Class A common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

Organizational Structure

GS Holdings is a limited liability company that is taxed as a partnership. Because U.S. tax law generally makes it impractical for an entity taxed as a partnership to sell membership interests publicly, GSLLC has formed a holding company that will be taxed as a corporation, GreenSky, Inc., to sell Class A common stock publicly. However, for holders of Class A, B and C units of GS Holdings (which will be converted to Holdco Units in the Reorganization Transactions) that do not intend to sell their Holdco Units in connection with this offering, it is more tax efficient for them to retain their Holdco Units until they are ready to sell them and then, at that time, to exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of Class A common stock (or cash, at our option, such determination to be made by the disinterested members of our board of directors) and then to sell those shares. This structure—the formation of a holding company taxed as a corporation above a limited liability company taxed as a partnership where some members of the limited liability company continue to own some or all of their membership interests—is often referred to as an “Up-C structure.”

Prior to the Reorganization Transactions (as defined below) and the closing of this offering, the capital structure of GS Holdings consisted of (i) three classes of membership interests (Class A, B and C units) held by the Original GS Equity Owners (including the Former Corporate Investors) and (ii) profits interests held by the Original Profits Interests Holders. Options and warrants to purchase Class A units of GS Holdings also were outstanding. As further discussed below, following the Reorganization Transactions, the Original GS Equity Owners (other than the Former Corporate Investors) and certain Original Profits Interests Holders, which we collectively refer to as the Continuing LLC Members, will continue to own Holdco Units in GS Holdings (other than Holdco Units that they will be exchanging in connection with this offering).

The diagram below depicts our organizational structure immediately prior to the Reorganization Transactions.

11


 

 

 

(1)

 

“Original GS Equity Owners” refers to the owners of units of GS Holdings prior to the Reorganization Transactions. Significant Original GS Equity Owners include: (i) certain affiliates of David Zalik (our Chief Executive Officer); (ii) certain affiliates of Robert Sheft (a director of our Company); and (iii) TPG Georgia Holdings, L.P.

     

“Former Corporate Investors” refers to certain of the Original GS Equity Owners that will merge with and into one or more subsidiaries of GreenSky, Inc. in connection with the Reorganization Transactions. Significant Former Corporate Investors include an affiliate of TPG Georgia Holdings, L.P.

 

(2)

 

“Original Profits Interests Holders” refers to the owners of profits interests in GS Holdings prior to the Reorganization Transactions, which include certain current and former employees, directors, and an affiliate of one of the directors, of GS Holdings and its subsidiaries.

Following the Reorganization Transactions and this offering, we will be a holding company. Our sole material asset will be an equity interest in GS Holdings, which also is a holding company and has the sole equity interest in GSLLC, the subsidiary that conducts all of our operations. Because GreenSky, Inc. will be the managing member of GS Holdings (with 100% of the management and voting power in GS Holdings), and GS Holdings will be the managing member of GSLLC, we will indirectly operate and control all of the business and affairs (and will consolidate the financial results) of GS Holdings and its subsidiaries, including GSLLC.

Prior to the consummation of this offering, (i) the operating agreement of GS Holdings will be amended and restated (the “Holdings LLC Agreement”) to, among other things, modify its capital structure by replacing the different classes of membership interests and profits interests with a single new class of membership interests of GS Holdings (referred to as Holdco Units); (ii) we will issue to each of the Continuing LLC Members a number of shares of GreenSky, Inc. Class B common stock equal to the number of Holdco Units held by it (other than the Holdco Units that it will be exchanging in connection with this offering), for consideration in the amount of $0.001 per share of Class B common stock; (iii) Holdco Units received by some of the smaller Original Profits Interests Holders will be contributed to GreenSky, Inc. in exchange for shares of our Class A common stock; (iv) equity holders of the Former Corporate Investors will contribute their equity in the Former Corporate Investors to GreenSky, Inc. in exchange for shares of our Class A common

12


 

stock and the right to certain payments under the Tax Receivable Agreement, and the merger of the Former Corporate Investors with and into subsidiaries of GreenSky, Inc.; (v) outstanding options to acquire Class A units of GS Holdings will be equitably adjusted so that they will be exercisable for shares of Class A common stock; and (vi) outstanding warrants to acquire Class A units of GS Holdings will be equitably adjusted pursuant to their terms so that they will be exercisable for Holdco Units (and an equal number of shares of Class B common stock). We refer to these transactions collectively as the “Reorganization Transactions.” Following the Reorganization Transactions, Holdco Units (and shares of Class B common stock), options and warrants will be subject to the same vesting and/or forfeiture conditions as the previously held securities in GS Holdings, as applicable.

Under the Holdings LLC Agreement, the membership interests in GS Holdings will be adjusted (the “Forward Split”) so that each Holdco Unit (together with a share of Class B common stock) is economically equivalent to a share of Class A common stock on a one-for-one basis. Corresponding adjustments will be made to options and warrants.

Our Class B common stock initially will entitle holders thereof to ten votes per share. Our Class B common stock will vote as a single class with our Class A common stock, but will not have any economic rights.

Prior to the Reorganization Transactions, but adjusted for the 10-for-1 Forward Split, GS Holdings effectively had outstanding 133,393,447 Class A units, 30,326,348 Class B units and 12,627,491 Class C units. Inclusive of dilution from outstanding options, warrants and profits interests, our fully-diluted share count was 189,294,306. As part of the Reorganization Transactions, certain holders of Class B units (which we refer to as Former Corporate Investors) exchanged 8,405,772 units for shares of Class A common stock.

In this offering the former holders of Class A units of GS Holdings will sell to GreenSky the equivalent of 27,018,269 of those units, the former holders of Class B units will sell to GreenSky the equivalent of 2,927,401 of those units, and the former holders of Class C units will not sell the equivalent of any units. In addition, Original Profits Interests Holders will sell to GreenSky the equivalent of 2,212,726 Holdco Units, the owners of the Former Corporate Investors will sell to GreenSky 1,716,095 shares of Class A common stock and the former GS Holdings option and warrant holders collectively will sell to GreenSky the equivalent of 216,418 shares. Following the offering, profits interests equivalent to 415,899 Holdco Units will be converted into Class A common stock.

In connection with the Reorganization Transactions, we will enter into one or more exchange agreements with the Continuing LLC Members and GS Holdings (which we refer to collectively as the “Exchange Agreement”), pursuant to which the Continuing LLC Members, and any other Exchange Agreement parties, will have the right to exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for stock splits, stock dividends and reclassifications, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors). Any Holdco Units exchanged under those exchange provisions will thereafter be owned by GreenSky, Inc., and the corresponding shares of Class B common stock will be cancelled.

The Reorganization Transactions also include various other agreements and processes. For additional details, see “Organizational Structure” and “Certain Relationships and Related Party Transactions.”

13


 

The diagram below depicts our simplified organizational structure immediately following this offering after giving effect to the use of proceeds and assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

(1)

 

“Continuing LLC Members” refers to those Original GS Equity Owners and Original Profits Interests Holders who will continue to own Holdco Units after the Reorganization Transactions and who may, following the consummation of this offering, exchange their Holdco Units (with automatic cancellation of an equal number of shares of our Class B common stock) for shares of our Class A common stock or cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors). Significant Continuing LLC Members include: (i) certain affiliates of David Zalik (our Chief Executive Officer); (ii) certain affiliates of Robert Sheft (a director of our Company); and (iii) TPG Georgia Holdings, L.P.

 

(2)

 

“Former Corporate Investors” refers to certain of the Original GS Equity Owners that will merge with and into one or more subsidiaries of GreenSky, Inc. in connection with the Reorganization Transactions. Significant Former Corporate Investors include an affiliate of TPG Georgia Holdings, L.P.

 

(3)

 

The shares of Class B common stock have no economic rights, but each share of Class B common stock initially entitles its holder to ten votes on all matters to be voted on by stockholders generally. See “Description of Capital Stock—Common Stock—Class B Common Stock—Voting Rights.”

14


 

     

See “Principal Stockholders.”

Our Up-C structure will allow the Continuing LLC Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for income tax purposes following the offering. One of these benefits is that future taxable income of the Company that is allocated to such owners will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Holdco Units that the Continuing LLC Members will hold are exchangeable (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock or cash, at our option (such determination to be made by the disinterested members of our board of directors), the Up-C structure also provides the Continuing LLC Members potential liquidity that holders of non-publicly traded limited liability companies typically are not afforded. See “Organizational Structure” and “Description of Capital Stock.”

GreenSky, Inc. will hold Holdco Units and therefore receive the same benefits as the Continuing LLC Members on account of its ownership in an entity treated as a partnership, or “pass-through” entity, for income tax purposes. Our use of the net proceeds from this offering to purchase Holdco Units from the Exchanging Members, our acquisition of the equity of the Former Corporate Investors, and any future exchanges of Holdco Units for our Class A common stock pursuant to the Exchange Agreement, are expected to result in increases in GreenSky, Inc.’s allocable tax basis in the assets of GS Holdings. This so-called “step-up” in tax basis will provide GreenSky, Inc. with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to GreenSky, Inc. GreenSky, Inc. and GS Holdings will enter into a Tax Receivable Agreement under which GreenSky, Inc. will agree to pay the TRA Parties 85% of the value of these and certain other tax benefits and will retain the remaining 15% of the value of such benefits. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

Corporate Information

GreenSky, Inc. was incorporated on July 12, 2017, and had no business transactions or activities and no material assets or liabilities prior to the Reorganization Transactions and this offering. Our principal executive offices are located at 5565 Glenridge Connector, Suite 700, Atlanta, Georgia 30342. Our telephone number is (678) 264-6105. The address of our main website is www.greenskycredit.com. The information contained on or accessible through our website does not constitute a part of this prospectus.

Recent Developments

In December 2017, we issued 10,101,990 Class C-1 preferred units for gross proceeds of $200 million in an offering pursuant to Rule 506(b) of Regulation D under the United States Securities Act of 1933, as amended (the “Securities Act”). We intend to use the net proceeds of $194.4 million from such offering for general operating purposes.

In 2017, we declared non-tax distributions of $346.5 million to our unit holders and holders of profits interests and a related party at the time we entered into the term loan described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Term loan and revolving loan facility” and in Note 7 to the consolidated financial statements of GS Holdings included in this prospectus, of which $337.2 million was paid as of December 31, 2017 and $2.6 million has been paid to date in 2018. In December 2017, we declared a $160.0 million special cash distribution to our unit holders and holders of profits interests using the proceeds from a sale of loan receivables and cash from operations, of which $156.1 million was paid as of December 31, 2017 and $0.9 million has been paid to date in 2018. Tax-related distributions totaled $71.3 million in 2017 and have totaled $36.3 million to date in 2018. See “Dividend Policy.”

15


 

The Offering

 

 

 

Issuer

 

GreenSky, Inc.

 

Class A common stock offered by us

 

34,090,909 shares of Class A common stock (or 39,204,545 shares if the underwriters’ option is exercised in full).

 

Underwriters’ option to purchase
additional shares

 

 
We have granted the underwriters a 30-day option to purchase up to an additional 5,113,636 shares of Class A common stock at the public offering price less underwriting discounts and commissions.

 

Common stock to be outstanding after
giving effect to this offering and the
use of proceeds to us therefrom

 

 
 
41,196,485 shares of Class A common stock (or 46,052,707 shares if the underwriters’ option is exercised in full). If all outstanding Holdco Units held by the Continuing LLC Members were exchanged (with automatic cancellation of an equal number of shares of Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis, and all outstanding options were exercised, 189,294,306 shares of Class A common stock (or 189,294,306 shares if the underwriters’ option is exercised in full) would be outstanding.

 

 

 

144,727,632 shares of Class B common stock (or 139,903,873 shares if the underwriters’ option is exercised in full), equal to one share per Holdco Unit (other than any Holdco Units owned by GreenSky, Inc.).

 

Voting

 

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally.

 

 

 

After this offering, the Continuing LLC Members will hold an equal number of shares of Class B common stock and Holdco Units. The shares of Class B common stock have no economic rights, but each share of Class B common stock initially entitles its holder to ten votes on all matters to be voted on by stockholders generally. Once the collective holdings of the Continuing LLC Members in the aggregate are less than 15% of the combined economic interest in us, each share of Class B common stock will entitle its holder to one vote per share on all matters to be voted upon by stockholders generally. See “Description of Capital Stock—Common Stock—Class B Common Stock—Voting Rights.”

 

 

 

Holders of our Class A and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

 

Voting power held by holders of
Class A common stock after giving
effect to this offering and the use of
proceeds

 

 
 
 
2.8% (or 100% if all outstanding Holdco Units held by the Continuing LLC Members were exchanged (with

16


 

 

 

 

 

 

automatic cancellation of all outstanding shares of Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis).

 

Voting power held by holders of
Class B common stock after giving
effect to this offering and the use of
proceeds

 

 
 
 
97.2% (or 0% if all outstanding Holdco Units held by the Continuing LLC Members were exchanged (with automatic cancellation of all outstanding shares of Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis).

 

Voting power

 

81.5 (or 78.7% if the underwriters’ option is exercised in full) will be held by executive officers, directors and greater than 5% stockholders after giving effect to this offering and the use of proceeds.

 

 

 

97.2% (or 96.8% if the underwriters’ option is exercised in full) will be held by executive officers, directors and greater than 5% stockholders, together with other current members of GS Holdings, after giving effect to this offering and the use of proceeds.

 

Use of proceeds

 

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $701.4 million (or approximately $807.1 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), assuming an initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

 

 

 

“Redemption proceeds” refers to gross proceeds from this offering, after deducting underwriting discounts and commissions, but not other offering expenses. We intend to use redemption proceeds of approximately $672.1 million to purchase an aggregate of 32,158,396 Holdco Units from the Exchanging Members, including our Chief Executive Officer and certain of our other officers and directors, as described under “Organizational Structure.” We also intend to use redemption proceeds of (i) approximately $35.9 million to redeem 1,716,095 shares of our Class A common stock from equity holders of the Former Corporate Investors and (ii) approximately $4.5 million to redeem shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings. See “Certain Relationships and Related Party Transactions—Purchase of Holdco Units and Redemption of Class A Common Stock” for the number of Holdco Units to be purchased from the Exchanging Members and shares of Class A common stock to be redeemed from equity holders of the Former Corporate Investors and option holders of GS Holdings. The per share purchase price for each Holdco Unit surrendered for purchase, or Class A share redeemed, will be equal to the price per share of our Class A

17


 

 

 

 

 

 

common stock in this offering, less underwriting discounts and commissions.

 

 

 

If the underwriters exercise in full their option to purchase 5,113,636 additional shares of Class A common stock, in addition to the use of proceeds described above, we intend to use redemption proceeds of approximately $100.8 million to purchase an additional 4,823,759 Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) from the Exchanging Members, including our Chief Executive Officer and certain of our other officers and directors; approximately $5.4 million to redeem shares of our Class A common stock from equity holders of the Former Corporate Investors; and approximately $0.7 million to redeem shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings.

 

 

 

See “Use of Proceeds.”

 

Dividend policy

 

We have no current plans to pay dividends on our Class A common stock. Any future determination to pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions (including those under our Credit Agreement, as defined below), general business conditions and other factors that our board of directors may deem relevant.

 

 

 

Subject to having available cash and subject to limitations imposed by applicable law and contractual restrictions (including pursuant to our Credit Agreement or other debt instruments), the Holdings LLC Agreement requires GS Holdings to make certain distributions to GreenSky, Inc. and the Continuing LLC Members, pro rata, in order to facilitate their payment of taxes with respect to GS Holdings’ income and to facilitate the payment by GreenSky, Inc. of amounts due under the Tax Receivable Agreement. Because GreenSky, Inc. will be the managing member of GS Holdings, which is the managing member of GSLLC, we will have the ability to determine the amount and timing of distributions by GSLLC to GS Holdings, subject to compliance with applicable law. Any such distributions will then be distributed to all holders of Holdco Units, including us, pro rata based on holdings of Holdco Units. In addition, in order to maintain to the greatest extent practicable the parity in value of Holdco Units and shares of Class A common stock, to the extent that GreenSky, Inc. accumulates substantial cash and cash equivalents, and receivables from GS Holdings, we will consider making distributions to Class A common stockholders. While the determination of what level of cash and cash equivalents, and receivables from GS Holdings (if any), warrant such distribution will depend upon the facts and circumstances at the time of determination, we

18


 

 

 

 

 

 

generally would expect to make distributions where such amounts exceed $100 million. See “Dividend Policy.”

 

Listing

 

We have applied to list our Class A common stock on the NASDAQ under the symbol “GSKY.”

 

Exchange rights of the Continuing LLC
Members

 

 
Prior to the consummation of this offering, we will complete the reorganization described in “Organizational Structure.” Pursuant to the Exchange Agreement, each Continuing LLC Member, and any other Exchange Agreement parties, will have the right to exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of Class A common stock of GreenSky, Inc. on a one-for-one basis, subject to customary adjustment for stock splits, stock dividends and reclassifications, or for cash (based on the market price of the Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors). We have reserved for issuance shares of Class A common stock in respect of the aggregate number of shares of Class A common stock that may be issued upon exchange of Holdco Units. See “Certain Relationships and Related Party Transactions—Exchange Agreement.”

 

Tax Receivable Agreement

 

Our purchase of Holdco Units from the Exchanging Members using a portion of the net proceeds from this offering, our acquisition of the equity of the Former Corporate Investors, and any future exchanges of Holdco Units for our Class A common stock pursuant to the exchange rights described above are expected to result in increases in GreenSky, Inc.’s allocable tax basis in the assets of GS Holdings. The merger of the Former Corporate Investors is expected to increase certain tax attributes of GreenSky, Inc. These increases in tax basis are expected to increase (for tax purposes) depreciation and amortization deductions allocable to GreenSky, Inc. and, with the additional tax attributes, reduce the amount of tax that GreenSky, Inc. otherwise would be required to pay in the future. These increases in tax basis also may decrease gain (or increase loss) on future dispositions of certain assets to the extent tax basis is allocated to those assets. We and GS Holdings will enter into a tax receivable agreement with the TRA Parties (the “Tax Receivable Agreement”), whereby GreenSky, Inc. will agree to pay those parties 85% of the amount of cash tax savings, if any, in United States federal, state and local taxes that GreenSky, Inc. realizes or is deemed to realize as a result of these increases in tax basis, increases in basis from such payments and deemed interest deductions arising from such payments.

 

 

 

Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that the tax savings associated

19


 

 

 

 

 

 

with the purchase of Holdco Units from the Exchanging Members in connection with this offering and our acquisition of the equity of the Former Corporate Investors, together with future exchanges of Holdco Units (with automatic cancellation of Class B common stock) as described above, would aggregate to approximately $1,209.6 million over 15 years from the date of this offering based on an initial public offering price of $22.00 per share of our Class A common stock, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and assuming all future exchanges would occur one year after this offering. Under such scenario, assuming future payments are made on the date each relevant tax return is due, without extensions, we would be required to pay approximately 85% of such amount, or approximately $1,028.1 million, over the 15-year period from the date of this offering. If we were to elect to terminate the Tax Receivable Agreement immediately after this offering, based on an initial public offering price of $22.00 per share of our Class A common stock, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, we estimate that we would be required to pay approximately $630.1 million in the aggregate under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

Registration Rights Agreement

 

We intend to enter into a registration rights agreement whereby, following this offering and the expiration of the related 180-day lock-up period, we may be required to register under the Securities Act the sale of shares of our Class A common stock (i) that may be issued to certain of the Continuing LLC Members upon exchange of their Holdco Units (with automatic cancellation of Class B common stock) and (ii) issued to the equity holders of the Former Corporate Investors in connection with the Reorganization Transactions. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

Risk factors

 

Please read the section entitled “Risk Factors” for a discussion of certain factors you should carefully consider before deciding to invest in our Class A common stock.

Unless otherwise indicated or the context otherwise requires, the number of shares of Class A common stock outstanding and other information in this prospectus:

 

 

assumes the effectiveness of our amended and restated certificate of incorporation and bylaws, which we will adopt prior to completion of this offering;

 

 

assumes an initial public offering price of $22.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus;

 

 

assumes that the underwriters do not exercise their option to purchase 5,113,636 additional shares of Class A common stock from us;

 

 

excludes 144,727,632 shares of Class A common stock issuable upon the exchange of 144,727,632 Holdco Units (with automatic cancellation of an equal number of shares of

20


 

 

 

 

Class B common stock) that will be held by the Continuing LLC Members immediately following this offering;

 

 

excludes 613,003 shares of Class A common stock issuable upon exchange of 613,003 Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock), which are issuable upon exercise of warrants with a weighted-average exercise price of $1.081;

 

 

excludes 2,757,186 shares of Class A common stock issuable upon exercise of options with a weighted-average exercise price of $2.99; and

 

 

excludes 24,000,000 shares of Class A common stock reserved as of the date of this prospectus for future issuance under our 2018 Omnibus Incentive Compensation Plan (including the 2,757,186 shares of Class A common stock issuable upon exercise of options, as referenced above);

21


 

Summary Historical and Pro Forma Consolidated Financial Data

The following tables set forth summary historical consolidated financial and other data of GS Holdings at the dates and for the periods indicated. Following the formation of GS Holdings, effective August 2017 the equity holders of GSLLC exchanged their equity interests in GSLLC for equity interests in GS Holdings in proportion to their existing ownership interests. In accordance with ASC 805, Business Combinations, the exchange was accounted for as a common control transaction resulting in a change in the reporting entity. As the entities were always under common control, we retrospectively adjusted the historical consolidated financial statements of GS Holdings as if the common control transaction had occurred as of the earliest period presented. GS Holdings is considered our predecessor for accounting purposes, and its historical consolidated financial statements, which include the consolidated financial statements of GSLLC for periods prior to August 2017, will be our historical consolidated financial statements following this offering. The statements of operating data for the years ended December 31, 2017, 2016 and 2015, and balance sheet data as of December 31, 2017 and 2016, are derived from the audited consolidated financial statements of GS Holdings and related notes included elsewhere in this prospectus. The statements of operating data for the three months ended March 31, 2018 and 2017, and the balance sheet data as of March 31, 2018, are derived from the unaudited consolidated financial statements of GS Holdings and related notes included elsewhere in this prospectus. The unaudited consolidated financial statements of GS Holdings have been prepared on the same basis as the audited consolidated financial statements of GS Holdings and include all adjustments that we consider necessary for a fair statement of GS Holdings’ consolidated financial position and results of operations for all periods presented. The summary historical financial data of GreenSky, Inc. have not been presented because GreenSky, Inc. is a newly incorporated entity and has not engaged in any business or other activities except in connection with its formation and initial capitalization.

The summary unaudited pro forma consolidated statement of operations data for the fiscal year ended December 31, 2017 and the three months ended March 31, 2018 present our consolidated results of operations after giving pro forma effect to (i) the Reorganization Transactions and this offering, as described under “Organizational Structure,” as if such transactions occurred on January 1, 2017, (ii) the use of the estimated net proceeds to us from this offering, as described under “Use of Proceeds,” (iii) the effects of the Tax Receivable Agreement, as described under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement,” and (iv) a provision for corporate income taxes on the income attributable to GreenSky, Inc. at an effective rate of 22.37% for the three months ended March 31, 2018, and 38.41% for the year ended December 31, 2017, inclusive of all United States federal, state and local income taxes. The summary unaudited pro forma consolidated balance sheet data as of March 31, 2018 present our consolidated financial position giving pro forma effect to (i) the Reorganization Transactions and this offering, as if such transactions occurred on March 31, 2018, (ii) the use of the estimated net proceeds from this offering, as described under “Use of Proceeds,” and (iii) the effects of the Tax Receivable Agreement, as described under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect their impact, on a pro forma basis, on the historical financial information of GS Holdings. The summary unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of GreenSky, Inc. that would have occurred had GreenSky, Inc. been in existence or operated as a public company or otherwise during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the described transactions occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

The following summary historical consolidated financial and other data are qualified in their entirety by reference to, and should be read in conjunction with, our audited consolidated financial statements and related notes, our unaudited consolidated financial statements and related notes

22


 

and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Information” and other financial information included in this prospectus. Historical results included below and elsewhere in this prospectus are not necessarily indicative of our future performance, and the results for any interim period are not necessarily indicative of the operating results to be expected for the full fiscal year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Historical GS Holdings

 

Pro Forma GreenSky, Inc.

 

 

Year ended
December 31,

 

Three months ended
March 31,

 

Year ended
December 31,

 

Three
months
ended
March 31,
2018

 

2017

 

2016

 

2015

 

2018

 

2017

 

2017

 

 

(dollars in thousands, except per share data)

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

 

$

 

278,958

 

 

 

$

 

228,446

 

 

 

$

 

152,678

 

 

 

$

 

70,940

 

 

 

$

 

54,921

   

 

$

 

278,958

   

 

$

 

70,940

 

Servicing and other

 

 

 

46,929

 

 

 

 

35,419

 

 

 

 

20,779

 

 

 

 

14,386

 

 

 

 

10,416

   

 

 

46,929

   

 

 

14,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

325,887

 

 

 

 

263,865

 

 

 

 

173,457

 

 

 

 

85,326

 

 

 

 

65,337

   

 

 

325,887

   

 

 

85,326

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of depreciation and amortization shown separately below)

 

 

 

89,708

 

 

 

 

79,145

 

 

 

 

36,506

 

 

 

 

36,130

 

 

 

 

23,299

   

 

 

89,708

   

 

 

36,130

 

Compensation and benefits

 

 

 

54,650

 

 

 

 

39,836

 

 

 

 

27,738

 

 

 

 

16,343

 

 

 

 

12,430

   

 

 

54,650

   

 

 

16,343

 

Sales and marketing

 

 

 

2,198

 

 

 

 

1,085

 

 

 

 

861

 

 

 

 

828

 

 

 

 

233

   

 

 

2,198

   

 

 

828

 

Property, office and technology

 

 

 

10,062

 

 

 

 

8,000

 

 

 

 

4,283

 

 

 

 

2,722

 

 

 

 

2,526

   

 

 

10,062

   

 

 

2,722

 

Depreciation and amortization

 

 

 

3,983

 

 

 

 

3,708

 

 

 

 

2,356

 

 

 

 

970

 

 

 

 

966

   

 

 

3,983

   

 

 

970

 

General and administrative

 

 

 

14,876

 

 

 

 

10,602

 

 

 

 

7,071

 

 

 

 

4,173

 

 

 

 

3,780

   

 

 

14,876

   

 

 

4,173

 

Related party expenses

 

 

 

4,811

 

 

 

 

1,678

 

 

 

 

1,536

 

 

 

 

583

 

 

 

 

511

   

 

 

4,811

   

 

 

583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

 

180,288

 

 

 

 

144,054

 

 

 

 

80,351

 

 

 

 

61,749

 

 

 

 

43,745

   

 

 

180,288

   

 

 

61,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

145,599

 

 

 

 

119,811

 

 

 

 

93,106

 

 

 

 

23,577

 

 

 

 

21,592

   

 

 

145,599

   

 

 

23,577

 

Other income/(expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

5,180

 

 

 

 

7,302

 

 

 

 

1,912

 

 

 

 

1,320

 

 

 

 

936

   

 

 

5,180

   

 

 

1,320

 

Interest expense

 

 

 

(7,536

)

 

 

 

 

 

 

 

 

 

 

 

 

(5,591

)

 

 

 

 

(64

)

 

 

 

 

(7,536

)

 

 

 

 

(5,591

)

 

Other gains/(losses)

 

 

 

(4,575

)

 

 

 

 

(2,649

)

 

 

 

 

(1,199

)

 

 

 

 

(702

)

 

 

 

 

(453

)

 

 

 

 

(4,575

)

 

 

 

 

(702

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income/(expense), net

 

 

 

(6,931

)

 

 

 

 

4,653

 

 

 

 

713

 

 

 

 

(4,973

)

 

 

 

 

419

   

 

 

(6,931

)

 

 

 

 

(4,973

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

138,668

   

 

 

18,604

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

11,802

   

 

 

923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

138,668

 

 

 

$

 

124,464

 

 

 

$

 

93,819

 

 

 

$

 

18,604

 

 

 

$

 

22,011

   

 

$

 

126,866

   

 

$

 

17,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

107,942

   

 

 

14,483

 

Net income attributable to participating interests

 

 

 

35,449

 

 

 

 

25,233

 

 

 

 

17,594

 

 

 

 

5,571

 

 

 

 

4,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Class A unit holders

 

 

$

 

103,219

 

 

 

$

 

99,231

 

 

 

$

 

76,225

 

 

 

$

 

13,033

 

 

 

$

 

17,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to GreenSky, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

$

 

18,924

   

 

$

 

3,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma weighted average shares of Class A common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

41,196,485

   

 

 

41,196,485

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

189,294,306

   

 

 

189,294,306

 

Pro forma net income available to Class A common stock per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

$

 

0.46

   

 

$

 

0.08

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

$

 

0.45

   

 

$

 

0.08

 

23


 

 

 

 

 

 

 

 

 

 

As of December 31,

 

As of March 31,

 

2017

 

2016

 

2018

 

 

(dollars in thousands)

Consolidated Balance Sheet Data:

 

 

 

 

 

 

Cash

 

 

$

 

224,614

 

 

 

$

 

185,243

 

 

 

$

 

277,501

 

Restricted cash

 

 

 

129,224

 

 

 

 

42,871

 

 

 

 

141,677

 

Loan receivables held for sale, net

 

 

 

73,606

 

 

 

 

41,268

 

 

 

 

67,291

 

Property, equipment and software, net

 

 

 

7,848

 

 

 

 

7,018

 

 

 

 

7,670

 

Total assets

 

 

 

462,889

 

 

 

 

302,205

 

 

 

 

521,326

 

Finance charge reversal liability

 

 

 

94,148

 

 

 

 

68,064

 

 

 

 

100,913

 

Term loan

 

 

 

338,263

 

 

 

 

 

 

 

 

388,555

 

Total liabilities

 

 

 

488,928

 

 

 

 

89,995

 

 

 

 

545,850

 

Total temporary equity

 

 

 

430,348

 

 

 

 

335,720

 

 

 

 

430,348

 

Total permanent equity (deficit)

 

 

 

(456,387

)

 

 

 

 

(123,510

)

 

 

 

 

(454,872

)

 

Non-GAAP Financial Measures

In addition to financial measures presented in accordance with United States generally accepted accounting principles (“GAAP”), we monitor Adjusted EBITDA, a non-GAAP measure, to manage our business, make planning decisions, evaluate our performance and allocate resources. We define “Adjusted EBITDA” as net income before interest expense, taxes, depreciation and amortization, adjusted to eliminate equity-based compensation and payments and certain non-cash and nonrecurring expenses.

We believe that Adjusted EBITDA is one of the key financial indicators of our business performance over the long term and provides useful information regarding whether cash provided by operating activities is sufficient to maintain and grow our business. We believe that this methodology for determining Adjusted EBITDA can provide useful supplemental information to help investors better understand the economics of our platform.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, such as net income. Some of the limitations of Adjusted EBITDA include:

 

 

it does not reflect our future contractual commitments;

 

 

it does not reflect the impact of working capital requirements; and

 

 

it is not a universally consistent calculation, limiting its usefulness as a comparative measure.

24


 

Management compensates for the inherent limitations associated with using the measure of Adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income, as presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

Three months ended March 31,

 

2017

 

2016

 

2015

 

2018

 

2017

 

 

(In thousands)

Net income

 

 

$

 

138,668

 

 

 

$

 

124,464

 

 

 

$

 

93,819

 

 

 

$

 

18,604

 

 

 

$

 

22,011

 

Interest expense

 

 

 

7,536

 

 

 

 

 

 

 

 

 

 

 

 

5,591

 

 

 

 

64

 

Tax expense(1)

 

 

 

309

 

 

 

 

281

 

 

 

 

187

 

 

 

 

66

 

 

 

 

72

 

Depreciation and amortization

 

 

 

3,983

 

 

 

 

3,708

 

 

 

 

2,356

 

 

 

 

970

 

 

 

 

966

 

Equity-related expense(2)

 

 

 

4,253

 

 

 

 

2,288

 

 

 

 

1,094

 

 

 

 

1,005

 

 

 

 

694

 

Fair value change in servicing liabilities(3)

 

 

 

2,071

 

 

 

 

 

 

 

 

 

 

 

 

116

 

 

 

 

 

Nonrecurring transaction expenses(4)

 

 

 

2,612

 

 

 

 

 

 

 

 

 

 

 

 

1,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

$

 

159,432

 

 

 

$

 

130,741

 

 

 

$

 

97,456

 

 

 

$

 

27,475

 

 

 

$

 

23,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

Includes taxes in certain states related to our operations, as we did not incur any federal or state income taxes during these periods given our flow-through status. Tax expense is included within general and administrative expenses in our Consolidated Statements of Operations.

 

(2)

 

Includes equity-based compensation to employees and directors, as well as equity-based payments to non-employees.

 

(3)

 

Includes the non-cash impact of the initial recognition of servicing liabilities and subsequent fair value changes in such servicing liabilities during the periods presented. See Notes 1, 2 and 3 to the consolidated financial statements of GS Holdings included in this prospectus for additional discussion of our servicing liabilities.

 

(4)

 

For 2017, includes one-time fees paid to an affiliate of one of the members of the board of managers in conjunction with the August 2017 term loan transaction. For the first three months of 2018, includes third party costs, such as legal and debt arrangement costs, in conjunction with the March 2018 term loan transaction. See Note 7 to the consolidated financial statements of GS Holdings included in this prospectus for additional discussion of our term loan transaction.

25


 

RISK FACTORS

You should carefully review and consider the following risk factors and the other information contained in this prospectus, including the financial statements and notes to the financial statements included herein, before investing in our Class A common stock. The occurrence of one or more of the events or circumstances described in these risk factors, alone or in combination with other events or circumstances, may have a material adverse effect on our business, reputation, revenue, financial condition, results of operations and future prospects, in which event the market price of our Class A common stock could decline, and you could lose part or all of your investment. Unless otherwise indicated, reference in this section and elsewhere in this prospectus to our business being adversely affected, negatively impacted or harmed will include an adverse effect on, or a negative impact or harm to, our business, reputation, financial condition, results of operations, revenue and future prospects. You should carefully consider the following risk factors in addition to the other information included in this prospectus, including in the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

Risks Related to Our Business and the Consumer Financial Services Industry

Our agreements with our Bank Partners are non-exclusive, short-term in duration and subject to termination by our Bank Partners upon the occurrence of certain events, including our failure to comply with applicable regulatory requirements. If such agreements are terminated, and we are unable to replace the commitments of the terminating Bank Partners, our business would be adversely affected.

We rely on our Bank Partners to originate all of the loans made through the GreenSky program. Our four largest Bank Partners—SunTrust Bank, Regions Bank, Fifth Third Bank and Synovus Bank—provided approximately 89% of the commitments to originate loans as of March 31, 2018. We have entered into separate loan origination agreements and servicing agreements with each of our Bank Partners. The loan origination agreements generally contain customary termination provisions that allow our Bank Partners to terminate the agreement upon certain events including, among other things, our breach of the loan origination agreement or servicing agreement, underperformance of loan portfolios or regulatory requirements, and certain loan origination agreements, including loan origination agreements with certain of our largest Bank Partners, entitle the Bank Partner to terminate the agreement for convenience. Our servicing agreements with our Bank Partners generally contain customary termination provisions that allow our Bank Partners to terminate our servicing of loans under the agreement upon certain events including, among other things, our breach of the loan origination agreement or servicing agreement. If any of our largest Bank Partners were to terminate their agreements with us, it would have a material adverse effect on our business.

Our agreements with our Bank Partners generally have automatically renewable one-year terms. These agreements are non-exclusive and do not prohibit our Bank Partners from working with our competitors or from offering competing products, except that certain Bank Partners have agreed not to provide customer financing outside of the GreenSky program to our merchants and Sponsors during the term of their agreements with us and generally for one year after termination or expiration. As a result, any of our Bank Partners could with minimal notice decide that working with us is not in its interest, could offer us less favorable or unfavorable economic or other terms or could decide to enter into exclusive or more favorable relationships with one of our competitors. We also could have future disagreements or disputes with our Bank Partners, which could negatively affect or threaten our relationships with them.

Our Bank Partners also may terminate their agreements with us if we fail to comply with regulatory requirements applicable to them. We are a service provider to our Bank Partners, and, as a result, we are subject to audit by our Bank Partners in accordance with customary practice and applicable regulatory guidance related to management by banks of third-party vendors. We also are subject to the examination and enforcement authority of the federal banking agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, as a bank service company, and are subject to the examination and enforcement

26


 

authority of the Consumer Financial Protection Bureau (“CFPB”) as a service provider to a covered person under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). It is imperative that our Bank Partners continue to have confidence in our compliance efforts. Any substantial failure, or alleged or perceived failure, by us to comply with applicable regulatory requirements could cause them to be unwilling to originate loans through our program or could cause them to terminate their agreements with us. See “—Risks Related to Our Regulatory Environment.” If we are unsuccessful in maintaining our relationships with our Bank Partners for any of the foregoing reasons, or if we are unable to develop relationships with new Bank Partners, it would have a material adverse effect on our business and our ability to grow.

Our results of operations and continued growth depend on our ability to retain existing, and attract new, merchants and Bank Partners.

A substantial majority of our total revenue is generated from the transaction fees that we receive from our merchants and, to a lesser extent, servicing and other fees that we receive from our Bank Partners in connection with loans made by our Bank Partners to the customers of our merchants. Approximately 86% of our revenue in 2017, and approximately 83% of our total revenue for the three months ended March 31, 2018, was generated from transaction fees paid to us by our merchants. To attract and retain merchants, we market our program to them on the basis of a number of factors, including financing terms, the flexibility of promotional offerings, approval rates, speed and simplicity of loan origination, service levels, products and services, technological capabilities and integration, customer service, brand and reputation.

There is significant competition for our existing merchants. If we fail to retain any of our larger merchants or a substantial number of our smaller merchants, and we do not acquire new merchants of similar size and profitability, it would have a material adverse effect on our business and future growth. We have experienced some turnover in our merchants, as well as varying activation rates and volatility in usage of the GreenSky program by our merchants, and this may continue or even increase in the future. Program agreements generally are terminable by merchants at any time. Also, we generally do not have exclusive arrangements with our merchants, and they are free to use our competitors’ programs at any time and without notice to us. If a significant number of our existing merchants were to use other competing programs, thereby reducing their use of our program, it would have a material adverse effect on our business and results of operations.

Competition for new merchants also is significant, especially in industry verticals in which we do not have an established reputation, such as elective healthcare. As a result, our continued success and growth depend on our ability to attract new merchants, including in new verticals, and our failure to do so would limit our growth and our ability to continue generating revenue at current levels.

Our failure to retain existing, and attract and retain new, Bank Partners also would materially adversely affect our business and our ability to grow. We market our program to banks on the basis of the risk-adjusted yields available to them and geographic diversity of the loans that they are able to originate through the GreenSky program, as well as the absence of significant upfront and ongoing costs and the general attractiveness of the consumers that use the GreenSky program. Bank Partners have alternative sources for attractive, if not similar, loans, including internal loan generation, and they could elect to originate loans through those alternatives rather than through the GreenSky program.

Based upon current commitment levels, our four largest Bank Partners are SunTrust Bank, Regions Bank, Fifth Third Bank and Synovus Bank. As of March 31, 2018, they provided approximately 89% of the overall commitments to originate loans through our program. If any of our larger Bank Partners, or a substantial number of our smaller Bank Partners, were to suspend, limit or otherwise terminate their relationships with us, it would have a material adverse effect on our business. If we need to enter into arrangements with a different bank to replace one of our Bank Partners, we may not be able to negotiate a comparable alternative arrangement.

27


 

A large percentage of our revenue is concentrated with our top ten merchants, and the loss of a significant merchant could have a negative impact on our operating results.

Our top ten merchants (including certain groups of affiliated merchants) accounted for an aggregate of 30% of our total revenue in 2017 as well as in the three months ended March 31, 2018. The Home Depot is our most significant single merchant and represented approximately 6% of total revenue in 2017 and in the three months ended March 31, 2018. In addition, affiliates of Renewal by Andersen, our largest Sponsor, represented together approximately 19% of total revenue both in 2017 and in the three months ended March 31, 2018. Our agreement with Renewal by Andersen provides that Renewal by Andersen will promote the GreenSky program through notifying its dealers of the availability of the GreenSky program and providing them ancillary materials. Our agreement also provides that we will provide Renewal by Andersen a rebate if certain financing goals are met. Both parties have the right to terminate the agreement generally upon 90-days notice. If Renewal by Andersen terminates the agreement, Renewal by Andersen dealers would not be obligated to terminate their participation in the GreenSky program, although they could choose to do so. We expect to have significant concentration in our largest merchant relationships for the foreseeable future. In the event that (i) The Home Depot or one or more of our other significant merchants, or groups of merchants, or (ii) Renewal by Andersen or one or more of our other significant Sponsors, and their dealers, terminate their relationships with us, or elect to utilize an alternative source for financing, the number of loans originated through the GreenSky program would decline, which would materially adversely affect our business and, in turn, our revenue.

Our results depend, to a significant extent, on the active and effective promotion and support of the GreenSky program by our Sponsors and merchants.

Our success depends on the active and effective promotion of the GreenSky program by our Sponsors to their network of merchants and by our merchants to their customers. We rely on our Sponsors, including large franchisors within different home improvement industry sub-verticals, to promote the GreenSky program within their networks of merchants. Approximately two-thirds of our active merchants are affiliated with Sponsors. Although our Sponsors generally are under no obligation to promote the GreenSky program, many do so through direct mail, email campaigns and trade shows. The failure by our Sponsors to effectively promote and support the GreenSky program would have a material adverse effect on the rate at which we acquire new merchants and the cost thereof.

We also depend on our merchants, which generally accept most major credit cards and other forms of payment, to promote the GreenSky program, to integrate our platform and the GreenSky program into their business, and to educate their sales associates about the benefits of the GreenSky program so that their sales associates encourage customers to apply for and use our services. Our relationship with our merchants, however, generally is non-exclusive, and we do not have, or utilize, any recourse against merchants when they do not promote the GreenSky program. The failure by our merchants to effectively promote and support the GreenSky program would have a material adverse effect on our business.

If our merchants fail to fulfill their obligations to consumers or comply with applicable law, we may incur remediation costs.

Although our merchants are obligated to fulfill their contractual commitments to consumers and to comply with applicable law, from time to time they might not, or a consumer might allege that they did not. This, in turn, can result in claims against our Bank Partners and us or in loans being uncollectible. In those cases, we may decide that it is beneficial to remediate the situation, either through assisting the consumers to get a refund, working with our Bank Partners to modify the terms of the loan or reducing the amount due, making a payment to the consumer or otherwise. Historically, the cost of remediation has not been material to our business, but we make no assurance that it will not be in the future.

28


 

We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our operational, administrative and financial resources.

The number of loans originated through the GreenSky program grew from approximately 289,000 in 2015 to approximately 488,000 in 2017, and our total revenue grew from $173 million in 2015 to $326 million in 2017. Our rapid growth has caused significant demands on our operational, marketing, compliance and accounting infrastructure, and has resulted in increased expenses, which we expect to continue as we grow. In addition, we are required to continuously develop and adapt our systems and infrastructure in response to the increasing sophistication of the consumer finance market and regulatory developments relating to our existing and projected business activities and those of our Bank Partners. Our future growth will depend, among other things, on our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources.

As a result of our growth, we face significant challenges in:

 

 

securing commitments from our existing and new Bank Partners to provide loans to customers of our merchants;

 

 

maintaining existing and developing new relationships with merchants and Sponsors;

 

 

maintaining adequate financial, business and risk controls;

 

 

implementing new or updated information and financial and risk controls and procedures;

 

 

training, managing and appropriately sizing our workforce and other components of our business on a timely and cost-effective basis;

 

 

navigating complex and evolving regulatory and competitive environments;

 

 

securing funding (including credit facilities and/or equity capital) to maintain our operations and future growth;

 

 

increasing the number of borrowers in, and the volume of loans facilitated through, the GreenSky program;

 

 

expanding within existing markets;

 

 

entering into new markets and introducing new solutions;

 

 

continuing to revise our proprietary credit decisioning and scoring models;

 

 

continuing to develop, maintain and scale our platform;

 

 

effectively using limited personnel and technology resources;

 

 

maintaining the security of our platform and the confidentiality of the information (including personally identifiable information) provided and utilized across our platform; and

 

 

attracting, integrating and retaining an appropriate number of qualified employees.

We may not be able to manage our expanding operations effectively, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.

If we experience negative publicity, we may lose the confidence of our Bank Partners, merchants and consumers who use the GreenSky program and our business may suffer.

Reputational risk, or the risk to us from negative publicity or public opinion, is inherent to our business. Recently, consumer financial services companies have been experiencing increased reputational harm as consumers and regulators take issue with certain of their practices and judgments, including, for example, fair lending, credit reporting accuracy, lending to members of the military, state licensing (for lenders, servicers and money transmitters) and debt collection. Maintaining a positive reputation is critical to our ability to attract and retain Bank Partners, merchants, consumers, investors and employees. Negative public opinion can arise from many sources, including actual or alleged misconduct, errors or improper business practices by employees, Bank Partners, merchants, outsourced service providers or other counterparties;

29


 

litigation or regulatory actions; failure by us, our Bank Partners, or merchants to meet minimum standards of service and quality; inadequate protection of consumer information; failure of merchants to adhere to the terms of their GreenSky program agreements or other contractual arrangements or standards; compliance failures; and media coverage, whether accurate or not. Negative public opinion can diminish the value of our brand and adversely affect our ability to attract and retain Bank Partners, merchants and consumers, as a result of which our results of operations may be materially harmed and we could be exposed to litigation and regulatory action.

We may be unable to successfully develop and commercialize new or enhanced products and services.

The consumer financial services industry is subject to rapid and significant changes in technologies, products and services. Our business is dependent upon technological advancement, such as our ability to process applications instantly, accept electronic signatures and provide other conveniences expected by borrowers and counterparties. We must ensure that our technology facilitates a consumer experience that is quick and easy and equals or exceeds the consumer experience provided by our competitors. Therefore, a key part of our financial success depends on our ability to develop and commercialize new products and services and enhancements to existing products and services, including with respect to mobile and point-of-sale technologies.

Realizing the benefit of such products and services is uncertain, and we may not assign the appropriate level of resources, priority or expertise to the development and commercialization of these new products, services or enhancements. Our ability to develop, acquire and commercialize competitive technologies, products and services on acceptable terms, or at all, may be limited by intellectual property rights that third parties, including competitors and potential competitors, may assert. In addition, our success is dependent on factors such as merchant and customer acceptance, adoption and usage, competition, the effectiveness of marketing programs, the availability of appropriate technologies and business processes and regulatory approvals. Success of a new product, service or enhancement also may depend upon our ability to deliver it on a large scale, which may require a significant investment.

We also could utilize and invest in technologies, products and services that ultimately do not achieve widespread adoption and, therefore, are not as attractive or useful to our merchants and their customers as we anticipate. Our merchants also may not recognize the value of new products and services or believe they justify any potential costs or disruptions associated with implementing them. Because our solution is typically marketed through our merchants, if our merchants are unwilling or unable to effectively implement or market new technologies, products, services or enhancements, we may be unable to grow our business. Competitors also may develop or adopt technologies or introduce innovations that change the markets they operate in and make our solution less competitive and attractive to our merchants and their customers. Moreover, we may not realize the benefit of new technologies, products, services or enhancements for many years, and competitors may introduce more compelling products, services or enhancements in the meantime.

Changes in market interest rates could have an adverse effect on our business.

The fixed interest rates charged on the loans that our Bank Partners originate are calculated based upon a margin above a market benchmark at the time of origination. Increases in the market benchmark would result in increases in the interest rates on new loans. Increased interest rates may adversely impact the spending levels of consumers and their ability and willingness to borrow money. Higher interest rates often lead to higher payment obligations, which may reduce the ability of customers to remain current on their obligations to our Bank Partners and, therefore, lead to increased delinquencies, defaults, customer bankruptcies and charge-offs, and decreasing recoveries, all of which could have an adverse effect on our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk.”

30


 

Increases in loan delinquencies and default rates in the GreenSky program could cause us to lose amounts we place in escrow and may require us to deploy resources to enhance our collections and default servicing capabilities, which could adversely affect our ability to maintain loan volumes.

Loans funded by our Bank Partners generally are not secured by collateral, are not guaranteed or insured by any third party and are not backed by any governmental authority in any way, which limits the ability of our Bank Partners to collect on loans if a borrower is unwilling or unable to repay. A borrower’s ability to repay can be negatively impacted by increases in the borrower’s payment obligations to other lenders under home, credit card and other loans; loss of employment or other sources of income; adverse health conditions; or for other reasons. Changes in a borrower’s ability to repay loans made by our Bank Partners also could result from increases in base lending rates or structured increases in payment obligations. While consumers using our platform to date have had high average credit scores, we may enter into new industry verticals in which consumers have lower average credit scores, leading to potentially higher rates of defaults.

Should delinquencies and default rates increase, we will need to expand our collections and default servicing capabilities, which will require skills and resources that we currently may not have. This will result in higher costs due to the time and effort required to collect payments from delinquent borrowers.

While we are not generally responsible for defaults by customers, we have agreed with each of our Bank Partners to fund an escrow in order to provide the Bank Partners limited protection against credit losses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Components of Results of Operations—Operating Expenses.” If credit losses increase, we could lose a portion, or all, of these escrowed funds, which would have an adverse effect on our business.

Because the agreements we have with our Bank Partners are of short duration and because our Bank Partners generally may terminate their agreements or reduce their commitments to provide loans if credit losses increase, the overall volume of GreenSky program loans may decrease in the event of higher default rates. In addition, in certain limited circumstances, our Bank Partners may terminate the agreements under which we service their loan portfolios, in which case we will suffer a decrease in our revenues from loan servicing.

We own receivables for certain loans, and the non-performance, or even significant underperformance, of those receivables would adversely affect our business.

We hold some of the receivables underlying the loans originated by our Bank Partners, which we refer to as “R&D Receivables” and which are designated as loan receivables held for sale on our Consolidated Balance Sheets. As of March 31, 2018, we had $67.3 million in loan receivables held for sale, net. Generally, we hold R&D Receivables that we purchase from an originating Bank Partner with the intent to hold the loan receivables only for a short period of time before we can transfer the loan receivables to a Bank Partner following its adoption of a new credit policy. Our objective is to hold these receivables only until we have enough experience with the particular products or industry verticals for our Bank Partners to purchase the receivables. However, there is no assurance that our Bank Partners will expand their underwriting criteria and purchase the receivables underlying these loans and, during the period that we own the receivables, we bear the entire credit risk in the event that the borrowers default. In addition, we are obligated to purchase from our Bank Partners the receivables underlying any loans that were approved in error or otherwise involved customer or merchant fraud. Our ownership of receivables also requires us to commit or obtain corresponding funding. In addition, non-performance, or even significant underperformance, of the loan receivables held for sale that we own could have a materially adverse effect on our business.

31


 

We are subject to certain additional risks in connection with promotional financing offered through the GreenSky program.

Many of the loans originated by our Bank Partners provide promotional financing in the form of low or deferred interest. When a deferred interest loan is paid in full prior to the end of the promotional period (typically six to 24 months), any interest that has been billed on the loan by our Bank Partner to the consumer is reversed, which triggers an obligation on our part to make a payment to the Bank Partner that made the loan in order to fully offset the reversal (each event, a “finance charge reversal” or “FCR”). We record a finance charge reversal liability on our balance sheet for interest billed during the promotional period that is expected to be reversed prior to the end of such period. As of March 31, 2018, this liability totaled $100.9 million, up from $94.1 million as of December 31, 2017. See Notes 1 and 3 to the consolidated financial statements of GS Holdings included in this prospectus. If the rate at which deferred interest loans are paid in full prior to the end of the promotional period increases, resulting in increased payments by us to our Bank Partners, it would adversely affect our business.

Further, deferred interest loans are subject to enhanced regulatory scrutiny as a result of abusive marketing practices by some lenders, and the CFPB has initiated enforcement actions against both lenders and servicers alleging that they have engaged in unfair, deceptive or abusive acts or practices because of lack of clarity in disclosures with respect to such loans. Such scrutiny could reduce the attractiveness to consumers of deferred interest loans or result in a general unwillingness on the part of our Bank Partners to make deferred interest loans. A reduction of deferred interest loans would adversely affect our business.

The loss of the services of our senior management could adversely affect our business.

The experience of our senior management, including, in particular, David Zalik, our Chief Executive Officer, is a valuable asset to us. Our management team has significant experience in the consumer loan business and would be difficult to replace. Competition for senior executives in our industry is intense, and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management team or other key personnel. Failure to retain talented senior leadership could have a material adverse effect on our business. We do not maintain key life insurance policies relating to our senior management.

Our vendor relationships subject us to a variety of risks, and the failure of third parties to comply with legal or regulatory requirements or to provide various services that are important to our operations could have an adverse effect on our business.

We have significant vendors that, among other things, provide us with financial, technology and other services to support our loan servicing and other activities, including, for example, credit ratings and reporting, cloud-based data storage and other IT solutions, and payment processing. The CFPB has issued guidance stating that institutions under its supervision may be held responsible for the actions of the companies with which they contract. Accordingly, we could be adversely impacted to the extent our vendors fail to comply with the legal requirements applicable to the particular products or services being offered.

In some cases, third-party vendors are the sole source, or one of a limited number of sources, of the services they provide to us. Most of our vendor agreements are terminable on little or no notice, and if our current vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms (or at all). For example, we currently utilize a single third-party transaction processor, Comdata Network, Inc. (“Comdata”). If Comdata were to stop providing transaction processing services to us on acceptable terms, we would need to procure alternative transaction processing services from another third-party transaction processor in a timely and efficient manner and on acceptable terms. If any third-party vendor fails to provide the services we require, fails to meet contractual requirements (including compliance with applicable laws and regulations), fails to maintain adequate data privacy and electronic security systems, or suffers a cyber-attack or other security breach, we could be subject to CFPB, FTC and other regulatory enforcement actions and

32


 

suffer economic and reputational harm that could have a material adverse effect on our business. Further, we may incur significant costs to resolve any such disruptions in service, which could adversely affect our business.

Litigation, regulatory actions and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and/or requirements resulting in increased expenses.

Our business is subject to increased risks of litigation and regulatory actions as a result of a number of factors and from various sources, including as a result of the highly regulated nature of the financial services industry and the focus of state and federal enforcement agencies on the financial services industry.

In the ordinary course of business, we have been named as a defendant in various legal actions, including arbitrations, class actions and other litigation. Generally, this litigation arises from the dissatisfaction of a consumer with the products or services of a merchant; some of this litigation, however, has arisen from other matters, including claims of discrimination, credit reporting and collection practices. Certain of those actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. From time to time, we also are involved in, or the subject of, reviews, requests for information, investigations and proceedings (both formal and informal) by state and federal governmental agencies, including banking regulators and the CFPB, regarding our business activities and our qualifications to conduct our business in certain jurisdictions, which could subject us to significant fines, penalties, obligations to change our business practices and other requirements resulting in increased expenses and diminished earnings. Our involvement in any such matter also could cause significant harm to our reputation and divert management attention from the operation of our business, even if the matters are ultimately determined in our favor. We have in the past chosen to settle (and may in the future choose to settle) certain matters in order to avoid the time and expense of contesting them. Although none of the settlements has been material to our business, there is no assurance that, in the future, such settlements will not have a material adverse effect on our business. Moreover, any settlement, or any consent order or adverse judgment in connection with any formal or informal proceeding or investigation by a government agency, may prompt litigation or additional investigations or proceedings as other litigants or other government agencies begin independent reviews of the same activities.

In addition, a number of participants in the consumer finance industry have been the subject of putative class action lawsuits; state attorney general actions and other state regulatory actions; federal regulatory enforcement actions, including actions relating to alleged unfair, deceptive or abusive acts or practices; violations of state licensing and lending laws, including state usury laws; actions alleging discrimination on the basis of race, ethnicity, gender or other prohibited bases; and allegations of noncompliance with various state and federal laws and regulations relating to originating and servicing consumer finance loans. The current regulatory environment, increased regulatory compliance efforts and enhanced regulatory enforcement have resulted in significant operational and compliance costs and may prevent us from providing certain products and services. There is no assurance that these regulatory matters or other factors will not, in the future, affect how we conduct our business and, in turn, have a material adverse effect on our business. In particular, legal proceedings brought under state consumer protection statutes or under several of the various federal consumer financial services statutes subject to the jurisdiction of the CFPB may result in a separate fine for each violation of the statute, which, particularly in the case of class action lawsuits, could result in damages substantially in excess of the amounts we earned from the underlying activities.

We contest our liability and the amount of damages, as appropriate, in each pending matter. The outcome of pending and future matters could be material to our results of operations, financial condition and cash flows, and could materially adversely affect our business.

In addition, from time to time, through our operational and compliance controls, we identify compliance issues that require us to make operational changes and, depending on the nature of the

33


 

issue, result in financial remediation to impacted customers. These self-identified issues and voluntary remediation payments could be significant, depending on the issue and the number of customers impacted, and also could generate litigation or regulatory investigations that subject us to additional risk.

See “—Risks Related to Our Regulatory Environment.”

Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting “disparate impact” claims.

Antidiscrimination statutes, such as the Equal Credit Opportunity Act (the “ECOA”), prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments, including the U.S. Department of Justice (“DOJ”) and CFPB, take the position that these laws prohibit not only intentional discrimination, but also neutral practices that have a “disparate impact” on a group and that are not justified by a business necessity.

These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are focusing greater attention on “disparate impact” claims. To the extent that the “disparate impact” theory continues to apply, we may face significant administrative burdens in attempting to identify and eliminate neutral practices that do have “disparate impact.” The ability to identify and eliminate neutral practices that have “disparate impact” is complicated by the fact that often it is our merchants, over which we have limited control, that implement our practices. In addition, we face the risk that one or more of the variables included in the GreenSky program’s loan decisioning model may be invalidated under the disparate impact test, which would require us to revise the loan decisioning model in a manner that might generate lower approval rates or higher credit losses.

In addition to reputational harm, violations of the ECOA can result in actual damages, punitive damages, injunctive or equitable relief, attorneys’ fees and civil money penalties.

Fraudulent activity could negatively impact our business and could cause our Bank Partners to be less willing to originate loans as part of the GreenSky program.

Fraud is prevalent in the financial services industry and is likely to increase as perpetrators become more sophisticated. We are subject to the risk of fraudulent activity associated with our merchants, their customers and third parties handling customer information. Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. The level of our fraud charge-offs could increase and our results of operations could be materially adversely affected if fraudulent activity were to significantly increase. High profile fraudulent activity also could negatively impact our brand and reputation, which could negatively impact the use of our services and products. In addition, significant increases in fraudulent activity could lead to regulatory intervention, which could increase our costs and also negatively impact our business.

Cyber-attacks and other security breaches could have an adverse effect on our business.

In the normal course of our business, we collect, process and retain sensitive and confidential information regarding our Bank Partners, our merchants and consumers. We also have arrangements in place with certain of our third-party service providers that require us to share consumer information. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of our Bank Partners, merchants and third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, and other similar events. We, our Bank Partners, our merchants and our third-party service providers have experienced all of these events in the past and expect to continue to experience them in the future. We also face security threats from malicious third parties that could obtain unauthorized access to our systems and networks, which threats we anticipate will continue to grow in scope and complexity over time. These events could interrupt our business or operations, result in significant legal and financial exposure,

34


 

supervisory liability, damage to our reputation and a loss of confidence in the security of our systems, products and services. Although the impact to date from these events has not had a material adverse effect on us, no assurance is given that this will be the case in the future.

Information security risks in the financial services industry have increased recently, in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized criminals, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks and other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks that are designed to disrupt key business services, such as consumer-facing websites. We may not be able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents. Nonetheless, early detection efforts may be thwarted by sophisticated attacks and malware designed to avoid detection. We also may fail to detect the existence of a security breach related to the information of our Bank Partners, merchants and consumers that we retain as part of our business and may be unable to prevent unauthorized access to that information.

We also face risks related to cyber-attacks and other security breaches that typically involve the transmission of sensitive information regarding borrowers through various third parties, including our Bank Partners, our merchants and data processors. Some of these parties have in the past been the target of security breaches and cyber-attacks. Because we do not control these third parties or oversee the security of their systems, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. While we regularly conduct security assessments of significant third-party service providers, no assurance is given that our third-party information security protocols are sufficient to withstand a cyber-attack or other security breach.

The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding GreenSky program customers or our own proprietary information, software, methodologies and business secrets could interrupt our business or operations, result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services, all of which could have a material adverse impact on our business. In addition, there recently have been a number of well-publicized attacks or breaches affecting companies in the financial services industry that have heightened concern by consumers, which could also intensify regulatory focus, cause users to lose trust in the security of the industry in general and result in reduced use of our services and increased costs, all of which could also have a material adverse effect on our business.

Disruptions in the operation of our computer systems and third-party data centers could have an adverse effect on our business.

Our ability to deliver products and services to our Bank Partners and merchants, service loans made by our Bank Partners and otherwise operate our business and comply with applicable laws depends on the efficient and uninterrupted operation of our computer systems and third-party data centers, as well as those of our Bank Partners, merchants and third-party service providers.

These computer systems and third-party data centers may encounter service interruptions at any time due to system or software failure, natural disasters, severe weather conditions, health pandemics, terrorist attacks, cyber-attacks or other events. Any of such catastrophes could have a negative effect on our business and technology infrastructure (including our computer network systems), on our Bank Partners and merchants and on consumers. Catastrophic events also could prevent or make it more difficult for customers to travel to our merchants’ locations to shop, thereby negatively impacting consumer spending in the affected regions (or in severe cases, nationally), and could interrupt or disable local or national communications networks, including the payment systems

35


 

network, which could prevent customers from making purchases or payments (temporarily or over an extended period). These events also could impair the ability of third parties to provide critical services to us. All of these adverse effects of catastrophic events could result in a decrease in the use of our solution and payments to us, which could have a material adverse effect on our business.

In addition, the implementation of technology changes and upgrades to maintain current and integrate new systems may cause service interruptions, transaction processing errors or system conversion delays and may cause us to fail to comply with applicable laws, all of which could have a material adverse effect on our business. We expect that new technologies and business processes applicable to the consumer financial services industry will continue to emerge and that these new technologies and business processes may be better than those we currently use. There is no assurance that we will be able to successfully adopt new technology as critical systems and applications become obsolete and better ones become available. A failure to maintain and/or improve current technology and business processes could cause disruptions in our operations or cause our solution to be less competitive, all of which could have a material adverse effect on our business.

If the credit decisioning and scoring models we use contain errors or are otherwise ineffective, our reputation and relationships with our Bank Partners, our merchants and consumers could be harmed.

Our ability to attract consumers to the GreenSky program, and to build trust in the consumer loan products offered through the GreenSky program, is significantly dependent on our ability to effectively evaluate a consumer’s credit profile and likelihood of default in accordance with our Bank Partners’ underwriting policies. To conduct this evaluation, we use proprietary credit decisioning and scoring models. If any of the credit decisioning and scoring models we use contains programming or other errors, is ineffective or the data provided by consumers or third parties is incorrect or stale, or if we are unable to obtain accurate data from consumers or third parties (such as credit reporting agencies), our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans and possibly our having to repurchase the loan. This could damage our reputation and relationships with consumers, our Bank Partners and our merchants, which could have a material adverse effect on our business.

We depend on the accuracy and completeness of information about customers of our merchants, and any misrepresented information could adversely affect our business.

In evaluating loan applicants, we rely on information furnished to us by or on behalf of customers of our merchants, including credit, identification, employment and other relevant information. Some of the information regarding customers provided to us is used in our proprietary credit decisioning and scoring models, which we use to determine whether an application meets the applicable underwriting criteria. We rely on the accuracy and completeness of that information.

Not all customer information is independently verified. As a result, we rely on the accuracy and completeness of the information we are provided by consumers. If any of the information that is considered in the loan review process is inaccurate, whether intentional or not, and such inaccuracy is not detected prior to loan funding, the loan may have a greater risk of default than expected. Additionally, there is a risk that, following the date of the credit report that we obtain and review, a customer may have defaulted on, or become delinquent in the payment of, a pre-existing debt obligation, taken on additional debt, lost his or her job or other sources of income, or experienced other adverse financial events. Where an inaccuracy constitutes fraud or otherwise causes us to incorrectly conclude that a loan meets the applicable underwriting criteria, we generally bear the risk of loss associated with the inaccuracy. Any significant increase in inaccuracies or resulting increases in losses would adversely affect our business.

36


 

We rely extensively on models in managing many aspects of our business. Any inaccuracies or errors in our models could have an adverse effect on our business.

In assisting our Bank Partners and merchants with the design of the products that are offered on our platform, we make assumptions about various matters, including repayment timing and default rates, and then utilize our proprietary modeling to analyze and forecast the performance and profitability of the products. Our assumptions may be inaccurate and our models may not be as predictive as expected for many reasons, including that they often involve matters that are inherently difficult to predict and beyond our control (e.g., macroeconomic conditions) and that they often involve complex interactions between a number of dependent and independent variables and factors. Any significant inaccuracies or errors in our assumptions could impact the profitability of the products to our Bank Partners, as well as the profitability of our business, could result in our underestimating potential FCRs.

If assumptions or estimates we use in preparing our financial statements are incorrect or are required to change, our reported results of operations and financial condition may be adversely affected.

We are required to make various assumptions and estimates in preparing our financial statements under GAAP, including for purposes of determining finance charge reversals, share-based compensation, asset impairment, reserves related to litigation and other legal matters, and other regulatory exposures and the amounts recorded for certain contractual payments to be paid to, or received from, our merchants and others under contractual arrangements. In addition, significant assumptions and estimates are involved in determining certain disclosures required under GAAP, including those involving fair value measurements. If the assumptions or estimates underlying our financial statements are incorrect, the actual amounts realized on transactions and balances subject to those estimates will be different, which could have a material adverse effect on our business. For additional information on the key areas for which assumptions and estimates are used in preparing our financial statements, see Notes 1, 3 and 10 to the consolidated financial statements of GS Holdings included in this prospectus.

The consumer finance and payments industry is highly competitive and is likely to become more competitive, and our inability to compete successfully or maintain or improve our market share and margins could adversely affect our business.

Our success depends on our ability to generate usage of the GreenSky program. The consumer financial services industry is highly competitive and increasingly dynamic as emerging technologies continue to enter the marketplace. Technological advances and heightened e-commerce activities have increased consumers’ accessibility to products and services, which has intensified the desirability of offering loans to consumers through digital-based solutions. In addition, because many of our competitors are large financial institutions that own the loans that they originate, they have certain revenue opportunities not available to us. We face competition in areas such as compliance capabilities, financing terms, promotional offerings, fees, approval rates, speed and simplicity of loan origination, ease-of-use, marketing expertise, service levels, products and services, technological capabilities and integration, customer service, brand and reputation. Many of our competitors are substantially larger than we are, which may give those competitors advantages we do not have, such as a more diversified product and customer base, the ability to reach more customers and potential customers, operational efficiencies, more versatile technology platforms, broad-based local distribution capabilities, and lower-cost funding. Commercial banks and savings institutions also may have significantly greater access to consumers given their deposit-taking and other services. In addition, because many of our competitors are large financial institutions that own the loans that they originate, they also have certain revenue opportunities not available to us.

Our existing and potential competitors may decide to modify their pricing and business models to compete more directly with our model. Any reduction in usage of the GreenSky program, or a reduction in the lifetime profitability of loans under the GreenSky program in an effort to attract or

37


 

retain business, could reduce our revenues and earnings. If we are unable to compete effectively for merchants and customer usage, our business could be materially adversely affected.

Our revenue is impacted, to a significant extent, by the general economy and the financial performance of our merchants.

Our business, the consumer financial services industry and our merchants’ businesses are sensitive to macroeconomic conditions. Economic factors such as interest rates, changes in monetary and related policies, market volatility, consumer confidence and unemployment rates are among the most significant factors that impact consumer spending behavior. Weak economic conditions or a significant deterioration in economic conditions reduce the amount of disposable income consumers have, which in turn reduces consumer spending and the willingness of qualified borrowers to take out loans. Such conditions are also likely to affect the ability and willingness of borrowers to pay amounts owed to our Bank Partners, each of which would have a material adverse effect on our business.

The generation of new loans through the GreenSky program, and the transaction fees and other fee income to us associated with such loans, is dependent upon sales of products and services by our merchants. Our merchants’ sales may decrease or fail to increase as a result of factors outside of their control, such as the macroeconomic conditions referenced above, or business conditions affecting a particular merchant, industry vertical or region. Weak economic conditions also could extend the length of our merchants’ sales cycle and cause customers to delay making (or not make) purchases of our merchants’ products and services. The decline of sales by our merchants for any reason will generally result in lower credit sales and, therefore, lower loan volume and associated fee income for us. This risk is particularly acute with respect to our largest merchants that account for a significant amount of our platform revenue.

In addition, if a merchant closes some or all of its locations or becomes subject to a voluntary or involuntary bankruptcy proceeding (or if there is a perception that it may become subject to a bankruptcy proceeding), GreenSky program borrowers may have less incentive to pay their outstanding balances to our Bank Partners, which could result in higher charge-off rates than anticipated. Moreover, if the financial condition of a merchant deteriorates significantly or a merchant becomes subject to a bankruptcy proceeding, we may not be able to recover amounts due to us from the merchant.

Because our business is heavily concentrated on consumer lending and payments in the U.S. home improvement industry, our results are more susceptible to fluctuations in that market than the results of a more diversified company would be.

Even though we recently expanded into the elective healthcare industry vertical and may continue expanding our services into other industry verticals, our business currently is heavily concentrated on consumer lending in the home improvement industry. As a result, we are more susceptible to fluctuations and risks particular to U.S. consumer credit, real estate and home improvements than a more diversified company would be as well as to factors that may drive the demand for home improvements, such as sales levels of existing homes and the aging of housing stock. We also are more susceptible to the risks of increased regulations and legal and other regulatory actions that are targeted at consumer credit, the specific consumer credit products that our Bank Partners offer (including promotional financing), real estate and home improvements. Our business concentration could have an adverse effect on our business.

We are, and intend in the future to continue, expanding into new industry verticals, including elective healthcare, and our failure to comply with applicable regulations, or accurately predict demand or growth, in those new industries could have an adverse effect on our business.

We recently expanded into the elective healthcare industry vertical, which involves consumer financing for elective medical procedures and products. Elective healthcare providers include

38


 

doctors’ and dentists’ offices, outpatient surgery centers and clinics providing orthodontics, cosmetic and aesthetic dentistry, vision correction, bariatric surgery, cosmetic surgery, hair replacement, reproductive medicine, veterinary medicine and hearing aid devices. We make no assurance that we will achieve similar levels of success, if any, in this industry vertical, or that we will not face unanticipated challenges in our ability to offer our program in this industry vertical. In addition, the elective healthcare industry vertical is highly regulated and we, our merchants and our Bank Partners, as applicable, will be subject to significant additional regulatory requirements, including various healthcare and privacy laws. We have limited experience in managing these risks and the compliance requirements attendant to these additional regulatory requirements. See “—Risks Related to Our Regulatory Environment—The increased scrutiny of third-party medical financing by governmental agencies may lead to increased regulatory burdens and adversely affect our consolidated revenue or results of operations.” The costs of compliance and any failure by us, our merchants or our Bank Partners, as applicable, to comply with such regulatory requirements could have a material adverse effect on our business.

We may in the future further expand into other industry verticals. There is no assurance that we will be able to successfully develop consumer financing products and services for these new industries. Our investment of resources to develop consumer financing products and services for the new industries we enter may either be insufficient or result in expenses that are excessive in light of loans actually originated by our Bank Partners in those industries. Additionally, industry participants, including our merchants, their customers and our Bank Partners, may not be receptive to our solution in these new industries. The borrower profile of consumers in new verticals may not be as attractive, in terms of average FICO scores or other attributes, as in our current verticals, which may lead to higher levels of delinquencies or defaults than we have historically experienced. Industries change rapidly, and we make no assurance that we will be able to accurately forecast demand (or the lack thereof) for our solution or that those industries will grow. Failure to predict demand or growth accurately in new industries could have a materially adverse impact on our business.

Our business would suffer if we fail to attract and retain highly skilled employees.

Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, particularly information technology and sales. Trained and experienced personnel are in high demand and may be in short supply. Many of the companies with which we compete for experienced employees have greater resources than we do and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors that may seek to recruit them. We may not be able to attract, develop and maintain the skilled workforce necessary to operate our business, and labor expenses may increase as a result of a shortage in the supply of qualified personnel.

The Credit Agreement that governs our term loan and revolving loan facility contains various covenants that could limit our ability to engage in activities that may be in our best long-term interests.

We have a term loan and revolving loan facility that we may draw on to finance our operations and for other corporate purposes. The Credit Agreement contains operating covenants, including customary limitations on the incurrence of certain indebtedness and liens, restrictions on certain intercompany transactions and limitations on dividends and stock repurchases. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under the Credit Agreement and any future financial agreements into which we may enter. If we default on our credit obligations, our lenders may require repayment of any outstanding debt and terminate the Credit Agreement.

If any of these events occurs, our ability to fund our operations could be seriously harmed. If not waived, defaults could cause any outstanding indebtedness under our Credit Agreement and any future financing agreements that we may enter into to become immediately due and payable.

39


 

For more information on our term loan and revolving loan facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Term loan and revolving loan facility” and Note 7 to the consolidated financial statements of GS Holdings included in this prospectus.

We may be unable to sufficiently protect our proprietary rights and may encounter disputes from time to time relating to our use of the intellectual property of third parties.

We rely on a combination of trademarks, service marks, copyrights, trade secrets, domain names and agreements with employees and third parties to protect our proprietary rights. In 2014, we submitted a patent application relating to our mobile application process and credit decisioning model, which application is currently pending. There is no assurance that our patent application will be granted. We have trademark and service mark registrations and pending applications for additional registrations in the United States. We also own the domain name rights for greensky.com, as well as other words and phrases important to our business. Nonetheless, third parties may challenge, invalidate or circumvent our intellectual property, and our intellectual property may not be sufficient to provide us with a competitive advantage.

Despite our efforts to protect these rights, unauthorized third parties may attempt to duplicate or copy the proprietary aspects of our technology and processes. Our competitors and other third parties independently may design around or develop similar technology or otherwise duplicate our services or products such that we could not assert our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property and confidential and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure. Measures in place may not prevent misappropriation or infringement of our intellectual property or proprietary information and the resulting loss of competitive advantage, and we may be required to litigate to protect our intellectual property and proprietary information from misappropriation or infringement by others, which is expensive, could cause a diversion of resources and may not be successful.

We also may encounter disputes from time to time concerning intellectual property rights of others, and we may not prevail in these disputes. Third parties may raise claims against us alleging that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights. Some third-party intellectual property rights may be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid all alleged violations of such intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, an assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim, even if we ultimately prevail, pay significant money damages, lose significant revenues, be prohibited from using the relevant systems, processes, technologies or other intellectual property (temporarily or permanently), cease offering certain products or services, or incur significant license, royalty or technology development expenses.

Moreover, it has become common in recent years for individuals and groups to purchase intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims is time consuming and expensive and could result in the diversion of time and attention of our management and employees. In addition, although in some cases a third party may have agreed to indemnify us for such costs, such indemnifying party may refuse or be unable to uphold its contractual obligations. In other cases, our insurance may not cover potential claims of this type adequately or at all, and we may be required to pay monetary damages, which may be significant.

Our risk management processes and procedures may not be effective.

Our risk management processes and procedures seek to appropriately balance risk and return and mitigate our risks. We have established processes and procedures intended to identify,

40


 

measure, monitor and control the types of risk to which we and our Bank Partners are subject, including credit risk, market risk, liquidity risk, strategic risk and operational risk. Credit risk is the risk of loss that arises when an obligor fails to meet the terms of an obligation. While our exposure to the direct economic cost of consumer credit risk is limited because, with the exception of R&D Receivables and other loans for which we purchase the receivables, we do not hold the loans or the receivables underlying the loans that our Bank Partners originate, we are exposed to consumer credit risk in the form of both our finance charge reversal liability and our limited escrow requirement, as well as our ability to maintain relationships with our existing Bank Partners and recruit new bank partners. Market risk is the risk of loss due to changes in external market factors such as interest rates. Liquidity risk is the risk that financial condition or overall safety and soundness are adversely affected by an inability, or perceived inability, to meet obligations and support business growth. Strategic risk is the risk from changes in the business environment, improper implementation of decisions or inadequate responsiveness to changes in the business environment. Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (e.g., natural disasters), compliance, reputational or legal matters and includes those risks as they relate directly to us as well as to third parties with whom we contract or otherwise do business.

Management of our risks depends, in part, upon the use of analytical and forecasting models. If these models are ineffective at predicting future losses or are otherwise inadequate, we may incur unexpected losses or otherwise be adversely affected. In addition, the information we use in managing our credit and other risks may be inaccurate or incomplete as a result of error or fraud, both of which may be difficult to detect and avoid. There also may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, including when processes are changed or new products and services are introduced. If our risk management framework does not effectively identify and control our risks, we could suffer unexpected losses or be adversely affected, which could have a material adverse effect on our business.

Some aspects of our platform include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

Aspects of our platform include software covered by open source licenses. The terms of various open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our platform. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and loan products. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with the use of open source software cannot be eliminated and could adversely affect our business.

To the extent that we seek to grow through future acquisitions, or other strategic investments or alliances, we may not be able to do so effectively.

We may in the future seek to grow our business by exploring potential acquisitions or other strategic investments or alliances. We may not be successful in identifying businesses or opportunities that meet our acquisition or expansion criteria. In addition, even if a potential acquisition target or other strategic investment is identified, we may not be successful in completing such acquisition or integrating such new business or other investment. We may face significant competition for acquisition and other strategic investment opportunities from other well-capitalized companies, many of which have greater financial resources and greater access to debt and equity capital to secure and complete acquisitions or other strategic investments, than we do. As a result

41


 

of such competition, we may be unable to acquire certain assets or businesses, or take advantage of other strategic investment opportunities that we deem attractive; the purchase price for a given strategic opportunity may be significantly elevated; or certain other terms or circumstances may be substantially more onerous. Any delay or failure on our part to identify, negotiate, finance on favorable terms, consummate and integrate any such acquisition, or other strategic investment, opportunity could impede our growth.

There is no assurance that we will be able to manage our expanding operations effectively or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses. Furthermore, we may be responsible for any legacy liabilities of businesses we acquire or be subject to additional liability in connection with other strategic investments. The existence or amount of these liabilities may not be known at the time of acquisition, or other strategic investment, and may have a material adverse effect on our business.

The effect of comprehensive U.S. tax reform legislation or challenges to our tax positions could adversely affect our business.

We operate in multiple jurisdictions and are subject to tax laws and regulations of the United States federal, state and local governments. United States federal, state and local tax laws and regulations are complex and subject to varying interpretations. There is no assurance that our tax positions will not be successfully challenged by relevant tax authorities.

In addition, on December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”). Among a number of significant changes to the U.S. federal income tax rules, the Tax Act reduces the marginal U.S. corporate income tax rate from 35% to 21%, limits the deduction for net interest expense, and shifts the United States toward a more territorial tax system. While our analysis of the Tax Act’s impact on our cash tax liability and financial condition has not identified any overall material adverse effect, we are still evaluating the effects of the Tax Act on us and there are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the Tax Act. In the absence of guidance on these issues, we will use what we believe are reasonable interpretations and assumptions in interpreting and applying the Tax Act for purposes of determining our cash tax liabilities and results of operations, which may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves over time. It is possible that the Internal Revenue Service (“IRS”) could issue subsequent guidance or take positions on audit that differ from the interpretations and assumptions that we previously made, which could have a material adverse effect on our cash tax liabilities, results of operations and financial condition, or an indirect effect on our business through its impact on our Bank Partners, merchants and consumers. You are urged to consult your tax adviser regarding the implications of the Tax Act.

Future changes in financial accounting standards may significantly change our reported results of operations.

GAAP is subject to standard setting or interpretation by the Financial Accounting Standards Board (“FASB”), the PCAOB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change.

Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including revenue recognition, finance charge reversals, and share-based compensation are highly complex and involve subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us (i) could require us to make changes to our accounting systems that could increase our operating costs and (ii) could significantly change our reported or expected financial performance.

42


 

Risks Related to Our Regulatory Environment

We are subject to federal and state consumer protection laws.

In connection with our administration of the GreenSky program, we must comply with various regulatory regimes, including those applicable to consumer credit transactions, various aspects of which are untested as applied to our business model. The laws to which we are or may be subject include:

 

 

state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, money transmission, debt servicing and collection and unfair or deceptive business practices;

 

 

the Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions;

 

 

Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices (“UDAAP”) in connection with any consumer financial product or service;

 

 

the ECOA and Regulation B promulgated thereunder, which prohibit creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the Federal Consumer Credit Protection Act or any applicable state law;

 

 

the Fair Credit Reporting Act (the “FCRA”), as amended by the Fair and Accurate Credit Transactions Act, which promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies;

 

 

the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, as well as state debt collection laws, all of which provide guidelines and limitations concerning the conduct of third-party debt collectors in connection with the collection of consumer debts;

 

 

the Gramm-Leach-Bliley Act (the “GLBA”), which includes limitations on disclosure of nonpublic personal information by financial institutions about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;

 

 

the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;

 

 

the Servicemembers Civil Relief Act (the “SCRA”), which allows active duty military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;

 

 

the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts;

 

 

the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and

 

 

the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures.

While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance is given that our compliance policies and procedures will be effective. Failure to comply with these laws and with regulatory requirements applicable to our

43


 

business could subject us to damages, revocation of licenses, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business.

Our industry is highly regulated and is undergoing regulatory transformation, which has created inherent uncertainty. Changing federal, state and local laws, as well as changing regulatory enforcement policies and priorities, may negatively impact our business.

In connection with our administration of the GreenSky program, we are subject to extensive regulation, supervision and examination under United States federal and state laws and regulations. We are required to comply with numerous federal, state and local laws and regulations that regulate, among other things, the manner in which we administer the GreenSky program, the terms of the loans that our Bank Partners originate and the fees that we may charge. A material or continued failure to comply with any of these laws or regulations could subject us to lawsuits or governmental actions and/or damage our reputation, which could materially adversely affect our business. Regulators, including the CFPB, have broad discretion with respect to the interpretation, implementation and enforcement of these laws and regulations, including through enforcement actions that could subject us to civil money penalties, customer remediations, increased compliance costs, and limits or prohibitions on our ability to offer certain products and services or to engage in certain activities. In addition, to the extent that we undertake actions requiring regulatory approval or non-objection, regulators may make their approval or non-objection subject to conditions or restrictions that could have a material adverse effect on our business. Moreover, some of our competitors are subject to different, and in some cases less restrictive, legislative and regulatory regimes, which may have the effect of providing them with a competitive advantage over us.

Additionally, federal, state and local governments and regulatory agencies have proposed or enacted numerous new laws, regulations and rules related to personal loans. Federal and state regulators also are enforcing existing laws, regulations and rules more aggressively and enhancing their supervisory expectations regarding the management of legal and regulatory compliance risks. Consumer finance regulation is constantly changing, and new laws or regulations, or new interpretations of existing laws or regulations, could have a materially adverse impact on our ability to operate as we currently intend.

These regulatory changes and uncertainties make our business planning more difficult and could result in changes to our business model and potentially adversely impact our results of operations. New laws or regulations also require us to incur significant expenses to ensure compliance. As compared to our competitors, we could be subject to more stringent state or local regulations or could incur marginally greater compliance costs as a result of regulatory changes. In addition, our failure to comply (or to ensure that our agents and third-party service providers comply) with these laws or regulations may result in costly litigation or enforcement actions, the penalties for which could include: revocation of licenses; fines and other monetary penalties; civil and criminal liability; substantially reduced payments by borrowers; modification of the original terms of loans, permanent forgiveness of debt, or inability to, directly or indirectly, collect all or a part of the principal of or interest on loans; and increased purchases of receivables underlying loans originated by our Bank Partners and indemnification claims.

Proposals to change the statutes affecting financial services companies are frequently introduced in Congress and state legislatures that, if enacted, may affect our operating environment in substantial and unpredictable ways. In addition, numerous federal and state regulators have the authority to promulgate or change regulations that could have a similar effect on our operating environment. We cannot determine with any degree of certainty whether any such legislative or regulatory proposals will be enacted and, if enacted, the ultimate impact that any such potential legislation or implementing regulations, or any such potential regulatory actions by federal or state regulators, would have upon our business.

With respect to state regulation, although we seek to comply with applicable state loan, loan broker, loan originator, servicing, debt collection, money transmitter and similar statutes in all U.S. jurisdictions, and with licensing and other requirements that we believe may be applicable to us, if we are found to not have complied with applicable laws, we could lose one or more of our licenses

44


 

or authorizations or face other sanctions or penalties or be required to obtain a license in one or more such jurisdictions, which may have an adverse effect on our ability to make the GreenSky program available to borrowers in particular states and, thus, adversely impact our business.

We also are subject to potential enforcement and other actions that may be brought by state attorneys general or other state enforcement authorities and other governmental agencies. Any such actions could subject us to civil money penalties and fines, customer remediations and increased compliance costs, as well as damage our reputation and brand and limit or prohibit our ability to offer certain products and services or engage in certain business practices.

New laws, regulations, policy or changes in enforcement of existing laws or regulations applicable to our business, or our reexamination of our current practices, could adversely impact our profitability, limit our ability to continue existing or pursue new business activities, require us to change certain of our business practices or alter our relationships with GreenSky program customers, affect retention of our key personnel, or expose us to additional costs (including increased compliance costs and/or customer remediation). These changes also may require us to invest significant resources, and devote significant management attention, to make any necessary changes and could adversely affect our business.

The highly regulated environment in which our Bank Partners operate could have an adverse effect on our business.

Our Bank Partners are subject to federal and state supervision and regulation. Federal regulation of the banking industry, along with tax and accounting laws, regulations, rules and standards, may limit their operations significantly and control the methods by which they conduct business. In addition, compliance with laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance requirements. For example, the Dodd-Frank Act imposes significant regulatory and compliance changes on financial institutions. Regulatory requirements affect our Bank Partners’ lending practices and investment practices, among other aspects of their businesses, and restrict transactions between us and our Bank Partners. These requirements may constrain the operations of our Bank Partners, and the adoption of new laws and changes to, or repeal of, existing laws may have a further impact on our business.

In choosing whether and how to conduct business with us, current and prospective Bank Partners can be expected to take into account the legal, regulatory and supervisory regime that applies to them, including potential changes in the application or interpretation of regulatory standards, licensing requirements or supervisory expectations. Regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, certain risk management or other operational practices for financial services companies in a manner that impacts our Bank Partners. Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of the regulations and laws and their interpretation of the quality of our Bank Partners’ loan portfolios and other assets. If any regulatory agency’s assessment of the quality of our Bank Partners’ assets, operations, lending practices, investment practices or other aspects of their business changes, it may materially reduce our Bank Partners’ earnings, capital ratios and share price in such a way that affects our business.

Bank holding companies and financial institutions are extensively regulated and currently face an uncertain regulatory environment. Applicable state and federal laws, regulations, interpretations, including licensing laws and regulations, enforcement policies and accounting principles have been subject to significant changes in recent years, and may be subject to significant future changes. We cannot predict with any degree of certainty the substance or effect of pending or future legislation or regulation or the application of laws and regulations to our Bank Partners. Future changes may have a material adverse effect on our Bank Partners and, therefore, on us.

45


 

We are subject to regulatory examinations and investigations and may incur fines, penalties and increased costs that could negatively impact our business.

Federal and state agencies have broad enforcement powers over us, including powers to investigate our business practices and broad discretion to deem particular practices unfair, deceptive, abusive or otherwise not in accordance with the law. The continued focus of regulators on the consumer financial services industry has resulted, and could continue to result, in new enforcement actions that could, directly or indirectly, affect the manner in which we conduct our business and increase the costs of defending and settling any such matters, which could negatively impact our business. In some cases, regardless of fault, it may be less time-consuming or costly to settle these matters, which may require us to implement certain changes to our business practices, provide remediation to certain individuals or make a settlement payment to a given party or regulatory body. We have in the past chosen to settle certain matters in order to avoid the time and expense of contesting them. There is no assurance that any future settlements will not have a material adverse effect on our business.

In addition, the laws and regulations applicable to us are subject to administrative or judicial interpretation. Some of these laws and regulations have been enacted only recently and may not yet have been interpreted or may be interpreted infrequently. As a result of infrequent or sparse interpretations, ambiguities in these laws and regulations may create uncertainty with respect to what type of conduct is permitted or restricted under such laws and regulations. Any ambiguity under a law or regulation to which we are subject may lead to regulatory investigations, governmental enforcement actions and private causes of action, such as class action lawsuits, with respect to our compliance with such laws or regulations.

The CFPB is a relatively new agency, and there continues to be uncertainty as to how its actions will impact our business; the agency’s actions have had, and may continue to have, an adverse impact on our business.

The CFPB has broad authority over the businesses in which we engage. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority and to remediate violations of numerous consumer protection laws in a variety of ways, including collecting civil money penalties and fines and providing for customer restitution. The CFPB is charged, in part, with enforcing certain federal laws involving consumer financial products and services and is empowered with examination, enforcement and rulemaking authority. The CFPB has taken an active role in regulating lending markets. For example, the CFPB sends examiners to banks and other financial institutions that service and/or originate consumer loans to determine compliance with applicable federal consumer financial laws and to assess whether consumers’ interests are protected. In addition, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including those included in the GreenSky program.

There continues to be uncertainty as to how the CFPB’s strategies and priorities will impact our business and our results of operations going forward. Actions by the CFPB could result in requirements to alter or cease offering affected products and services, making them less attractive or restricting our ability to offer them. Although we have committed significant resources to enhancing our compliance programs, changes by the CFPB in regulatory expectations, interpretations or practices could increase the risk of additional enforcement actions, fines and penalties.

In March 2015, the CFPB issued a report scrutinizing pre-dispute arbitration clauses and, in May 2016, it published a proposed rule that would substantially curtail our ability to enter into voluntary pre-dispute arbitration clauses with consumers. In July 2017, the CFPB issued a final rule banning bars on class action arbitration (but not arbitration generally). Pre-dispute arbitration clauses currently are contained in all of the loan agreements processed through the GreenSky program. The new rule was subsequently challenged in Congress and, on November 1, 2017, President Trump approved a resolution repealing the rule. In the future, if a similar rule were to

46


 

become effective, we expect that our exposure to class action arbitration would increase significantly, which could have a material adverse effect on our business.

On January 16, 2018, a CFPB rule commonly referred to as the “Payday Loan Rule” became effective. Most of the substantive provisions of the rule require compliance by August 19, 2019. Resolutions are pending in Congress to cancel the rule through the Congressional Review Act. While the rule does not appear to be targeted at businesses like ours, some of its provisions are broad and potentially could be triggered by the promotional loans that our Bank Partners extend that require increases in payments at specified points in time. We are continuing to review the implications of the rule. We currently believe that the promotional loan products can be structured in a manner that does not implicate the rule in any meaningful respect, but we have not yet finalized any plans for responding to the rule.

Future actions by the CFPB (or other regulators) against us or our competitors that discourage the use of our or their services could result in reputational harm and adversely affect our business. If the CFPB changes regulations that were adopted in the past by other regulators and transferred to the CFPB by the Dodd-Frank Act, or modifies through supervision or enforcement past regulatory guidance or interprets existing regulations in a different or stricter manner than they have been interpreted in the past by us, the industry or other regulators, our compliance costs and litigation exposure could increase materially. If future regulatory or legislative restrictions or prohibitions are imposed that affect our ability to offer promotional financing for certain of our products or that require us to make significant changes to our business practices, and if we are unable to develop compliant alternatives with acceptable returns, these restrictions or prohibitions could have a material adverse effect on our business.

The Dodd-Frank Act generally permits state officials to enforce regulations issued by the CFPB and to enforce its general prohibition against unfair, deceptive or abusive practices. This could make it more difficult than in the past for federal financial regulators to declare state laws that differ from federal standards to be preempted. To the extent that states enact requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that differ from those adopted by the CFPB, we may be required to alter or cease offering products or services in some jurisdictions, which would increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide, and we may be subject to a higher risk of state enforcement actions.

The contours of the Dodd-Frank UDAAP standard are still uncertain and there is a risk that certain features of the GreenSky program loans could be deemed to violate the UDAAP standard.

The Dodd-Frank Act prohibits “Unfair, Deceptive, or Abusive Acts or Practices” (“UDAAP”) and authorizes the CFPB to enforce that prohibition. The CFPB has filed a large number of UDAAP enforcement actions against consumer lenders for practices that do not appear to violate other consumer finance statutes. There is a risk that the CFPB could determine that certain features of the GreenSky program loans are unfair, deceptive or abusive. The CFPB has filed actions alleging that deferred interest programs can be unfair, deceptive or abusive if lenders do not adequately disclose the terms of the deferred interest loans.

On June 2, 2016, the CFPB issued proposed rules that would impose numerous restrictions on certain “high-cost installment loans.” It is not clear if or when the CFPB will publish the final version of these rules, or what their content will be. Among other things, the proposed rules would impose various obligations to determine a consumer’s ability to repay a consumer loan. It is possible that the final rules, if enacted, could impact the GreenSky program. It is also possible that, depending on the form of the final rules, changes would be necessary to the GreenSky program, which changes could have a material adverse effect on the revenue that we derive from certain loans made by our Bank Partners, including transaction fee revenue, in particular.

47


 

Our use of third-party vendors and our other ongoing third-party business relationships is subject to increasing regulatory requirements and attention.

We regularly use third-party vendors and subcontractors as part of our business. We also depend on our substantial ongoing business relationships with our Bank Partners, merchants and other third parties. These types of third-party relationships, particularly with our Bank Partners, are subject to increasingly demanding regulatory requirements and oversight by federal bank regulators (such as the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) and the CFPB. The CFPB has enforcement authority with respect to the conduct of third parties that provide services to financial institutions. The CFPB has made it clear that it expects non-bank entities to maintain an effective process for managing risks associated with third-party vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we are expected to perform due diligence reviews of potential vendors, review their policies and procedures and internal training materials to confirm compliance-related focus, include enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations.

In certain cases, we may be required to renegotiate our agreements with our vendors and/or our subcontractors to meet these enhanced requirements, which could increase the costs of operating our business. It is expected that regulators will hold us responsible for deficiencies in our oversight and control of third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over third-party vendors and subcontractors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, as well as requirements for customer remediation.

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by them. For example, in connection with our administration of the GreenSky program, we are subject to the GLBA and implementing regulations and guidance. Among other things, the GLBA (i) imposes certain limitations on the ability to share consumers’ nonpublic personal information with nonaffiliated third parties and (ii) requires certain disclosures to consumers about their information collection, sharing and security practices and their right to “opt out” of the institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions).

Furthermore, legislators and/or regulators are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices; our collection, use, sharing, retention and safeguarding of consumer and/or employee information; and some of our current or planned business activities. This also could increase our costs of compliance and business operations and could reduce income from certain business initiatives.

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer and/or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services (such as products or services that involve us sharing information with third parties or storing sensitive credit card information), which could materially and adversely affect our profitability. Privacy requirements, including notice and opt out requirements, under the GLBA and FCRA are enforced by the FTC and by the CFPB through UDAAP and are a standard component of CFPB examinations. State entities also may initiate actions for alleged violations of privacy or security requirements under state law. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory

48


 

investigations and government actions, litigation, fines or sanctions, consumer, Bank Partner or merchant actions and damage to our reputation and brand, all of which could have a material adverse effect on our business.

The increased scrutiny of third-party medical financing by governmental agencies may lead to increased regulatory burdens and may adversely affect our business.

We recently expanded the GreenSky program into the elective healthcare industry vertical, which includes consumer financing for elective medical procedures. Recently, regulators have increased scrutiny of third-party providers of financing for medical procedures that are generally not covered by health insurance. In addition, the CFPB and attorneys general in New York and Minnesota have conducted investigations of alleged abusive lending practices or exploitation regarding third-party medical financing services.

If, in the future, any of our practices in this space were found to be deficient, it could result in fines, penalties or increased regulatory burdens. Additionally, any regulatory inquiry could damage our reputation and limit our ability to conduct operations, which could adversely affect our business. Moreover, the adoption of any law, rule or regulation affecting the industry may also increase our administrative costs, require us to modify our practices to comply with applicable regulations or reduce our ability to participate competitively, which could have a material adverse effect on our business.

In recent years, federal regulators and the United States DOJ have increased their focus on enforcing the SCRA against servicers. Similarly, state legislatures have taken steps to strengthen their own state-specific versions of the SCRA.

The DOJ and federal regulators have entered into significant settlements with a number of loan servicers alleging violations of the SCRA. Some of the settlements have alleged that the servicers did not correctly apply the SCRA’s 6% interest rate cap, while other settlements have alleged, without limitation, that servicers did not comply with the SCRA’s default judgment protections when seeking to collect payment of a debt. Recent settlements indicate that the DOJ and federal regulators broadly interpret the scope of the substantive protections under the SCRA and are moving aggressively to identify instances in which loan servicers have not complied with the SCRA. Recent SCRA-related settlements continue to make this a significant area of scrutiny for both regulatory examinations and public enforcement actions.

In addition, most state legislatures have their own versions of the SCRA. In most instances, these laws extend some or all of the substantive benefits of the federal SCRA to members of the state National Guard who are in state service, but certain states also provide greater substantive protections to National Guard members or individuals who are in federal military service. In recent years, certain states have revised their laws to increase the potential benefits to individuals, and these changes pose additional compliance burdens on our Bank Partners and us as we seek to comply with both the federal and relevant state versions of the SCRA.

No assurance is given that our efforts and those of our Bank Partners to comply with the SCRA will be effective, and our failure to comply could subject us to liability, damages and reputational harm, all of which could have an adverse effect on our business.

Anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.

We maintain an enterprise-wide program designed to enable us to comply with all applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the Patriot Act. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering and terrorist financing. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or

49


 

monetary instruments. No assurance is given that our programs and controls will be effective to ensure compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations, and our failure to comply with these laws and regulations could subject us to significant sanctions, fines, penalties and reputational harm, all of which could have a material adverse effect on our business.

If we were found to be operating without having obtained necessary state or local licenses, it could adversely affect our business.

Certain states have adopted laws regulating and requiring licensing by parties that engage in certain activity regarding consumer finance transactions, including facilitating and assisting such transactions in certain circumstances. Furthermore, certain states and localities have also adopted laws requiring licensing for consumer debt collection or servicing. While we believe we have obtained all necessary licenses, the application of some consumer finance licensing laws to the GreenSky program is unclear. If we were found to be in violation of applicable state licensing requirements by a court or a state, federal, or local enforcement agency, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas), criminal penalties and other penalties or consequences, and the loans originated through the GreenSky program could be rendered void or unenforceable in whole or in part, any of which could have a material adverse effect on our business.

If loans originated through the GreenSky program are found to violate applicable state usury laws or other lending laws, it could adversely affect our business.

Because the loans originated through the GreenSky program are originated by and held by our Bank Partners, under principles of federal preemption the terms and conditions of the loans are not subject to most state consumer finance laws, including state licensing and usury restrictions. If a court, or a state or federal enforcement agency, were to deem GreenSky—rather than our Bank Partners—the “true lender” for loans originated through the GreenSky program, and if for this reason (or any other reason) the loans were deemed subject to and in violation of certain state consumer finance laws, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas), and other penalties or consequences, and the loans could be rendered void or enforceable in whole or in part, any of which could have a material adverse effect on our business.

We have been in the past and may in the future be subject to federal and state regulatory inquiries regarding our business.

We have, from time to time in the normal course of our business, received, and may in the future receive or be subject to, inquiries or investigations by state and federal regulatory agencies and bodies such as the CFPB, state Attorneys General, state financial regulatory agencies, and other state or federal agencies or bodies regarding the GreenSky program, including the origination and servicing of consumer loans, practices by merchants or other third parties, and licensing and registration requirements. For example, we have entered into regulatory agreements with state agencies regarding issues including merchant conduct and oversight and loan pricing and may enter into similar agreements in the future. We have also received inquiries from state regulatory agencies regarding requirements to obtain licenses from or register with those states, including in states where we have determined that we are not required to obtain such a license or be registered with the state, and we expect to continue to receive such inquiries. Any such inquiries or investigations could involve substantial time and expense to analyze and respond to, could divert management’s attention and other resources from running our business, and could lead to public enforcement actions or lawsuits and fines, penalties, injunctive relief, and the need to obtain additional licenses that we do not currently possess. Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation, lead to additional investigations and enforcement actions from other agencies or litigants, and further divert management attention and resources from the

50


 

operation of our business. As a result, the outcome of legal and regulatory actions arising out of any state or federal inquiries we receive could be material to our business, results of operations, financial condition and cash flows and could have a material adverse effect on our business, financial condition or results of operations.

Risks Related to Our Organizational Structure

We will be a holding company with no operations of our own and, as such, will depend on our subsidiaries for cash to fund all of our operations and expenses, including future dividend payments, if any.

Upon consummation of this offering, we will be a holding company and will have no material assets other than our equity interest in GS Holdings, which has the sole equity interest in GSLLC. We have no independent means of generating revenue or cash flow. We have determined that GS Holdings will be a variable interest entity (“VIE”) and that we will be the primary beneficiary of GS Holdings. Accordingly, pursuant to the VIE accounting model, we will consolidate GS Holdings in our consolidated financial statements. In the event of a change in accounting guidance or amendments to the operating agreement of GS Holdings resulting in us no longer having a controlling interest in GS Holdings, we may not be able to consolidate its results of operations with our own, which would have a material adverse effect on our results of operations.

GS Holdings is treated as a partnership for United States federal income tax purposes, and GSLLC is treated as an entity disregarded as separate from GS Holdings for United States federal income tax purposes. As a result, neither GS Holdings nor GSLLC is subject to United States federal income tax. Instead, taxable income is allocated to the members of GS Holdings, including us. Accordingly, we incur income taxes on our proportionate share of any net taxable income of consolidated GS Holdings. We intend to cause GSLLC to make distributions to GS Holdings and to cause GS Holdings to make distributions to its unit holders in an amount sufficient to cover all applicable taxes payable by such unit holders determined according to assumed rates, payments owing under the Tax Receivable Agreement and dividends, if any, declared by us. The ability of GSLLC to make distributions to GS Holdings, and of GS Holdings to make distributions to us, is limited by their obligations to satisfy their own obligations to their creditors. Further, future and current financing arrangements of GSLLC and GS Holdings contain, and future obligations could contain, negative covenants limiting such distributions. Additionally, our right to receive assets upon the liquidation or reorganization of GS Holdings, or indirectly from GSLLC, will be effectively subordinated to the claims of each entity’s creditors. To the extent that we are recognized as a creditor of GS Holdings or GSLLC, our claims may still be subordinate to any security interest in, or other lien on, its assets and to any of its debt or other obligations that are senior to our claims.

To the extent that we need funds and GSLLC or GS Holdings are restricted from making such distributions under applicable law or regulation, or are otherwise unable to provide such funds, it could materially and adversely affect our liquidity and financial condition. In addition, because tax distributions are based on an assumed tax rate, GS Holdings may be required to make tax distributions that, in the aggregate, may exceed the amount of taxes that GS Holdings would have paid if it were itself taxed on its net income at the assumed rate.

Funds used by GS Holdings to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, the tax distributions that GS Holdings will be required to make may be substantial and may exceed (as a percentage of GS Holdings’ income) the overall effective tax rate applicable to a similarly situated corporate taxpayer.

We may be required to pay additional taxes as a result of the new partnership audit rules.

The Bipartisan Budget Act of 2015 changed the rules applicable to U.S. federal income tax audits of partnerships, including entities such as GS Holdings that is taxed as a partnership. Under these rules (which generally are effective for taxable years beginning after December 31, 2017), subject to certain exceptions, audit adjustments to items of income, gain, loss, deduction, or credit of an entity (and any member’s share thereof) is determined, and taxes, interest, and penalties

51


 

attributable thereto, are assessed and collected, at the entity level. Although it is uncertain how these rules will be implemented, it is possible that they could result in GS Holdings being required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a member of GS Holdings, could be required to indirectly bear the economic burden of those taxes, interest, and penalties even though we may not otherwise have been required to pay additional corporate-level taxes as a result of the related audit adjustment.

Under certain circumstances, GS Holdings may be eligible to make an election to cause members (including us) to take into account the amount of any understatement, including any interest and penalties, in accordance with their interests in GS Holdings in the year under audit. We cannot provide any assurance that GS Holdings will be able to make this election, in which case current members (including us) would economically bear the burden of the understatement even if they had a different percentage interest in GS Holdings during the year under audit, unless, and only to the extent, GS Holdings is able to recover such amounts from current or former impacted members. If the election is made, members would be required to take the adjustment into account in the taxable year in which the adjusted K-1s are issued.

The changes created by these new rules are sweeping and in many respects dependent on the promulgation of future regulations or other guidance by the U.S. Department of the Treasury.

The owners of the Class B common stock, who also are the Continuing LLC Members, control us and their interests may conflict with yours in the future.

Immediately following this offering and the application of net proceeds, the owners of the Class B common stock, who also are the Continuing LLC Members, will control us. Each share of our Class B common stock will initially entitle its holders to ten votes on all matters presented to our stockholders generally. Once the collective holdings of those owners in the aggregate are less than 15% of the combined economic interest in us, each share of Class B common stock will entitle its holder to one vote per share on all matters to be voted upon by our stockholders. See “Description of Capital Stock—Common Stock—Class B Common Stock—Voting Rights.”

Immediately following this offering and the application of net proceeds, the owners of the Class B common stock will own approximately 97.2% of the combined voting power of our Class A and Class B common stock (or 96.8% if the underwriters’ option is exercised in full). Accordingly, those owners, if voting in the same manner, will be able to control the election and removal of our directors and thereby determine our corporate and management policies, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our certificate of incorporation and bylaws and other significant corporate transactions for so long as they retain significant ownership of us. This concentration of ownership may delay or deter possible changes in control of our Company, which may reduce the value of an investment in our common stock. So long as they continue to own a significant amount of our combined voting power, even if such amount is less than 50%, they will continue to be able to strongly influence or effectively control our decisions.

In addition, immediately following this offering and the application of net proceeds to us therefrom, the owners of the Class B common stock, as Continuing LLC Members, will own 77.8% of the Holdco Units (or 75.2% if the underwriters’ option is exercised in full). Because they hold their economic ownership interest in our business through GS Holdings, rather than GreenSky, Inc., these existing unit holders may have conflicting interests with holders of our Class A common stock. For example, the Continuing LLC Members may have different tax positions from us, which could influence their decisions regarding whether and when to dispose of assets and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the Tax Receivable Agreement. In addition, the structuring of future transactions may take into account the tax considerations of the Continuing LLC Members even where no similar benefit would accrue to us. It is through their ownership of Class B common stock that they may be able to influence, if not control, decisions such as these. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

52


 

We will be required to pay for certain tax benefits we may claim arising in connection with the merger of the Former Corporate Investors, our purchase of Holdco Units and future exchanges of Holdco Units under the Exchange Agreement, which payments could be substantial.

On the date of this offering, we will be treated for United States federal income tax purposes as having directly purchased Holdco Units from the Exchanging Members. In the future, the Continuing LLC Members will be able to exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of Class A common stock on a one-for-one basis, subject to adjustments for stock splits, stock dividends, reclassifications, and other similar transactions, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors) (as described in more detail in “Certain Relationships and Related Party Transactions—Exchange Agreement”). As a result of these transactions, and our acquisition of the equity of the Former Corporate Investors, we are and will become entitled to certain tax basis adjustments with respect to GS Holdings’ tax basis in its assets. As a result, the amount of income tax that we would otherwise be required to pay in the future may be reduced by the increase (for income tax purposes) in depreciation and amortization deductions attributable to our interests in GS Holdings. An increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain assets to the extent tax basis is allocated to those assets. The IRS, however, may challenge all or part of that tax basis adjustment, and a court could sustain such a challenge.

We will enter into the Tax Receivable Agreement with the TRA Parties that will provide for the payment by us of 85% of the amount of cash savings, if any, in United States federal, state and local income tax that we realize or are deemed to realize as a result of (i) the tax basis adjustments referred to above, (ii) any incremental tax basis adjustments attributable to payments made pursuant to the Tax Receivable Agreement, and (iii) any deemed interest deductions arising from payments made by us pursuant to the Tax Receivable Agreement. While the actual amount of the adjusted tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the basis of our proportionate share of GS Holdings’ assets on the dates of exchanges, the timing of exchanges, the price of shares of our Class A common stock at the time of each exchange, the extent to which such exchanges are taxable, the deductions and other adjustments to taxable income to which GS Holdings is entitled, and the amount and timing of our income, we expect that during the anticipated term of the Tax Receivable Agreement, the payments that we may make could be substantial. Payments under the Tax Receivable Agreement may give rise to additional tax benefits and, therefore, to additional potential payments under the Tax Receivable Agreement. In addition, the Tax Receivable Agreement will provide for interest accrued from the due date (without extensions) of the corresponding tax return for the taxable year with respect to which the payment obligation arises to the date of payment under the Tax Receivable Agreement. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that the tax savings associated with the purchase of Holdco Units from the Exchanging Members in connection with this offering and future exchanges of Holdco Units (and automatic cancellation of an equal number of shares of Class B common stock) as described above (assuming such exchanges would occur one year after this offering) would aggregate to approximately 1,209.6 million over 15 years from the date of this offering based on an initial public offering price of $22.00 per share of our Class A common stock, which is the midpoint of the estimated price range set forth on the cover page of this prospectus. Under such scenario, assuming future payments are made on the date each relevant tax return is due, without extensions, we would be required to pay approximately 85% of such amount, or $1,028.1 million, over the 15-year period from the date of this offering.

There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the Tax Receivable Agreement exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement and/or (ii) distributions to us by GS Holdings are not sufficient to permit us to make payments under the Tax Receivable Agreement after paying our other obligations. For example, were the IRS to

53


 

challenge a tax basis adjustment or other deductions or adjustments to taxable income of GS Holdings, we will not be reimbursed for any payments that may previously have been made under the Tax Receivable Agreement, except that excess payments will be netted against payments otherwise to be made, if any, after our determination of such excess. As a result, in certain circumstances we could make payments under the Tax Receivable Agreement in excess of our ultimate cash tax savings. In addition, the payments under the Tax Receivable Agreement are not conditioned upon any recipient’s continued ownership of interests in us or GS Holdings, and the right to receive payments can be assigned.

In certain circumstances, including certain changes of control of our Company, payments by us under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement will provide that (i) in the event that we materially breach any of our material obligations under the Tax Receivable Agreement, whether as a result of failure to make any payment, failure to honor any other material obligation required thereunder or by operation of law as a result of the rejection of the Tax Receivable Agreement in a bankruptcy or otherwise, (ii) if, at any time, we elect an early termination of the Tax Receivable Agreement, or (iii) upon certain changes of control of our Company, our (or our successor’s) obligations under the Tax Receivable Agreement (with respect to all Holdco Units, whether or not such units have been exchanged or acquired before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions. These assumptions include that (i) we (or our successor) will have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits subject to the Tax Receivable Agreement, (ii) we (or our successor) will utilize (subject to any applicable limitations) any loss carryovers generated by the increased tax deductions and tax basis and other benefits on a pro rata basis through the scheduled expiration date of such loss carryovers, or if such carryforwards do not have an expiration date, over the 15-year period after such carryforwards were generated, and (iii) GS Holdings and its subsidiaries will sell certain nonamortizable assets (and realize certain related tax benefits) no later than a specified date. As a result of the foregoing, if we breach a material obligation under the Tax Receivable Agreement, if we elect to terminate the Tax Receivable Agreement early or if we undergo a change of control, we would be required to make an immediate lump-sum payment equal to the present value of the anticipated future tax savings, which payment may be required to be made significantly in advance of the actual realization of such future tax savings, and the actual cash tax savings ultimately realized may be significantly less than the corresponding Tax Receivable Agreement payments. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity. There is no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement. Additionally, the obligation to make a lump sum payment on a change of control may deter potential acquirors, which could negatively affect our stockholders’ potential returns. If we were to elect to terminate the Tax Receivable Agreement immediately after this offering and the use of proceeds to us therefrom, based on the offering price of $22.00 per share of our Class A common stock, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and a discount rate equal to 6.07% percent per annum, compounded annually, we estimate that we would be required to pay $630.1 million in the aggregate under the Tax Receivable Agreement.

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of our ownership of GS Holdings and GSLLC, applicable restrictions could make it impractical for us to continue our business as currently contemplated and could have an adverse effect on our business.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or

54


 

trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

Because GreenSky, Inc. will be the managing member of GS Holdings, and GS Holdings will be the managing member of GSLLC, we will indirectly operate and control all of the business and affairs of GS Holdings and its subsidiaries, including GSLLC. On that basis, we believe that our interest in GS Holdings and GSLLC is not an “investment security,” as that term is used in the 1940 Act. However, if we were to cease participation in the management of GS Holdings and GSLLC, our interest in such entities could be deemed an “investment security” for purposes of the 1940 Act.

We, GS Holdings and GSLLC intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Our certificate of incorporation will provide, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers, employees or stockholders.

Pursuant to our certificate of incorporation, as will be in effect upon the completion of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine. The forum selection clause in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our stockholders’ ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or any of our directors, officers, other employees or stockholders. The exclusive forum provision does not apply to any actions under United States federal securities laws.

By purchasing shares of our Class A common stock, you will have agreed and consented to the provisions set forth in our certificate of incorporation related to choice of forum. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

Risks Related to this Offering and our Class A Common Stock

An active trading market for our Class A common stock may never develop or be sustained, which may cause shares of our Class A common stock to trade at a discount from the initial public offering price and make it difficult to sell the shares of Class A common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that an active trading market for our Class A common stock will not develop or continue or, if developed, that it will not be sustained, which would make it difficult for you to sell your shares of Class A common stock at an attractive price (or at all). The initial public offering price per share of our Class A common stock will be determined by agreement between us

55


 

and the underwriters and may not be indicative of the price at which shares of our Class A common stock will trade in the public market after this offering. The market price of our Class A common stock may decline below the initial public offering price, and you may not be able to sell your shares of our Class A common stock at or above the price you paid in this offering (or at all).

The market price of our Class A common stock may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A common stock may fluctuate and cause significant price variations to occur. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market and political conditions, could reduce the market price of shares of our Class A common stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly or annual results of operations, additions or departures of key management personnel, the loss of key Bank Partners, merchants or Sponsors, changes in our earnings estimates (if provided) or failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or the investment community with respect to us or our industry, adverse announcements by us or others and developments affecting us, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, actions by institutional stockholders, and increases in market interest rates that may lead investors in our shares to demand a higher yield, and in response the market price of shares of our Class A common stock could decrease significantly. You may be unable to resell your shares of Class A common stock at or above the initial public offering price (or at all).

These broad market and industry factors may decrease the market price of our Class A common stock, regardless of our actual operating performance. The stock market in general has, from time to time, experienced extreme price and volume fluctuations. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, and our management will be required to devote substantial time to new compliance matters, which could lower profits and make it more difficult to run our business.

As a public company, we expect to incur significant legal, accounting, reporting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements and costs of recruiting and retaining non-executive directors. We also have incurred, and will continue to incur, costs associated with compliance with the rules and regulations of the SEC and various other costs of a public company. The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements. These laws and regulations also could make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.

56


 

These laws and regulations could also make it more difficult to attract and retain qualified persons to serve on our board of directors and board committees and serve as executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Failure to comply with the requirements to design, implement and maintain effective internal controls could have an adverse effect on our business and stock price.

As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environment and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

If we are unable to establish and maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our operating results. In addition, beginning with our second annual report following this offering, we will be required pursuant to SEC rules to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in internal control over financial reporting. In addition, our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to the SEC rules commencing the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” (as defined in the JOBS Act). See “—We are an ‘emerging growth company,’ as defined under the federal securities laws, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.” Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the SEC rules or our independent registered public accounting firm may not issue an unqualified opinion. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could cause the price of our common stock to decline and could subject us to investigation or sanctions by the SEC.

We are an “emerging growth company,” as defined under the federal securities laws, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Securities Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, among other things, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a non-binding stockholder advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information that they may deem important.

An emerging growth company can utilize the extended transition period provided in the Securities Act for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period and, thus, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

57


 

We could be an emerging growth company for up to five years following the date of this prospectus, although circumstances could cause us to lose that status earlier, including if our total annual gross revenues exceed $1.07 billion, if we issue more than $1.0 billion in non-convertible debt during any three-year period or if the market value of our Class A common stock held by non-affiliates exceeds $700 million as of any June 30 before that time. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock, our stock price may be more volatile and the price of our Class A common stock may decline.

Investors in this offering will experience immediate and substantial dilution.

The initial public offering price of our Class A common stock will be substantially higher than the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after this offering. As a result, you will pay a price per share of Class A common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. In addition, you will pay more for your shares of Class A common stock than the amounts paid by our existing owners. Assuming an offering price of $22.00 per share of Class A common stock, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, you will incur immediate and substantial dilution in an amount of $24.47 per share of Class A common stock. See “Dilution.”

You may be diluted by the future issuance of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering and the use of proceeds to us therefrom, we will have an aggregate of 258,803,515 shares of Class A common stock authorized but unissued, including 144,727,632 shares of Class A common stock issuable upon exchange of Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) that will be held by the Continuing LLC Members. Our certificate of incorporation authorizes us to issue these shares of Class A common stock and rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 24,000,000 shares for issuance under our 2018 Omnibus Incentive Compensation Plan (including any LTIP Units (as defined below), which may be granted thereunder), subject to adjustment in certain events. See “Executive Compensation—Employee Benefit Plans—2018 Omnibus Incentive Compensation Plan.” Any Class A common stock that we issue, including under our 2018 Omnibus Incentive Compensation Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

Because we have no current plans to pay cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.

We have no current plans to pay cash dividends on our Class A common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash, current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, implications on the payment of dividends by us to our stockholders or by our subsidiary to us and such other factors as our board of directors may deem relevant. In addition, the terms of our existing financing arrangements restrict or limit our ability to pay cash dividends. Accordingly, we may not pay any dividends on our Class A common stock in the foreseeable future. See “Dividend Policy.”

58


 

Future offerings of debt or equity securities by us may adversely affect the market price of our Class A common stock.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our Class A common stock or offering debt or other equity securities, including commercial paper, medium-term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to obtain the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness and/or cash from operations.

Issuing additional shares of our Class A common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our Class A common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our Class A common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing and nature of our future offerings.

Future sales, or the expectation of future sales, of shares of our Class A common stock by Continuing LLC Members could cause the market price of our Class A common stock to decline.

The sale of a substantial number of shares of our Class A common stock in the public market, or the perception that such sales could occur, including sales by the Continuing LLC Members, could adversely affect the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price we deem appropriate. Upon consummation of this offering, after giving effect to the use of proceeds to us therefrom, we will have outstanding a total of 41,196,485 shares of Class A common stock. Of the outstanding shares, the 34,090,909 shares of Class A common stock sold in this offering by us, or 39,204,545 shares if the underwriters exercise their option to purchase additional shares in full, will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act (“Rule 144”), may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.” In addition, subject to certain limitations and exceptions, pursuant to certain provisions of the Exchange Agreement, the Continuing LLC Members may exchange Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for stock splits, stock dividends and reclassifications, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors). Upon consummation of this offering and after giving effect to the use of proceeds to us therefrom, the Continuing LLC Members will beneficially own 144,727,632 Holdco Units and shares of Class B common stock, or 139,903,873 Holdco Units and shares of Class B common stock if the underwriters exercise their option to purchase additional shares in full, all of which will be exchangeable for shares of our Class A common stock or cash, at our option (such determination to be made by the disinterested members of our board of directors), subject to the terms of the Exchange Agreement.

Our certificate of incorporation authorizes us to issue additional shares of Class A common stock and rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion. In accordance with the DGCL

59


 

and the provisions of our certificate of incorporation, we also may issue preferred stock that has designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to shares of Class A common stock. Similarly, the Holdings LLC Agreement permits GS Holdings to issue an unlimited number of additional limited liability company interests of GS Holdings with designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to the Holdco Units, and which may be exchangeable for shares of our Class A common stock.

Each of our directors and officers, and substantially all of our equity holders, have entered into lock-up agreements with the underwriters that restrict their ability to sell or transfer their shares of Class A common stock. The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, however, may, in their sole discretion, permit our officers, directors and other current equity holders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

After the lock-up agreements expire, up to an additional 148,097,821 shares of Class A common stock will be eligible for sale in the public market, approximately 101,118,530 of which are held by our executive officers, directors and their affiliated entities, and will be subject to volume limitations under Rule 144 and various vesting agreements. See “Shares Eligible for Future Sale.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our Class A common stock or securities convertible into, or exchangeable for, shares of our Class A common stock issued pursuant to our 2018 Omnibus Incentive Compensation Plan. See “Executive Compensation—Employee Benefit Plans—2018 Omnibus Incentive Compensation Plan—General.” Any such Form S-8 registration statement automatically will become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover shares of our Class A common stock.

As restrictions on resale end, the market price of our shares of Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors also could make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.

We cannot predict with certainty the impact our capital structure may have on our stock price.

In July 2017, S&P Dow Jones, a provider of widely-followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recently stated that it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common stock. There is no assurance that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.

60


 

Certain provisions of our certificate of incorporation and bylaws could hinder, delay or prevent a change in control of us, which could adversely affect the price of our Class A common stock.

Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include:

 

 

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

 

prohibit stockholder action by written consent, requiring all stockholder actions be taken at a meeting of our stockholders;

 

 

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

 

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

 

establish a classified board of directors, as a result of which our board of directors will be divided into three classes, with each class serving for staggered three-year terms, which prevents stockholders from electing an entirely new board of directors at an annual meeting.

In addition, these provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management or our board of directors. Stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is favorable to them. These anti-takeover provisions could substantially impede your ability to benefit from a change in control or change our management and board of directors and, as a result, may adversely affect the market price of our Class A common stock and your ability to realize any potential change of control premium. See “Description of Capital Stock—Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws.”

If securities and industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will depend, in part, on the research and reports that securities and industry analysts publish about us and our business. Securities and industry analysts do not currently, and may never, cover our Company. If securities and industry analysts do not commence coverage of our Company, the trading price of our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

61


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You generally can identify these statements by the use of words such as “outlook,” “potential,” “continue,” “may,” “seek,” “approximately,” “predict,” “believe,” “expect,” “plan,” “intend,” “estimate” or “anticipate” and similar expressions or the negative versions of these words or comparable words, as well as future or conditional verbs such as “will,” “should,” “would,” “likely” and “could.” These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. These risks and uncertainties include, but are not limited to, those risks described under the section entitled “Risk Factors” set forth herein. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.

62


 

ORGANIZATIONAL STRUCTURE

Following the Reorganization Transactions and the closing of this offering, we will be a holding company, and our sole material asset will be an equity interest in GS Holdings. GS Holdings has the sole equity interest in GSLLC. GreenSky, Inc. has not engaged in any business or other activities except in connection with the Reorganization Transactions and this offering. Following this offering, because GreenSky, Inc. will be the managing member of GS Holdings (with 100% of the management and voting power in GS Holdings), which will be the managing member of GSLLC, our operating subsidiary that directly or indirectly conducts all of our operations, we will indirectly operate and control all of the business and affairs (and will consolidate the financial results) of GS Holdings and its subsidiaries, including GSLLC. The ownership interest of the members of GS Holdings (other than GreenSky, Inc.) will be reflected as noncontrolling interests in our consolidated financial statements.

The diagram below depicts our simplified organizational structure immediately following the Reorganization Transactions and this offering after giving effect to the use of proceeds and assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

(1)

 

“Continuing LLC Members” refers to those Original GS Equity Owners and Original Profits Interests Holders who will continue to own Holdco Units after the Reorganization Transactions and who may, following the consummation of this offering, exchange their Holdco Units (with automatic cancellation of an equal number of shares of our Class B common stock) for shares of our Class A common stock or cash (based on the market price of the shares of Class A

63


 

 

 

 

common stock), at our option (such determination to be made by the disinterested members of our board of directors). Significant Continuing LLC Members include: (i) certain affiliates of David Zalik (our Chief Executive Officer); (ii) certain affiliates of Robert Sheft (a director of our Company); and (iii) TPG Georgia Holdings, L.P.

     

“Original GS Equity Owners” refers to the owners of units of GS Holdings prior to the Reorganization Transactions.

     

“Original Profits Interests Holders” refers to the owners of profits interests in GS Holdings prior to the Reorganization Transactions, which include certain current and former employees, directors, and an affiliate of one of the directors, of GS Holdings and its subsidiaries.

 

(2)

 

“Former Corporate Investors” refers to certain of the Original GS Equity Owners that will merge with and into one or more subsidiaries of GreenSky, Inc. in connection with the Reorganization Transactions. Significant Former Corporate Investors include an affiliate of TPG Georgia Holdings, L.P.

 

(3)

 

The shares of Class B common stock have no economic rights, but each share of our Class B common stock initially entitles its holder to ten votes on all matters to be voted on by stockholders generally. See “Description of Capital Stock—Common Stock—Class B Common Stock—Voting Rights.”

     

See “Principal Stockholders.”

Reorganization Transactions

GSLLC was organized as a Georgia limited liability company in 2006. GS Holdings was organized as a Georgia limited liability company in 2017 to serve as the holding company for GSLLC. Prior to the Reorganization Transactions, GS Holdings had:

 

 

28 members holding three different classes of membership interests (Class A, B, C units);

 

 

68 current and former employees, directors, and an affiliate of one of our directors, holding profits interests; and

 

 

152 current and former employees and directors holding options to purchase Class A units.

Because U.S. tax law generally makes it impractical for a limited liability company that is taxed as a partnership to sell membership interests publicly, GS Holdings is undertaking a series of transactions that will be completed prior to the consummation of this offering (collectively, the “Reorganization Transactions”) designed to create a corporate holding company that can conduct a public offering. These transactions include:

 

 

the formation of GreenSky, Inc. as a Delaware corporation to function as the ultimate parent and publicly-traded entity;

 

 

the amendment and restatement of the operating agreement of GS Holdings to, among other things, modify its capital structure by replacing the different classes of membership interests and profits interests with a single new class of membership interests of GS Holdings (referred to as Holdco Units);

 

 

the issuance to each of the Original GS Equity Owners (other than the Former Corporate Investors) and the Original Profits Interests Holders (other than the smaller Original Profits Interests Holders) (collectively referred to as the Continuing LLC Members) of a number of shares of our Class B common stock equal to the number of Holdco Units held by it (other than the Holdco Units that they will be exchanging in connection with this offering), for consideration in the amount of $0.001 per share of Class B common stock. Our Class B common stock initially will entitle holders to ten votes per share and will vote as a single class with our Class A common stock, but our Class B common stock will not have any economic rights;

 

 

the contribution of the Holdco Units received by some of the smaller Original Profits Interests Holders to GreenSky, Inc. in exchange for shares of our Class A common stock;

64


 

 

 

the contribution by the equity holders of the Former Corporate Investors of their equity in the Former Corporate Investors to GreenSky, Inc. in exchange for shares of our Class A common stock and the right to certain payments under the Tax Receivable Agreement, and the merger of the Former Corporate Investors with and into subsidiaries of GreenSky, Inc.;

 

 

the equitable adjustment of outstanding options to acquire Class A units of GS Holdings so that they will be exercisable for shares of Class A common stock; and

 

 

the equitable adjustment, pursuant to their terms, of outstanding warrants to acquire Class A units of GS Holdings so that they will be exercisable for Holdco Units (together with an equal number of shares of our Class B common stock), which Holdco Units are exchangeable (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for stock splits, stock dividends and reclassifications, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors).

In connection with the amendment and restatement of the operating agreement of GS Holdings (discussed above), the membership interests in GS Holdings will be adjusted pursuant to a 10-for-1 split (the “Forward Split”) so that each Holdco Unit (together with a share of Class B common stock) is economically equivalent to a share of Class A common stock on a one-for-one basis. Corresponding adjustments will be made to options and warrants.

Incident to the foregoing transactions, we and certain of the Continuing LLC Members will enter into various agreements, including:

(a) the Exchange Agreement, which provides for the exchange of Holdco Units in GS Holdings (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustment for stock splits, stock dividends and reclassifications, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors). As a holder exchanges its Holdco Units, those Holdco Units thereafter will be owned by GreenSky, Inc. and GreenSky, Inc.’s interest in GS Holdings will be correspondingly increased. The corresponding shares of Class B common stock will be cancelled;

(b) the Tax Receivable Agreement, which is designed to provide the TRA Parties with 85% of the amount of cash savings, if any, in United States federal, state and local taxes that GreenSky, Inc. realizes or is deemed to realize as a result of increases in tax basis resulting from our purchase of Holdco Units from the Exchanging Members using a portion of the net proceeds from this offering, our acquisition of the equity of the Former Corporate Investors, any future exchanges of Holdco Units (with automatic cancellation of an equal number of shares of our Class B common stock) for our Class A common stock pursuant to the Exchange Agreement, and certain related benefits. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement;” and

(c) a registration rights agreement whereby, following this offering and the expiration of the related lock-up period, we may be required to register under the Securities Act the sale of shares of our Class A common stock (i) issuable to certain of the Continuing LLC Members upon exchange of their Holdco Units (and automatic cancellation of an equal number of shares of Class B common stock), and (ii) issued to equity holders of the Former Corporate Investors in connection with the Reorganization Transactions. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

Offering-Related Transactions

“Redemption proceeds” refers to gross proceeds from this offering, after deducting underwriting discounts and commissions, but not other offering expenses. At the time of this offering, we intend to use a portion of the redemption proceeds to us from this offering to purchase an aggregate of 32,158,396 Holdco Units from the Exchanging Members, including our Chief Executive Officer and

65


 

certain other officers and directors, at a per unit price equal to the initial public offering price per share of our Class A common stock in the offering, less underwriting discounts and commissions. See “Certain Relationships and Related Party Transactions—Purchase of Holdco Units and Redemption of Class A Common Stock” for the number of Holdco Units to be purchased from each of the Exchanging Members. We also intend to use a portion of the redemption proceeds to us from this offering to redeem (i) 1,716,095 shares of our Class A common stock from equity holders of the Former Corporate Investors and (ii) 216,418 shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings. The number of Holdco Units acquired by us from GS Holdings and the Exchanging Members will be equal to the number of shares of Class A common stock issued in connection with the Reorganization Transactions and this offering, and the Continuing LLC Members will own the remaining outstanding Holdco Units. Any shares of Class B common stock corresponding to Holdco Units that are exchanged will be cancelled. Any shares of Class A common stock redeemed by us from equity holders of the Former Corporate Investors or option holders of GS Holdings will thereafter be held by GreenSky, Inc. as treasury stock or cancelled.

As a result of the transactions described above, and assuming the sale of shares of Class A common stock in this offering at a price per share to the public of $22.00, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after giving effect to the use of proceeds to us from this offering as described above:

 

 

the investors in this offering will collectively own 34,090,909 shares of our Class A common stock (or 39,204,545 shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

GreenSky, Inc. will hold 41,196,485 Holdco Units (or 46,052,707 Holdco Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing 22.2% of the total economic interest of GS Holdings (or 24.8% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

the Continuing LLC Members will collectively hold 144,727,632 Holdco Units, representing 77.8% of the total economic interest of GS Holdings (or 139,903,873 Holdco Units, representing 75.2% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

the investors in this offering will collectively have 2.3% of the voting power in GreenSky, Inc. (or 2.7% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

the Continuing LLC Members will collectively hold 144,727,632 shares of Class B common stock, representing 97.2% of the voting power in GreenSky, Inc. (or 96.8% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

equity holders of the Former Corporate Investors will collectively hold 7,105,576 shares of Class A common stock, representing 0.5% of the voting power in GreenSky, Inc. (or 0.5% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

the current and former employees of GSLLC and its subsidiaries will collectively hold options to acquire 2,757,186 shares of Class A common stock; and

 

 

certain investors in GS Holdings will collectively hold warrants to acquire 613,003 Holdco Units (together with an equal number of shares of our Class B common stock), which Holdco Units will be exchangeable (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to adjustment for stock splits, stock dividends and reclassifications, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors).

Our post-offering organizational structure will allow the Continuing LLC Members to retain their equity ownership in GS Holdings, an entity that is classified as a partnership for United States

66


 

federal income tax purposes, in the form of Holdco Units. Investors in this offering will, by contrast, hold their equity ownership in GreenSky, Inc., a Delaware corporation that is a domestic corporation for United States federal income tax purposes, in the form of shares of Class A common stock. We believe that certain of our Continuing LLC Members generally will find it advantageous to hold their equity interests in an entity that is not taxable as a corporation for United States federal income tax purposes. The Continuing LLC Members, like GreenSky, Inc., will incur United States federal, state and local income taxes on their proportionate share of any taxable income of GS Holdings, including taxable income of GSLLC.

The Continuing LLC Members also will hold shares of Class B common stock of GreenSky, Inc. Although those shares have no economic rights, they will allow the Continuing LLC Members to exercise voting power over GreenSky, Inc., the managing member of GS Holdings, at a level that is greater than their overall equity ownership of our business. Under our certificate of incorporation, each holder of Class B common stock will initially be entitled to ten votes for each share of Class B common stock held by such holder on all matters presented to stockholders of GreenSky, Inc. When the Continuing LLC Members exchange Holdco Units for shares of Class A common stock of GreenSky, Inc. pursuant to the Exchange Agreement, an equivalent number of shares of Class B common stock will be cancelled. Accordingly, as the Continuing LLC Members subsequently exchange Holdco Units for shares of Class A common stock of GreenSky, Inc. or cash, at our option, pursuant to the Exchange Agreement, the voting power afforded to the Continuing LLC Members by their shares of Class B common stock is automatically and correspondingly reduced. See “Description of Capital Stock—Common Stock—Class B Common Stock—Voting Rights.”

Holding Company Structure

GreenSky, Inc. was incorporated as a Delaware corporation on July 12, 2017. GreenSky, Inc. has not engaged in any business or other activities except in connection with its formation and initial capitalization. Our certificate of incorporation at the time of this offering will authorize two classes of common stock, Class A common stock and Class B common stock, and one or more series of preferred stock, each having the terms described in “Description of Capital Stock.” Holders of our Class A common stock have one vote per share of Class A common stock. Holders of our Class B common stock have ten votes per share of Class B common stock. Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law. See “Description of Capital Stock—Common Stock—Class B Common Stock.”

GreenSky, Inc. will be a holding company, and its sole material asset will be an equity interest in GS Holdings, which holds all of the equity interests in GSLLC. Because GreenSky, Inc. will be the managing member of GS Holdings (with 100% of the management and voting power in GS Holdings), and GS Holdings is the managing member of GSLLC, GreenSky, Inc. will indirectly operate and control all of the business and affairs (and consolidate the financial results) of GS Holdings and its subsidiaries, including GSLLC. The ownership interest of the Continuing LLC Members will be reflected as a noncontrolling interest in GreenSky, Inc.’s consolidated financial statements.

GS Holdings was formed as a Georgia limited liability company on July 25, 2017. Following the closing of this offering, GreenSky, Inc., the managing member of GS Holdings, will have the right to determine the timing and amount of any distributions (other than tax distributions as described below) to be made to holders of the Holdco Units in GS Holdings. Profits and losses of GS Holdings will be allocated, and all distributions with respect to Holdco Units will be made, pro rata to the holders of the Holdco Units (including the Continuing LLC Members) in accordance with their terms. See “Certain Relationships and Related Party Transactions—Operating Agreement of GS Holdings.”

The holders of Holdco Units in GS Holdings, including GreenSky, Inc., generally will have to include for purposes of calculating their United States federal, state and local income taxes their respective share of any taxable income of GS Holdings. Taxable income of GS Holdings generally will be allocated to the holders of Holdco Units in GS Holdings (including GreenSky, Inc.) pro rata

67


 

in accordance with their respective share of the net profits and net losses of GS Holdings. Under the Holdings LLC Agreement, GS Holdings will be obligated, subject to available cash and applicable law and contractual restrictions (including pursuant to its debt instruments), to make cash distributions, which we refer to as “tax distributions,” based on certain assumptions, to its members (including GreenSky, Inc.) pro rata based on their Holdco Units in GS Holdings. Generally, these tax distributions to holders of Holdco Units in GS Holdings will be an amount equal to our estimate of the taxable income of GS Holdings, net of taxable losses, allocable per Holdco Unit in GS Holdings multiplied by an assumed tax rate set forth in the operating agreement of GS Holdings.

GS Holdings may be required to make tax distributions that, in the aggregate, exceed the amount of taxes that GS Holdings would have paid if it were taxed on its net income at the assumed rate. See “Certain Relationships and Related Party Transactions—Operating Agreement of GS Holdings.”

Under the Tax Receivable Agreement, we will be obligated to pay the TRA Parties a portion of the cash savings, if any, in United States federal, state and local taxes that we realize or are deemed to realize as a result of our purchase of Holdco Units from the Exchanging Members using a portion of the net proceeds from this offering, our acquisition of the equity of the Former Corporate Investors, and any future exchanges of Holdco Units for our Class A common stock. A portion of the tax distributions that we receive likely will be used to fund this obligation. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

68


 

USE OF PROCEEDS

We estimate that the net proceeds from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $701.4 million (or $807.1 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock) based upon an assumed initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

Each $1.00 increase or decrease in the assumed initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would (1) increase or decrease the net proceeds to us from this offering by approximately $32.4 million, and (2) decrease or increase by 0 or 0, respectively, the number of shares of our Class A common stock outstanding as a result of being redeemed from equity holders of the Former Corporate Investors and option holders of GS Holdings, in each case assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

“Redemption proceeds” refers to gross proceeds from this offering, after deducting estimated underwriting discounts and commissions, but not other offering expenses. We intend to use redemption proceeds of approximately $672.1 million to purchase an aggregate of 32,158,396 Holdco Units from the Exchanging Members. We also intend to use redemption proceeds of (i) approximately $35.9 million to redeem 1,716,095 shares of our Class A common stock from equity holders of the Former Corporate Investors and (ii) approximately $4.5 million to redeem 216,418 shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings.

The purchase price for each Holdco Unit surrendered, and share of Class A common stock redeemed, will equal the price per share of our Class A common stock in this offering, less underwriting discounts and commissions.

If the underwriters exercise in full their option to purchase 5,113,636 additional shares of Class A common stock, in addition to the use of our proceeds described above, we intend to use the additional redemption proceeds of approximately $100.8 million from our sale of additional shares to purchase an additional 4,823,759 Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) from the Exchanging Members; approximately $5.4 million to redeem an additional 257,414 shares of our Class A common stock from equity holders of the Former Corporate Investors; and approximately $0.7 million to redeem an additional 32,463 shares of our Class A common stock issued upon exercise of options by certain option holders of GS Holdings.

The Exchanging Members will include affiliates of our Chief Executive Officer and, either directly or indirectly through affiliates, other officers and directors. See “Certain Relationships and Related Party Transactions—Purchase of Holdco Units and redemption of Class A common stock.”

69


 

DIVIDEND POLICY

We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual, legal, tax and regulatory restrictions, general business conditions and other factors that our board of directors may deem relevant.

We are a holding company and will have no material assets other than our ownership of Holdco Units in GS Holdings. Our ability to pay cash dividends will depend on the payment of distributions by our current and future subsidiaries, including GS Holdings and GSLLC, and such distributions may be restricted as a result of regulatory restrictions, state law regarding distributions by a limited liability company to its members, or contractual agreements, including agreements governing their indebtedness. See “Risk Factors—Risks Related to Our Organizational Structure—We will be a holding company with no operations of our own and, as such, will depend on our subsidiaries for cash to fund all of our operations and expenses, including future dividend payments, if any.” In addition, our ability to pay cash dividends may be restricted by the terms of our debt financing arrangements, and any future debt financing arrangement likely will contain terms restricting or limiting the amount of dividends that may be declared or paid on our common stock.

Following this offering, we will receive a portion of any distributions made by GS Holdings. Because GreenSky, Inc. will be the managing member of GS Holdings, which is the managing member of GSLLC, we will have the ability, subject to the restrictions and limitations referred to above, to determine when distributions (other than tax distributions) will be made by GSLLC to GS Holdings and the amount of any such distributions. Any such distributions will be distributed to all holders of Holdco Units, including us, pro rata based on holdings of Holdco Units. The cash received from such distributions will first be used by us to satisfy any tax liability and then to make any payments required under the Tax Receivable Agreement. Subject to limited exceptions, the Holdings LLC Agreement will obligate GS Holdings to make certain tax distributions. See “Certain Relationships and Related Party Transactions—Operating Agreement of GS Holdings.” In addition, in order to maintain to the greatest extent practicable the parity in value of Holdco Units and shares of Class A common stock, to the extent that GreenSky, Inc. accumulates substantial cash and cash equivalents, and receivables from GS Holdings, we will consider making distributions to Class A common stockholders. While the determination of what level of cash and cash equivalents, and receivables from GS Holdings (if any), warrant such distribution will depend upon the facts and circumstances at the time of determination, we generally would expect to make distributions where such amounts exceed $100 million.

Other than tax-related distributions, GS Holdings did not make any distributions to its existing owners during 2015 or 2016. In 2017, we declared non-tax distributions of $346.5 million to our unit holders and holders of profits interests and a related party at the time we entered into the term loan described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Term loan and revolving loan facility” and in Note 7 to the consolidated financial statements of GS Holdings included in this prospectus, of which $337.2 million was paid as of December 31, 2017 and $2.6 million has been paid to date in 2018. In December 2017, we declared a $160.0 million special cash distribution to our unit holders and holders of profits interests using the proceeds from a sale of loan receivables and cash from operations, of which $156.1 million was paid as of December 31, 2017 and $0.9 million has been paid to date in 2018. Tax-related distributions totaled $39.5 million in 2015, $46.9 million in 2016, $71.3 million in 2017, and have totaled $36.3 million to date in 2018.

70


 

CAPITALIZATION

The following table sets forth our cash and capitalization as of March 31, 2018 on:

 

 

a historical basis for GS Holdings; and

 

 

a pro forma basis for GreenSky, Inc., giving effect to the transactions and other matters described under “Unaudited Pro Forma Consolidated Financial Information,” including the Reorganization Transactions, and application of the proceeds from this offering as described in “Use of Proceeds” based upon an assumed initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses and other related transaction costs payable by us.

You should read this table, together with the information contained in this prospectus, including “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

 

 

 

 

 

 

 

As of March 31, 2018

 

Actual
GS Holdings

 

Pro Forma
GreenSky, Inc.

 

 

(dollars in thousands)

Cash

 

 

$

 

277,501

   

 

$

 

170,315

 

 

 

 

 

 

Debt:

 

 

 

 

Total debt

 

 

 

388,555

   

 

 

388,555

 

Temporary equity:

 

 

 

 

Redeemable preferred units

 

 

 

430,348

   

 

 

Class B common stock, par value $0.001 per share, 200,000,000 shares authorized on a pro forma basis; 144,727,632 shares issued and outstanding on a pro forma basis

 

 

 

 

 

144

 

 

 

 

 

 

Total temporary equity

 

 

 

430,348

   

 

 

144

 

Capital (permanent equity (deficit)):

 

 

 

 

Preferred Stock, par value $0.01 per share, 10,000,000 shares authorized on a pro forma basis; no shares issued and outstanding on a pro forma basis

 

 

   

 

 

Class A common stock, par value $0.01 per share, 300,000,000 shares authorized on a pro forma basis; 41,196,485 shares issued and outstanding on a pro forma basis

 

 

   

 

 

341

 

Paid-in capital

 

 

 

(553,901

)

 

 

 

 

751,319

 

Retained earnings

 

 

 

99,029

   

 

 

 

 

 

 

 

Total permanent equity (deficit), before noncontrolling interests

 

 

 

(454,872

)

 

 

 

 

751,660

 

Noncontrolling interests

 

 

 

 

 

(853,732

)

 

 

 

 

 

 

Total permanent equity (deficit)

 

 

 

(454,872

)

 

 

 

 

(102,072

)

 

 

 

 

 

 

Total capitalization

 

 

$

 

641,532

   

 

$

 

456,942

 

 

 

 

 

 

An increase or decrease in the assumed initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would not meaningfully increase or decrease the paid-in capital and total permanent equity (deficit) given that the proceeds will be used for redemptions.

71


 

DILUTION

If you invest in the initial public offering of our Class A common stock, your interest will be diluted to the extent of the excess of the initial public offering price per share of our Class A common stock over the pro forma net tangible book value per share of our Class A common stock after this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the net tangible book value per share attributable to the existing equity holders.

Our pro forma net tangible book value at March 31, 2018 was approximately $(101.9) million. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities of GS Holdings, after giving effect to the Reorganization Transactions, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, after giving effect to the Reorganization Transactions and assuming that all of the Continuing LLC Members exchanged their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for newly-issued shares of our Class A common stock on a one-for-one basis.

After giving effect to this offering, at an assumed initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and the application of estimated net proceeds, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value at March 31, 2018 would have been $(101.8) million or $(2.47) per share of Class A common stock, assuming that all of the Continuing LLC Members exchanged their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for newly-issued shares of our Class A common stock on a one-for-one basis.

The following table illustrates the immediate dilution of $24.47 per share to new stockholders purchasing Class A common stock in this offering, assuming the underwriters do not exercise their option to purchase additional shares.

 

 

 

Assumed initial public offering price per share

 

 

$

 

22.00

 

Pro forma net tangible book value per share, as adjusted to give effect to this offering

 

 

 

(2.47

)

 

Dilution in pro forma net tangible book value per share to new investors

 

 

$

 

24.47

 

A $1.00 increase or decrease in the assumed initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would not meaningfully increase or decrease our pro forma net tangible book value as the additional proceeds would be used for redemptions. However, it would increase or decrease the per share dilution on approximately a dollar-for-dollar basis.

If the underwriters’ option to purchase additional shares is exercised in full, there will be no meaningful increase or decrease in pro forma net tangible book value per share at March 31, 2018. However, the percentage of our shares held by existing equity owners would decrease to approximately 14.9% and the percentage of our shares held by new investors would increase to approximately 85.1%.

The following table summarizes, on the same pro forma basis at March 31, 2018, the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share paid by the Continuing LLC Members and by new investors purchasing shares in this offering, assuming that all of the Continuing LLC Members exchanged

72


 

their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares of Class A
Common Stock
Purchased/Granted

 

Total Consideration

 

Average Price
Per Share

 

Number

 

Percentage

 

Amount

 

Percentage

 

         

(dollars in thousands)

 

 

Investors prior to this offering

 

 

 

N/A

   

 

 

N/A

   

 

 

N/A

   

 

 

0

%

 

 

 

 

N/A

 

New investors in this offering

 

 

 

34,090,909

   

 

 

100

%

 

 

 

$

 

750.0

   

 

 

100

%

 

 

 

$

 

22.00

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

34,090,909

   

 

 

100

%

 

 

 

$

 

750.0

   

 

 

100

%

 

 

 

$

 

22.00

 

 

 

 

 

 

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $22.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease total consideration paid by new investors in this offering and total consideration paid by all investors by approximately $32.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The table above excludes shares of our Class A common stock reserved for issuance under our 2018 Omnibus Incentive Compensation Plan. To the extent that equity awards are issued under our incentive plan, investors participating in this offering will experience further dilution.

73


 

SELECTED CONSOLIDATED FINANCIAL DATA

The following table shows selected historical consolidated financial data of our accounting predecessor, GS Holdings, for the periods and as of the dates presented. Following the formation of GS Holdings, effective August 2017 the equity holders of GSLLC exchanged their equity interests in GSLLC for equity interests in GS Holdings in proportion to their existing ownership interests. In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, the exchange was accounted for as a common control transaction resulting in a change in the reporting entity. As the entities were always under common control, we retrospectively adjusted the historical consolidated financial statements of GS Holdings as if the common control transaction had occurred as of the earliest period presented.

The selected Consolidated Statement of Operations data for each of the years ended December 31, 2017, 2016 and 2015, and the selected Consolidated Balance Sheet data as of December 31, 2017 and 2016, were derived from the audited consolidated financial statements of GS Holdings included elsewhere in this prospectus. The selected Consolidated Statements of Operations data for the three months ended March 31, 2018 and 2017 and the selected Consolidated Balance Sheet data as of March 31, 2018 were derived from the unaudited consolidated financial statements of GS Holdings included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a consistent basis with the audited consolidated financial statements of GS Holdings. Such unaudited financial statements contain all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of the financial information set forth in those statements. Our results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. Further, our historical results are not necessarily indicative of our results in any future period.

The selected consolidated financial data of GreenSky, Inc. have not been presented because GreenSky, Inc. is a newly incorporated entity and has not engaged in any business or other activities except in connection with its formation and initial capitalization.

You should read the following financial information together with the information under “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

74


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended
December 31,

 

Three months ended
March 31,

 

2017

 

2016

 

2015

 

2018

 

2017

 

 

(dollars in thousands, except per unit data)

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

 

$

 

278,958

 

 

 

$

 

228,446

 

 

 

$

 

152,678

 

 

 

$

 

70,940

 

 

 

$

 

54,921

 

Servicing and other

 

 

 

46,929

 

 

 

 

35,419

 

 

 

 

20,779

 

 

 

 

14,386

 

 

 

 

10,416

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

325,887

 

 

 

 

263,865

 

 

 

 

173,457

 

 

 

 

85,326

 

 

 

 

65,337

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of depreciation and amortization shown separately below)

 

 

 

89,708

 

 

 

 

79,145

 

 

 

 

36,506

 

 

 

 

36,130

 

 

 

 

23,299

 

Compensation and benefits

 

 

 

54,650

 

 

 

 

39,836

 

 

 

 

27,738

 

 

 

 

16,343

 

 

 

 

12,430

 

Sales and marketing

 

 

 

2,198

 

 

 

 

1,085

 

 

 

 

861

 

 

 

 

828

 

 

 

 

233

 

Property, office and technology

 

 

 

10,062

 

 

 

 

8,000

 

 

 

 

4,283

 

 

 

 

2,722

 

 

 

 

2,526

 

Depreciation and amortization

 

 

 

3,983

 

 

 

 

3,708

 

 

 

 

2,356

 

 

 

 

970

 

 

 

 

966

 

General and administrative

 

 

 

14,876

 

 

 

 

10,602

 

 

 

 

7,071

 

 

 

 

4,173

 

 

 

 

3,780

 

Related party expenses

 

 

 

4,811

 

 

 

 

1,678

 

 

 

 

1,536

 

 

 

 

583

 

 

 

 

511

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

 

180,288

 

 

 

 

144,054

 

 

 

 

80,351

 

 

 

 

61,749

 

 

 

 

43,745

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

145,599

 

 

 

 

119,811

 

 

 

 

93,106

 

 

 

 

23,577

 

 

 

 

21,592

 

Total other income/(expense), net

 

 

 

(6,931

)

 

 

 

 

4,653

 

 

 

 

713

 

 

 

 

(4,973

)

 

 

 

 

419

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

138,668

 

 

 

$

 

124,464

 

 

 

$

 

93,819

 

 

 

$

 

18,604

 

 

 

$

 

22,011

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to participating interests

 

 

 

35,449

 

 

 

 

25,233

 

 

 

 

17,594

 

 

 

 

5,571

 

 

 

 

4,979

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Class A unit holders

 

 

$

 

103,219

 

 

 

$

 

99,231

 

 

 

$

 

76,225

 

 

 

$

 

13,033

 

 

 

$

 

17,032

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit attributable to Class A unit holders(1):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

7.74

 

 

 

$

 

7.44

 

 

 

$

 

5.72

 

 

 

$

 

0.98

 

 

 

$

 

1.28

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

$

 

7.49

 

 

 

$

 

7.19

 

 

 

$

 

5.54

 

 

 

$

 

0.95

 

 

 

$

 

1.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

See Note 2 to the consolidated financial statements of GS Holdings included elsewhere in this prospectus for a description of how we compute basic and diluted earnings per unit.

 

 

 

 

 

 

 

 

 

As of December 31,

 

As of March 31,

 

2017

 

2016

 

2018

 

 

(dollars in thousands)

Consolidated Balance Sheet Data:

 

 

 

 

 

 

Cash

 

 

$

 

224,614

 

 

 

$

 

185,243

 

 

 

$

 

277,501

 

Restricted cash

 

 

 

129,224

 

 

 

 

42,871

 

 

 

 

141,677

 

Loan receivables held for sale, net

 

 

 

73,606

 

 

 

 

41,268

 

 

 

 

67,291

 

Property, equipment and software, net

 

 

 

7,848

 

 

 

 

7,018

 

 

 

 

7,670

 

Total assets

 

 

 

462,889

 

 

 

 

302,205

 

 

 

 

521,326

 

Finance charge reversal liability

 

 

 

94,148

 

 

 

 

68,064

 

 

 

 

100,913

 

Term loan

 

 

 

338,263

 

 

 

 

 

 

 

 

388,555

 

Total liabilities

 

 

 

488,928

 

 

 

 

89,995

 

 

 

 

545,850

 

Total temporary equity

 

 

 

430,348

 

 

 

 

335,720

 

 

 

 

430,348

 

Total permanent equity (deficit)

 

 

 

(456,387

)

 

 

 

 

(123,510

)

 

 

 

 

(454,872

)

 

Other Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

Three months
ended March 31,

 

2017

 

2016

 

2015

 

2018

 

2017

 

 

(dollars in thousands)

Adjusted EBITDA

 

 

$

 

159,432

 

 

 

$

 

130,741

 

 

 

$

 

97,456

 

 

 

$

 

27,475

 

 

 

$

 

23,807

 

For information regarding our use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, see “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial Data.”

75


 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited Pro Forma Consolidated Statements of Operations for the year ended December 31, 2017 and the three months ended March 31, 2018 present our consolidated results of operations after giving pro forma effect to (i) the Reorganization Transactions and this offering, as described under “Organizational Structure,” as if such transactions occurred on January 1, 2017; (ii) the use of the estimated net proceeds to us from this offering, as described under “Use of Proceeds;” (iii) the effects of the Tax Receivable Agreement, as described under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement;” and (iv) a provision for corporate income taxes on the income attributable to GreenSky, Inc. at an effective rate of 22.37% for the three months ended March 31, 2018, and 38.41% for the year ended December 31, 2017, inclusive of all United States federal, state and local income taxes.

The unaudited Pro Forma Consolidated Balance Sheet is based on our historical unaudited Consolidated Balance Sheet as of March 31, 2018 and includes pro forma adjustments to give effect to (i) the Reorganization Transactions and this offering, as described under “Organizational Structure,” as if such transactions had occurred on March 31, 2018; (ii) the use of the estimated net proceeds from this offering, as described under “Use of Proceeds;” and (iii) the effects of the Tax Receivable Agreement, as described under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” The unaudited Pro Forma Consolidated Statements of Operations are based on (i) our audited consolidated financial statements as of and for the year ended December 31, 2017, and (ii) our unaudited consolidated financial statements as of and for the three months ended March 31, 2018.

The unaudited pro forma consolidated financial statements have been prepared on the basis that we will be taxed as a corporation for United States federal and state income tax purposes and, accordingly, will become a taxpaying entity subject to United States federal and state income taxes, and should be read in conjunction with “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

The pro forma data presented reflect events directly attributable to the described transactions and certain assumptions that we believe are reasonable. The pro forma data are not necessarily indicative of financial results that would have been attained had the described transactions occurred on the dates indicated below or that could be achieved in the future because they necessarily exclude various operating expenses, such as incremental general and administrative expense associated with being a public company. The adjustments are based on currently available information and certain estimates and assumptions. Therefore, the actual adjustments may differ from the pro forma adjustments. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma consolidated financial statements.

The unaudited pro forma consolidated financial statements and related notes are presented for illustrative purposes only. If this offering and other transactions contemplated herein had occurred in the past, our operating results might have been materially different from those presented in the unaudited pro forma financial statements. The unaudited pro forma consolidated financial statements should not be relied upon as an indication of operating results that our Company would have achieved if this offering and other transactions contemplated herein had taken place on the specified date. In addition, future results may vary significantly from the results reflected in the unaudited Pro Forma Consolidated Statements of Operations and should not be relied on as an indication of our results after the consummation of this offering and the other transactions contemplated by such unaudited pro forma consolidated financial statements.

76


 

GREENSKY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

GS Holdings
Historical

 

Reorganization
Transactions
Adjustments

 

GS Holdings
Historical
as Adjusted
for the
Reorganization
Transactions

 

Offering
Adjustments

 

GreenSky, Inc.
Pro Forma
as Adjusted
for this
Offering and
Use of
Proceeds

 

 

(dollars in thousands, except per share data)

Assets

 

 

 

 

 

 

 

 

 

 

Cash

 

 

$

 

277,501

   

 

$

 

(96,058

)(1)

 

 

 

$

 

181,443

   

 

$

 

(11,128

)(4)

 

 

 

$

 

170,315

 

Restricted cash

 

 

 

141,677

 

 

 

 

 

 

141,677

   

 

 

 

 

141,677

 

Loan receivables held for sale, net

 

 

 

67,291

 

 

 

 

 

 

67,291

   

 

 

 

 

67,291

 

Accounts receivable, net

 

 

 

17,367

 

 

 

 

 

 

17,367

   

 

 

 

 

17,367

 

Related party receivables

 

 

 

457

 

 

 

 

 

 

457

   

 

 

 

 

457

 

Property, equipment and software, net

 

 

 

7,670

 

 

 

 

 

 

7,670

   

 

 

 

 

7,670

 

Other assets

 

 

 

9,363

 

 

 

 

 

 

9,363

   

 

 

(2,017

)(5)

 

 

 

 

7,346

 

Deferred tax assets

 

 

   

 

 

220,307

(2)

 

 

 

 

220,307

   

 

 

 

 

220,307

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

 

521,326

   

 

$

 

124,249

   

 

$

 

645,575

   

 

$

 

(13,145

)

 

 

 

$

 

632,430

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Temporary and Permanent Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

$

 

11,899

   

 

$

   

 

$

 

11,899

   

 

$

 

(2,017

)(5)

 

 

 

$

 

9,882

 

Accrued compensation and benefits

 

 

 

3,372

 

 

 

 

 

 

3,372

   

 

 

 

 

3,372

 

Other accrued expenses

 

 

 

940

 

 

 

 

 

 

940

   

 

 

 

 

940

 

Finance charge reversal liability

 

 

 

100,913

 

 

 

 

 

 

100,913

   

 

 

 

 

100,913

 

Term loan

 

 

 

388,555

 

 

 

 

 

 

388,555

   

 

 

 

 

388,555

 

Related party liabilities

 

 

 

1,472

 

 

 

 

 

 

1,472

   

 

 

 

 

1,472

 

Other liabilities

 

 

 

38,699

 

 

 

 

 

 

38,699

   

 

 

 

 

38,699

 

Amounts payable pursuant to Tax Receivable Agreement

 

 

   

 

 

190,525

(2)

 

 

 

 

190,525

   

 

 

 

 

190,525

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

545,850

   

 

 

190,525

   

 

 

736,375

   

 

 

(2,017

)

 

 

 

 

734,358

 

 

 

 

 

 

 

 

 

 

 

 

Commitments, Contingencies and Guarantees (Note 11 to Consolidated Financial Statements of GS Holdings)

 

 

 

 

 

 

 

 

 

 

Temporary Equity

 

 

 

 

 

 

 

 

 

 

Redeemable preferred units

 

 

 

430,348

   

 

 

(430,348

)(1)(3)

 

 

 

   

 

 

 

 

Temporary equity attributable to GreenSky, Inc.:

 

 

 

 

 

 

 

 

 

 

Class B common stock, par value $0.001 per share, 200,000,000 shares authorized on a pro forma basis; 144,727,632 shares issued and outstanding on a pro forma basis

 

 

 

 

 

 

 

 

 

144

(6)

 

 

 

 

144

 

Permanent Equity–GS Holdings

 

 

 

 

 

 

 

 

 

 

Paid-in capital

 

 

 

(553,901

)

 

 

 

 

553,901

(1)(3)

 

 

 

   

 

 

 

 

Retained earnings

 

 

 

99,029

   

 

 

(99,029

)(1)(3)

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total permanent equity (deficit) attributable to GS Holdings

 

 

 

(454,872

)

 

 

 

 

454,872

   

 

   

 

 

 

 

Permanent Equity–GreenSky, Inc.

 

 

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, 10,000,000 shares authorized on a pro forma basis; no shares issued or outstanding on a pro forma basis

 

 

 

 

 

 

 

 

 

 

Class A common stock, par value $0.01 per share, 300,000,000 shares authorized on a pro forma basis; 41,196,485 shares issued and outstanding on a pro forma basis

 

 

 

 

 

 

 

 

 

341

(7)

 

 

 

 

341

 

Additional paid-in capital

 

 

 

 

 

86,154

(2)

 

 

 

 

86,154

   

 

 

665,165

(4)(5)(7)

 

 

 

 

751,319

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total permanent equity attributable to GreenSky, Inc.

 

 

 

 

 

86,154

   

 

 

86,154

   

 

 

665,506

   

 

 

751,660

 

Equity (deficit) attributable to noncontrolling interests

 

 

 

 

 

(176,954

)(3)

 

 

 

 

(176,954

)

 

 

 

 

(676,778

)(6)(7)

 

 

 

 

(853,732

)

 

 

 

 

 

 

 

 

 

 

 

 

Total permanent equity (deficit)

 

 

 

(454,872

)

 

 

 

 

364,072

   

 

 

(90,800

)

 

 

 

 

(11,272

)

 

 

 

 

(102,072

)

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, temporary and permanent equity

 

 

$

 

521,326

   

 

$

 

124,249

   

 

$

 

645,575

   

 

$

 

(13,145

)

 

 

 

$

 

632,430

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Pro Forma Consolidated Balance Sheet

77


 

Notes to Pro Forma Consolidated Balance Sheet

 

(1)

 

Reflects the distribution of $96.1 million to GS Holdings existing unit holders and profits interests holders consisting of the following: (i) $75.0 million special distribution using the proceeds from the modified term loan executed as an amendment to the Credit Agreement on March 29, 2018 and cash from operations; (ii) $18.3 million tax-related distribution; and (iii) $2.8 million related to a previously accrued 2017 special distribution.

 

(2)

 

Reflects adjustments to give effect to the Tax Receivable Agreement as a result of the Reorganization Transactions based on the following assumptions:

 

a.

 

We will record a deferred tax asset for the estimated income tax effects of the increase in the tax basis of the purchased interests and for payments under the Tax Receivable Agreement, which will give rise to additional tax benefits and additional potential payments under the Tax Receivable Agreement, based on a statutory tax rate of 23.47% (which includes a provision for United States federal, state and local income taxes);

 

b.

 

The deferred tax asset will be netted with a deferred tax liability reflecting the tax impact of the equity holders of the Former Corporate Investors exchanging their equity in the Former Corporate Investors for GreenSky, Inc. Class A common stock;

 

c.

 

We will record 85% of the estimated realizable tax benefit as an increase to the liability due to TRA Parties under the Tax Receivable Agreement and the remaining 15% of the estimated realizable tax benefit as an increase to total stockholders’ equity, which assumes that the initial net step-up is equal to the cash paid to the Exchanging Members; and

 

d.

 

Assumes that there are no material changes in the relevant tax law and that we earn sufficient taxable income in each year to realize the full tax benefit of the amortization of our assets.

 

(3)

 

Represents the reclassification of permanent and temporary equity in GS Holdings into noncontrolling interest in GreenSky, Inc. upon completion of the Reorganization Transactions.

 

(4)

 

Represents payment of certain costs associated with this offering, including registration and filing fees, financial advisory fees and certain legal, accounting and other related expenses using cash on hand.

 

(5)

 

Represents the deferral of certain costs associated with this offering, including certain legal, accounting and other related expenses, which have been recorded in our Consolidated Balance Sheet. Upon completion of this offering, these deferred costs will be charged against the proceeds from this offering with a corresponding reduction to additional paid-in capital.

 

(6)

 

Reflects the issuance to each of the Continuing LLC Members a number of shares of GreenSky, Inc. Class B common stock equal to the number of Holdco Units held by it (other than the Holdco Units that it will be exchanging in connection with this offering), for consideration in the amount of $0.001 per share of Class B common stock.

 

(7)

 

Represents adjustments to GreenSky, Inc. permanent equity reflecting the following:

 

a.

 

Receipt of offering proceeds of $750.0 million as a result of this offering;

 

b.

 

Payment of $712.5 million to purchase Holdco Units held by Exchanging Members and Former Corporate investors, as described under “Organizational Structure—Offering-Related Transactions,” $35.9 million of which reduced additional paid-in capital and $676.6 million of which reduced noncontrolling interest; and

 

c.

 

Payment of approximately $48.6 million of underwriting discounts and commissions and estimated offering expenses.

78


 

GREENSKY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

GS Holdings
Historical

 

Reorganization
Transactions
Adjustments

 

GS Holdings
Historical
as Adjusted
for the
Reorganization
Transactions

 

Offering
Adjustments

 

GreenSky, Inc.
Pro Forma
as Adjusted
for this
Offering and
Use of
Proceeds

 

 

(dollars in thousands, except per share data)

Revenue

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

 

$

 

70,940

   

 

$

 

 

   

 

$

 

70,940

   

 

$

   

 

$

 

70,940

 

Servicing and other

 

 

 

14,386

 

 

 

 

 

 

14,386

   

 

 

 

 

14,386

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

85,326

 

 

 

 

 

 

85,326

   

 

 

 

 

85,326

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of depreciation and amortization shown separately below)

 

 

 

36,130

 

 

 

 

 

 

36,130

   

 

 

 

 

36,130

 

Compensation and benefits

 

 

 

16,343

 

 

 

 

 

 

16,343

   

 

 

 

 

16,343

 

Sales and marketing

 

 

 

828

 

 

 

 

 

 

828

   

 

 

 

 

828

 

Property, office and technology

 

 

 

2,722

 

 

 

 

 

 

2,722

   

 

 

 

 

2,722

 

Depreciation and amortization

 

 

 

970

 

 

 

 

 

 

970

   

 

 

 

 

970

 

General and administrative

 

 

 

4,173

 

 

 

 

 

 

4,173

   

 

 

 

 

4,173

 

Related party expenses

 

 

 

583

 

 

 

 

 

 

583

   

 

 

 

 

583

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

 

61,749

 

 

 

 

 

 

61,749

   

 

 

 

 

61,749

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

23,577

 

 

 

 

 

 

23,577

   

 

 

 

 

23,577

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

1,320

 

 

 

 

 

 

1,320

   

 

 

 

 

1,320

 

Interest expense

 

 

 

(5,591

)

 

 

 

 

 

 

(5,591

)

 

 

 

 

 

 

(5,591

)

 

Other gains/(losses)

 

 

 

(702

)

 

 

 

 

 

 

(702

)

 

 

 

 

 

 

(702

)

 

 

 

 

 

 

 

 

 

 

 

 

Total other income/(expense), net

 

 

 

(4,973

)

 

 

 

 

 

 

(4,973

)

 

 

 

 

 

 

(4,973

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

 

 

 

 

 

18,604

   

 

 

 

 

18,604

 

Income tax expense

 

 

 

 

 

805

(1)

 

 

 

 

805

   

 

 

118

(1)

 

 

 

 

923

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

18,604

   

 

$

 

(805

)

 

 

 

$

 

17,799

   

 

$

 

(118

)

 

 

 

$

 

17,681

 

Net income attributable to noncontrolling interests(4)

 

 

 

 

 

15,007

(2)

 

 

 

 

15,007

   

 

 

(524

)(3)

 

 

 

 

14,483

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to GreenSky, Inc.

 

 

 

 

$

 

2,792

   

 

$

 

2,792

   

 

$

 

406

   

 

$

 

3,198

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

Pro forma weighted average shares of Class A common stock outstanding(4):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

41,196,485

 

Diluted(5)

 

 

 

 

 

 

 

 

 

 

 

189,294,306

 

Pro forma net income available to Class A common stock per share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

$

 

0.08

 

Diluted(5)

 

 

 

 

 

 

 

 

 

 

$

 

0.08

 

See Notes to Pro Forma Consolidated Statement of Operations

79


 

GREENSKY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

GS Holdings
Historical

 

Reorganization
Transactions
Adjustments

 

GS Holdings
Historical
as Adjusted
for the
Reorganization
Transactions

 

Offering
Adjustments

 

GreenSky, Inc.
Pro Forma
as Adjusted
for this
Offering and
Use of
Proceeds

 

 

(dollars in thousands, except per share data)

Revenue

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

 

$

 

278,958

   

 

$

 

 

   

 

$

 

278,958

   

 

$

 

 

   

 

$

 

278,958

 

Servicing and other

 

 

 

46,929

 

 

 

 

 

 

46,929

   

 

 

 

 

46,929

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

325,887

 

 

 

 

 

 

325,887

   

 

 

 

 

325,887

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of depreciation and amortization shown separately below)

 

 

 

89,708

 

 

 

 

 

 

89,708

   

 

 

 

 

89,708

 

Compensation and benefits

 

 

 

54,650

 

 

 

 

 

 

54,650

   

 

 

 

 

54,650

 

Sales and marketing

 

 

 

2,198

 

 

 

 

 

 

2,198

   

 

 

 

 

2,198

 

Property, office and technology

 

 

 

10,062

 

 

 

 

 

 

10,062

   

 

 

 

 

10,062

 

Depreciation and amortization

 

 

 

3,983

 

 

 

 

 

 

3,983

   

 

 

 

 

3,983

 

General and administrative

 

 

 

14,876

 

 

 

 

 

 

14,876

   

 

 

 

 

14,876

 

Related party expenses

 

 

 

4,811

 

 

 

 

 

 

4,811

   

 

 

 

 

4,811

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

 

180,288

 

 

 

 

 

 

180,288

   

 

 

 

 

180,288

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

145,599

 

 

 

 

 

 

145,599

   

 

 

 

 

145,599

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

5,180

 

 

 

 

 

 

5,180

   

 

 

 

 

5,180

 

Interest expense

 

 

 

(7,536

)

 

 

 

 

 

 

(7,536

)

 

 

 

 

 

 

(7,536

)

 

Other gains/(losses)

 

 

 

(4,575

)

 

 

 

 

 

 

(4,575

)

 

 

 

 

 

 

(4,575

)

 

 

 

 

 

 

 

 

 

 

 

 

Total other income/(expense), net

 

 

 

(6,931

)

 

 

 

 

 

 

(6,931

)

 

 

 

 

 

 

(6,931

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

 

 

 

 

 

138,668

   

 

 

 

 

138,668

 

Income tax expense

 

 

 

 

 

10,298

(1)

 

 

 

 

10,298

   

 

 

1,504

(1)

 

 

 

 

11,802

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

138,668

   

 

$

 

(10,298

)

 

 

 

$

 

128,370

   

 

$

 

(1,504

)

 

 

 

$

 

126,866

 

Net income attributable to noncontrolling interests(4)

 

 

 

 

 

111,857

(2)

 

 

 

 

111,857

   

 

 

(3,915

)(3)

 

 

 

 

107,942

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to GreenSky, Inc.

 

 

 

 

$

 

16,513

   

 

$

 

16,513

   

 

$

 

2,411

   

 

$

 

18,924

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

Pro forma weighted average shares of Class A common stock outstanding(4):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

41,196,485

 

Diluted(5)

 

 

 

 

 

 

 

 

 

 

189,294,306

 

Pro forma net income available to Class A common stock per share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

$

 

0.46

 

Diluted(5)

 

 

 

 

 

 

 

 

 

 

$

 

0.45

 

See Notes to Pro Forma Consolidated Statement of Operations

80


 

Notes to Pro Forma Consolidated Statement of Operations

 

(1)

 

Following the Reorganization Transactions and this offering, GreenSky, Inc. will be subject to United States federal income taxes, in addition to state and local taxes, with respect to its allocable share of any net taxable income of GS Holdings, which will result in higher income taxes than during our history as a limited liability company. As a result, the Pro Forma Consolidated Statements of Operations reflect adjustments to our provision for corporate income taxes to reflect an effective tax rate of 22.37% for the three months ended March 31, 2018 and 38.41% for the year ended December 31, 2017, which include a provision for United States federal income taxes and uses our estimates of the weighted average statutory rates apportioned to each state and local jurisdiction.

 

(2)

 

Reflects the issuance of GreenSky, Inc. Class A common stock upon exchange of the equity held by the Former Corporate Investors prior to our repurchase of Holdco Units and Class A common stock. GreenSky, Inc. will be the managing member of GS Holdings. GreenSky, Inc. will initially own 19.3% of the economic interest in GS Holdings, but will have 100% of the voting power and control the management of GS Holdings. The Continuing LLC Members will initially own the remaining 80.7% of the economic interest in GS Holdings, which will be accounted for as a noncontrolling interest in the future consolidated financial results of GreenSky, Inc. Immediately following the Reorganization Transactions, GS Holdings income before income taxes was attributable to the noncontrolling interest based on its ownership interest.

 

(3)

 

GreenSky, Inc. will be the managing member of GS Holdings. Following this offering, GreenSky, Inc. will initially own 22.2% of the economic interest in GS Holdings, but will have 100% of the voting power and control the management of GS Holdings. The Continuing LLC Members will own the remaining 77.8% of the economic interest in GS Holdings, which will be accounted for as a noncontrolling interest in the future consolidated financial results of GreenSky, Inc. These amounts have been determined based on the assumption that the underwriters’ option to purchase additional shares is not exercised. If the underwriters’ option to purchase additional shares is exercised, the ownership percentage held by the noncontrolling interest would decrease to 75.2%.

 

(4)

 

The shares of Class B common stock of GreenSky, Inc. do not share in GreenSky, Inc. earnings and are, therefore, not allocated any net income attributable to the controlling and noncontrolling interests. As a result, the shares of Class B common stock are not considered participating securities and are, therefore, not included in the weighted average shares outstanding for purposes of computing net income available per share.

 

(5)

 

For purposes of applying the as-if converted method for calculating diluted earnings per share, we assumed that all Holdco Units are exchanged (with automatic cancellation of all outstanding shares of Class B common stock) for Class A common stock. Such exchange is affected by the allocation of income or loss associated with the exchange of Holdco Units (and cancellation of Class B common stock) for Class A common stock and, accordingly, the effect of such exchange has been included for calculating diluted pro forma net income available to Class A common stock per share. Giving effect to (i) the exchange of all Holdco Units (and cancellation of Class B common stock) for shares of Class A common stock and (ii) the vesting of all unvested Holdco Unit stock based compensation awards, diluted pro forma net income per share available to Class A common stock would be computed as follows:

 

 

 

 

 

 

 

Year ended
December 31, 2017

 

Three months ended
March 31, 2018

Pro forma income before income taxes

 

 

$

 

138,668

   

 

$

 

18,604

 

Adjusted pro forma income taxes(a)

 

 

 

53,262

   

 

 

4,162

 

 

 

 

 

 

Adjusted pro forma net income to GreenSky, Inc. stockholders(b)

 

 

 

85,406

   

 

 

14,442

 

Weighted average shares of Class A common stock outstanding (assuming the exchange of all Holdco Units for shares of Class A common stock)(c)(d)

 

 

 

189,294

   

 

 

189,294

 

Pro forma diluted net income available to Class A common stock per share

 

 

$

 

0.45

   

 

$

 

0.08

 

81


 

 

(a)

 

Represents the implied provision for income taxes assuming the exchange of all Holdco Units in GS Holdings for shares of Class A common stock of GreenSky, Inc. using the same method applied in calculating the pro forma tax provision.

 

(b)

 

Assumes elimination of noncontrolling interest due to the assumed exchange of all Holdco Units (and cancellation of Class B common stock) for shares of Class A common stock of GreenSky, Inc. as of the beginning of the period.

 

(c)

 

The equity award units are converted to Holdco Units based on the treasury stock method and an as-if converted method is used to give effect to the exchange provisions of the Holdings LLC Agreement for the diluted weighted average share calculation.

 

(d)

 

We expect to grant 587,500 stock options to our directors and certain employees in connection with this offering, at an exercise price equal to the initial public offering price. Under the treasury stock method, assuming the stock options were granted at the beginning of the period at an exercise price equal to $22.00 per share (the assumed initial public offering price), the effect of these stock options is anti-dilutive and has, therefore, been excluded from the computations of pro forma diluted net income per share.

82


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Following the formation of GS Holdings, effective August 2017 the equity holders of GSLLC exchanged their equity interests in GSLLC for equity interests in GS Holdings in proportion to their existing ownership interests. The exchange was accounted for as a common control transaction resulting in a change in the reporting entity. As the entities were always under common control, we retrospectively adjusted the historical consolidated financial statements of GS Holdings as if the common control transaction had occurred as of the earliest period presented. The following discussion should be read in conjunction with the consolidated financial statements and related notes of GS Holdings included in this prospectus.

Share and per share amounts have been adjusted to reflect a 10-for-1 split as part of the Reorganization Transactions.

Overview

We are a leading technology company that powers commerce at the point of sale. Our platform facilitates merchant sales, while reducing the friction, and improving the economics, associated with a consumer making a purchase and a bank extending financing for that purchase. We had approximately 12,000 active merchants on our platform as of March 31, 2018 and, from our inception through March 31, 2018, merchants used our platform to enable approximately 1.7 million consumers to finance over $12 billion of transactions with our Bank Partners.

We have a strong recurring revenue model built upon repeat and growing usage by merchants. We derive most of our revenue and profitability from upfront transaction fees that merchants pay us every time they facilitate a transaction using our platform. Thus, our profitability is strongly correlated with merchant transaction volume. The transaction fee rate depends on the terms of financing selected by a consumer. In addition, we collect servicing fees on the loan portfolios we service for our Bank Partners.

We have achieved significant growth in active merchants, transaction volume, total revenue, net income and Adjusted EBITDA. Our low-cost go-to-market strategy, coupled with our recurring revenue model, has helped us generate strong margins. Transaction volume (as defined below) was $3.8 billion in 2017, representing an increase of 31% from $2.9 billion in 2016. Further, transaction volume was $1.0 billion in the three months ended March 31, 2018, representing an increase of 47% from $0.7 billion in the three months ended March 31, 2017. Active merchants (as defined below) totaled 12,231 as of March 31, 2018, representing an increase of 52% from 8,048 as of March 31, 2017. Our total revenue grew 23% from $264 million in 2016 to $326 million in 2017, net income grew 12% from $124 million in 2016 to $139 million in 2017, and Adjusted EBITDA grew 21% from $131 million in 2016 to $159 million in 2017. For the period ended March 31, 2018, total revenue was $85 million, net income was $19 million and Adjusted EBITDA was $27 million. For information regarding our use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, see “Prospectus Summary–Summary Historical and Pro Forma Consolidated Financial Data.”

83


 

The charts below demonstrate these upward trends:

Business Metrics

We review a number of operating and financial metrics, including the following, to evaluate our business, measure our performance, identify trends, formulate plans and make strategic decisions.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended
December 31,

 

Three months ended March 31,

 

2017

 

2016

 

2015

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

Active Merchants

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

10,891

 

 

 

 

7,361

 

 

 

 

5,076

 

 

 

 

12,231

 

 

 

 

8,048

 

Percentage Increase

 

 

 

48%

 

 

 

 

45%

 

 

 

 

 

 

52%

 

 

 

Transaction Volume

 

 

 

 

 

 

 

 

 

 

Dollars (millions)

 

 

$

 

3,767

 

 

 

$

 

2,882

 

 

 

$

 

2,076

 

 

 

$

 

1,033

 

 

 

$

 

705

 

Percentage Increase

 

 

 

31%

 

 

 

 

39%

 

 

 

 

 

 

47%

 

 

 

Loan Servicing Portfolio

 

 

 

 

 

 

 

 

 

 

Dollars (millions)

 

 

$

 

5,390

 

 

 

$

 

3,832

 

 

 

$

 

2,561

 

 

 

$

 

5,693

 

 

 

$

 

4,018

 

Percentage Increase

 

 

 

41%

 

 

 

 

50%

 

 

 

 

 

 

42%

 

 

 

Cumulative Consumer Accounts

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

1,565,166

 

 

 

 

1,077,400

 

 

 

 

692,428

 

 

 

 

1,709,364

 

 

 

 

1,181,230

 

Active Merchants. We define active merchants as home improvement merchants and healthcare providers that have submitted at least one consumer application during the 12 months ended at the date of measurement. Since our transaction volume is a function of the size, engagement and growth of our merchant network, active merchants, in aggregate, are an indicator of future revenue and profitability, although they are not directly correlated. As of March 31, 2018, we had 12,231 active merchants on our platform, representing an increase of 52% over 8,048 as of March 31, 2017.

Transaction Volume. We define transaction volume as the dollar value of loans facilitated on our platform during a given period. Transaction volume is an indicator of revenue and overall platform profitability and has grown substantially in the past several years. For the three months ended March 31, 2018, transaction volume was $1.0 billion, which represented an increase of 47% over $0.7 billion for the same period in 2017.

84


 

Loan Servicing Portfolio. We define our loan servicing portfolio as the aggregate outstanding consumer loan balance (principal plus accrued interest and fees) facilitated and serviced by our platform at the date of measurement. Our loan servicing portfolio is an indicator of our servicing activities. As of December 31, 2017, we had a loan servicing portfolio of $5.4 billion, representing an increase of 41% over $3.8 billion as of December 31, 2016. Our average loan servicing portfolio was $4.5 billion in 2017 and $3.2 billion in 2016. As of March 31, 2018, we had a loan servicing portfolio of $5.7 billion, representing an increase of 42% over $4.0 billion as of March 31, 2017. Our average loan servicing portfolio was $5.5 billion for the three months ended March 31, 2018 and $3.9 billion for the same period in 2017.

Cumulative Consumer Accounts. We define cumulative consumer accounts as the aggregate number of consumer accounts approved on our platform since our inception, including both existing and prior accounts. Although not directly correlated to revenue, cumulative consumer accounts is a measure of our brand awareness among consumers, as well as the value of the data we have been collecting from such consumers since our inception. We may use this data to support future growth by cross-marketing products and delivering potential additional customers to merchants who may not have been able to source those customers themselves. As of March 31, 2018, we had 1.7 million cumulative consumer accounts compared to 1.2 million as of March 31, 2017.

Factors Affecting our Performance

Growth in Active Merchants and Transaction Volume. Growth trends in active merchants and transaction volume are critical variables directly affecting our revenue and financial results. Both factors influence the number of loans funded on our platform and, therefore, the fees that we earn and the per unit cost of the services that we provide. Growth in active merchants and transaction volume will depend on our ability to retain our existing platform participants, add new participants and expand to new industry verticals. To support our efforts to increase our network of merchants, we expanded our sales and marketing groups, which focus on merchant acquisition, from 37 full-time-equivalents as of December 31, 2015 to 120 as of March 31, 2018.

Increasing Bank Partner Commitments. Bank Partner funding commitments are integral to the success of our program. Our ability to increase transaction volume and expand our loan servicing portfolio is dependent on securing sufficient commitments from our Bank Partners and adding new Bank Partners to our program. As of March 31, 2018, we had approximately $8.1 billion of total commitments from our Bank Partners, of which $2.6 billion were unused, and which should be sufficient to fund more than one year of originations based on an average rolling 12 months of origination volume. Our efforts to grow existing commitments from our Bank Partners and to attract new Bank Partners to our program is an integral part of our strategy.

Performance of the Loans our Bank Partners Originate. While our Bank Partners bear substantially all of the credit risk on their wholly-owned loan portfolios, Bank Partner credit losses and prepayments impact our profitability as follows:

 

 

Our contracts with our Bank Partners entitle us to incentive payments when the finance charges billed to borrowers exceed the sum of an agreed-upon portfolio yield, a fixed servicing fee and realized credit losses. This incentive payment varies from month to month, primarily due to the amount of realized credit losses.

 

 

With respect to deferred interest loans, we bill the consumer for interest throughout the deferred interest promotional period, but the consumer is not obligated to pay any interest if the loan is repaid in full before the end of the promotional period. We are obligated to remit this accumulated billed interest to our Bank Partners to the extent the loan principal balances are paid off within the promotional periods (each event, a “finance charge reversal” or “FCR”) even though the interest billed to the consumer is reversed. Our maximum FCR liability is limited to the gross amount of finance charges billed during promotional periods, offset by the collection of incentive payments from our Bank Partners during such periods and proceeds received from transfers of Charged-Off Receivables. Our profitability is impacted by the difference between the cash collected from the incentive payments and Charged-Off Receivables, and the cash to be remitted on a future date to settle our FCR liability. Our

85


 

 

 

 

FCR liability quantifies our expected future obligation to remit billed interest with respect to deferred interest loans.

 

 

If credit losses exceed an agreed-upon threshold, we make limited payments to our Bank Partners. Our maximum financial exposure is contractually limited to the escrow that we establish with each Bank Partner, which represented a weighted average target rate of 1.3% of the total outstanding principal balance as of March 31, 2018. Cash set aside to meet this requirement is classified as restricted cash in our Consolidated Balance Sheets.

For further discussion of our sensitivity to the credit risk exposure of our Bank Partners, see “Quantitative and Qualitative Disclosure About Market Risk—Credit Risk.”

General Economic Conditions and Industry Trends. Our results of operations are impacted by the relative strength of the overall economy and its effect on unemployment, consumer spending behavior and consumer demand for our merchants’ products and services. As general economic conditions improve or deteriorate, the amount of disposable income consumers have tends to fluctuate, which in turn impacts consumer spending levels and the willingness of consumers to take out loans to finance purchases. Specific economic factors such as interest rate levels, changes in monetary and related policies, market volatility, consumer confidence and, particularly, unemployment rates also influence consumer spending and borrowing patterns. In addition, trends within the industry verticals in which we operate affect consumer spending on the products and services our merchants offer in those industry verticals. For example, the strength of the national and regional real estate markets and trends in new and existing home sales impact demand for home improvement goods and services and, as a result, the volume of loans originated to finance these purchases. In addition, trends in healthcare costs, advances in medical technology, and increasing life expectancy are likely to impact demand for elective medical procedures and services.

Seasonality. Our operating results can vary from quarter to quarter as a result of seasonality in consumer spending and payment patterns. Our revenue growth generally is higher during the second and third quarters of the year as the weather improves, the residential real estate market becomes more active and consumers begin home improvement projects. During these periods, we tend to experience increased loan applications and, in turn, transaction volume. Conversely, our revenue growth generally slows during the first and fourth quarters of the year, as consumer spending on home improvement projects tends to slow leading up to the holiday season and through the winter months. As a result, growth in loan applications and transaction volume also tends to slow during these periods. Unlike the home improvement vertical, the elective healthcare vertical is less susceptible to quarter to quarter seasonality, as the volume of elective healthcare procedures tends to remain relatively constant throughout the year. Our seasonality trends may vary in the future as we introduce our program to new industry verticals and we become less concentrated in the home improvement industry.

The origination related and finance charge reversal components of our cost of revenue also are subject to these same seasonal factors, while the servicing related component of cost of revenue, in particular customer service staffing, printing and posting costs, is not as closely correlated to seasonal volume patterns. As transaction volume increases, the transaction volume related personnel costs, as well as costs related to credit and identity verification, among other activities, increase as well. Further, costs related to finance charge reversals are positively correlated to transaction volume in the same period of the prior year. As prepayments on deferred interest loans, which trigger finance charge reversals, typically are highest towards the end of the promotional period, and promotional periods are most commonly 12, 18 and 24 months, finance charge reversal settlements follow a similar seasonal pattern as transaction volumes over the course of a calendar year.

Components of Results of Operations

Revenue

We generate a substantial majority of our total revenue from transaction fees paid by merchants each time a consumer utilizes our platform to finance a purchase and, to a lesser extent, from fixed servicing fees on Bank Partner loans.

86


 

Transaction fees. We earn a specified transaction fee in connection with each purchase made by a consumer based on a loan’s terms and promotional features. Transaction fees are billed to, and collected directly from, the merchant and are considered to be earned at the time of the merchant’s transaction with the consumer. We also may earn a specified interchange fee in connection with purchases where payments are processed through a credit card payment network. Transaction fees constitute the majority of our total revenues, accounting for approximately 83% of our total revenues for the three months ended March 31, 2018.

Servicing and other. Servicing fees are derived from providing professional services to manage loan portfolios on behalf of our Bank Partners. We are entitled to collect servicing fees as part of the servicing agreements with our Bank Partners, which are paid monthly based upon an annual fixed percentage of the outstanding Bank Partner loan portfolio balance.

Cost of Revenue (exclusive of depreciation and amortization expense)

Origination and servicing costs. Origination and servicing costs consist primarily of compensation and benefits related to activities such as customer service and merchant underwriting. In addition, we incur processing fees on each transaction processed by our third-party transaction processor, costs for printing and postage related to consumer statement production and other costs related to consumer application review. We expect our origination and servicing related costs to decrease on a per unit basis as we realize greater economies of scale and the benefits of investments in these functions over the past few years.

Fair value change in FCR liability. Deferred interest loan products, which historically have represented a substantial portion of our transaction volume, have a feature whereby the consumer borrower is provided a promotional period to repay the loan principal balance in full without incurring finance charges. We bill interest accrued on the loan each month to the consumer throughout the promotional period and, if the loan is repaid in full before the end of the promotional period, the interest billed to the consumer is reversed. Under the terms of our contracts with our Bank Partners, we are obligated to remit this reversed billed interest to the Bank Partners.

The monthly billing of interest on deferred interest loan products triggers a potential future FCR liability for us, which qualifies as an embedded derivative. Fair value changes reflect the increase or decrease in our expected obligation to return billed interest to our Bank Partners in the future. Fair value changes in the FCR liability are partially offset by the receipt of monthly incentive payments from Bank Partners during the promotional period, which vary from month to month.

Our total FCR liability is recorded in our Consolidated Balance Sheets and is calculated at the end of each period as the following:

 

 

FCR liability beginning balance, plus

 

 

Receipts, which are comprised of, first, incentive payments from Bank Partners and, second, transfers of rights to previously charged-off loan receivables (“Charged-Off Receivables”) in exchange for cash. Incentive payments from Bank Partners are the surplus of finance charges billed to borrowers over an agreed-upon portfolio yield, a fixed servicing fee and realized net credit losses. Transfers of Charged-Off Receivables are cash payments we receive from third party investors for recovery interests in previously charged-off Bank Partner loans; minus

 

 

Settlements, which represent the remittance of previously billed, but uncollected, finance charges for loans that were paid off within the promotional period, plus

 

 

Fair value change in FCR liability, which represents an estimate of future settlements, equals

 

 

FCR liability ending balance

See Notes 1 and 3 to the consolidated financial statements of GS Holdings included in this prospectus for additional information on our FCR liability, including an illustration of the sensitivity of the fair value of our FCR liability to changes in the finance charge reversal rate and “Quantitative and Qualitative Disclosures about Market Risk—Credit risk” for additional information on the sensitivity of the fair value of our FCR liability to portfolio net credit losses.

87


 

Operating Expenses

Compensation and benefits. Compensation and benefits expenses primarily consist of salaries, benefits and share-based compensation for executive, information technology, sales and marketing, finance, legal, human resources, product management and other overhead-related activities.

Sales and marketing. Sales and marketing expenses, which exclude compensation and benefits, primarily relate to promotional activities and travel related expenses. The majority of our sales and marketing spend is “business-to-business” related, as we primarily attract new merchants to our program through trade shows, on-site visits with prospective merchants and other means.

Property, office and technology. Property, office and technology expenses primarily relate to technology, telecommunications and rent expense. These costs also include maintenance and security expenses associated with our facilities, as well as expenses related to phone and internet usage.

Depreciation and amortization. Depreciation and amortization expense is related to capitalizable computer hardware, furniture and leasehold improvements, as well as software, which is primarily internally developed. Computer hardware and software are expensed over three years, furniture is expensed over five years, and leasehold improvements are expensed over the shorter of the expected life of the asset or the remaining lease term.

General and administrative. General and administrative expenses primarily consist of legal, accounting, consulting and investment banking fees, recruiting and travel costs, as well as Bank Partner escrow expenses which represent our maximum exposure to our Bank Partners’ portfolio credit losses.

Related party expenses. Related party expenses primarily consist of rent expense, as we lease office space from a related party. In addition, we make equity-based payments to certain related parties.

88


 

Results of Operations

The following table summarizes our historical Consolidated Statement of Operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended
December 31,

 

Three months ended March 31,

 

2017

 

2016

 

2015

 

2018

 

2017

 

 

(dollars in thousands, except per unit data)

Revenue

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

 

$

 

278,958

 

 

 

$

 

228,446

 

 

 

$

 

152,678

 

 

 

$

 

70,940

 

 

 

$

 

54,921

 

Servicing and other

 

 

 

46,929

 

 

 

 

35,419

 

 

 

 

20,779

 

 

 

 

14,386

 

 

 

 

10,416

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

325,887

 

 

 

 

263,865

 

 

 

 

173,457

 

 

 

 

85,326

 

 

 

 

65,337

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of depreciation and amortization shown separately below)

 

 

 

89,708

 

 

 

 

79,145

 

 

 

 

36,506

 

 

 

 

36,130

 

 

 

 

23,299

 

Compensation and benefits

 

 

 

54,650

 

 

 

 

39,836

 

 

 

 

27,738

 

 

 

 

16,343

 

 

 

 

12,430

 

Sales and marketing

 

 

 

2,198

 

 

 

 

1,085

 

 

 

 

861

 

 

 

 

828

 

 

 

 

233

 

Property, office and technology

 

 

 

10,062

 

 

 

 

8,000

 

 

 

 

4,283

 

 

 

 

2,722

 

 

 

 

2,526

 

Depreciation and amortization

 

 

 

3,983

 

 

 

 

3,708

 

 

 

 

2,356

 

 

 

 

970

 

 

 

 

966

 

General and administrative

 

 

 

14,876

 

 

 

 

10,602

 

 

 

 

7,071

 

 

 

 

4,173

 

 

 

 

3,780

 

Related party expenses

 

 

 

4,811

 

 

 

 

1,678

 

 

 

 

1,536

 

 

 

 

583

 

 

 

 

511

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

 

180,288

 

 

 

 

144,054

 

 

 

 

80,351

 

 

 

 

61,749

 

 

 

 

43,745

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

145,599

 

 

 

 

119,811

 

 

 

 

93,106

 

 

 

 

23,577

 

 

 

 

21,592

 

Other income/(expense), net

 

 

 

(6,931

)

 

 

 

 

4,653

 

 

 

 

713

 

 

 

 

(4,973

)

 

 

 

 

419

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

 

138,668

 

 

 

$

 

124,464

 

 

 

$

 

93,819

 

 

 

$

 

18,604

 

 

 

$

 

22,011

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to participating interests

 

 

 

35,449

 

 

 

 

25,233

 

 

 

 

17,594

 

 

 

 

5,571

 

 

 

 

4,979

 

 

 

 

 

 

 

 

 

</