10-Q 1 gsky10q2018q2.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________

FORM 10-Q
ý
Quarterly REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38506
GreenSky, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
82-2135346
(I.R.S. Employer Identification No.)
5565 Glenridge Connector, Suite 700, Atlanta Georgia
Registrant’s Telephone Number, Including Area Code: (678) 264-6105
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ý*
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer ý
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the Registrant’s Class A common stock as of August 10, 2018 was 57,650,251 shares.
* The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 since it became subject to such reporting requirements on May 23, 2018.




GreenSky, Inc.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 









CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements 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 Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, 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 Part II, Item 1A “Risk Factors.” 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.



PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

GreenSky, Inc.
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands, except share data)
 
 
June 30, 2018
 
December 31, 2017
 
 
 

 
 
 
Assets
 
 
 
 
Cash
$
236,629

 
$
224,614

 
Restricted cash
142,542

 
129,224

 
Loan receivables held for sale, net
43,489

 
73,606

 
Accounts receivable, net
20,424

 
18,358

 
Related party receivables
335

 
218

 
Property, equipment and software, net
8,518

 
7,848

 
Deferred tax assets, net
301,358

 

 
Other assets
5,401

 
9,021

 
Total assets
$
758,696

 
$
462,889

 
 
 
 
 
 
Liabilities, Temporary and Permanent Equity (Deficit)
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
$
6,342

 
$
6,845

 
Accrued compensation and benefits
6,451

 
7,677

 
Other accrued expenses
1,077

 
1,606

 
Finance charge reversal liability
107,047

 
94,148

 
Term loan
387,979

 
338,263

 
Tax receivable agreement liability
255,823

 

 
Related party liabilities
825

 
1,548

 
Other liabilities
39,612

 
38,841

 
Total liabilities
805,156

 
488,928

 
 
 
 
 
 
Commitments, Contingencies and Guarantees (Note 12)

 

 
Temporary Equity (Note 16)
 
 
 
 
Redeemable preferred units

 
430,348

 
Permanent Equity (Deficit)
 
 
 
 
Class A common stock, par value of $.01 and 57,650,251 shares issued and outstanding at June 30, 2018 and 0 shares issued and outstanding at December 31, 2017
576

 

 
Class B common stock, par value of $.001 and 128,983,353 shares issued and outstanding at June 30, 2018 and 0 shares issued and outstanding at December 31, 2017
129

 

 
Additional paid-in capital
15,373

 
(554,906
)
 
Retained earnings
5,482

 
98,519

 
Noncontrolling interest
(68,020
)
 

 
Total permanent equity (deficit)
(46,460
)
 
(456,387
)
 
Total liabilities, temporary and permanent equity (deficit)
$
758,696

 
$
462,889


The accompanying notes are an integral part of these unaudited consolidated financial statements.

4



GreenSky, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Transaction fees
$
90,197

 
$
71,452

 
$
161,137

 
$
126,373

Servicing and other
15,507

 
10,968

 
29,893

 
21,384

Total revenue
105,704

 
82,420

 
191,030

 
147,757

Costs and expenses
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
33,765

 
23,193

 
69,895

 
46,492

Compensation and benefits
15,585

 
13,167

 
31,928

 
25,597

Sales and marketing
1,038

 
339

 
1,866

 
572

Property, office and technology
3,137

 
2,754

 
5,859

 
5,280

Depreciation and amortization
1,067

 
909

 
2,037

 
1,875

General and administrative
4,074

 
4,226

 
8,247

 
8,006

Related party expenses
230

 
493

 
813

 
1,004

Total costs and expenses
58,896

 
45,081

 
120,645

 
88,826

Operating profit
46,808


37,339


70,385


58,931

Other income/(expense), net
 
 
 
 
 
 
 
Interest income
1,482

 
1,594

 
2,802

 
2,531

Interest expense
(5,787
)
 
(110
)
 
(11,378
)
 
(174
)
Other gains/(losses)
(93
)
 
(230
)
 
(795
)
 
(684
)
Total other income/(expense), net
(4,398
)
 
1,254

 
(9,371
)
 
1,673

Income before income tax expense
42,410


38,593


61,014


60,604

Income tax expense
1,594

 

 
1,594

 

Net income
$
40,816

 
$
38,593

 
$
59,420

 
$
60,604

Less: Net income attributable to noncontrolling interests
35,266

 
N/A

 
53,870

 
N/A

Net income attributable to GreenSky, Inc.
$
5,550


N/A


$
5,550


N/A

 
 
 
 
 
 
 
 
Earnings per share of Class A common stock(1):
 
 
 
 
 
 
 
Basic
$
0.10

 
N/A

 
$
0.10

 
N/A

Diluted
$
0.09

 
N/A

 
$
0.09

 
N/A


(1) 
Basic and diluted earnings per share of Class A common stock is applicable only for the period from May 24, 2018 through June 30, 2018, which is the period following the initial public offering ("IPO") and related Reorganization Transactions (as defined in Note 1 to the unaudited consolidated financial statements). See Note 2, Earnings per Share for the number of shares used in the computation of earnings per share of Class A common stock and the basis for the computation of earnings per share.



The accompanying notes are an integral part of these unaudited consolidated financial statements.

5



GreenSky, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
(Dollars in thousands, except share data)
 
 
GreenSky Holdings, LLC (Prior to Reorganization Transactions)
GreenSky, Inc. Stockholders Equity
 
 
Additional Paid-in capital
 
Retained Earnings
 
Total
Permanent
Equity
(Deficit)
 
Temporary
Equity
Class A Shares
Class B Shares
Class A Amount
Class B Amount
Additional Paid-in Capital
Retained Earnings
Noncontrolling Interest
Total
 
 
 
 
 
Balance at December 31, 2017
 
$
(554,906
)
 
$
98,519

 
$
(456,387
)
 
$
430,348



$

$

$

$

$

$
(26,039
)
Net income prior to Reorganization Transactions
 

 
38,213

 
38,213

 








38,213

Issuances prior to Reorganization Transactions
 
339

 

 
339

 








339

Redemptions prior to Reorganization Transactions
 
(496
)
 

 
(496
)
 








(496
)
Share-based compensation prior to Reorganization Transactions
 
2,132

 

 
2,132

 








2,132

Distributions prior to Reorganization Transactions
 
(37,980
)
 
(57,003
)
 
(94,983
)
 
(16,358
)







(111,341
)
Equity-based payments to non-employees prior to Reorganization Transactions
 
6

 

 
6

 








6

Effect of Reorganization Transactions
 
590,905

 
(79,729
)
 
511,176

 
(413,990
)
15,816,268


158


(97,344
)



Issuance of Class A common stock in IPO, net of costs
 

 

 

 

43,700,000


437


950,553



950,990

Class A common stock option exercises in connection with IPO
 

 

 

 

125,398


1


(1
)



Purchases of GreenSky Holdings, LLC units in connection with IPO
 

 

 

 





(901,833
)


(901,833
)
Class B common stock issuances in connection with IPO
 

 

 

 


128,983,353


129




129

Class A common stock repurchases in connection with IPO
 

 

 

 

(2,426,198
)

(24
)

(52,988
)


(53,012
)
Issuances of Class A common stock effective on date of IPO
 

 

 

 

434,783


4


(4
)



Initial effect of the Reorganization Transactions and IPO on noncontrolling interests
 

 

 

 





69,299


(69,299
)

Net income subsequent to Reorganization Transactions
 

 

 

 






5,550

15,657

21,207

Share-based compensation subsequent to Reorganization Transactions
 

 

 

 





719



719

Equity based payments to non-employees subsequent to Reorganization Transactions
 

 

 

 





2



2

Impact on noncontrolling interest of change in ownership during period
 

 

 

 





(159
)

159


Distributions subsequent to Reorganization Transactions
 

 

 

 






(68
)
(14,537
)
(14,605
)
Deferred tax adjustments related to Reorganization Transactions
 

 

 

 





47,129



47,129

Balance at June 30, 2018
 
$

 
$

 
$

 
$

57,650,251

128,983,353

$
576

$
129

$
15,373

$
5,482

$
(68,020
)
$
(46,460
)
Balance at December 31, 2016
 
$
(283,529
)
 
$
160,019

 
$
(123,510
)
 
$
335,720



$

$

$

$

$

$
212,210

Net income
 

 
60,604

 
60,604

 








60,604

Distributions
 

 
(55,283
)
 
(55,283
)
 








(55,283
)
Unit option exercises
 
15

 

 
15

 








15

Share-based compensation
 
1,574

 

 
1,574

 








1,574

Equity-based payments to non-employees
 
198

 

 
198

 








198

Balance at June 30, 2017
 
$
(281,742
)
 
$
165,340

 
$
(116,402
)
 
$
335,720



$

$

$

$

$

$
219,318


The accompanying notes are an integral part of these unaudited consolidated financial statements.

6



GreenSky, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
 
Six Months Ended June 30,
2018
 
2017
 

 

Cash flows from operating activities
 
 
 
Net income
$
59,420

 
$
60,604

Adjustments to reconcile net income to net cash provided by/(used in) operating activities
 
 
 
Depreciation and amortization
2,037

 
1,875

Provision for bad debt expense
1,225

 
508

Share-based compensation expense
2,851

 
1,574

Equity-based payments to non-employees
8

 
198

Non-cash rent expense
(193
)
 
(181
)
Amortization of debt related costs
840

 
75

Fair value change in assets and liabilities
201

 

Original issuance discount on term loan payment
(10
)
 

Deferred tax expense
1,594

 

Changes in assets and liabilities:
 
 
 
(Increase)/decrease in loan receivables held for sale
29,896

 
(40,982
)
(Increase)/decrease in accounts receivable
(3,070
)
 
(2,531
)
(Increase)/decrease in related party receivables
182

 
106

(Increase)/decrease in other assets
3,619

 
(1,659
)
Increase/(decrease) in accounts payable
(1,217
)
 
9,211

Increase/(decrease) in finance charge reversal liability
12,899

 
8,255

Increase/(decrease) in related party liabilities
(1,044
)
 
(607
)
Increase/(decrease) in other liabilities
366

 
3,710

Net cash provided by/(used in) operating activities
109,604

 
40,156

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(2,707
)
 
(1,985
)
Net cash used in investing activities
(2,707
)
 
(1,985
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from IPO, net of underwriters discount and commissions
954,845

 

Purchases of GreenSky Holdings, LLC units
(901,833
)
 

Purchases of Class A common stock
(53,012
)
 

Issuances of Class B common stock
129

 

Redemptions of GreenSky Holdings, LLC units prior to Reorganization Transactions
(496
)
 

Proceeds from term loan
399,000

 

Repayments of term loan
(350,115
)
 

Member distributions
(127,640
)
 
(55,283
)
Equity option exercises prior to Reorganization Transactions
339

 
15

Payment of IPO related expenses
(2,749
)
 

Payment of equity transaction expenses, prior to Reorganization Transactions
(32
)
 

Payment of debt issuance costs

 
(361
)
Net cash provided by/(used in) financing activities
(81,564
)
 
(55,629
)
 
 
 
 
Net increase/(decrease) in cash and restricted cash
25,333

 
(17,458
)
Cash and restricted cash at beginning of period
353,838

 
228,114

Cash and restricted cash at end of period
$
379,171

 
$
210,656

 
 
 
 
Supplemental non-cash investing and financing activities
 
 
 
Equity transaction costs accrued but not paid
$
1,106

 
$

Distributions accrued but not paid
11,493

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

7

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)


1. Organization, Basis of Presentation and New Accounting Standards
Organization
GreenSky, Inc. (or the "Company," "we" or "our") was formed as a Delaware corporation on July 12, 2017. The Company was formed for the purpose of completing an IPO of its Class A common stock and certain Reorganization Transactions, as further described below, in order to carry on the business of GreenSky Holdings, LLC (“GS Holdings”) and its consolidated subsidiaries. GS Holdings, a holding company with no operating assets or operations, was organized in August 2017. On August 24, 2017, GS Holdings acquired a controlling interest in GreenSky LLC ("GSLLC"), a Georgia limited liability company, which is an operating entity. Common membership interests of GS Holdings, are referred to as "Holdco Units."
Immediately prior to our IPO, (i) the operating agreement of GS Holdings (the "GS Holdings Agreement") was amended and restated to, among other things, modify its capital structure by replacing the different classes of membership interests and profits interests with Holdco Units; (ii) we issued to each of the Continuing LLC Members (as defined below) 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 were exchanged in connection with the IPO), for consideration in the amount of $0.001 per share of Class B common stock; (iii) certain Holdco Units were contributed to GreenSky, Inc. in exchange for shares of our Class A common stock; (iv) equity holders of the Former Corporate Investors (as defined below) contributed 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 (“TRA”), and Former Corporate Investors merged with and into subsidiaries of GreenSky, Inc.; (v) outstanding options to acquire Class A units of GS Holdings were equitably adjusted so that they are exercisable for shares of Class A common stock; and (vi) outstanding warrants to acquire Class A units of GS Holdings were equitably adjusted pursuant to their terms so that they are 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”. The Reorganization Transactions are more fully described in our final IPO prospectus dated May 23, 2018 filed with the United States Securities and Exchange Commission on May 25, 2018 (the "Final IPO Prospectus").
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," continue to own Holdco Units. Original GS Equity Owners refers to the owners of units of GS Holdings prior to the Reorganization Transactions. Former Corporate Investors refers to certain of the Original GS Equity Owners that merged with and into one or more subsidiaries of GreenSky, Inc. in connection with the Reorganization Transactions, which was accounted for as a common control transaction and had no material impact on the net assets of the Company. Original Profits Interests Holders refers to the owners of profits interests in GS Holdings prior to the Reorganization Transactions.
On May 24, 2018, the Company's Class A common stock commenced trading on the NASDAQ Stock Market in connection with its IPO of 43,700,000 shares of its Class A common stock at a public offering price of $23.00 per share, receiving approximately $954.8 million in net proceeds, after deducting underwriting discounts and commissions (but not including other offering costs), which were used to purchase 2,426,198 shares of Class A common stock and 41,273,802 newly-issued GS Holdings common units at a price per unit equal to the price per share of Class A common stock sold in the IPO, less underwriting discounts and commissions. The newly-issued GS Holdings common units were sold by Continuing LLC Members, which we also refer to as "Exchanging Members." Pursuant to an "Exchange Agreement," the Exchanging Members can 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, 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).
The IPO and Reorganization Transactions resulted in the Company becoming the sole managing member of GS Holdings. As the sole managing member of GS Holdings, we operate and control all of GS Holdings’ operations

8

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

and, through GS Holdings and its subsidiaries, conduct GS Holdings’ business. As of June 30, 2018, the Company had an economic interest in GS Holdings of 31.3%. The Company consolidates the financial results of GS Holdings and reports a noncontrolling interest in its unaudited consolidated financial statements representing the GS Holdings interests held by Continuing LLC Members.
Basis of Presentation
Our independent registered public accounting firm has not audited our accompanying interim financial statements. We derived the Unaudited Consolidated Balance Sheet at June 30, 2018, from the audited Consolidated Financial Statements included in our Final IPO Prospectus. In the opinion of our management, the Unaudited Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our statements of operations for the three and six months ended June 30, 2018 and June 30, 2017, our balance sheets at June 30, 2018 and December 31, 2017, and our cash flows for the six months ended June 30, 2018 and June 30, 2017.
We have condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these interim statements should be read in conjunction with our Final IPO Prospectus. The results for the three and six months ended June 30, 2018, are not necessarily indicative of results that may be expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles ("GAAP"), requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, share based compensation and income taxes. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Cash and Restricted Cash
The following table provides a reconciliation of cash and restricted cash reported within the Unaudited Consolidated Balance Sheets to the total included within the Unaudited Consolidated Statements of Cash Flows as of the periods indicated.
 
June 30, 2018
 
June 30, 2017
 
Cash
$
236,629

 
$
107,087

Restricted cash
142,542

 
103,569

Cash and restricted cash in Unaudited Consolidated Statements of Cash Flows
$
379,171

 
$
210,656

Recently Adopted or Issued Accounting Standards
Revenue from contracts with customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard, which is codified in ASC Topic 606, Revenue from Contracts with Customers. Under this new standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB also issued several updates to ASU 2014-09. We elected to early adopt this standard and to apply its provisions as of January 1, 2017 to all open contracts existing as of that date using the modified retrospective approach. We determined that the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings was immaterial. Further, our adoption of the new standard did not have a material impact on any balance sheet or

9

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

income statement line items in the period of adoption and, as such, we did not record any adjustments to the consolidated financial statements related to our adoption of this standard.
Disaggregated revenue
Revenue disaggregated by type of service was as follows for the periods presented:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Merchant fees
$
75,576

 
$
59,709

 
$
134,941

 
$
105,768

Interchange fees
14,621

 
11,743

 
26,196

 
20,605

Transaction fees
90,197

 
71,452


161,137


126,373

Servicing fees
15,458

 
10,887

 
29,789

 
21,174

Other(1)
49

 
81

 
104

 
210

Servicing and other
15,507

 
10,968


29,893


21,384

Total revenue
$
105,704

 
$
82,420


$
191,030


$
147,757

(1) 
Other revenue includes several miscellaneous revenue items that are individually immaterial. Other revenue is presented separately herein in order to clearly present merchant, interchange and servicing fees, which are more integral to our primary operations and better enable financial statement users to calculate metrics such as servicing and merchant fee yields.
We have no remaining performance obligations as of June 30, 2018. No assets were recognized from the costs to obtain or fulfill a contract with a customer as of June 30, 2018 or December 31, 2017.
Recognition and measurement of financial assets and financial liabilities
In January 2016, the FASB issued ASU 2016-01 to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. We adopted the standard for the reporting period beginning January 1, 2018. As a result of adopting the standard, we eliminated the disclosure requirement of the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet, which applies to our fair value of term loan disclosure in Note 3. The remaining provisions of the standard were either not applicable to us or already satisfied in our disclosures. Therefore, our adoption of this standard did not have any impact on our unaudited consolidated financial statements.
Improvements to employee share-based payment accounting
In March 2016, the FASB issued ASU 2016-09 to simplify certain aspects of the accounting for share-based payment transactions. Under the new standard, all excess tax benefits and tax deficiencies should be recognized as income tax benefit or expense, respectively, in the income statement when stock awards vest or are settled. In addition, the standard eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the statements of cash flows, increases the threshold for withholding an employee’s vested shares for tax-withholding purposes without triggering liability accounting and clarifies that cash payments made by an employer to tax authorities on an employee’s behalf when directly withholding shares for tax-withholding purposes should be presented as a financing activity on the statement of cash flows. The standard also provides an accounting policy election to account for forfeitures as they occur rather than to estimate the number of awards that are expected to vest. We adopted the standard for the reporting period beginning January 1, 2017. The provisions related to excess tax benefits or deficiencies from share-based award activity became applicable for us following the IPO and Reorganization Transactions. We also elected to retain our existing accounting policy election to estimate award forfeitures.

10

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

Scope of modification accounting
In May 2017, the FASB issued ASU 2017-09 to provide clarity and reduce both diversity in practice and the cost and complexity to an entity when applying the guidance in ASC 718, Compensation—Stock Compensation, to a change in the terms or conditions of a share-based payment award. The standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. We adopted the standard for the reporting period beginning January 1, 2018, and will apply its provisions prospectively to any award modified on or after the adoption date. Our adoption of this standard did not have any impact on our unaudited consolidated financial statements.
Accounting standards issued but not yet adopted
Leases
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize leases with terms greater than twelve months on the balance sheet as right-of-use assets and corresponding liabilities. Lessees will continue to classify leases as either operating leases, using a straight-line expense pattern, or financing leases, using a front-loaded expense pattern. The standard also requires enhanced quantitative and qualitative disclosures related to the lease arrangements. The standard is effective for us on January 1, 2019, with early adoption permitted, using a modified retrospective approach.
We are evaluating the potential impact of adopting this standard by reviewing our existing lease contracts, all of which are operating leases wherein the Company is the lessee. For predominantly all of the future minimum lease payments of $17.7 million as of June 30, 2018, required under our existing operating leases (as disclosed in Note 12) and for other similar leases we may enter into prior to adopting this standard, we expect to gross up our Unaudited Consolidated Balance Sheets at their present values to recognize the right-of-use assets and lease liabilities. The quantitative impact of adopting this standard remains under evaluation; however, we do not expect material changes to the recognition of rent expense, which is included within property, office and technology expenses and related party expenses in our Unaudited Consolidated Statements of Operations.
In July 2018, the FASB issued ASU 2018-10, which clarifies certain aspects of the guidance issued in ASU 2016-02. Upon adoption of this standard, we, as the lessee, will be required to reassess lease classification upon modification based on the facts and circumstances, and the modified terms and conditions, if applicable, as of the date of reassessment. The remaining provisions of the standard are either not applicable to us or already satisfied in our disclosures. The standard is effective for us on January 1, 2019, with early adoption permitted, using a modified retrospective approach. We are currently evaluating the potential impact of adopting this standard; however, we do not expect material changes to the classification of leases or to the recognition of rent expense.
Measurement of credit losses on financial instruments
In June 2016, the FASB issued ASU 2016-13, which is intended to better align the timing of recognition of credit losses on financial instruments with management’s expectations. The standard requires a financial asset (or group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. Management must determine expected credit losses for all financial assets held at the reporting date based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts, the latter of which broadens current guidance. The standard requires enhanced disclosures to help investors and other financial statement users to better understand the significant estimates and judgments used in estimating credit losses. The standard is effective for us on January 1, 2020, with early adoption permitted, but not before January 1, 2019, and for the majority of its provisions should be applied using a modified retrospective approach. We are currently evaluating the potential impact of adopting this standard.
Improvements to nonemployee share-based payment accounting
In June 2018, the FASB issued ASU 2018-07 to simplify certain aspects of the accounting for nonemployee share-based payment transactions. Under the new standard, all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment

11

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

awards are in the scope of ASC 718. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of ASC 718 are measured at grant-date fair value of the equity instruments, and the requirement to reassess classification of nonemployee share-based payment awards upon vesting is eliminated. The standard is effective for us on January 1, 2019, including interim periods within that fiscal year, with early adoption permitted, using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption to remeasure equity-classified awards for which a measurement date has not been established and liability-classified awards that have not been settled by the date of adoption. We are currently evaluating the potential impact of adopting this standard; however, we do not expect adoption to have a material impact as the Company has a limited number of nonemployee share-based payment transactions outstanding and does not anticipate material nonemployee share-based payment transactions in the future.
2. Earnings per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to GreenSky, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GreenSky, Inc., adjusted for the assumed exchange of all potentially dilutive Holdco Units for Class A common stock, by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements.
Prior to the IPO, the GS Holdings membership structure included Class A, B, C Units and Profits Interests. The Company analyzed the calculation of earnings per unit for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of these unaudited consolidated financial statements. Therefore, earnings per share information has not been presented for the three and six months ended June 30, 2017. The basic and diluted earnings per share period for the three and six months ended June 30, 2018, represents only the period from May 24, 2018 to June 30, 2018, which represents the period wherein we had outstanding Class A common stock.

12

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2018
 
 
 
 
Numerator:
 
 
 
Income before income tax expense
$
42,410

 
$
61,014

Less: Net income attributable to GS Holdings prior to the Reorganization Transactions
19,609

 
38,213

Less: Net income attributable to noncontrolling interests subsequent to the Reorganization Transactions
15,657

 
15,657

Less: Income tax expense
1,594

 
1,594

Net income attributable to GreenSky, Inc. - basic
$
5,550

 
$
5,550

Add: Reallocation of net income attributable to noncontrolling interests after the Reorganization Transactions from the assumed exchange of common units of GS Holdings for Class A common stock
15,657

 
15,657

Less: Income tax expense on reallocation of net income attributable to noncontrolling interests(1)
3,493

 
3,493

Net income attributable to GreenSky, Inc. - diluted
$
17,714

 
$
17,714

Denominator:
 
 
 
Weighted average shares of Class A common stock outstanding - basic
57,399,632

 
57,399,632

Add: Dilutive effects as shown separately below
 
 
 
Holdco Units that are exchangeable for Class A common stock
128,257,580

 
128,257,580

Class A common stock options
2,479,889

 
2,479,889

Holdco warrants exchangeable for Class A common stock
563,458

 
563,458

Unvested Class A common stock
189,363

 
189,363

Weighted average shares of Class A common stock outstanding - diluted
188,889,922

 
188,889,922

 
 
 
 
Earnings per share of Class A common stock outstanding - basic
$
0.10

 
$
0.10

Earnings per share of Class A common stock outstanding - diluted (2)
$
0.09

 
$
0.09

(1)
For the three and six months ended June 30, 2018 periods, we assumed effective tax rates of 22.3% and 22.3%, respectively.
(2)
Our calculation of diluted earning per share excludes 472,500 and 472,500 of Class A common stock options for the three and six months ended June 30, 2018, respectively, as their inclusion would have been anti-dilutive.
Shares of the Company’s Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
3. Fair Value of Assets and Liabilities
We have financial assets and liabilities subject to fair value measurement, which include our loan receivables held for sale, finance charge reversal ("FCR") liability, and servicing liabilities associated with transfers of rights to previously charged-off loan receivables ("Charged-Off Receivables").
We apply the market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities, to value our loan receivables held for

13

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

sale and the income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount, to value our FCR liability and servicing liabilities.
Loan receivables held for sale
Loan receivables held for sale are recorded at the lower of cost or fair value and are, therefore, measured at fair value on a nonrecurring basis. For our loan receivables held for sale, fair value approximates par value, as we have consistently sold loans for the full current balance in historical and current period transactions with federally insured banks that originate loans under the GreenSky program and any other lenders with respect to those loans (referred to henceforth as "Bank Partners").
Loan receivables held for sale are classified within Level 2 of the fair value hierarchy, as the primary component of the price is obtained from observable values of loan receivables with similar terms and characteristics sold to our Bank Partners. We have the ability to access this market, and it is the market into which these loan receivables are typically sold. Refer to Note 4 for additional information on our loan receivables held for sale.
Finance charge reversals
Our Bank Partners offer certain loan products that have a feature whereby the account holder is provided a promotional period to repay the loan principal balance in full without incurring a finance charge. For these loan products, we bill interest each month throughout the promotional period and, under the terms of the contracts with our Bank Partners, we are obligated to return this billed interest to the Bank Partners if an account holder pays off the loan balance in full within the promotional period. Therefore, the monthly process of billing interest on deferred loan products triggers a potential future FCR liability for the Company. The FCR component of our Bank Partner contracts qualifies as an embedded derivative.
The FCR liability is carried at fair value on a recurring basis in the Unaudited Consolidated Balance Sheets and is estimated based on historical experience and management’s expectation of future FCR. The FCR liability is classified within Level 3 of the fair value hierarchy, as the primary component of the fair value is obtained from unobservable inputs based on the Company’s data, reasonably adjusted for assumptions that would be used by market participants.
The FCR liability is not designated as a hedge for accounting purposes and, as such, changes in its fair value are recorded within cost of revenue in the Unaudited Consolidated Statements of Operations.
Charged-off receivables
Periodically, we transfer our rights to certain Charged-Off Receivables in exchange for a cash payment based on the expected recovery rate of such loan receivables, which consist primarily of previously charged-off Bank Partner loans. We have no continuing involvement with these Charged-Off Receivables other than performing reasonable servicing and collection efforts on behalf of the third parties and Bank Partners that purchased the Charged-Off Receivables. The proceeds from transfers of Charged-Off Receivables attributable to Bank Partner loans are recognized on a collected basis as reductions to cost of revenue, which reduces the fair value adjustment to the FCR liability in the period of transfer. The following table presents details of Charged-Off Receivable transfers during the periods indicated. There were no transfers of Charged-Off Receivables during the three or six months ended June 30, 2017.
 
Aggregate Unpaid Balance
 
Proceeds
Bank Partner
loans
 
Loan
receivables
held for sale
 
Total(1)
 
Bank Partner
loans
 
Loan
receivables
held for sale
 
Total
Three months ended June 30, 2018
$
37,469

 
$
124

 
$
37,593

 
$
5,021

 
$
17

 
$
5,038

Six months ended June 30, 2018
74,895

 
1,283

 
76,178

 
10,000

 
171

 
10,171

(1) 
During the three and six months ended June 30, 2018, $3,461 and $6,680, respectively, of the aggregate unpaid balance on cumulative transferred Charged-Off Receivables were recovered through our servicing efforts on behalf of our Charged-Off Receivables investors.

14

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

Financial guarantee
Under the terms of the contracts with our Bank Partners, we provide limited protection in the event of excessive Bank Partner portfolio credit losses and record a financial guarantee liability at fair value based on historical experience and the amount of current customer delinquencies expected to convert into Bank Partner portfolio credit losses. Refer to Note 12 for additional information.
Servicing liabilities
Based on our election to adopt the fair value method, our servicing liabilities are carried at fair value on a recurring basis within other liabilities in the Unaudited Consolidated Balance Sheets and are estimated using a discounted cash flow model. Servicing liabilities are classified within Level 3 of the fair value hierarchy, as the primary component of the fair value is obtained from unobservable inputs based on peer market data, reasonably adjusted for assumptions that would be used by market participants to service our transferred Charged-Off Receivables portfolios, for which market data is not available. Changes in the fair value of our servicing liabilities are recorded within other gains/(losses) in the Unaudited Consolidated Statements of Operations.
The following table summarizes, by level within the fair value hierarchy, the carrying amounts and estimated fair values of our assets and liabilities measured at fair value on a recurring or nonrecurring basis or disclosed, but not carried, at fair value in the Unaudited Consolidated Balance Sheets as of the periods presented. There were no transfers into, out of, or between levels within the fair value hierarchy during any of the periods presented. Refer to Note 4, Note 7 and Note 8 for additional information on these assets and liabilities.
 
Level
 
June 30, 2018
 
December 31, 2017
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Loan receivables held for sale, net(1)
2
 
$
43,489

 
$
44,294

 
$
73,606

 
$
74,190

Liabilities:
 
 
 
 
 
 
 
 
 
Finance charge reversal liability(2)
3
 
$
107,047

 
$
107,047

 
$
94,148

 
$
94,148

Servicing liabilities(2)
3
 
2,272

 
2,272

 
2,071

 
2,071

Term loan(3)
2
 
387,979

 
398,037

 
338,263

 
345,820

(1) 
Measured at fair value on a nonrecurring basis.
(2) 
Measured at fair value on a recurring basis. Servicing liabilities are presented within other liabilities in the Unaudited Consolidated Balance Sheets.
(3) 
Disclosed, but not carried, at fair value. The amounts disclosed for June 30, 2018, relate to the modified term loan and amounts disclosed for December 31, 2017, relate to the original term loan. Refer to Note 7 for additional information. The carrying value of our term loan is net of unamortized debt discount and debt issuance costs. The fair value of our term loan was determined using a discounted cash flow model based on observable market factors (such as changes in credit spreads for comparable benchmark companies) and credit factors specific to us.
The following table presents the (increases)/decreases in fair value and Unaudited Consolidated Statements of Operations locations related to our liabilities that are measured at fair value on a recurring basis during the following periods.
 
Unaudited Statements of
Operations Location
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
FCR liability
Cost of revenue
 
$
(19,226
)
 
$
(11,980
)
 
$
(40,736
)
 
$
(25,449
)
Servicing liabilities
Other gains/(losses)
 
(85
)
 

 
(201
)
 


15

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

The cash flow impacts of our liabilities that are measured at fair value on a recurring basis are included within net cash provided by operating activities in the Unaudited Consolidated Statements of Cash Flows.
Finance charge reversals
The following table reconciles the beginning and ending fair value measurements of our FCR liability, which is classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs, during the periods indicated.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Beginning balance
$
100,913

 
$
73,181

 
$
94,148

 
$
68,064

Receipts(1)
33,742

 
23,920

 
61,835

 
44,339

Settlements(2)
(46,834
)
 
(32,762
)
 
(89,672
)
 
(61,533
)
Fair value changes recognized in cost of revenue(3)
19,226

 
11,980

 
40,736

 
25,449

Ending balance
$
107,047

 
$
76,319

 
$
107,047

 
$
76,319

(1) 
Represents cash received from deferred payment loans during the promotional period (incentive payments) as well as the proceeds received from transferring our rights to Charged-Off Receivables attributable to previously charged-off Bank Partner loans. We consider all monthly incentive payments from Bank Partners during the period to be related to billed finance charges on deferred interest products until monthly incentive payments exceed total billed finance charges on deferred products, which did not occur during any of the periods presented.
(2) 
Represents the reversal of previously billed finance charges associated with deferred payment loan principal balances that paid off within the promotional period.
(3) 
A fair value adjustment is made based on the expected reversal percentage of billed finance charges (expected settlements), which is estimated at each reporting period.
The following table presents the estimated reversal rate for billed interest on deferred loan products, which is the significant unobservable input used to value the Level 3 FCR liability, as of the dates indicated.
Reversal rate
June 30, 2018
 
December 31, 2017
 
 
 
 
 
Range
86.0% - 98.3%

 
85.5% – 98.0%

Weighted average
89.7
%
 
89.0
%
The following table demonstrates the impact on the fair value of FCR assuming a 100 basis points increase or decrease in the reversal rate assumption, while holding all other inputs constant, as of the dates indicated.
Reversal rate sensitivity
Increase/(Decrease) in Fair Value of FCR Liability
June 30, 2018
 
December 31, 2017
 
 
 
 
 
+ 100 basis points
$
1,932

 
$
1,586

- 100 basis points
$
(1,833
)
 
$
(1,524
)

16

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

Servicing liabilities
Significant assumptions used in valuing our servicing liabilities were as follows:
Cost of servicing: The cost of servicing represents the servicing rate a willing market participant would require to service loans with similar characteristics as the Charged-Off Receivables.
Discount rate: The discount rate reflects the time value of money adjusted for a risk premium and is within an observable range based on peer market data.
Recovery period: Our recovery period was determined based on a reasonable recovery period for loans of this size and characteristics based on historical experience. We assumed that collection efforts for these loans will cease after five years, and the run-off of the portfolio will follow a straight-line methodology, adjusted for actual cash recoveries over time.
The following table reconciles the beginning and ending fair value measurements of our servicing liabilities associated with transferring our rights to Charged-Off Receivables, which are classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs, during the periods presented. There were no such servicing liabilities during the three and six months ended June 30, 2017.
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
 
 
Beginning balance
$
2,187

 
$
2,071

Initial obligation from transfer of Charged-Off Receivables(1)
450

 
911

Fair value changes recognized in other gains/(losses)
 
 
 
Change in inputs or assumptions used in the valuation model

 

Other changes in fair value(2)
(365
)
 
(710
)
Ending balance
$
2,272

 
$
2,272

(1) 
Recognized in other gains/(losses).
(2) 
Represents the reduction of our servicing liability due to the passage of time and collection of loan payments.
The following table presents quantitative information about the significant unobservable inputs used to value the Level 3 servicing liabilities as of the dates presented.
Input
 
June 30, 2018
 
December 31, 2017
 
Range
 
Weighted Average
 
Range
 
Weighted Average
 
 
 
 
 
 
 
 
 
Cost of servicing (basis points)
 
62.5

 
62.5

 
62.5

 
62.5

Discount rate
 
18.0
%
 
18.0
%
 
18.0
%
 
18.0
%
Recovery period (years)
 
4.1 - 4.9

 
4.4

 
4.6 – 4.9

 
4.8


17

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

The following table demonstrates the impact on the fair value of servicing liabilities assuming hypothetical changes in certain inputs, while holding all other inputs constant as of the dates presented.
 
Increase/(Decrease) in Fair Value of
Servicing Liabilities
June 30, 2018
 
December 31, 2017
 
 
 
 
Cost of servicing sensitivity:
 
 
 
Increase of 10 basis points
$
364

 
$
331

Decrease of 10 basis points
(364
)
 
(331
)
Discount rate sensitivity:
 
 
 
Increase of 1%
(26
)
 
(25
)
Decrease of 1%
27

 
26

Recovery period sensitivity:
 
 
 
Increase of one year
380

 
316

Decrease of one year
(422
)
 
(351
)
4. Loan Receivables Held for Sale
The following table summarizes the activity in the balance of loan receivables held for sale at lower of cost or fair value during the periods indicated.
 
Six Months Ended June 30,
2018
 
2017
 
 
 
 
Beginning balance
$
73,606

 
$
41,268

Additions
43,085

 
73,235

Proceeds from sales and customer payments(1)
(71,687
)
 
(28,691
)
Loss on sale

 
(88
)
Decrease/(increase) in valuation allowance
(220
)
 

Transfers(2)
24

 
(1,688
)
Write offs and other(3)
(1,319
)
 
(1,786
)
Ending balance
$
43,489

 
$
82,250

(1) 
Customer payments include accrued interest and fees, recoveries of previously charged-off loan receivables held for sale, as well as proceeds from transferring our rights to Charged-Off Receivables attributable to loan receivables held for sale. We retain servicing arrangements on sold loan receivables with the same terms and conditions as loans that are originated by our Bank Partners. Income from loan receivables held for sale activities is recorded within interest income and other gains in the Unaudited Consolidated Statements of Operations. We sold loan receivables held for sale to certain Bank Partners on the following dates during the six months ended June 30, 2018 and 2017:
2018
 
Amount
 
2017
 
Amount
May 21
 
$
9,552

 
June 29
 
$
17,900

June 27
 
50,614

 
 
 
 
Total
 
$
60,166

 
Total
 
$
17,900

(2) 
We temporarily hold certain loan receivables, which are originated by a Bank Partner, while non-originating Bank Partner eligibility is being determined. Once we determine that a loan receivable meets the investment requirements of an eligible Bank Partner, we transfer the loan to the Bank Partner at cost plus any accrued

18

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

interest. The reported amount also includes loans that have been placed on non-accrual and non-payment status while we investigate consumer loan balance inquiries.
(3) 
We received recovery payments of $17 and $104 during the three months ended June 30, 2018 and 2017, respectively, and $33 and $189 during the six months ended June 30, 2018 and 2017, respectively, which are included within other income/(expense), net in the Unaudited Consolidated Statements of Operations. During the three and six months ended June 30, 2018, write offs and other were reduced by $17 and $171, respectively, related to cash proceeds received from transferring our rights to Charged-Off Receivables attributable to loan receivables held for sale. The cash proceeds received were recorded within other income/(expense), net in the Unaudited Consolidated Statements of Operations. There were no cash proceeds received for Charged-Off Receivable transfers during the first six months of 2017.
Recoveries of principal and finance charges and fees on previously written off loan receivables held for sale are recognized on a collected basis as other gains and interest income.
The following table presents activities associated with our loan receivable sales and servicing activities during the periods indicated.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Gain/(loss) on sold loan receivables held for sale
$

 
$
(88
)
 
$

 
$
(88
)
Cash Flows
 
 
 
 
 
 
 
Sales of loans
$
60,166

 
$
17,900

 
$
60,166

 
$
17,900

Servicing fees
533

 
811

 
1,099

 
1,711

The following table presents information about the principal balances of sold loan receivables that are not recorded in our Unaudited Consolidated Balance Sheets, but with which we have a continuing involvement through our servicing arrangements with our Bank Partners. The sold loan receivables are pooled with other loans originated by the Bank Partners for purposes of determining escrow balances and incentive payments. The escrow balances represent our only direct exposure to potential losses associated with these sold loan receivables.
 
June 30, 2018
 
December 31, 2017
 
 
 
 
Total principal balance
$
322,661

 
$
305,748

Delinquent loans (unpaid principal balance)
14,926

 
20,409

 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net charge-offs (unpaid principal balance)
$
1,787

 
$
1,353

 
$
4,712

 
$
3,005


19

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

5. Accounts Receivable
Accounts receivable consisted of the following as of the dates indicated.
 
Accounts
Receivable,
Gross
 
Allowance
for
Losses
 
Accounts
Receivable,
Net
June 30, 2018
 
 
 
 
 
Transaction related
$
19,508

 
$
(424
)
 
$
19,084

Servicing related
1,340

 

 
1,340

Total
$
20,848

 
$
(424
)
 
$
20,424

 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
Transaction related
$
15,997

 
$
(276
)
 
$
15,721

Servicing related
2,637

 

 
2,637

Total
$
18,634

 
$
(276
)
 
$
18,358

6. Property, Equipment and Software
Property, equipment and software were as follows as of the dates indicated.
 
June 30, 2018
 
December 31, 2017
 
 
 
 
Furniture
$
2,873

 
$
2,704

Leasehold improvements
3,785

 
3,659

Computer hardware
3,047

 
2,987

Software
5,761

 
4,836

Total property, equipment and software, at cost
15,466

 
14,186

Less: accumulated depreciation
(4,928
)
 
(4,060
)
Less: accumulated amortization
(2,020
)
 
(2,278
)
Total property, equipment and software, net
$
8,518

 
$
7,848


7. Borrowings
Credit Agreement
In August 2017, we entered into a $450 million credit agreement (“Credit Agreement”), which provided for a $350 million term loan (“original term loan”) maturing on August 25, 2024 and a $100 million revolving loan facility maturing on August 25, 2022.
Original term loan. The original term loan incurred interest, due quarterly in arrears, at an adjusted LIBOR rate, which represented the one-month LIBOR rate multiplied by the statutory reserve rate, as defined in the Credit Agreement, plus a margin of 4.00% per annum. An original issuance discount of $3,500 and debt issuance costs of $7,949 were recorded as a direct deduction from the face amount of the original term loan and were being amortized into interest expense over the term of the loan using the effective interest method.
The net proceeds from the term loan of $338.6 million, along with $7.9 million of cash, were set aside for a subsequent $346.5 million payment (which is occurring in stages) to certain equity holders and a related party. With the exception of the payments to the related party, which are related party expenses, the payments were accounted for as distributions. As of June 30, 2018, $340.2 million of the reserved payment was paid in cash. The remaining $6.3 million of the reserved payment was included within other liabilities and related party liabilities in the Unaudited Consolidated Balance Sheets as of June 30, 2018.

20

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

The distribution to GS Holdings unit holders and GS Holdings holders of profits interests was made on a basis generally proportionate to their equity interests in GS Holdings. GS Holdings' members approved the Credit Agreement and the distribution of the proceeds of the original term loan to the GS Holdings unit holders, holders of profits interests and a related party. The purpose of the distribution was to provide a cash return on investment to the GS Holdings members and holders of profits interests.
Revolving loan facility. Under the revolving loan facility, revolving loans incur interest at our election at either (i) a base rate, which represents, for any day, a rate per annum equal to the greater of (a) the prime rate on such day, (b) the federal funds rate on such day plus 0.50%, and (c) the adjusted LIBOR for a one-month interest period on such day plus 1.00%, plus a margin of 3.00% per annum or (ii) an adjusted LIBOR rate, as discussed below, plus a margin of 4.00% per annum. If our first lien net leverage ratio, as discussed further below, is equal to or below 1.50 to 1.00, these interest margins are reduced to 2.75% and 3.75% for base rate loans and Eurodollar loans, respectively. As of June 30, 2018 and December 31, 2017, we had no borrowings under the revolving loan facility.
We are required to pay a quarterly commitment fee at a per annum rate of 0.50% on the daily unused amount of the revolving loan facility, inclusive of the aggregate amount available to be drawn under all outstanding letters of credit, of which there were $10.0 million as of June 30, 2018 and $0.0 million as of December 31, 2017 as discussed further below. This rate is reduced to 0.375% for any quarterly period in which our first lien net leverage ratio is equal to or below 1.50 to 1.00. For the three months ended June 30, 2018 and 2017, we recognized $96 and $0, respectively, of commitment fees within interest expense in the Unaudited Consolidated Statements of Operations. For the six months ended June 30, 2018 and 2017, we recognized $221 and $0, respectively, of commitment fees within interest expense in the Unaudited Consolidated Statements of Operations.
Amended Credit Agreement
In March 2018, we amended certain terms of our Credit Agreement ("Amended Credit Agreement"). The term loan and revolving loan facility under the Amended Credit Agreement are collectively referred to as the "Credit Facility."
Term loan. The Amended Credit Agreement replaced the original term loan with a $400 million term loan (“modified term loan”) and extended the maturity date to March 29, 2025. Further, the interest margin on the modified term loan was reduced to 3.25% per annum.
We contemporaneously settled the outstanding principal balance on the original term loan of $349.1 million with the issuance of the $400.0 million modified term loan. An original issuance discount of $1.0 million was reported in the Unaudited Consolidated Balance Sheets as a direct deduction from the face amount of the modified term loan. Therefore, the gross proceeds of the modified term loan were $399.0 million. The proceeds from the modified term loan were primarily used to repay the outstanding principal balance on the original term loan and to pay $1.1 million of third party costs, including legal and debt arrangement costs, which were immediately expensed and recorded within general and administrative expense in the Unaudited Consolidated Statements of Operations on the modification date. The remaining $48.8 million of proceeds were used to provide for distributions to certain equity holders and a related party prior to the IPO. As of June 30, 2018, $46.9 million of the distribution was paid in cash. The remaining $1.8 million and $0.1 million of the reserved payment was included within other liabilities and related party liabilities, respectively, in the Unaudited Consolidated Balance Sheets as of June 30, 2018.

21

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

Key details of the term loans are as follows:
Description
 
June 30, 2018(1)
 
December 31, 2017(1)
 
 
 
 
 
Term loan, face value(2)
 
$
399,000

 
$
349,125

Unamortized debt discount(3)
 
(4,037
)
 
(3,321
)
Unamortized debt issuance costs(3)
 
(6,984
)
 
(7,541
)
Term loan
 
$
387,979

 
$
338,263


(1) 
Amounts reported reflect details of the original term loan as of December 31, 2017, and details of the modified term loan as of June 30, 2018.
(2) 
The principal balance of the original term loan was scheduled to be repaid on a quarterly basis at an amortization rate of 0.25% per quarter. We made the first principal payment in December 2017. The principal balance of the modified term loan is scheduled to be repaid on a quarterly basis at an amortization rate of 0.25% per quarter, with the balance due at maturity. We made the first principal payment on the modified term loan in June 2018. For each of the next five years, principal repayments on the modified term loan are expected to be $4,000.
(3) 
For the three months ended June 30, 2018 and 2017, $155 and $0 of debt discount and $268 and $0 of debt issuance costs, respectively, were amortized into interest expense in the Unaudited Consolidated Statements of Operations. For the six months ended June 30, 2018 and 2017, $283 and $0 of debt discount and $557 and $0 of debt issuance costs, respectively, were amortized into interest expense in the Unaudited Consolidated Statements of Operations.
Revolving loan facility. Under the Amended Credit Agreement, the maturity date of the $100.0 million revolving loan facility was extended to March 29, 2023. Further, the interest margin applied to revolving loans that incur interest at a base rate was modified to 2.00% per annum and the margin applied to revolving loans that incur interest at an adjusted LIBOR rate was modified to 3.00% per annum. However, if our first lien net leverage ratio is equal to or above 1.50 to 1.00, these interest margins are raised to 2.25% and 3.25%, respectively. As of June 30, 2018, we had no borrowings under the revolving loan facility. Lastly, the Amended Credit Agreement provided for a $10.0 million letter of credit, which, to the extent drawn upon, would reduce the amount of availability under the revolving loan facility by the same amount. No letters of credit were outstanding as of June 30, 2018. The Credit Agreement commitment fee rates on the revolving loan facility (inclusive of the letter of credit), as disclosed above, were not changed.
Covenants
The Amended Credit Agreement contains certain financial and non-financial covenants with which we must comply. The financial covenant requires a first lien net leverage ratio equal to or below 3.50 to 1.00 for any measurement date at which the principal amounts of outstanding revolving loans and letters of credit exceed 25% of the aggregate principal amount of the revolving loan facility. The first lien net leverage ratio is calculated as the ratio of (i) the aggregate principal amount of indebtedness, minus the aggregate amount of consolidated cash (exclusive of restricted cash), as of the measurement date to (ii) consolidated EBITDA, as defined in the Amended Credit Agreement, for the four prior quarters.
The non-financial covenants include, among other things, restrictions on indebtedness, liens, fundamental changes to the business (such as acquisitions, mergers, liquidations or changes in the nature of the business, asset dispositions, restricted payments, transactions with affiliates and other customary matters).
The Amended Credit Agreement also includes various negative covenants, including one that restricts GS Holdings from making non-tax distributions unless certain financial tests are met. In general, GS Holdings is restricted from making distributions unless (a) after giving effect to the distribution it would have, as of a

22

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

measurement date, a total net leverage ratio of no more than 3.00 to 1.00, and (b) the source of such distributions is retained excess cash flow, certain equity issuance proceeds and certain other sources.
We were in compliance with all covenants, both financial and non-financial, as of June 30, 2018 and December 31, 2017.
The Amended Credit Agreement defines events of default, the breach of which could require early payment of all borrowings under, and termination of, the Amended Credit Agreement or similar actions.
Any borrowings under the Amended Credit Agreement are unconditionally guaranteed by our subsidiaries. Further, the lenders have a security interest in substantially all of the assets of GS Holdings and the other guarantors thereunder.
Initial Credit Facility
On February 10, 2017, GSLLC entered into an agreement (“Initial Credit Facility Agreement”) for a two-year, $50 million bank revolving credit facility (“Initial Credit Facility”), which was expandable, upon our request and successful syndication, to $100 million. The Initial Credit Facility Agreement also allowed us to request the issuance of letters of credit denominated in United States dollars as the applicant thereof for the support of our or our subsidiaries’ obligations. In conjunction with the Initial Credit Agreement, on August 25, 2017, we terminated the Initial Credit Facility. We had no borrowings under the Initial Credit Facility, nor requests for letters of credit during the year ended December 31, 2017.
During the three and six months ended June 30, 2017, we recorded commitment fees on the daily unused amount of each lender’s commitment under the Initial Credit Facility of $64 and $98, respectively, which were recorded within interest expense in the Unaudited Consolidated Statements of Operations. Further, we recorded up-front and other fees associated with the Initial Credit Facility within other assets in the Unaudited Consolidated Balance Sheet, which were amortized on a straight-line basis over the remaining term of the Initial Credit Facility into interest expense in the Unaudited Consolidated Statements of Operations. For the three and six months ended June 30, 2017, we recorded $45 and $75, respectively, of amortization of such fees within interest expense in the Unaudited Consolidated Statements of Operations.
8. Other Liabilities
The following table details the components of other liabilities in the Unaudited Consolidated Balance Sheets as of the dates indicated.
 
June 30, 2018
 
December 31, 2017
 
 
 
 
Deferred lease liabilities
$
2,736

 
$
2,819

Transaction processing liabilities
16,824

 
16,435

Servicing liabilities(1)
2,272

 
2,071

Distributions payable(2)
11,171

 
13,189

Accruals and other liabilities
6,609

 
4,327

Total other liabilities
$
39,612

 
$
38,841

(1) 
Refer to Note 3 for additional information on the servicing liabilities.
(2) 
Related party distributions payable are not included in this balance, but are instead included within related party liabilities.

23

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

9. Noncontrolling Interests
GreenSky, Inc. is the sole managing member of GS Holdings, and consolidates the financial results of GS Holdings. Therefore, the Company reports a noncontrolling interest based on the common units of GS Holdings held by the Continuing LLC Members. Changes in GreenSky, Inc.’s ownership interest in GS Holdings, while GreenSky, Inc. retains its controlling interest in GS Holdings, are accounted for as equity transactions. As such, future redemptions or direct exchanges of common units of GS Holdings by the Continuing LLC Members will result in a change in ownership and reduce or increase the amount recorded as noncontrolling interest and increase or decrease additional paid-in capital when GS Holdings has positive or negative net assets, respectively.
As of June 30, 2018, GreenSky, Inc. had 57,650,251 shares of Class A common stock outstanding, which resulted in an equivalent amount of ownership of GS Holdings common units. When adjusted for unvested units, GreenSky Inc. had a 31.3% economic ownership interest in GS Holdings.
10. Share-Based Compensation
In anticipation of our IPO, the Company adopted the 2018 Omnibus Incentive Compensation Plan (the "2018 Plan") in April 2018. The Company reserved a total of 24,000,000 shares of Class A common stock for issuance pursuant to the 2018 Plan. The Company currently has three types of share-based compensation awards outstanding, namely, Class A common stock options, unvested Holdco Units and unvested Class A common stock awards.
Class A Common Stock Options
Class A common stock option ("Options") activity was as follows during the periods indicated:
 
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2017
 
 
Number of
Options
 
Weighted
Average
Exercise Price
 
Number of
Options
 
 
 
 
 
 
 
 
Outstanding at beginning of period
9,821,884

 
$
2.65

 
10,006,890

 
Granted prior to Reorganization Transactions and IPO(1)
340,000

 
14.95

 
315,000

 
Exercised prior to Reorganization Transactions and IPO(2)(3)
(270,000
)
 
3.19

 
(2,000
)
 
Forfeited prior to Reorganization Transactions and IPO
(260,000
)
 
6.41

 
(338,000
)
 
Effect of Reorganization Transactions and IPO
(186,772
)
 
7.56

 
N/A

 
Granted after the Reorganization Transactions and IPO(1)
622,500

 
23.00

 
N/A

 
Exercised after Reorganization Transactions and IPO

 
N/A

 
N/A

 
Forfeited after Reorganization Transactions and IPO
(160,000
)
 
22.14

 
N/A

 
Outstanding at end of period(4)
9,907,612

 
$
3.83

 
9,981,890

 
Exercisable at end of period(4)
7,161,832

 
$
1.47

 
6,822,500

(1) 
Weighted average grant date fair value of Options granted during the six months ended June 30, 2018 and 2017 was $6.34 and $3.52, respectively.
(2) 
The total intrinsic value of Options exercised, which is defined as the amount by which the market value of the stock on the date of exercise exceeds the exercise price, during the six months ended June 30, 2018 and 2017 was $1,190 and $8, respectively.
(3) 
Employees paid $339 during the six months ended June 30, 2018 to the Company to exercise Options, which resulted in the issuance of 30,516 Holdco Units. Additionally, during the six months ended June 30, 2018, 210,000 Options were exercised by means of a cashless net exercise procedure, which resulted in the issuance of 38,637 Holdco Units.

24

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

(4) 
The aggregate intrinsic value and weighted average remaining contractual terms of Options outstanding and Options exercisable were as follows as of June 30, 2018:
 
June 30, 2018
 

Aggregate intrinsic value (in millions)
 
Unit Options outstanding
$
60.3

Unit Options exercisable
$
45.9

Weighted average remaining term (in years)
 
Unit Options outstanding
5.51

Unit Options exercisable
4.63

Profits Interests
Profits interests activity was as follows during the periods indicated:
 
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2017
 
 
Number of
Profits
Interests
 
Weighted
Average
Threshold Price
 
Number of
Profits
Interests
 
 

 

 
 
 
Outstanding at beginning of period
14,061,530

 
$
8.23

 
12,616,890

 
Granted prior to Reorganization Transactions and IPO(1)
2,920,000

 
14.31

 
295,000

 
Forfeited prior to Reorganization Transactions and IPO
(800,000
)
 
9.32

 
(400,000
)
 
Redeemed prior to Reorganization Transactions and IPO

 
N/A

 

 
Effect of Reorganization Transactions and IPO
(16,181,530
)
 
9.27

 
N/A

 
Outstanding at end of period(2)

 
N/A

 
12,511,890

(1) Weighted average grant-date fair value of profits interests granted during the six months ended June 30, 2018 and 2017 was $4.47 and $2.89, respectively.
(2) The total fair value based on grant-date fair value of profits interests that vested was $371 and $345 during the six months ended June 30, 2018 and 2017, respectively.

25

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

Unvested Holdco Units
As part of the Reorganization Transactions and the IPO, 15,241,530 profits interests in GS Holdings were converted into 2,941,139 and 3,172,843 vested and unvested Holdco Units, respectively, based on the prevailing profits interests thresholds and the IPO price of $23.00 per share. The converted Holdco Units remain subject to the same service vesting requirements of the original profits interests. Unvested Holdco Units activity was as follows during the periods indicated:
 
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2017
 
 
Holdco Units
 
Weighted Average Grant Date Fair Value
 
Holdco Units
 
 

 

 

 
Unvested at beginning of period

 
N/A

 
N/A
 
Effect of Reorganization Transactions and IPO
3,172,843

 
$
23.00

 
N/A
 
Granted

 
N/A

 
N/A
 
Forfeited

 
N/A

 
N/A
 
Vested

 
N/A

 
N/A
 
Unvested at June 30, 2018
3,172,843

 
$
23.00

 
N/A
Unvested Class A Common Stock Awards
As part of the Reorganization Transactions and the IPO, 940,000 profits interests in GS Holdings were converted into 127,327 and 255,904 vested and unvested Class A stock awards based on the prevailing profits interests thresholds and the IPO price of $23.00 per share. The converted unvested Class A common stock awards are subject to the same service vesting requirements of the original profits interests. Unvested Class A common stock award activity was as follows during the periods indicated:
 
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2017
 
 
Class A common stock
 
Weighted Average Grant Date Fair Value
 
Class A common stock
 
Unvested at beginning of period

 
N/A

 
N/A
 
Effect of Reorganization Transactions and IPO
255,904

 
$
23.00

 
N/A
 
Granted

 
N/A

 
N/A
 
Forfeited

 
N/A

 
N/A
 
Vested(1)
(6,696
)
 
23.00

 
N/A
 
Unvested at June 30, 2018
249,208

 
$
23.00

 
N/A
(1) 
The total fair value, based on grant-date fair value, of unvested Class A common stock awards that vested was $154 during the six months ended June 30, 2018.
We recorded share-based compensation expense of $2,851 and $1,574 for the six months ended June 30, 2018 and 2017, respectively, which is included within compensation and benefits expense in the Unaudited Consolidated Statements of Operations. At June 30, 2018, unrecognized compensation costs related to non-vested Options totaled $7.9 million, which will be recognized over a weighted average remaining requisite service period of 4.1 years. At June 30, 2018, unrecognized compensation costs related to unvested Holdco Unit awards totaled $17.7 million, which will be recognized over a weighted average remaining requisite service period of 4.0 years. At June 30, 2018, unrecognized compensation costs related to unvested Class A common stock totaled $1.5 million, which will be recognized over a weighted average remaining requisite service period of 4.3 years. Historical information prior to

26

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

the Reorganization Transactions has been restated above to account for the 10 to 1 stock split that occurred immediately prior to the IPO in connection with the Reorganization Transactions.
11. Taxation
GreenSky, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from GS Holdings based upon GreenSky, Inc.’s economic interest held in GS Holdings. GS Holdings is treated as a pass-through partnership for income tax reporting purposes. GS Holdings’ members, including GreenSky, Inc., are liable for federal, state and local income taxes based on their share of GS Holdings’ pass-through taxable income.     
The Company’s effective tax rate for the three and six months ended June 30, 2018, was 3.8% and 2.6%, respectively, and the Company recorded $1,594 and $1,594 of income tax expense for the three and six months ended June 30, 2018, respectively. The Company’s effective tax rates for the three and six months ended June 30, 2018, was less than our combined federal and state statutory tax rate of 23.5%, primarily because the Company is not liable for income taxes on the portion of GS Holdings’ earnings that are attributable to noncontrolling interests, and prior to the Reorganization Transactions, GS Holdings earnings were completely exempt from federal corporate income taxation. The results from the three and six months ended June 30, 2017 do not reflect income tax expense, because prior to the Reorganization Transactions, the consolidated GS Holdings pass-through entity, was not subject to corporate tax.
The Company regularly monitors its uncertain tax benefits, and as of June 30, 2018, there were no material uncertain tax benefits that if realized would affect the estimated annual effective tax rate, nor were there positions for which it is reasonably possible that the total amount of uncertain tax benefits will significantly increase or decrease within the next 12 months.
As a result of the IPO and Reorganization Transactions, the Company recognized a net deferred tax asset in the amount of $245,836 primarily associated with the basis difference in our investment in GS Holdings. During the six months ended June 30, 2018, we also recognized $57,116 of deferred tax assets related to additional tax basis increases generated from expected future payments under a TRA with certain of the then-existing members of GS Holdings and related deductions for imputed interest on such payments. See "Tax receivable agreement liability" below for more information. We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized.
As of June 30, 2018, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets are more likely than not to be realized. As such, no additional valuation allowance was recognized. The Company did not recognize any change to the valuation allowance through the provision for income tax for the three or six months ended June 30, 2017, because prior to the Reorganization Transactions, GreenSky, Inc., did not have any operations or investments, and therefore, did not have any deferred tax assets.
Tax receivable agreement liability
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of GS Holdings when Holdco Units are redeemed or exchanged by the Continuing LLC Members of GS Holdings. We intend to treat any redemptions and exchanges of Holdco Units as direct purchases of Holdco Units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On May 23, 2018, we entered into a TRA that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of GS Holdings resulting from any redemptions or exchanges of Holdco Units and from our acquisition of the equity of certain of the Former Corporate Investors, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the "TRA

27

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

Payments"). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in GS Holdings or us. The rights of each member of GS Holdings, that is a party to the TRA, are assignable to transferees of their respective Holdco Units.
As of June 30, 2018, the Company had a liability of $255.8 million related to its projected obligations under the TRA, which is captioned as tax receivable agreement liability in our Unaudited Consolidated Balance Sheet.
12. Commitments, Contingencies and Guarantees
Commitments
We primarily lease our premises under multi-year, non-cancelable operating leases with terms expiring through 2024, exclusive of renewal option periods. Our lease agreement expiring in 2024 also contains a renewal option, at our election, to extend the lease for five consecutive three-year periods. Base rent is subject to rent escalations on each annual anniversary from the lease commencement dates. Rental payments, as well as any step rent provisions specified in the lease agreements, are aggregated and charged evenly to expense over the lease term. Certain of these operating leases contain rent holidays and tenant allowances that may be applied toward leasehold improvements or other lease concessions. Capital improvement funding and other lease concessions provided by the landlord are recorded as deferred liabilities and are amortized evenly over the lease term as a reduction of rent expense. In most circumstances, we expect that in the normal course of business, leases will be renewed or replaced by other leases.
Rent expense is recognized on a straight-line basis over the life of the lease and included within property, office and technology or related party expenses in the Unaudited Consolidated Statements of Operations. Refer to Note 13 for additional information regarding office space leased from a related party. Rent expense was $812 and $750 for the three months ended June 30, 2018 and 2017, respectively. Rent expense was $1,556 and $1,475 for the six months ended June 30, 2018 and 2017, respectively.
As of June 30, 2018, future minimum lease payments under our leases for the succeeding five fiscal years and thereafter are as follows:
 
 
 
June 30, 2018
 
 
Remainder of 2018
$
1,764

2019
3,723

2020
3,815

2021
3,878

2022
2,827

2023 and thereafter
1,647

Total minimum lease payments
$
17,654

Our transaction processor imposes certain financial covenants upon our wholly owned subsidiary, GSLLC.
The financial covenants with our transaction processor apply only to GSLLC and include the following:
Tangible net worth, as defined in the agreement, of no less than $7.5 million;
Minimum aggregate net income of $5.0 million for the trailing four fiscal quarters, and
Ratio of total liabilities to total equity not to exceed 3.00:1.00.
As of June 30, 2018, GSLLC was in compliance with all financial covenants.
As of June 30, 2018, our outstanding open and unused line of credit on approved loans was $3.7 million. We have not recorded a provision for these unfunded commitments, but believe we have adequate cash on hand to fund these commitments.

28

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

For certain Bank Partners, we maintain a restricted cash balance based on a contractual percentage of the total interest billed on outstanding deferred interest loans that are within the promotional period less previous FCR on such outstanding loans. As of June 30, 2018, restricted cash in the Unaudited Consolidated Balance Sheet includes $42.2 million associated with this arrangement.
Contingencies
In limited instances, the Company may be subject to operating losses if we make certain errors in managing credit programs and we determine that a customer is not liable for a loan originated by a Bank Partner. We evaluated this contingency in accordance with ASC 450, Contingencies, and determined that it is reasonably possible that losses could result from errors in underwriting. However, in management’s opinion, it is not possible to estimate the likelihood or range of reasonably possible future losses related to errors in underwriting based on currently available information. Therefore, we have not established a liability for this loss contingency.
Further, from time to time, we place Bank Partner loans on non-accrual and non-payment status (“Pended Status”) while we investigate consumer loan balance inquiries, which may arise from disputed charges related to work performed by third-party merchants. As of June 30, 2018, Bank Partner loan balances in Pended Status were $14.2 million. While it is management’s expectation that most of these loan balance inquiries will be resolved without incident, in certain instances we may determine that it is appropriate for the Company to permanently reverse the loan balance and assume the economic responsibility for the loan balance itself. We record a liability for these instances. As of June 30, 2018, our liability for potential Pended Status future losses was $2.6 million.
From time to time, we may become a party to civil claims and lawsuits. As of June 30, 2018, we were not a party as a defendant to any litigation that we believed was material to our operations or results.
Financial guarantees
Under the terms of the contracts with our Bank Partners, a contractual percentage of the Bank Partners’ monthly originations and month-end outstanding portfolio balance is held and maintained in restricted, interest-bearing escrow accounts to serve as limited protection to the Bank Partners in the event of excess Bank Partner portfolio credit losses. The Company’s maximum exposure to Bank Partner portfolio credit losses is limited to the contractual restricted cash balance, which was $72.7 million as of June 30, 2018. The recorded fair value of the financial guarantee related to these contracts was $0.6 million as of June 30, 2018, which was recorded within other liabilities in the Unaudited Consolidated Balance Sheets. Recorded financial guarantees are typically settled within one year of the initial measurement of the liability. In determining the measured liabilities, we consider a variety of factors, including historical experience and management’s expectations of current customer delinquencies converting into Bank Partner portfolio losses.
13. Related Party Transactions
We lease office space from a related party under common management control for which rent expenses are recognized within related party expenses in the Unaudited Consolidated Statements of Operations. Total rent expenses related to this office space were $441 and $372 for the three months ended June 30, 2018 and 2017, respectively. Total rent expenses related to this office space were $813 and $745 for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, a $300 tenant allowance associated with this lease was outstanding, which is presented within related party receivables in the Unaudited Consolidated Balance Sheets.
We entered into loan agreements, most of which are non-interest bearing, with certain non-executive employees for which the remaining outstanding balances will be forgiven ratably over designated periods based on continual employment with the Company. As of June 30, 2018 and December 31, 2017, the remaining outstanding balances on these loan agreements were $35 and $210, respectively, which are presented within related party receivables in the Unaudited Consolidated Balance Sheets.
Equity-based payments to non-employees resulted in related party expenses for the three months ended June 30, 2018 and 2017, of $0 and $95, respectively. Equity-based payments to non-employees resulted in related party expenses for the six months ended June 30, 2018 and 2017, of $0 and $190, respectively.

29

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

In May 2018, we declared a special operating distribution of $26.2 million. As of June 30, 2018, $25.1 million of the declared distribution was paid in cash, including $1.0 million to an affiliate of a related party. The remaining portion of the declared distribution will be paid in stages upon vesting events, and is recorded within related party liabilities ($0.2 million) and other liabilities ($0.9 million) in the Unaudited Consolidated Balance Sheets as of June 30, 2018.
In August 2017, we incurred fees of $2.6 million due to an affiliate of one of the members of the board of managers in connection with finalizing our August 2017 term loan transaction. These costs were not directly attributable to the original term loan and were, therefore, expensed as incurred, rather than deferred against the term loan balance. The unpaid portion of these fees of $0.5 million is recorded within related party liabilities in the Unaudited Consolidated Balance Sheets as of June 30, 2018.
In November 2016, we executed a $20.0 million Bank Partner agreement (“2016 Agreement”) with affiliates of two members of our Board of Directors. The agreement was structured similarly to the origination and servicing arrangements with the other Bank Partners, wherein the Company is required to hold restricted cash based on monthly originations and the month-end outstanding portfolio balance. In June 2018, the outstanding loans owned by this related party were sold to another Bank Partner, which is not a related party, and continue to be serviced by us. In connection with that loan sale, the related party financing partner ended its servicing agreement with us, and as such, as of June 30, 2018, we no longer have any related party financing partner agreements.
We are entitled to collect fixed servicing fees in conjunction with the 2016 Agreement. As of June 30, 2018, and December 31, 2017, our related party financing partners had committed balances in the aggregate of $0.0 million and $11.7 million, respectively.
Unaudited Consolidated Balance Sheets effects associated with our related party financing partners were as follows at the dates indicated:
 
June 30, 2018
 
December 31, 2017
Related party receivables(1)
$

 
$
8

Related party liabilities(2)

 
445

Restricted cash

 
437

(1) 
Receivables related to servicing and other.
(2) 
Related party liabilities primarily consisted of related party servicing payables.
Unaudited Consolidated Statements of Operations effects associated with our related party financing partners were as follows during the periods indicated, and includes the income related impact of our two previous related party financing arrangements that were terminated in June 2018 and June 2017, respectively.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Servicing and other
$
26

 
$
137

 
$
54

 
$
216

Related party expenses(1)
(211
)
 
26

 

 
69

(1) 
Expenses incurred related to related party financing partner credit losses.

30

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

14. Segment Reporting
We conduct our operations through a single operating segment and, therefore, one reportable segment. Operating segments are revenue-generating components of a company for which separate financial information is internally produced for regular use by the Chief Operating Decision Maker (“CODM”) to allocate resources and assess the performance of the business. Our CODM uses a variety of measures to assess the performance of the business; however, detailed profitability information of the nature that could be used to allocate resources and assess the performance of the business are managed and reviewed for the Company as a whole.
There are no significant concentrations by state or geographical location, nor are there any significant individual customer concentrations by balance.
15. Variable Interest Entities
Upon completion of our IPO, GreenSky, Inc. became the managing member of GS Holdings with 100% of the management and voting power in GS Holdings. In its capacity as managing member, GreenSky, Inc. has the sole authority to make decisions on behalf of GS Holdings and bind GS Holdings to signed agreements. Further, GS Holdings maintains separate capital accounts for its investors as a mechanism for tracking earnings and subsequent distribution rights. Accordingly, management concluded that GS Holdings is determined to be a limited partnership or similar legal entity as contemplated in ASC 810.
Furthermore, management concluded that GreenSky, Inc. is GS Holdings' primary beneficiary. As the primary beneficiary, GreenSky, Inc. consolidates the results of GS Holdings for financial reporting purposes under the variable interest consolidation model guidance in ASC 810.
GreenSky, Inc.’s relationship with GS Holdings results in no recourse to the general credit of GreenSky, Inc. GS Holdings and its consolidated subsidiaries represents GreenSky, Inc.’s sole investment. GreenSky, Inc. shares in the income and losses of GS Holdings in direct proportion to GreenSky, Inc.’s ownership percentage. Further, GreenSky, Inc. has no contractual requirement to provide financial support to GS Holdings.
Below are tabular disclosures, which give insight into how GS Holdings affects GreenSky, Inc.’s financial position, performance and cash flows. Prior to the IPO and Reorganization Transactions, GreenSky, Inc. was not impacted by GS Holdings, and therefore 2017 periods were not presented below.

31

GreenSky, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)
Information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 is unaudited
(Dollars in thousands, except per share data, unless otherwise stated)

The following table presents the balances related to GS Holdings that are included on the Unaudited Consolidated Balance Sheets as well as GreenSky, Inc.'s interest in the variable interest entity ("VIE") at June 30, 2018.
 
 
June 30, 2018
 
 
 
 
 
Assets
 
 
Cash
$
236,524

 
Restricted cash
142,542

 
Loan receivables held for sale, net
43,489

 
Accounts receivable, net
20,424

 
Related party receivables
335

 
Property, equipment and software, net
8,518

 
Other assets
5,401

 
Total assets
$
457,233

 
 
 
 
Liabilities and Members Equity (Deficit)
 
 
Liabilities
 
 
Accounts payable
$
6,342

 
Accrued compensation and benefits
6,451

 
Other accrued expenses
1,077

 
Finance charge reversal liability
107,047

 
Term loan
387,979

 
Related party liabilities
825

 
Other liabilities
39,612

 
Total liabilities
549,333

 
 
 
 
Members Equity (Deficit)