ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statementsUnaudited Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statementsthe Audited Consolidated Financial Statements and related notes as disclosedand "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our prospectus dated May 23, 2018,the GreenSky, Inc. 2019 Form 10-K filed with the Securities and Exchange Commission (the "SEC") on May 25, 2018 (the "Final IPO Prospectus"March 2, 2020 ("2019 Form 10-K"). This discussion and analysis contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under Part II, Item 1A “Risk Factors” included in this Quarterly Report on Form 10-Q.
Information regarding our use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP (as defined below) measure, is included in "Non-GAAP Financial Measures.Measure."
In addition to financial measures presented in accordance with United States generally accepted accounting principles (“GAAP”), we monitor Adjusted EBITDA to manage our business, make planning decisions, evaluate our performance and allocate resources. We define “Adjusted EBITDA” as net income (loss) before interest expense,
taxes, depreciation and amortization, adjusted to eliminate equity-based compensation and payments and certain non-cash and non-recurring expenses.
We believe that Adjusted EBITDA is one of the key financial indicators of our business performance over the long term and provides useful information regarding whether cash provided by operating activities is sufficient to maintain and grow our business. We believe that this methodology for determining Adjusted EBITDA can provide useful supplemental information to help investors better understand the economics of our platform.business.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, such as net income.income (loss). Some of the limitations of Adjusted EBITDA include:
Pro Forma Net Income has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, such as net income. Some of the limitations of Pro Forma Net Income include:
It makes assumptions about tax expense, which may differ from actual results
It is not a universally consistent calculation, which limits its usefulness as a comparative measure
Management compensates for the inherent limitations associated with using the measure of Adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss), as presented below.
| | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| Net income (loss) | $ | (10,919) | | | $ | 7,401 | |
| Interest expense | 5,620 | | | 6,243 | |
| Income tax expense (benefit) | (895) | | | (595) | |
| Depreciation and amortization | 2,445 | | | 1,467 | |
Equity-based compensation expense(1) | 3,499 | | | 2,668 | |
Change in financial guarantee liability(2) | 18,408 | | | — | |
Transaction expenses(3) | 262 | | | — | |
Non-recurring expenses(4) | 971 | | | 1,216 | |
| Adjusted EBITDA | $ | 19,391 | | | $ | 18,400 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | $ | 40,816 |
| | $ | 38,593 |
| | $ | 59,420 |
| | $ | 60,604 |
|
| Interest expense | 5,787 |
| | 110 |
| | 11,378 |
| | 174 |
|
Tax expense (1) | 1,740 |
| | 100 |
| | 1,806 |
| | 172 |
|
| Depreciation and amortization | 1,067 |
| | 909 |
| | 2,037 |
| | 1,875 |
|
Equity-related expense (2) | 1,854 |
| | 1,078 |
| | 2,859 |
| | 1,772 |
|
Fair value change in servicing liabilities (3) | 85 |
| | — |
| | 201 |
| | — |
|
Non-recurring transaction expenses (4) | 759 |
| | — |
| | 1,882 |
| | — |
|
| Adjusted EBITDA | $ | 52,108 |
| | $ | 40,790 |
| | $ | 79,583 |
| | $ | 64,597 |
|
| |
(1)
| Includes non-corporate tax expense. Non-corporate tax expense is included within general and administrative expenses in our Unaudited Consolidated Statements of Operations. Prior to the IPO and Reorganization Transactions we did not have any corporate income tax expense. |
| |
(2)
| Includes equity-based compensation to employees and directors, as well as equity-based payments to non-employees. |
| |
(3)
| Includes the non-cash impact of the initial recognition of servicing liabilities and subsequent fair value changes in such servicing liabilities during the periods presented. See Note 3 to the unaudited consolidated financial statements for an additional discussion of our servicing liabilities. |
(1)Includes equity-based compensation to employees and directors, as well as equity-based payments to non-employees.
(2)Includes non-cash charges related to our financial guarantee arrangements with our ongoing Bank Partners, which are primarily a function of new loans facilitated on our platform during the period increasing the contractual escrow balance and the associated financial guarantee liability.
| |
(4)
| Non-recurring transaction expenses include certain costs associated with our IPO, which were not deferrable against the proceeds of the IPO. Further, certain costs related to our March 2018 term loan upsizing were expensed as incurred, rather than deferred against the balance of the term loan, and therefore are being added back to net income given the non-recurring nature of these expenses. |
Management compensates(3)For the three months ended March 31, 2020, includes professional fees associated with our strategic alternatives review process.
(4)For the three months ended March 31, 2020, includes legal fees associated with IPO related litigation. For the three months ended March 31, 2019, includes the following: (i) legal fees associated with IPO related litigation of $435 thousand, (ii) one-time tax compliance fees related to filing the final tax return for the inherent limitationsFormer Corporate Investors associated with using the measureReorganization Transactions of Pro Forma Net Income through disclosure$160 thousand, and (iii) lien filing expenses related to certain Bank Partner solar loans of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Pro Forma Net Income to the most directly comparable GAAP measure, net income, as presented below.$621 thousand.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | $ | 40,816 |
| | $ | 38,593 |
| | $ | 59,420 |
| | $ | 60,604 |
|
Non-recurring transaction expenses (1) | 759 |
| | — |
| | 1,882 |
| | — |
|
Incremental pro forma tax expense (2) | (8,038 | ) | | (8,611 | ) | | (12,439 | ) | | (13,522 | ) |
| Pro forma Net Income | $ | 33,537 |
| | $ | 29,982 |
| | $ | 48,863 |
| | $ | 47,082 |
|
| |
(1)
| Non-recurring transaction expenses include certain costs associated with our IPO, which were not deferrable against the proceeds of the IPO. Further, certain costs related to our March 2018 term loan upsizing were expensed as incurred, rather than deferred against the balance of the term loan, and therefore are being added back to net income given the non-recurring nature of these expenses. |
| |
(2)
| This adjustment represents the incremental tax effect on net income, adjusted for non-recurring transaction expenses, assuming that all consolidated net income was subject to corporate taxation for the periods presented. For the three months ended June 30, 2018 and 2017, we assumed effective tax rates of 22.3% and 22.3%, respectively. For the six months ended June 30, 2018 and 2017, we assumed effective tax rates of 22.3% and 22.3%, respectively.
|
Business Metrics
We review a number of operating and financial metrics including the following, to evaluate our business, measure our performance, identify trends, formulate plans and make strategic decisions.decisions, including the following.
| | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| Transaction Volume | | | |
| Dollars (in millions) | $ | 1,372 | | | $ | 1,242 | |
| Percentage increase | 10 | % | | |
| Loan Servicing Portfolio | | | | | |
| Dollars (in millions, at end of period) | $ | 9,260 | | | $ | 7,612 | |
| Percentage increase | 22 | % | | |
| Active Merchants | | | |
| Number (at end of period) | 17,761 | | | 15,745 | |
| Percentage increase | 13 | % | | |
| Cumulative Consumer Accounts | | | |
| Number (in millions, at end of period) | 3.21 | | | 2.41 | |
| Percentage increase | 33 | % | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| Active Merchants | | | | | | | |
| Number (end of period) | 13,440 |
| | 9,279 |
| | 13,440 |
| | 9,279 |
|
| Percentage increase | 45 | % | | | | 45 | % | | |
| Transaction Volume | | | | | | | |
| Dollars (in millions) | $ | 1,318 |
| | $ | 970 |
| | $ | 2,351 |
| | $ | 1,675 |
|
| Percentage increase | 36 | % | | | | 40 | % | | |
| Loan Servicing Portfolio | | | | | | | |
| Dollars (in millions, at end of period) | $ | 6,253 |
| | $ | 4,433 |
| | $ | 6,253 |
| | $ | 4,433 |
|
| Percentage increase | 41 | % | | | | 41 | % | | |
| Cumulative Consumer Accounts | | | | | | | |
| Number (through end of period) | 1,896,710 |
| | 1,312,374 |
| | 1,896,710 |
| | 1,312,374 |
|
| Percentage increase | 45 | % | | | | 45 | % | | |
Loan Servicing Portfolio. We define our loan servicing portfolio as the aggregate outstanding consumer loan balance (principal plus accrued interest and fees) serviced by our platform at the date of measurement. Our loan servicing portfolio is an indicator of our servicing activities. The average loan servicing portfolio for the three months ended March 31, 2020 and 2019 was $9,214 million and $7,477 million, respectively.
Active Merchants. We define active merchants as home improvement merchants and healthcare providers that have submitted at least one consumer application during the 12twelve months ended at the date of measurement. Because our transaction volume is a function of the size, engagement and growth of our merchant network, active merchants, in aggregate, are an indicator of future revenue and profitability, although they are not directly correlated. The comparative measures can also be impacted by disciplined corrective action taken by the Company to remove merchants from our program who do not meet our customer satisfaction standards.
Transaction Volume. We define transaction volume as the dollar value of loans facilitated on our platform during a given period. Transaction volume is an indicator of revenue and overall platform profitability and has grown substantially in the past several years.
Loan Servicing Portfolio. We define our loan servicing portfolio as the aggregate outstanding consumer loan balance (principal plus accrued interest and fees) facilitated and serviced by our platform at the date of measurement. Our loan servicing portfolio is an indicator of our servicing activities. The average loan servicing portfolio for the three and six months ended June 30, 2018 was $5,931 million and $5,742 million, respectively. The average loan servicing portfolio for the three and six months ended June 30, 2017 was $4,210 million and $4,072 million, respectively.
Cumulative Consumer Accounts. We define cumulative consumer accounts as the aggregate number of consumer accounts approved on our platform since our inception, including accounts with both existingoutstanding and prior accounts.zero balances. Although not directly correlated to revenue, cumulative consumer accounts is a measure of our brand awareness among consumers, as well as the value of the data we have been collecting from such consumers since our inception. We may use this data to support future growth by cross-marketing products and delivering potential additional customers to merchants that may not have been able to source those customers themselves.
Factors Affecting our Performance
Growth inNetwork of Active Merchants and Transaction Volume. Growth trends in We have a robust network of active merchants, upon which our transaction volumes rely. Our revenues and financial results are heavily dependent on our transaction volume, are critical variables directly affecting our revenue and financial results. Both factors influencewhich represents the numberdollar amount of loans funded on our platform and, therefore, influences the fees that we earn and the per unitper-unit cost of the services that we provide. Growth in active merchants andOur transaction volume will dependdepends on our ability to retain our existing platform participants, add new participants and expand to new industry verticals. To support our efforts to increase ourWe engage new merchants through both direct sales channels, as well as affiliate channel partners, such as manufacturers, software companies and other entities that have a network of merchants we have expanded our salesthat would benefit from consumer financing. Once onboarded, merchant relationships are maintained and marketing groups, which focus ongrown by direct account management, as well as regular product enhancements that facilitate merchant acquisition, from 44 full-time-equivalents, as of June 30, 2017, to 137, as of June 30, 2018.growth.
Increasing Bank Partner Commitments.Relationships; Other Funding. "Bank Partner funding commitmentsPartners" are integral to the successfederally insured banks that originate loans under the consumer financing and payments program that we administer for use by merchants on behalf of our program.such banks in connection with which we provide point-of-sale financing and payments technology and related marketing, servicing, collection and other services (the "GreenSky program" or "program"). Our ability to generate and increase transaction volume and expand our loan servicing portfolio is, in part, dependent on securing sufficient(a) retaining our existing Bank Partners and having them renew and expand their commitments, (b) adding new Bank Partners, and/or (c) adding complementary funding arrangements to increase funding capacity. Our failure to do so could materially and adversely affect our business and our ability to grow. A Bank Partner’s funding commitment typically has an initial multi-year term, after which the commitment is either renewed (typically on an annual basis) or expires. No assurance is given that any of the current funding commitments of our Bank Partners will be renewed.
As of March 31, 2020, we had aggregate funding commitments from our ongoing Bank Partners of approximately $9.0 billion, of which approximately $1.6 billion was unused. These funding commitments are "revolving" and replenish as outstanding loans are paid down. As a result of loan pay downs, we anticipate approximately $3.4 billion of additional funding capacity will become available through 2021. As we add new Bank Partners, their full commitments are typically subject to a mutually-agreed-upon onboarding schedule. As previously disclosed, one of our Bank Partners adjusted its funding commitment effective April 30, 2020 from $3 billion to $2 billion, which adjustment is reflected in the incremental funding capacity noted above.The adjustment of the Bank Partner’s funding commitment had only a nominal impact on our current funding position, because the funding level by the Bank Partner at the time of the change was near the Bank Partner's maximum.
In addition to customary expansion of commitments from existing Bank Partners and the periodic addition of new Bank Partners to our funding group, we are working to diversify the funding for loans originated by our Bank Partners to also include alternative structures with one or more institutional investors, financial institutions or other financing sources. To that end, as noted above under "Executive Summary," we established the SPV Facility with JPMorgan Chase Bank, N.A. to finance purchases by the SPV of participations in loans originated through the GreenSky program. The SPV Facility provides committed financing of $300 million.The SPV Facility also permits up to $200 million in additional financing, subject to satisfying certain conditions specified in the SPV Facility and obtaining the consent of the lenders. The Company is in the final stages of finalizing an agreement governing the participation sales with an existing Bank Partner necessary to access funding under the SPV Facility. We expect the SPV to conduct periodic sales of the loan participations or issue asset-backed securities to third parties, which sales or issuances would allow additional purchases to be financed through the SPV Facility. To the extent that such sales occur, the SPV Facility could facilitate substantial incremental GreenSky program loan volume.
Additionally, we are continuing to work with multiple institutional investors, including a leading institutional asset manager, on both a whole loan sales program and a material forward flow financing arrangement.We would expect to close on one or more of these transactions in the second half of 2020.
If we do not timely consummate forward flow arrangements or other alternative structures, or if the funding commitments from our Bank Partners and adding new Bank Partnersforward flow arrangements or other alternative structures (should they be consummated) are not sufficient to support expected originations, it would limit our program. As of June 30, 2018, we had approximately $8.0 billion of total commitments fromability for loans to be originated or our Bank Partners, of which $2.1 billion were unused. Our effortsability to grow existing commitments from our Bank Partners and to attract new Bank Partners to our program are an integral part of our strategy.generate revenue at or above current levels.
Performance of the Loans our Bank Partners Originate. While our Bank Partners bear substantially all of the credit risk on their wholly-owned loan portfolios, Bank Partner credit losses and prepayments impact our profitability as follows:
•Our contracts with our Bank Partners entitle us to incentive payments when the finance charges billed to borrowers exceed the sum of an agreed-upon portfolio yield, a fixed servicing fee and realized credit losses. This incentive payment varies from month to month, primarily due to the amount of realized credit losses.
•With respect to deferred interest loans, we bill the consumerGreenSky program borrower for interest throughout the deferred interest promotional period, but the consumerGreenSky program borrower is not obligated to pay any interest if the loan is repaid in full before the end of the promotional period. We are obligated to remit this accumulated billed interest to our Bank Partners to the extent the loan principal balances are paid off within the promotional periodsperiod (each event, a finance charge reversal or "FCR") even though the interest billed to the consumerGreenSky program borrower is reversed. Our maximum FCR liability is limited to the gross amount of finance charges billed during the promotional periods,period, offset by (i) the collection of incentive payments from our Bank Partners during such periods andperiod, (ii) proceeds received from transfers of previouslyCharged-Off Receivables, and (iii) recoveries on unsold charged-off loan receivables ("Charged-Off Receivables").receivables. Our profitability is impacted by the difference between the cash collected from the incentive payments and Charged-Off Receivables,these items and the cash to be remitted on a future date to settle our FCR liability. Our FCR liability quantifies our expected future obligation to remit previously billed interest with respect to deferred interest loans.
•If credit losses exceed an agreed-upon threshold, we have committed to make limited payments to our Bank Partners. Our maximum financial exposure is contractually limited to the escrow that we establish with each Bank Partner, which represented a weighted average target rate of 1.3%2.2% of the total outstanding principalloan balance as of June 30, 2018.March 31, 2020. Cash set aside monthly to meet this requirement is classified as restricted cash in our Unaudited Condensed Consolidated Balance Sheets. As of March 31, 2020, the financial guarantee liability associated with our escrow arrangements recognized in accordance with ASU 2016-13 represents over 90% of the contractual escrow that we have established with each Bank Partner.
For further discussion of our sensitivity to the credit risk exposure of our Bank Partners, see Part I, Item 3 “Quantitative"Quantitative and Qualitative DisclosureDisclosures About Market Risk—Risk–Credit risk.”" In January 2020, our Bank Partners also became subject to ASU 2016-13, which may affect how they reserve for losses on loans.
General Economic Conditions and Industry Trends. Our results of operations are impacted by the relative strength of the overall economy and its effect on unemployment, consumer spending behavior and consumer demand for our merchants’ products and services. As general economic conditions improve or deteriorate, the amount of consumer disposable income consumers have tends to fluctuate, which, in turn, impacts consumer spending levels and the willingness of consumers to take out loans to finance purchases. Specific economic factors, such as interest rate levels, changes in monetary and related policies, market volatility, consumer confidence and, particularly, unemployment rates, also influence consumer spending and borrowing patterns. In addition, trends within the industry verticals in which we operate affect consumer spending on the products and services our merchants offer in those industry verticals. For example, the strength of the national and regional real estate markets and trends in new and existing home sales impact demand for home improvement goods and services and, as a result, the volume of loans originated to finance these purchases. In addition, trends in healthcare costs, advances in medical technology and increasing life expectancy are likely to impact demand for elective medical procedures and services.
Seasonality. Our operating results can vary from quarter Refer to quarter as"Executive Summary" above for a result of seasonality in consumer spending and payment patterns. Our revenue growth generally is higher during the second and third quartersdiscussion of the year asexpected impacts on our business from the weather improves, the residential real estate market becomes more active and consumers begin home improvement projects. During these periods, we tend to experience increased loan applications and, in turn, transaction volume. Conversely, our revenue growth generally slows during the first and fourth quarters of the year, as consumer spending on home improvement projects tends to slow leading up to the holiday season and through the winter months. As a result, growth in loan applications and transaction volume also tends to slow during these periods. Unlike the home improvement vertical, the elective healthcare vertical is less susceptible to quarter to quarter seasonality, as the volume of elective healthcare procedures tends to remain relatively constant throughout the year. Our seasonality trends may vary in the future as we introduce our program to new industry verticals and become less concentrated in the home improvement industry.COVID-19 pandemic.
The origination-related and finance charge reversal components of our cost of revenue also are subject to these same seasonal factors, while the servicing related component of cost of revenue, in particular customer service staffing, printing and posting costs, is not as closely correlated to seasonal volume patterns. As transaction volume increases, the transaction volume related personnel costs, as well as costs related to credit and identity verification, among other activities, increase as well. Further, costs related to finance charge reversals are positively correlated to transaction volume in the same period of the prior year. As prepayments on deferred interest loans, which trigger finance charge reversals, typically are highest towards the end of the promotional period, and promotional periods are most commonly 12, 18 or 24 months, finance charge reversal settlements follow a similar seasonal pattern as transaction volumes over the course of a calendar year.
Components of Results of Operations
Revenue
We generate a substantial majorityThere were no significant changes to the components of our total revenue from transaction fees paid by merchants each time a consumer utilizesresults of operations as disclosed in Part II, Item 7 of our platform to finance a purchase and, to a lesser extent, from fixed servicing fees on Bank Partner loans.2019 Form 10-K, except as noted below.
Transaction fees. We earn a specified transaction fee in connection with each purchase made by a consumer based on a loan’s terms and promotional features. Transaction fees are billed to, and collected directly from, the merchant and are considered to be earned at the timeFinancial guarantee. Upon our adoption of the merchant’s transactionprovisions of ASU 2016-13 on January 1, 2020, our financial guarantee liability associated with the consumer. We also may earn a specified interchange fee in connection with purchases where payments are processed through a credit card payment network.
Servicing and other. Servicing fees are derived from providing professional services to manage loan portfolios on behalf of our Bank Partners. We are entitled to collect servicing fees as part of the servicing agreementsescrow arrangements with our Bank Partners which are paid monthly based upon an annual fixed percentage of the outstanding Bank Partner loan portfolio balance.
Cost of Revenue (exclusive of depreciation and amortization expense)
Origination and servicing costs. Origination and servicing costs consist primarily of compensation and benefits related to activities such as customer service and merchant underwriting. In addition, we incur processing fees on each transaction processed by our third-party transaction processor, costs for printing and postage related to consumer statement production and other costs related to consumer application review. We expect our origination and servicing related costs to decrease on a per unit basis as we realize greater economies of scale and the benefits of investmentswas recognized in these functions over the past few years.
Fair value change in FCR liability. Deferred interest loan products, which historically have represented a substantial portion of our transaction volume, have a feature whereby the consumer borrower is provided a promotional period to repay the loan principal balance in full without incurring finance charges. We bill interest accrued on the loan each month to the consumer throughout the promotional period and, if the loan is repaid in full before the end of the promotional period, the interest billed to the consumer is reversed. Under the terms of our contractsaccordance with our Bank Partners, we are obligated to remit this reversed billed interest to the Bank Partners.
The monthly billing of interest on deferred interest loan products triggers a potential future FCR liability for us, which qualifies as an embedded derivative. Fair value changes reflect the increase or decrease in our expected obligation to return billed interest to our Bank PartnersASC 326, Financial Instruments–Credit Losses (CECL). Changes in the future. Fair value changes in the FCRfinancial guarantee liability are partially offset by the receipt of monthly incentive payments from Bank Partners during the promotional period, which vary from month to month.
Our total FCR liability is recorded in our Unaudited Consolidated Balance Sheets and is calculated at the end of each period as the following:
FCR liability beginning balance, plus
Receipts, whichmeasured under CECL are comprised of, first, incentive payments from Bank Partners and, second, transfers of Charged-Off Receivables in exchange for cash. Incentive payments from Bank Partners are the surplus of financerecorded as non-cash charges billed to borrowers over the combination of an agreed-upon portfolio yield, a fixed servicing fee and realized net credit losses. Transfers of Charged-Off Receivables are cash payments we receive from third party investors for recovery interests in previously charged-off Bank Partner loans; minus
Settlements, which represent the remittance of previously billed, but uncollected, finance charges for loans that were paid off within the promotional period, plus
Fair value change in FCR liability, which represents an estimate of future settlements, equals
FCR liability ending balance
See Note 3 to the unaudited consolidated financial statements included in Part I, Item 1 for additional information on our FCR liability, including an illustration of the sensitivity of the fair value of our FCR liability to changes in the finance charge reversal rate and Part I, Item 3 “Quantitative and Qualitative Disclosures about Market Risk—Credit risk” for additional information on the sensitivitystatement of the fair valueoperations.
Operating Expenses
Compensation and benefits. Compensation and benefits expenses primarily consist of salaries, benefits and share-based compensation for executive, information technology, sales and marketing, finance, legal, human resources, product management and other overhead-related activities.
Sales and marketing. Sales and marketing expenses, which exclude compensation and benefits, primarily relate to promotional activities and travel related expenses. The majority of our sales and marketing spend is “business-to-
business” related, as we primarily attract new merchants to our program through trade shows, on-site visits with prospective merchants and other means.
Property, office and technology. Property, office and technology expenses primarily relate to technology, telecommunications and rent expense. These costs also include maintenance and security expenses associated with our facilities, as well as expenses related to phone and internet usage.
Depreciation and amortization. Depreciation and amortization expense is related to capitalizable computer hardware, furniture and leasehold improvements, as well as software, which is primarily internally developed. Computer hardware and software are expensed over three years, furniture is expensed over five years, and leasehold improvements are expensed over the shorter of the expected life of the asset or the remaining lease term.
General and administrative. General and administrative expenses primarily consist of legal, accounting, consulting and investment banking fees, recruiting and non-sales and marketing travel costs, as well as Bank Partner escrow expenses which represent our maximum exposure to our Bank Partners’ portfolio credit losses.
Related party expenses. Related party expenses primarily consist of rent expense, as we lease office space from a related party. In addition, we have made equity and transaction-based payments to certain related parties.
Results of Operations Summary
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto included in Part I, Item 1 and with our audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations appearing in our Final IPO Prospectus. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Revenue | | | | | | | |
| Transaction fees | $ | 89,884 | | | $ | 84,048 | | | $ | 5,836 | | | 7 | % |
| Servicing and other | 31,286 | | | 19,652 | | | 11,634 | | | 59 | % |
| Total revenue | 121,170 | | | 103,700 | | | 17,470 | | | 17 | % |
| Costs and expenses | | | | | | | |
| Cost of revenue (exclusive of depreciation and amortization shown separately below) | 71,775 | | | 58,037 | | | 13,738 | | | 24 | % |
| Compensation and benefits | 22,434 | | | 19,633 | | | 2,801 | | | 14 | % |
| Sales and marketing | 789 | | | 1,203 | | | (414) | | | (34) | % |
| Property, office and technology | 4,022 | | | 4,414 | | | (392) | | | (9) | % |
| Depreciation and amortization | 2,445 | | | 1,467 | | | 978 | | | 67 | % |
| General and administrative | 6,711 | | | 5,700 | | | 1,011 | | | 18 | % |
| Financial guarantee | 18,408 | | | 1,222 | | 17,186 | | | 1,406 | % |
| Related party | 477 | | | 536 | | | (59) | | | (11) | % |
| Total costs and expenses | 127,061 | | | 92,212 | | | 34,849 | | | 38 | % |
| Operating profit (loss) | (5,891) | | | 11,488 | | | (17,379) | �� | | (151) | % |
| Other income (expense), net | (5,923) | | | (4,682) | | | (1,241) | | | 27 | % |
| Income (loss) before income tax expense (benefit) | (11,814) | | | 6,806 | | | (18,620) | | | (274) | % |
| Income tax expense (benefit) | (895) | | | (595) | | | (300) | | | 50 | % |
| Net income (loss) | $ | (10,919) | | | $ | 7,401 | | | $ | (18,320) | | | (248) | % |
| Less: Net income (loss) attributable to noncontrolling interests | (7,585) | | | 4,502 | | | (12,087) | | | (268) | % |
| Net income (loss) attributable to GreenSky, Inc. | $ | (3,334) | | | $ | 2,899 | | | $ | (6,233) | | | (215) | % |
| | | | | | | |
| Earnings (loss) per share of Class A common stock | | | | | | | |
| Basic | $ | (0.05) | | | $ | 0.05 | | | | | |
| Diluted | $ | (0.05) | | | $ | 0.05 | | | | | |
Three Months Ended March 31, 2020and2019 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| | | | | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | | | | |
| Transaction fees | $ | 90,197 |
| | $ | 71,452 |
| | $ | 18,745 |
| | 26 | % | | $ | 161,137 |
| | $ | 126,373 |
| | $ | 34,764 |
| | 28 | % |
| Servicing and other | 15,507 |
| | 10,968 |
| | 4,539 |
| | 41 | % | | 29,893 |
| | 21,384 |
| | 8,509 |
| | 40 | % |
| Total revenue | 105,704 |
| | 82,420 |
| | 23,284 |
| | 28 | % | | 191,030 |
| | 147,757 |
| | 43,273 |
| | 29 | % |
| Costs and expenses | | | | | | | | | | | | | | | |
| Cost of revenue (exclusive of depreciation and amortization shown separately below) | 33,765 |
| | 23,193 |
| | 10,572 |
| | 46 | % | | 69,895 |
| | 46,492 |
| | 23,403 |
| | 50 | % |
| Compensation and benefits | 15,585 |
| | 13,167 |
| | 2,418 |
| | 18 | % | | 31,928 |
| | 25,597 |
| | 6,331 |
| | 25 | % |
| Sales and marketing | 1,038 |
| | 339 |
| | 699 |
| | 206 | % | | 1,866 |
| | 572 |
| | 1,294 |
| | 226 | % |
| Property, office and technology | 3,137 |
| | 2,754 |
| | 383 |
| | 14 | % | | 5,859 |
| | 5,280 |
| | 579 |
| | 11 | % |
| Depreciation and amortization | 1,067 |
| | 909 |
| | 158 |
| | 17 | % | | 2,037 |
| | 1,875 |
| | 162 |
| | 9 | % |
| General and administrative | 4,074 |
| | 4,226 |
| | (152 | ) | | (4 | )% | | 8,247 |
| | 8,006 |
| | 241 |
| | 3 | % |
| Related party expenses | 230 |
| | 493 |
| | (263 | ) | | (53 | )% | | 813 |
| | 1,004 |
| | (191 | ) | | (19 | )% |
| Total costs and expenses | 58,896 |
| | 45,081 |
| | 13,815 |
| | 31 | % | | 120,645 |
| | 88,826 |
| | 31,819 |
| | 36 | % |
| Operating profit | 46,808 |
| | 37,339 |
| | 9,469 |
| | 25 | % | | 70,385 |
| | 58,931 |
| | 11,454 |
| | 19 | % |
| Other income/(expense), net | (4,398 | ) | | 1,254 |
| | (5,652 | ) | | N/A |
| | (9,371 | ) | | 1,673 |
| | (11,044 | ) | | N/A |
|
| Income before income tax expense | 42,410 |
| | 38,593 |
| | 3,817 |
| | 10 | % | | 61,014 |
| | 60,604 |
| | 410 |
| | 1 | % |
| Income tax expense | 1,594 |
| | — |
| | 1,594 |
| | N/A |
| | 1,594 |
| | — |
| | 1,594 |
| | N/A |
|
| Net income | $ | 40,816 |
| | $ | 38,593 |
| | $ | 2,223 |
| | 6 | % | | $ | 59,420 |
| | $ | 60,604 |
| | $ | (1,184 | ) | | (2 | )% |
| Less: Net income attributable to noncontrolling interests | 35,266 |
| | N/A |
| | N/A |
| | N/A |
| | 53,870 |
| | N/A |
| | N/A |
| | N/A |
|
| Net income attributable to GreenSky, Inc. | $ | 5,550 |
| | N/A |
| | N/A |
| | N/A |
| | $ | 5,550 |
| | N/A |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | |
| Earnings per share of Class A common stock | | | | | | | | | | | | | | | |
| Basic | $ | 0.10 |
| | N/A |
| | | | | | $ | 0.10 |
| | N/A |
| | | | |
| Diluted | $ | 0.09 |
| | N/A |
| | | | | | $ | 0.09 |
| | N/A |
| | | | |
Results of Operations forDuring the three and six months ended June 30, 2018,March 31, 2020, total revenue increased $17.5 million, or 17%, compared to the three and six months ended June 30, 2017
Total Revenue
Total revenuesame period in 2019. Transaction fees increased during the three and six months ended June 30, 2018 compared to the comparable prior periods primarily due to the7%, which was largely commensurate with an increase in transaction fees. During the three and six months ended June 30, 2018, transaction volume increased by 36% and 40%, respectively, compared to comparable 2017 periods.
of 10%. The impact of higher transaction volume was slightly offset by price concessions for a decreasesignificant merchant group, which reduced transaction fees by $2.4 million during the three months ended March 31, 2020 compared to $3.5 million offered to the same merchant group during the same period in transaction2019.
Transaction fees earned per dollar originated from 7.36% inwere 6.55% during the three months ended June 30, 2017March 31, 2020 compared to 6.84%6.77% during the same period in 2018. Similarly,2019. The year over year transaction fees earned per dollarfee rate decline is primarily related to the mix of promotional terms of loans originated declined from 7.54% during the six months ended June 30, 2017 to 6.85% in the same period in 2018.
on our platform. Loans with lower interest rates, or otherlonger stated maturities and longer promotional features, such as deferred interest loans,periods generally carry relatively higher transaction fee rates. Conversely, loans with higher interest rates, shorter stated terms and fewershorter promotional featuresperiods generally carry relatively lower transaction fee rates. The mix of loans offered by merchants generally varies by merchant category.category, and is dependent on merchant and consumer preference. Therefore, as theshifts in merchant mix of merchants evolves over time, the mix of loan products andhave a direct impact on our transaction fees will evolve accordingly. Infee rates. During the three and six months ended June 30, 2018,March 31, 2020 relative to the same periodsperiod in 2017,2019, we facilitated a larger volume of loans with higher annual percentage yields, resultingexperienced small shifts in loan originations from different merchant categories, which resulted in the 0.22% decrease in transaction fees earned per dollar originated.
The increase inDuring the three months ended March 31, 2020, servicing and other revenue increased $11.6 million, or 59%, compared to the same period in 2019, which was primarily attributable to the increase in our average loan
servicing portfolio. We earnportfolio of 23% combined with the receipt of higher fixed servicing fees from ourassociated with increases to the contractual fixed servicing fees for certain Bank Partners on this portfolio.in the second half of 2019. The average servicing fee increased to 1.29% of the average loan servicing portfolio in the three months ended March 31, 2020 from 1.05% in the same period in 2019. An additional increase of $1.8 million was related to the fair value change in our servicing asset associated with the growth in Bank Partner loan servicing portfolios.
Cost of Revenue (exclusive of depreciation and amortization expense)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | | | | |
| 2018 | | 2017 | | 2018 | | 2017 | | Three Months Ended
March 31, | |
| | | | | | | | | | 2020 | | 2019 |
| Origination related | $ | 5,970 |
| | $ | 5,467 |
| | $ | 12,211 |
| | $ | 9,850 |
| Origination related | $ | 6,457 | | | $ | 8,535 | |
| Servicing related | 8,569 |
| | 5,746 |
| | 16,948 |
| | 11,193 |
| Servicing related | 12,814 | | | 10,737 | |
| Fair value change in FCR liability | 19,226 |
| | 11,980 |
| | 40,736 |
| | 25,449 |
| Fair value change in FCR liability | 52,504 | | | 38,765 | |
| Total cost of revenue (exclusive of depreciation and amortization expense) | $ | 33,765 |
| | $ | 23,193 |
| | $ | 69,895 |
| | $ | 46,492 |
| Total cost of revenue (exclusive of depreciation and amortization expense) | $ | 71,775 | | | $ | 58,037 | |
Origination related
Origination related expenses increased by 9% and 24%, respectively, in the three and six months ended June 30, 2018 compared to the comparable prior periods, which supported our 36% and 40%, period over period transaction volume growth. Notabletypically include costs included those related toassociated with our customer service staff that supports Bank Partner loan originations, credit and identity verification, loan document delivery, transaction processing and customer protection expenses.
During the three months ended March 31, 2020, origination related expenses decreased 24% compared to the same period in 2019 despite our 10% period over period transaction processing.volume growth. The lesser variancelower expenses were largely driven by lower customer protection expenses of $1.8million during the three months ended June 30, 2018 was mostly attributable to a decline in origination losses as a percentage of origination volumeMarch 31, 2020 compared to the priorsame period in 2019, which are incurred when the Company determines that a merchant did not fulfill its obligation to the end consumer and compensates a Bank Partner for the applicable portion of the loan principal balance. Additionally, we achieved operational efficiencies with loan processing expenses, partially offset by higher personnel costs in the 2020 period.
Servicing related
Servicing related expenses increased by 49% and 51%, respectively, in the three and six months ended June 30, 2018 compared to the comparable prior periods, in line with our loan servicing portfolio growth andare primarily reflective of the cost of our personnel (including dedicated call center personnel), printing and postage.
During the three months ended March 31, 2020, servicing related expenses increased 19% compared to the same period in 2019, which resulted from our 23% period over period average loan servicing portfolio growth. The increases in servicing related expenses associated with the increase in loans serviced were primarily for personnel costs within our customer service, collections and quality assurance functions.
Fair value change in FCR liability
CalculationsThe following table reconciles the beginning and ending measurements of our FCR liability for the three and six months ended June 30, 2018 and 2017 are included below and highlighthighlights the activity that drove the increase in the fair value change in FCR liability included in our cost of revenue.
| | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| Beginning balance | $ | 206,035 | | | $ | 138,589 | |
Receipts (1) | 44,708 | | | 32,123 | |
Settlements (2) | (90,089) | | | (59,879) | |
Fair value changes recognized in cost of revenue (3) | 52,504 | | | 38,765 | |
| Ending balance | $ | 213,158 | | | $ | 149,598 | |
|
| | | | | | | | | | | | | | | |
| | 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 | 33,742 |
| | 23,920 |
| | 61,835 |
| | 44,339 |
|
| Settlements | (46,834 | ) | | (32,762 | ) | | (89,672 | ) | | (61,533 | ) |
| Fair value changes recognized in cost of revenue | 19,226 |
| | 11,980 |
| | 40,736 |
| | 25,449 |
|
| Ending balance | $ | 107,047 |
| | $ | 76,319 |
| | $ | 107,047 |
| | $ | 76,319 |
|
FCR related(2)Represents the reversal of previously billed finance charges associated with deferred payment loan principal balances that were repaid 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 date. The fair value adjustment is recognized in cost of revenue in the Unaudited Condensed Consolidated Statements of Operations.
Further detail regarding our receipts were $33.7is provided below for the periods indicated.
| | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| Incentive payments | $ | 42,453 | | | $ | 23,937 | |
Proceeds from Charged-Off Receivables transfers (1) | — | | | 7,355 | |
Recoveries on unsold charged-off receivables (2) | 2,255 | | | 831 | |
| Total receipts | $ | 44,708 | | | $ | 32,123 | |
(1)We collected recoveries on previously charged-off and transferred Bank Partner loans on behalf of our Charged-Off Receivables investors of $5.8 million and $5.1 million during the three months ended June 30, 2018, anMarch 31, 2020 and 2019, respectively. These collected recoveries are excluded from receipts, as they do not impact our fair value change in FCR liability.
(2)Represents recoveries on previously charged-off Bank Partner loans.
The increase of $9.8$13.7 million, or 41%35%, in the fair value change in FCR liability recognized in cost of revenue during the three months ended March 31, 2020 compared to the same period in 2019 was primarily a function of the growth of deferred interest loans in the loan servicing portfolio (and billed finance charges on loans in promotional status) combined with the absence of proceeds from Charged-Off Receivables transfers in the three months ended March 31, 2020 compared to proceeds of $7.4 million in the same period in 2019. Excluding the impact of the proceeds from Charged-Off Receivables transfers, the increase in the fair value change in FCR liability was 14% relative to our 22% growth in the loan servicing portfolio, as we benefited from a 77% increase in incentive payments resulting from the combination of lower agreed upon Bank Partner portfolio yield and lower Bank Partner portfolio credit losses.
Compensation and benefits
During the three months ended March 31, 2020, compensation and benefits expense increased $2.8 million, or 14%, compared to the same period in 2017. Of this increase, $5.0 million was related2019 due to cash proceeds from transferscontinued investment in our information technology, credit and sales infrastructure and increased share-based compensation expense of Charged-Off Receivables during the three months ended June 30, 2018. $0.8 million.
Sales and marketing
During the three months ended June 30, 2018, we collected $3.4 million of recoveries on behalf of the Charged-Off Receivables investors,March 31, 2020, sales and marketing expense, which are not included in the 2018 receipts amount in the above table. The remaining increase in receipts was attributable to incentive payments from Bank Partners, which were driven by growth in our loan servicing portfolio.
FCR related receipts were $61.8 million during the six months ended June 30, 2018, an increase of $17.5excludes compensation and benefits, decreased $0.4 million, or 39%34%, compared to the same period in 2017. Of this increase, $10.0 million was related to cash proceeds from transfers of Charged-Off Receivables during the six months ended June 30, 2018. During the six months ended June 30, 2018, we collected $6.6 million of recoveries on behalf of the Charged-Off Receivables investors, which are not included in the 2018 receipts amount in the above table. The remaining increase in receipts was attributable to incentive payments from Bank Partners, which were driven by period-over-period growth in our loan servicing portfolio.
Settlements, which represent the remittance to our Bank Partners of previously billed but uncollected, finance charges for loans that were paid off within the promotional period, increased $14.1 million and $28.1 million, respectively, or 43% and 46%, respectively, in the three and six months ended June 30, 2018, compared to the same periods in 2017. Settlement activity increased primarily as a result of continued growth in deferred interest loan products in our loan servicing portfolio.
Fair value changes in our FCR liability increased $7.2 million and $15.3 million, respectively, or 60% and 60%, respectively, in the three and six months ended June 30, 2018, compared to the same periods in 2017. As of June 30, 2018, we had $132.4 million of billed finance charges on loans in promotional status, an increase of $37.0 million, or 39%, compared to $95.4 million as of June 30, 2017. Further, our assumed weighted average future reversal rate on these billed finance charges was 89.7% as of June 30, 2018, an increase from 88.7% as of June 30, 2017, which was reflective of the continued strong correlation between the high credit and income quality of our consumers and their propensity to pay off loans during their promotional periods.
Compensation and benefits
Compensation and benefits expense increased during the three and six months ended June 30, 20182019 primarily due to increased headcount. Headcount for employees not includeddecreases in cost of revenue averaged 405 in the three months ended June 30, 2018 compared to 344 in the same period in 2017, an increase of 18%. Headcount for employees not included in cost of revenue averaged 395 in the six months ended June 30, 2018 compared to 333 in the same period in 2017, an increase of 19%. Management expects compensation and benefits to increase for the foreseeable future as we continue to add employees, particularly in our salestrade show attendance, advertising fees and marketing and technology functions.
Share-based compensation expense is included in compensation and benefits expense. See Note 10 to the unaudited consolidated financial statements included in Part I, Item 1 for discussion of unrecognized compensation
costsrelated travel expenses largely related to share based compensation awards asimpacts of June 30, 2018, and the weighted average remaining service period over which those costs will be recognized, which will impact compensation and benefits expense in future periods.
Sales and marketing
Increases in sales and marketing expense during the three and six months ended June 30, 2018 compared to the same periods in 2017 were primarily due to an increase in digital marketing and advertising fees, as well as personnel travel expenses. We expect sales and marketing expenditures to continue to become more significant in the remainder of 2018 as we work to further increase brand recognition, communicate our program benefits to new and prospective merchants and further develop our direct-to-consumer strategy.COVID-19 pandemic.
Property, office and technology
Increases in property, office and technology expense during the three and six months ended June 30, 2018 compared to the same periods in 2017 were primarily driven by increases of $0.2 million and $0.6 million, respectively, in hosting and software licensing and subscription costs.
Depreciation and amortization
Increases in depreciation and amortization expense during the three and six months ended June 30, 2018 compared to the same periods in 2017 were primarily driven by increased amortization expense during the three months ended June 30, 2018 related to increases in capitalized internally-developed software and increases in depreciation expense during the six months ended June 30, 2018 from our growing infrastructure needs.
General and administrative
General and administrative expense was relatively flat when comparing the three and six months ended June 30, 2018 to the same periods in 2017.
During the three months ended June 30, 2018, we had an increaseMarch 31, 2020, property, office and technology expense decreased $0.4 million, or 9%, compared to the same period in accounting, legal2019 primarily due to a decrease of $0.7 million in consulting expenses associated with additional technology process innovation costs in the 2019 period, partially offset by increases in software, hardware and hosting costs of $0.1 million and operating lease costs of $0.2 million.
Depreciation and amortization
During the three months ended March 31, 2020, depreciation and amortization expense increased $1.0 million, or 67%, compared to the same period in 2019 primarily driven by increases over time in capitalized internally-developed software.
General and administrative
During the three months ended March 31, 2020, general and administrative expense increased $1.0 million, or 18%, compared to the same period in 2019 primarily related to professional fees for litigation and compliance matters of $0.7 million and increases in advisory and insurance costs of $0.5 million compared to the comparable prior period, which was attributable to the costs of being a public company. These increases were offset by a $1.0 million decrease in financial advisory fees primarily related to charges in connection with increasing one of our Bank Partner funding commitments during$0.3 million.
Financial guarantee
During the three months ended June 30, 2017, which were not incurredMarch 31, 2020, non-cash financial guarantee expenses recognized subsequent to our adoption of ASU 2016-13 on January 1, 2020 totaled $18.4 million, representing the estimated increase in 2018.
The most significant expensethe financial guarantee liability. As measured in accordance with the new standard, the increase in the financial guarantee liability was primarily associated with new Bank Partner loans facilitated during the six months ended June 30, 2018 comparedquarter, which increased the required escrow balance, and, to a lesser degree, due to decreased expectations of Bank Partner loan credit performance under the current economic environment. See Note 1 and Note 14 to the prior period was primarily dueNotes to $1.2 million of third party costs, including debt arrangement costs, associated with the amendment of our Credit Agreement (as defined below). This increase was offset by a $2.0 million decrease in financial advisory fees primarily related to charges in connection with increasing one of our Bank Partner funding commitments in 2017, which were not incurred in 2018.
Related party expenses
Decreases in related party expense during the three and six months ended June 30, 2018 compared to the same periods in 2017 were primarily driven by activity from related party equity-based payments, which we did not incur during 2018.
Other income/(expense), net
Changes in total other expense, net, during the three and six months ended June 30, 2018 compared to the same periods in 2017, were primarily due to the below.
Interest expense incurred in the three and six months ended June 30, 2018 primarily related to our term loan that was established in August 2017 and amended in March 2018. The interest expense incurred in the three and six months ended June 30, 2017 was related to a credit facility that was established in February 2017 and terminated in August 2017. See Note 7 to the unaudited consolidated financial statementsUnaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information regarding the measurement of our borrowings.financial guarantees under the new standard.
Interest income variancesUnder this guidance, we are precluded from including future loan originations by our Bank Partners in measuring our financial guarantee liability. Consistent with the modeling of loan losses for any consumer loan portfolio assumed to go into "run-off," our recognized financial guarantee liability under this model represents a significant portion of the contractual escrow that we establish with each Bank Partner and typically increases each period, with a corresponding non-cash charge to the statement of operations, as new loans facilitated on our platform during the period increase the contractual escrow balance. Historically, our actual cash payments required under the financial guarantee arrangements have been immaterial for ongoing Bank Partner portfolios into which we continue originating loans, and we expect this to continue to be the case subject to the accuracy of our assumptions around the performance of the loan portfolios.
During the three and six months ended June 30, 2018,March 31, 2019, financial guarantee expenses recognized in accordance with legacy guidance in ASC 450, Contingencies, were $1.2 million, representing expected escrow usage in future periods associated with Bank Partner loan credit performance that was determined to be probable of occurring.
Related party
During the three months ended March 31, 2020, related party expenses decreased $0.1 million, or 11%, compared to the same periodsperiod in 2017, were attributable2019, which was primarily due to fees incurred in the 2019 period to a lower average gross balanceplacement agent in connection with certain Charged-Off Receivables transfers, of which there were none in the 2020 period.
Other income (expense), net
The $1.2 million, or 27%, increase in other expense, net during the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to: (i) higher loan loss reserves associated with loan receivables held for sale combined withof $2.4 million, and (ii) lower income generated from cash and cash equivalents of $0.3 million, partially offset by (iii) lower interest expense of $0.6 million due primarily to a lower effective interest rate, (iv) a decrease in the fair value change in servicing liability of $0.7 million, and (v) higher average annual percentage yield. Grossinterest income generated from loan receivables held for sale averaged $58.5of $0.3 million and $64.5 milliondue to a higher average balance.
during the three and six months ended June 30, 2018, respectively, compared to $93.6 million and $76.4 million during the same periods in 2017.
Additionally, average annual percentage yield on loan receivables held for sale for the three and six months ended June 30, 2018 was 7.57% and 7.35%, respectively, compared to 5.75% and 5.87% during the same periods in 2017.
Other gains and losses for the three and six months ended June 30, 2018 compared to the same periods in 2017, was mostly flat, primarily because realized losses on our loan receivables held for sale were relatively consistent for both the three and six months ended June 30, 2018 and 2017.
Tax expense
Prior to the Reorganization Transactions and the IPO, the Company was not subject to corporate income taxation and, thus, did not have any corporate incomeIncome tax expense in 2017. Therefore, a comparison of the three and six months ended June 30, 2018 versus the same periods in 2017 is not meaningful. The income(benefit)
Income tax expensebenefit recorded during the three and six months ended June 30, 2018 reflectsMarch 31, 2020of $0.9 million reflected theexpected income tax expensebenefit of $1.1 million on the net earningsloss for the period related to GreenSky, Inc.'s economic interest in GS Holdings.
NetHoldings, partially offset by $0.2 million of tax expense arising from discrete items, which primarily consisted of a stock-based compensation shortfall as a result of restricted stock awards vesting during the period. Income tax benefit recorded during the three months ended March 31, 2019 of $0.6 million reflected the expected income attributabletax expense of $0.5 million on the net earnings for the period related to noncontrolling interests
Prior to the Reorganization Transactions and IPO, we did not account for noncontrolling interests. Beginning on May 24, 2018, we have attributed income to the Continuing LLC Members based on theirGreenSky, Inc.'s economic interest in GS Holdings, which was 68.7% asoffset by a $1.1 million tax benefit arising from discrete items, which primarily consisted of June 30, 2018. Therefore, a comparison ofwarrant and stock-based compensation deductions during the period.
The decrease in the income tax expense was primarily related to the decrease in overall net earnings attributable to GreenSky, Inc.'s economic interest in GS Holdings compared to the 2019 period, partially offset by an increase in the statutory tax rate.
Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to noncontrolling interests for the three and six months ended June 30, 2018 versusMarch 31, 2020 and 2019 reflects income (loss) attributable to the sameContinuing LLC Members for the entire periods based on their weighted average ownership interest in 2017 is not meaningful.
GS Holdings, which was 63.8% and 67.8%, respectively.
Financial Condition Summary
The following table presents summarized unaudited consolidated balance sheet data as of the dates indicated:
|
| | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 | | % Change |
| Cash | $ | 236,629 |
| | $ | 224,614 |
| | 5 | % |
| Restricted cash | 142,542 |
| | 129,224 |
| | 10 | % |
| Loan receivables held for sale, net | 43,489 |
| | 73,606 |
| | (41 | )% |
| Accounts receivable, net | 20,424 |
| | 18,358 |
| | 11 | % |
| Related party receivables | 335 |
| | 218 |
| | 54 | % |
| Property, equipment and software, net | 8,518 |
| | 7,848 |
| | 9 | % |
| Deferred tax assets, net | 301,358 |
| | — |
| | N/A |
|
| Other assets | 5,401 |
| | 9,021 |
| | (40 | )% |
| Total assets | $ | 758,696 |
| | $ | 462,889 |
| | 64 | % |
| | | | | | |
| Accounts payable | $ | 6,342 |
| | $ | 6,845 |
| | (7 | )% |
| Accrued compensation and benefits | 6,451 |
| | 7,677 |
| | (16 | )% |
| Other accrued expenses | 1,077 |
| | 1,606 |
| | (33 | )% |
| Finance charge reversal liability | 107,047 |
| | 94,148 |
| | 14 | % |
| Term loan | 387,979 |
| | 338,263 |
| | 15 | % |
| Tax receivable agreement liability | 255,823 |
| | — |
| | N/A |
|
| Related party liabilities | 825 |
| | 1,548 |
| | (47 | )% |
| Other liabilities | 39,612 |
| | 38,841 |
| | 2 | % |
| Total liabilities | 805,156 |
| | 488,928 |
| | 65 | % |
| | | | | | |
| Total temporary equity | — |
| | 430,348 |
| | N/A |
|
| Total permanent equity (deficit) | (46,460 | ) | | (456,387 | ) | | (90 | )% |
| Total liabilities, temporary equity and permanent equity (deficit) | $ | 758,696 |
| | $ | 462,889 |
| | 64 | % |
Changes in the composition and balance of our assets and liabilities during the six months ended June 30, 2018as of March 31, 2020 compared to December 31, 2019 were principally attributable to the following:
•a $3.8 million increase in cash and cash equivalents and restricted cash. See "Liquidity and Capital Resources" in this Part I, Item 2 for further discussion of our cash flow activity;
•a $30.9 million decrease in loan receivables held for sale, our term loan, the impact of the TRA and the FCR liability. Loan receivables held for sale decreased by $60.2 million from two sales during the six months ended June 30, 2018, and were further reduced by customer payments of $11.5 million. These decreases were partially offset by purchases of loan receivables held for sale of $43.1 million.
The increase in deferred tax assets was primarily a result of the Company having recognized a net, deferred tax asset in the amount of $245.8 million associated with the basis difference in our investment in GS Holdings in connection with the IPO and Reorganization Transactions. During the six months ended June 30, 2018, we also recognized $57.1 million of deferred tax assets related to additional tax basis increases generated from expected future payments under our TRA (as discussed in "Liquidity and Capital Resources") and related deductions for imputed interest on such payments.
Total liabilities increased by $316.2 million, primarily due to proceeds of $24.1 million from a tax receivable agreement liability of $255.8January 2020 sale and customer payments;
•a $7.1 million associated with the deferred tax asset discussed above, the $50.1 million impact of the modification of our term loan in March 2018, and an increase in ourthe FCR liability, which was indicative of $12.9 million. The FCR liability increase is reflectivea larger balance of an increase in deferred interest loan originations during the 2018 period compared to prior periods andloans. This activity is analyzed in further detail throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations.Part I, Item 2;
The change in temporary equity was principally due to the IPO, which eliminated the redeemable aspect of the former GS Holdings Class B and C units.
Total permanent equity declined due to distributions of $125.9 million, partially offset by net income of $59.4 million and •the impact of deferred tax adjustments relatedour January 1, 2020 adoption of ASU 2016-13, which resulted in an additional financial guarantee liability of $118.0 million and a corresponding cumulative-effect adjustment to our TRA withequity at the Continuing LLC Membersadoption date, including $32.2 million to retained earnings, net of $47.1 million, which represented the net impact of ana $10.4 million increase in deferred tax assets, and $75.4 million to noncontrolling interest. The estimated value of $302.9the financial guarantee increased an additional $18.4 million based on our subsequent measurement during the three months ended March 31, 2020. See Note 1 and Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for further discussion of the new standard;
•a $7.9 million increase in accounts payable primarily due to monthly settlements with Bank Partners related to their portfolio activity;
•a $12.9 million increase in the interest rate swap liability due to the significantly decreased interest rate environment. See Note 8 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional information;
•a $7.9 million decrease in transaction processing liabilities, which is reflective of $255.8the reduction in custodial in-transit loan funding requirements; and
•a decrease in total equity of $158.6 million primarily due to: (i) the measurement of our financial guarantee liability under ASU 2016-13, as discussed above, (ii) distributions of $31.1 million, which were primarily tax distributions, and (iii) other comprehensive loss of $11.7 million associated with our interest rate swap, as discussed above. These decreases were partially offset by share-based compensation of $3.5 million.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations. Cash and restricted cash totaled $379.2 million as of June 30, 2018, an increase of $25.3 million from December 31, 2017. Restricted cash, which had a balance of $142.5 million as of June 30, 2018, compared to a balance of $103.6 million as of June 30, 2017, is not available to us to fund operations or for general corporate purposes. The most significant cash flow activities for the six months ended June 30, 2018 consisted of $109.6 million of cash generated from operations, partially offset by $2.7 million of cash used for capital expenditures. Another $81.6 million of cash was used for financing activities, highlighted by equity redemptions and distributions to members, offset by proceeds from our IPO and debt refinancing.
Our short-term liquidity needs primarily include funding Bank Partner escrow balances and interest payments on GS Holdings' Credit Facility, which is the term loan and revolving loan facility under the Amended Credit Agreement (collectively referred to as the "Credit Facility"), as defined and discussed in "Term loan and revolving loan facility." We currently generate sufficient cash from our operations to meet these short-term needs. Our $100 million revolving loan facility is available to supplement our cash from operations in satisfying our short-term liquidity needs. We currently anticipate that our available funds, including our revolving loan facility and cash flow from operations, will be sufficient to meet our operational cash needs for the foreseeable future.
We are a holding company with no operations and depend on our subsidiaries for cash to fund all of our consolidated operations, including future dividend payments, if any. We depend on the payment of distributions by our current subsidiaries, including GS Holdings and GSLLC, which distributions may be restricted as a result of regulatory restrictions, state law regarding distributions by a limited liability company to its members, or contractual agreements, including agreements governing their indebtedness. For a discussion of those restrictions, refer to Part II, Item 1A "Risk Factors -– Risks Related to Our Organizational Structure."
In particular, the Credit Facility (as defined below) contains certain negative covenants prohibiting GS Holdings and GSLLC from making cash dividends or distributions unless certain financial tests are met. In addition, while there are exceptions to these prohibitions, such as an exception that permits GS Holdings to pay our operating expenses, these exceptions apply only when there is not ano default under the Credit Facility. We currently anticipate that such restrictions will not impact our ability to meet our cash obligations.
Our principal source of liquidity is cash generated from operations. Our transaction fees are the most substantial source of our cash flows and follow a relatively predictable, short cash collection cycle. To the extent that the impact from the COVID-19 pandemic on consumer spending behavior results in a decline in our transaction volume compared to prior periods, our transaction fees would be similarly impacted. Our short-term liquidity needs primarily include setting aside restricted cash for Bank Partner escrow balances and interest payments on GS Holdings' Credit Facility, which consists of the term loan and revolving loan facility under the Amended Credit Agreement, as defined and discussed in Note 7 to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1. Further, we do not anticipate any major capital expenditures. We currently generate sufficient cash from our operations to meet these short-term needs. In addition, we expect to use cash for: (i) FCR liability settlements, which are not fully funded by the incentive payments we receive from our Bank Partners, but for which $91.1 million is held for certain Bank Partners in restricted cash as of March 31, 2020, and (ii) payments under our financial guarantee related to our portfolio with a Bank Partner that did not renew its loan origination agreement in late 2019 and our portfolio with a Bank Partner that adjusted its funding commitment effective April 30, 2020 and into which loans will not be originated until the balance of the portfolio is below the adjusted funding commitment. Our $100 million revolving loan facility is also available to supplement our cash flows from operating activities in satisfying our short-term liquidity needs.
As noted above under "Executive Summary," on May 11, 2020, we established the SPV Facility to finance purchases by the SPV of participations in loans originated through the GreenSky program. The SPV Facility provides committed financing of $300 million. The SPV Facility also permits up to $200 million in additional financing, subject to satisfying certain conditions specified in the SPV Facility and obtaining the consent of the lenders. The Company is in the final stages of finalizing an agreement governing the participation sales with an existing Bank Partner necessary to access funding under the SPV Facility. The Company currently expects that the SPV Facility will provide financing for approximately 70% of the purchase price for such participations (on average), and the Company will fund the remainder. We expect that the Company will from time to time purchase participations in loans that have future funding obligations. Such future funding obligations will be funded by the Bank Partner that owns the loan; however, the Company will be required to purchase a participation in the future funding amount, which the Company would intend to finance through the SPV Facility at similar rates. In addition, we expect the SPV to conduct periodic sales of the loan participations or issue asset-backed securities to third parties, which sales or issuances would allow additional purchases to be financed at similar rates.
Our most significant long-term liquidity need involves the repayment of our term loan upon maturity in March 2025, which assuming no prepayments, will have an expected remaining unpaid principal balance of $373
million at that time. Assuming no extended impact of the COVID-19 pandemic, we anticipate that our significant cash generated from operations will allow us to service this debt both for quarterly principal repayments and the balloon payment at maturity. Should operating cash flows be insufficient for this purpose, we will pursue other financing options. We have not made any material commitments for capital expenditures other than those disclosed in the "Contractual Obligations" table in Part II, Item 7 of our 2019 Form 10-K, which did not change materially during the three months ended March 31, 2020.
Significant Changes in Capital Structure
There were no significant changes in the Company's capital structure during the three months ended March 31, 2020. During the three months ended March 31, 2019, we purchased 4.3 million shares of Class A common stock at a cost of $51.0 million under our share repurchase program, which are held in treasury. See Note 11 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for further discussion of our treasury stock.
Cash flows
We prepare our Unaudited Condensed Consolidated Statements of Cash Flows using the indirect method, under which we reconcile net income (loss) to cash flows provided by/(used in)by operating activities by adjusting net income (loss) for those items that impact net income (loss), but may not result in actual cash receipts or payments during the period. The following table provides a summary of our operating, investing and financing cash flows for the periods indicated.
| | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| Net cash provided by operating activities | $ | 41,047 | | | $ | 43,455 | |
| Net cash used in investing activities | $ | (3,354) | | | $ | (3,391) | |
| Net cash used in financing activities | $ | (33,861) | | | $ | (55,905) | |
|
| | | | | | | |
| | Six Months Ended June 30, |
| 2018 | | 2017 |
| | | | |
| Net cash provided by operating activities | $ | 109,604 |
| | $ | 40,156 |
|
| Net cash (used in) investing activities | $ | (2,707 | ) | | $ | (1,985 | ) |
| Net cash (used in) financing activities | $ | (81,564 | ) | | $ | (55,629 | ) |
Our restricted cash balance totaled $142.5 millionbalances as of June 30, 2018,March 31, 2020 and wasDecember 31, 2019 were comprised of three components: $72.7(i) $165.0 million and $150.4 million, respectively, which represented the amounts that we have escrowed with Bank Partners as limited protection to the Bank Partners in the event of excess Bank Partner portfolio credit losses; $42.2(ii) $91.1 million and $75.0 million, respectively, which represented an additional restricted cash balance that we maintained for certain Bank Partners related to our FCR liability; and $27.6(iii) $16.9 million and $24.7 million, respectively, which represented certain custodial in-transit loan funding and consumer borrower payments that we were restricted from using for our operations. The restricted cash balances related to our FCR liability and our custodial balances wereare not included in our evaluation of restricted cash usage, as these balances are not held as part of a
financial guarantee arrangement. See Note 1214 to the unaudited consolidated financial statementsNotes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information on our restricted cash held as escrow with Bank Partners.
Cash provided by operating activities
Three Months Ended March 31, 2020.Cash flows provided by operating activities were $109.6$41.0 million during the sixthree months ended June 30, 2018March 31, 2020. Net loss of $10.9 million was adjusted favorably for certain non-cash items of $21.5 million, which were predominantly related to financial guarantee losses, depreciation and amortization, and equity-based expense, partially offset by the fair value changes in servicing assets and liabilities and deferred tax benefit.
Primary sources of operating cash during the three months ended March 31, 2020 were: (i) an excess of proceeds from sales of loan receivables compared to purchases, (ii) an increase in billed finance charges on deferred interest loans that are expected to reverse in future periods, and (iii) an increase in accounts payable largely driven by Bank Partner settlements related to their portfolio activity and payables for price concessions to a significant merchant group. These increases were offset by uses of cash associated with transaction processing liabilities, which is reflective of the reduction in custodial in-transit loan funding requirements.
Three Months Ended March 31, 2019. Cash flows provided by operating activities of $40.2were $43.5 million during the same period in 2017.three months ended March 31, 2019. Net income of $59.4$7.4 million and $60.6 million for the 2018 and 2017 periods, respectively, was adjusted favorably for certain non-cash items of $8.6$4.4 million, and $4.0 million, respectively, which were predominantly related to depreciation and amortization, equity-based expense, provision for bad debtfinancial guarantee losses and fair value changes in servicing liabilities, partially offset by deferred tax expense.benefit.
The primaryPrimary sources of operating cash during the sixthree months ended June 30, 2018 and 2017 wereMarch 31, 2019 were: (i) earnings, and increases(ii) an increase in our FCR liability of $12.9 million and $8.3 million, respectively, which werebilled finance charges on deferred interest loans that are expected to reverse in future periods, (iii) an increase in accounts payable largely the result of increases in originations of promotional loans. An additional $29.9 million source of cash in the 2018 period wasdriven by Bank Partner settlements related to loan receivables heldtheir portfolio activity and payables for sale, for which our net receiptsprice concessions to a significant merchant group, (iv) an increase in transaction processing liabilities primarily driven by the timing of transaction processing liability settlements, and (v) an excess of proceeds from customer payments and loan sales ($60.2 million) exceeded our purchases during the period.
Comparatively, loan receivables held for sale drove a $41.0 million use of cash in the 2017 period due to our purchases exceeding our net receipts from customer payments and a sale of $17.9 million in loan receivables during the period. The lower purchases of loan receivables held for sale during the six months ended June 30, 2018 compared to the comparable 2017 period is reflective of the expansion of our Bank Partner network and modification of their credit policies, enabling them to purchase these receivables. A further source of cash in the 2017 period was from increases of $9.2 million in accounts payable associated with expected settlements with our Bank Partners.purchases.
Cash used in investing activities
Detail of the cash used in investing activities is included below for each period (dollars in millions).
| | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| 2020 | | 2019 |
| Software | $ | 3.0 | | | $ | 2.3 | |
| Computer hardware | 0.3 | | | 0.7 | |
| Leasehold improvements | — | | | 0.2 | |
| Furniture | 0.1 | | | 0.2 | |
| Purchases of property, equipment and software | $ | 3.4 | | | $ | 3.4 | |
|
| | | | | | | |
| | Six Months Ended June 30, |
| 2018 | | 2017 |
| | | | |
| Computer hardware | $ | 0.3 |
| | $ | 0.7 |
|
| Leasehold improvements | 0.1 |
| | 0.4 |
|
| Furniture | 0.2 |
| | 0.4 |
|
| Software | 2.1 |
| | 0.5 |
|
| Purchases of property, equipment and software | $ | 2.7 |
| | $ | 2.0 |
|
We had net cash used inThe spend on investing activities of $2.7 million during the sixthree months ended June 30, 2018March 31, 2020 was flat compared to $2.0 million for the same period in 2017.2019. The increase in capitalized costs associated with various internally-developed software projects, such as mobile application development and transaction processing, were offset by lower hardware costs associated with higher spendinfrastructure needs in the 20182019 period was primarily related to an increase in software expenditures, most of which were capitalized costs related to internally-developed software.and lower leasehold improvement costs.
Cash used in financing activities
Our financing activities in the periods presented consisted of equity and debt related transactions and distributions, including the impact of our IPO.distributions. GS Holdings makes tax distributions based on the estimated tax payments that its members are expected to have to make during any given period (based upon various tax rate assumptions) and, which are typically are paid in January, April, June and September of each year. Special GS Holdings distributions are also possible, one of which occurred in 2018, prior to the IPO.
We had net cash used in financing activities of $81.6$33.9 million during the sixthree months ended June 30, 2018March 31, 2020 compared to net cash used in financing activities of $55.6$55.9 million during the same period in 2017.2019. In the 20182020 period, we contemporaneously settled the $349.1 million outstanding principal balance on our original term loan with the issuanceuse of a $400.0 million modified term loan, net of an original issuance discount of $1.0 million. These net proceeds were offset by distributions of $127.6 million and equity transactions costs of $2.8 million paid in the 2018 period. The cash used in financing activities during the six months ended June 30, 2017 was primarily related to tax and non-tax distributions to members of $31.1 million and $1.7 million, respectively, and repayments of the principal balance of our term loan (net of original issuance discount) of $1.0 million. In the 2019 period, our use of
cash was primarily related to: (i) our $51.0 million repurchase of Class A common stock, (ii) distributions of $55.3$2.7 million, (iii) repayments of the principal balance of our term loan (net of original issuance discount) of $1.0 million, and $0.4(iv) equity activity of $1.1 million related to fees associated with the establishmentconsisting of our Initial Credit Facility (as defined below), which was terminated later in 2017.Holdco Unit exchanges and option exercises.
Borrowings
See Note 7 to the unaudited consolidated financial statementsNotes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additionalfurther information onabout our borrowings.
Termborrowings, including the use of term loan and revolving loan facilityproceeds, as well as our interest rate swap.
On March 29, 2018, GS Holdings amended its August 25, 2017 GS Holdings entered into a Credit Agreement which was amended on March 29, 2018 ("Amended Credit Agreement”). The Amended Credit Agreement provides for a $400$400.0 million term loan, the proceeds of which were used, in large part, to settle the outstanding principal balance on the $350$350.0 million term loan previously executed under the Credit Agreement in August 2017, and includes a $100$100.0 million revolving loan facility. The revolving loan facility also includes a $10.0 million letter of credit. The Credit Facility is guaranteed by GS Holdings’ significant subsidiaries, including GSLLC, and areis secured by liens on substantially all of the assets of GS Holdings and the guarantors. Interest on the loans can be based either on a “Eurodollar rate” or a “base rate” and fluctuates dependentdepending upon a “first lien net leverage ratio.” The Amended Credit Agreement contains a variety of covenants, certain of which are designed to limit the ability of GS Holdings to make distributions on, or redeem, its equity interests unless, in general, either (a) its “first lien net leverage ratio” is no greater than 2.00 to 1.00, or (b) the funds used for the payments come from certain sources (such as retained excess cash flow and the issuance of new equity) and its “total net leverage ratio” is no greater than 3.00 to 1.00. In addition, during any period when 25% or more of our revolving facility is utilized, itGS Holdings is required to maintain a “first lien net leverage ratio” no greater than 3.50 to 1.00. There are various exceptions to these restrictions, including, for example, exceptions that enable us to pay our operating expenses and to make certain GS Holdings tax distributions. The $400$400.0 million term loan matures on March 29, 2025, and the revolving loan facility matures on March 29, 2023.
TheThere was no amount outstanding under our revolving loan facility inclusive of a $10 million letter of credit issued in March 2018 under the amendment of our Amended Credit Agreement, was not drawn as of June 30, 2018, andMarch 31, 2020, which is available to fund future needs of GS Holdings’ business.
See Note 7 to the unaudited consolidated financial statements included in Part I, Item 1 for further information about our borrowings, including theThe use of term loan proceeds.
Initial Credit Facility
In February 2017, we entered into a two-year, $50.0 million revolving credit facility (the “Initial Credit Facility”). The proceeds from borrowings under the Initial Credit Facility wereLondon Interbank Offered Rate (“LIBOR”) is expected to be phased out by the end of 2021. LIBOR is currently used to fund working capital needs andas a reference rate for general corporate purposes. The interest rates payable on borrowingscertain of our financial instruments, including our $400.0 million term loan under the InitialAmended Credit Facility were calculated at eitherAgreement and the related interest rate swap agreement, both of which are set to mature after the expected phase out of LIBOR. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate; however, we continue to monitor the efforts of various parties, including government agencies, seeking to identify an alternate basealternative rate plus a 1.25% per annum margin or an adjusted LIBORto replace LIBOR. We will work with our lenders and counterparties to accommodate any suitable replacement rate plus a 2.25% per annum margin. We had the ability to request the issuance of letters of creditwhere it is not already provided under the Initial Credit Facility.terms of the financial instruments and, going forward, we will use suitable alternative reference rates for our financial instruments. We made no borrowings underwill continue to assess and plan for how the Initial Credit Facility. The Initial Credit Facility was terminated in August 2017 whenphase out of LIBOR will affect the Company; however, while the LIBOR transition could adversely affect the Company, we entered intodo not currently perceive any material risks and do not expect the Credit Agreement. See Note 7impact to be material to the unaudited consolidated financial statements included in Part I, Item 1 for additional information on the Initial Credit Facility.Company.
Tax Receivable Agreement
Our purchase of Holdco Units from the Exchanging Members using a portion of the net proceeds from the IPO, our acquisition of the equity of certain of the Former Corporate Investors, and any future exchanges of Holdco Units for our Class A common stock pursuant to the Exchange Agreement (as such terms are defined in the 2019 Form 10-K) are expected to result in increases in our allocable tax basis in the assets of GS Holdings. These increases in tax basis are expected to increase (for tax purposes) depreciation and amortization deductions allocable to us and, therefore, reduce the amount of tax that we otherwise would be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain assets to the extent tax basis is allocated to those assets.
We and GS Holdings entered into a TRATax Receivable Agreement ("TRA") with the "TRA Parties" (which are the(the equity holders of the Former Corporate Investors, the Exchanging Members, the Continuing LLC Members and any other parties receiving benefits under the TRA)TRA, as those parties are defined in the 2019 Form 10-K), whereby we agreed
to pay to those parties 85% of the amount of cash tax savings, if any, in United States federal, state and local taxes that we realize or are deemed to realize as a result of these increases in tax basis, increases in basis from such payments, and deemed interest deductions arising from such payments. Refer to our Final IPO Prospectus for further discussion of the TRA.
Due to the uncertainty of various factors, we cannot estimate with any precision either the likely tax benefits we will realize as a result of our purchase of Holdco Units from the Exchanging Members, our acquisition of the
equity of certain of the Former Corporate Investors or any future exchanges of Holdco Units for our Class A common stock pursuant to the Exchange Agreement, or the resulting amounts we are likely to pay out to the TRA Parties pursuant to the TRA althoughare also uncertain. However, we expect that such payments will be substantial and may substantially exceed the tax receivable liability of $255.8$312.3 million as of June 30, 2018.March 31, 2020.
Because we are the managing member of GS Holdings, which is the managing member of GSLLC, we have the ability to determine when distributions (other than tax distributions) will be made by GSLLC to GS Holdings and the amount of any such distributions, subject to limitations imposed by applicable law and contractual restrictions (including pursuant to our Amended Credit Agreement or other debt instruments). Any such distributions will then be distributedmade to all holders of Holdco Units, including us, pro rata based on the number of Holdco Units. The cash received from such distributions will first be used by us to satisfy any tax liability and then to make any payments required under the TRA. We expect that such distributions will be sufficient to fund both our tax liability and the required payments under the TRA.
Charged-Off Receivables
In the second half of 2017,event that we began transferring our rights to the proceeds from certain Charged-Off Receivables to third parties and Bank Partners (collectively, "investors") in exchange for a cash payment based on the expected recovery rate of such loan receivables, which consisted primarily of previously charged-off Bank Partner loans. We have no continuing involvement with, and retain no future economic interest in, these Charged-Off Receivables other than performing customary servicing and collection efforts on behalf of the Charged-Off Receivables investors. During the six months ended June 30, 2018, we received an aggregate of $10.2 million in exchange for 100% of the economic interests in the future recoveries of an aggregate pool of Charged-Off Receivables with an unpaid balance at the time of the sales of $76.2 million.
Contractual Obligations
Our principal commitments consisted of obligations under our outstanding term loan and operating leases for office facilities. The following tables summarize our commitments to settle contractual obligations in cash as of the date presented.
|
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | | (in thousands) |
Term loan(1) | | $ | 399,000 |
| | $ | 4,000 |
| | $ | 8,000 |
| | $ | 8,000 |
| | $ | 379,000 |
|
Interest payments on term loan(2) | | 138,967 |
| | 21,227 |
| | 41,812 |
| | 40,958 |
| | 34,970 |
|
Revolving loan facility fees(3) | | 1,772 |
| | 375 |
| | 750 |
| | 647 |
| | — |
|
Operating leases(4) | | 17,654 |
| | 3,616 |
| | 7,634 |
| | 5,730 |
| | 674 |
|
| Total contractual obligations | | $ | 557,393 |
| | $ | 29,218 |
| | $ | 58,196 |
| | $ | 55,335 |
| | $ | 414,644 |
|
| |
(1)
| The principal balance of the term loan is repaid on a quarterly basis at an amortization rate of 0.25% per quarter, with the balance due at maturity. |
| |
(2)
| Variable interest payments on our term loan are calculated based on the interest rate as of June 30, 2018 and the scheduled maturity of the underlying term loan. As of June 30, 2018, we recorded $116 of accrued interest within other liabilities in our Unaudited Consolidated Balance Sheets. |
| |
(3)
| 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. 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. Amounts presented reflect a 0.375% commitment fee rate for June 30, 2018, and assume that the entire $100 million revolving loan facility is unused (the conditions that existed as of period end) for the duration of the agreement, which matures on March 29, 2023. For the six months ended June 30, 2018, we recognized $221 of commitment fees within interest expense in the Unaudited Consolidated Statements of Operations. |
| |
(4)
| Our operating leases are for office space. Certain of these leases contain provisions for rent escalations and/or lease concessions. 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. However, amounts included herein do not reflect this accounting treatment, as they represent the future contractual lease cash obligations.
The payments that we may be required to make timely payment of all or any portion of a tax benefit payment due under the TRA on or before a final payment date, LIBOR is the base for the default rate used to calculate the required interest. The TRA Parties may be significantis anticipated to remain in effect after the expected phase out of LIBOR in 2021. See Part I, Item 2 "Liquidity and are not reflected inCapital Resources–Borrowings" for further discussion of the contractual obligations tables set forth above as they are dependent upon future taxable income. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” in our Final IPO Prospectus for more details.LIBOR phase out.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of June 30, 2018, or December 31, 2017.
Contingencies
From time to time, we may become a party to civil claims and lawsuits arising in the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated, which requires management judgment. As of June 30, 2018March 31, 2020 and December 31, 2017,2019, we were not a party as a defendant to any litigation that we believed was material and did not record any provision for liability during those periods.liability. Should any of our estimates or assumptions change or prove to be incorrect, it could have a material adverse impact on our business.consolidated financial condition, results of operations or cash flows. See Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for discussion of certain legal proceedings and other contingent matters.
Recently Adopted or Issued Accounting Standards
See “Recently"Recently Adopted orAccounting Standards" and "Accounting Standards Issued, Accounting Standards”But Not Yet Adopted" in Note 1 to the unaudited consolidated financial statements includedNotes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional information.
Critical Accounting Policies and Estimates
There have been no significant changes to theThe accounting policies and estimates that we believe are the most critical to an understanding of our unaudited results of operations and financial condition which areas disclosed in our Final IPO Prospectus.Management's Discussion and Analysis of Financial Condition and Results of Operations as filed in our 2019 Form 10-K include those related to our accounting for finance charge reversals, servicing assets and liabilities, financial guarantees and income taxes. In the preparation of our Unaudited Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2020, there have been no significant changes to the accounting policies and estimates related to our accounting for finance charge reversals, servicing assets and liabilities and income taxes. On January 1, 2020, we adopted the provisions of ASU 2016-13, which impacted our accounting for the contingent aspect of our financial guarantees. Historical periods prior to January 1, 2020 continue to reflect the measurement of the contingent aspect of our financial guarantees under legacy guidance in ASC 450. Refer to Note 1 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for discussion of our adoption of ASU 2016-13 and its impact on our consolidated financial statements and for the revised accounting policy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in thousands unless otherwise indicated)
We are exposed to market risk, including changes to interest rates, and credit risk. However, regarding interest rate risk, we do not expect changes in interest rates to have a material impact on our ability to finance our cost of capital, given our relatively capital light operating model.
We have established processes and procedures intended to identify, measure, monitor and control the types of risk to which we are subject. The Audit Committee of our Board of Directors is responsible for overseeing the Company’s major financial risk exposures and reviewing the steps management has taken to monitor and control such exposures.
Interest rate risk
Loans originated by Bank Partners. The fixed interest rates chargedagreed upon Bank Partner portfolio yield on the loans that our Bank Partners originate areis calculated based upon a margin above a market benchmark at the time of origination. IncreasesAn increase in the market benchmark would result in increasesan increase in the agreed upon Bank Partner portfolio yield, which impacts future incentive payments and, therefore, can negatively impact the future fair value change in our FCR liability. We are able to manage some of the interest ratesrate risk impact on new loans. Increasedour FCR liability through the types of loan products that we design and make available through our program (e.g. higher interest rate products, all else equal, result in higher incentive payments). However, increased interest rates may adversely impact the spending levels of our merchants’ customers and their ability and willingness to borrow money. Higher interest rates often lead to higher payment obligations, which may reduce the ability of customers to remain current on their obligations to our Bank Partners and, therefore, lead to increased delinquencies, defaults, customer bankruptcies and charge-offs, and decreasing recoveries, all of which could have a material adverse effect on our business.business and also negatively impact the fair value change in FCR liability, which is recorded within cost of revenue in the Unaudited Condensed Consolidated Statements of Operations. Further, even though we generally intend to increase our transaction fee rates in response to rising interest rates, we might not be able to do so rapidly enough (or at all).
Loan receivables held for sale. Changes in U.S.United States interest rates affect the interest earned on our cash and cash equivalents and could impact the market value of loan receivables held for sale. Since we typically sell loan receivables held for sale at par to our Bank Partners, which is indicative of our short-term holding period, we do not expect interest rate risk related to loan receivables held for sale to be a material risk to us. A hypothetical 100 basis points increase in interest rates wouldmay have resulted in a decrease of $1.6$0.2 million and $2.0$0.5 million in the carrying value of our loan receivables held for sale as of June 30, 2018March 31, 2020 and December 31, 2017,2019, respectively. Alternatively, a 100 basis points decrease in interest rates would not have impacted the reported value of our loan receivables held for sale, as they are carried at the lower of cost or fair value. Since we typically sell loan receivables held for sale at par to our Bank Partners,
which is indicative of our short-term holding period, we do not expect interest rate risk to be a material risk to our operations. As of June 30, 2018 and December 31, 2017, the weighted average age of our loan receivables held for sale based on the origination date relative to the respective reporting date was approximately three months and 11 months, respectively.
Term loan. Interest rate fluctuations expose our variable-rate term loan, which consisted of our $350 million term loan under our Credit Agreement, as of December 31, 2017 and our $400$400.0 million term loan under our Amended Credit Agreement, as of June 30, 2018, to changes in interest expense and cash flows. The $350In June 2019, we entered into a four-year interest rate swap agreement that effectively converted interest payments on $350.0 million of our variable-rate term loan hadto a fixed-rate basis, thus mitigating the impact of interest rate changes on future interest expense. The term loan has a maturity date of August 25, 2024, which was extended to March 29, 2025 for the $400 million term loan.2025. Based on an outstanding principal balance on our $350 million term loan of $349.1$392.0 million as of DecemberMarch 31, 2017, and on our $400 million term loan of $399.0 million as of June 30, 2018,2020, and accounting for our scheduled quarterly principal balance repayments, a hypothetical 100 basis point increase in the one-month LIBOR rate would result in an increase in annualized interest expense, net of $3.5the effects of our interest rate swap, of $0.4 million.
LIBOR is used as the reference rate for our interest rate swap agreement that we use to hedge interest rate exposure under our $400.0 million term loan. Our interest rate swap agreement is set to mature after the expected phase out of LIBOR in 2021. See Part I, Item 2 "–Liquidity and $4.0 million, respectively.Capital Resources–Borrowings" for further discussion regarding the LIBOR transition and its perceived impact on the Company.
Credit risk
Credit risk management is a critical component of our management and growth strategy. Credit risk refers to the risk of loss arising from consumer default when consumersGreenSky program borrowers are unable or unwilling to meet their financial obligations. We expect our credit loss rate to stay relatively constant over time; however, our portfolio may change as we look for additional opportunities to generate attractive risk-adjusted returns for our
Bank Partners. Additionally, we manage our exposure to counterparty credit risk through requirement of minimum credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk.
Loans originated by Bank Partners. Our Bank Partners own and bear substantially all of the credit risk on their wholly-owned loan portfolios. We have full credit risk exposure as it relates to the loan receivables that we hold for sale.
We regularly assess and monitor the credit risk exposure of our Bank Partners. This commences with the credit application process on our platform, during which a credit decision is rendered to a customer immediately based on preset underwriting standards provided by our Bank Partners. In rendering this decision, we generally obtain certain information provided by the applicant and a credit report from one of the major credit bureaus. Further, on behalf of our Bank Partners as part of our obligation as the loan servicer, we try to mitigate portfolio credit losses through our collection efforts on past due amounts. For loans wholly owned by our Bank Partners, our credit risk exposure impacts the amount of FCR receiptsincentive payments and, therefore, the amount of fair value change in our FCR liability, as well as any potential financial guarantee payments. Restricted cash was set aside in escrow with our potential escrow usage, which representedBank Partners at a weighted average target rate of 1.3%2.2% of the total outstanding principalloan balance as of June 30, 2018.March 31, 2020. As of March 31, 2020, the financial guarantee liability associated with our escrow arrangements recognized in accordance with ASU 2016-13 represents over 90% of the contractual escrow that we have established with each Bank Partner.
Based on our FCR receiptsincentive payments during the three and six months ended June 30, 2018,March 31, 2020 and 2019, and holding all other inputs constant (namely, the size of our loan servicing portfolio and settlement activity), a hypothetical 100 basis point increase in loan servicing portfolio credit losses would have resultedresult in increases of $13.5$18.6 million and $25.6$16.1 million, respectively, in the fair value of our FCR liability, which is recorded within cost of revenue.liability. Further, such an increase in credit losses would have causedcause us to incur additional general and administrativefinancial guarantee expense of $0.8$3.6 million and $1.9$2.0 million forduring the three and six months ended June 30, 2018, respectively, related to Bank Partner escrow utilization.March 31, 2020 and 2019, respectively.
Loan receivables held for sale. We bear all of the credit risk associated with the receivables that we hold for sale. This portfolio was highly diversified across 8,2114,845 and 5,4289,272 consumer loansloan receivables as of June 30, 2018March 31, 2020 and December 31, 2017,2019, respectively, without significant individual exposures. Based on our $43.5$21.1 million and $73.6$51.9 million loan receivables held for sale balancesbalance as of June 30, 2018March 31, 2020 and December 31, 2017,2019, respectively, a hypothetical 100 basis point increase in portfolio credit losses would have resultedresult in lower annualized earnings of $0.4$0.2 million and $0.7$0.5 million, respectively.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report,March 31, 2020, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)), was carried out by our management and with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer). Based upon the evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.March 31, 2020.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 30, 2018,March 31, 2020, no changechanges in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) occurred that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to legal proceedings incidental to our business. WhileSee Note 14 to the outcome of these matters could differ from management’s expectations, we do not believe that the resolution of such matters is reasonably likelyNotes to have a material effect on our results of operations or financial condition.Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for information regarding legal proceedings.
ITEM 1A. RISK FACTORS
Our business involves significant risks, some of which are described below. You should carefully review and consider the following risk factors and the other information included in this Quarterly Report on Form 10-Q, including the financial statementsUnaudited Condensed Consolidated Financial Statements and notesNotes to the financial statementsUnaudited Condensed Consolidated Financial Statements included in Part I, Item 1. The occurrence of one or more of the events or circumstances described in these risk factors, alone or in combination with other events or circumstances, may have a material adverse effect on our business, reputation, revenue, financial condition, results of operations and future prospects, in which event the market price of our Class A common stock could decline, and you could lose part or all of your investment. In addition, our business, reputation, revenue, financial condition, results of operations and future prospects also could be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.
Risks Related to Our Business and the Consumer Financial Services Industry
The global outbreak of the novel coronavirus, or COVID-19, has caused severe disruptions in the U.S. economy, and may have an adverse impact on our performance and results of operations.
On March 11, 2020, the World Health Organization designated the novel coronavirus disease (referred to as "COVID-19") as a global pandemic. Measures taken across the U.S. and worldwide to mitigate the spread of the virus have significantly impacted the macroeconomic environment, including consumer confidence, unemployment and other economic indicators that contribute to consumer spending behavior and demand for credit. Our results of operations are impacted by the relative strength of the overall economy. As general economic conditions improve or deteriorate, the amount of consumer disposable income tends to fluctuate, which, in turn, impacts consumer spending levels and the willingness of consumers to take out loans to finance purchases. In addition, trends within the industry verticals in which we operate affect consumer spending on the products and services our merchants offer in those industry verticals.
The extent to which COVID-19 will impact our business, results of operations and financial condition is dependent on many factors, which are highly uncertain, including, but not limited to, the duration and severity of the outbreak, the actions to contain the virus or mitigate its impact, and how quickly and to what extent normal economic and operating conditions will resume. If we experience a prolonged decline in transaction volume or increases in delinquencies, our results of operations and financial condition could be materially adversely affected.
In our function as loan servicer and in partnership with our Bank Partners, we are actively engaged in discussions with GreenSky program borrowers, some of whom have indicated that they have experienced economic hardship due to the COVID-19 pandemic and have requested payment deferral or forbearance or other modifications of their loans. While we are addressing requests for loan relief, we may still experience higher instances of default, which will adversely affect our business, including, but not limited to, the credit profile of our servicing portfolio, the incentive payments we receive from our Bank Partners and the required escrow payments under our financial guarantee arrangements with our Bank Partners. Additionally, the COVID-19 pandemic could adversely affect our liquidity position and could limit our ability to grow our business or fully execute on our business strategy, including influencing our strategic alternatives review process or entering into alternative funding arrangements. Furthermore, the COVID-19 pandemic could negatively impact our ability to retain existing, and attract new, Bank Partners and other funding sources for the GreenSky program.
The COVID-19 pandemic also resulted in us modifying certain business practices, such as restricting employee travel and executing on a company-wide work-at-home program. We may take further actions as required by government authorities or as we determine to be in the best interests of our associates, Bank Partners, merchants
and GreenSky program borrowers. We may experience financial losses or disruptions due to a number of operational factors, including, but not limited to:
•increased cyber and payment fraud risk related to COVID-19, as cybercriminals attempt to profit from the disruption, given increased online banking, e-commerce and other online activity;
•challenges to the security, availability and reliability of our platform due to changes to normal operations, including the possibility of one or more clusters of COVID-19 cases affecting our employees or affecting the systems or employees of our partners; and
•an increased volume of customer and regulatory requests for information and support, or new regulatory requirements, which could require additional resources and costs to address, including, for example, government initiatives to reduce or eliminate payments costs.
Even after the COVID-19 outbreak has subsided, our business may continue to be unfavorably impacted by the economic turmoil caused by the pandemic. There are no recent comparable events that could serve to indicate the ultimate effect the COVID-19 pandemic may have and, as such, we do not at this time know what the extent of the impact of the COVID-19 pandemic will be on our business. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also heighten other risks described in this Part II, Item 1A.
For additional discussion of the impact of COVID-19 on our business, see additional risk factors included in this Part II, Item 1A, as well as Part I, Item 2 "Management’s Discussion and Analysis of Financial Condition and Results of Operations–Executive Summary."
Our agreements with our Bank Partners are non-exclusive, short-term in duration and subject to termination by our Bank Partners upon the occurrence of certain events, including our failure to comply with applicable regulatory requirements. If such agreements expire or are terminated, and we are unable to replace the commitments of the expiring or terminating Bank Partners, our business would be adversely affected.
We rely on our Bank Partners to originate all of the loans made through the GreenSky program. Our four largest ongoing Bank Partners: SunTrust Bank, RegionsPartners – BMO Harris Bank, Fifth Third Bank, Truist Bank and Synovus Bank – provided approximately 91%83% of the commitments to originate loans as of June 30, 2018.March 31, 2020. We have entered into separate loan origination agreements and servicing agreements with each of our Bank Partners. The loan origination agreementsPartners, each generally containcontaining customary termination provisions that allow our Bank Partners to terminate the agreement uponand, in certain events including, among other things, our breach of the loan origination agreement or servicing agreement, underperformance of loan portfolios or regulatory requirements, and certain loan origination agreements, including loan origination agreements with certain of our largest Bank Partners, entitleinstances, entitling the Bank Partner to terminate the agreementits agreements for convenience. Our servicingBank Partners could decide to terminate or not to renew their agreements for any number of reasons, including, for example, perceived or actual erosion in the credit quality or performance of loans, the geographic or other (such as home improvement loans) concentration of loans, the type of loan products offered (such as deferred payment loans), strategic decisions to make fewer consumer loans or loans originated through channels such as ours, alternative investment opportunities that are expected to be more favorable, increases in required loan loss reserves (such as ones that might result from upcoming accounting changes) and required margins, dissatisfaction with our Bank Partners generally contain customary termination provisions that allowperformance as administrator of our Bank Partners to terminate our servicingprogram or as servicer, reduced availability of funds for originating new loans, under the agreement upon certain events including, among other things, our breachregulatory concerns regarding any of the loan origination agreementforegoing factors or servicing agreement.others, or general economic conditions, including those that are expected to impact consumer spending, consumer credit or default rates. If any of our largest Bank Partners were to terminate their agreementsits relationship with us, it wouldcould have a material adverse effect on our business. See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations–Factors Affecting our Performance–Bank Partner Relationships; Other Funding" for more information regarding our Bank Partner relationships.
Our agreements with our Bank Partners generally have automatically renewable one-year terms. These agreements are non-exclusive and do not prohibit our Bank Partners from working with our competitors or from offering competing products, except that certain Bank Partners have agreed not to provide customer financing outside of the GreenSky program to our merchants and Sponsors (as defined below) during the term of their agreements with us and generally for one year after termination or expiration. "Sponsors" refers to manufacturers, their captive and franchised showroom operations, and trade associations with which we partner to onboard merchants. As a result of the foregoing, any of our Bank Partners could with minimal notice decide that working with us is not in its interest, could offer us less favorable or unfavorable economic or other terms or could decide to enter into exclusive or more favorable relationships with one of our competitors. We also could have future
disagreements or disputes with our Bank Partners, which could negatively affect or threaten our relationships with them.
Our Bank Partners also may terminate their agreements with us if we fail to comply with regulatory requirements applicable to them. We are a service provider to our Bank Partners, and, as a result, we are subject to audit by our Bank Partners in accordance with customary practice and applicable regulatory guidance related to management by banks of third-party vendors. We also are subject to the examination and enforcement authority of
the federal banking agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, as a bank service company, and are subject to the examination and enforcement authority of the Consumer Financial Protection Bureau (“CFPB”) as a service provider to a covered person under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). It is imperative that our Bank Partners continue to have confidence in our compliance efforts. Any substantial failure, or alleged or perceived failure, by us to comply with applicable regulatory requirements could cause them to be unwilling to originate loans through our program or could cause them to terminate their agreements with us. See “-Risks Related to Our Regulatory Environment.”
If we are unsuccessful in maintaining our relationships with our Bank Partners for any of the foregoing or other reasons, or if we are unable to develop relationships with new Bank Partners or other funding sources, it wouldcould have a material adverse effect on our business and our ability to grow.
Our results of operations and continued growth depend on our ability to retain existing, and attract new, merchants and Bank Partners.
A substantial majority of our total revenue is generated from the transaction fees that we receive from our merchants and, to a lesser extent, servicing and other fees that we receive from our Bank Partners in connection with loans made by our Bank Partners to the customers of our merchants. Approximately 86% of our revenue in 2017, and approximately 84% 74%of our total revenue for the sixthree months ended June 30, 2018,March 31, 2020 was generated from transaction fees paid to us by our merchants. To attract and retain merchants, we market our program to them on the basis of a number of factors, including financing terms, the flexibility of promotional offerings, approval rates, speed and simplicity of loan origination, service levels, products and services, technological capabilities and integration, customer service, brand and reputation.
There is significant competition for our existing merchants. If we fail to retain any of our larger merchants or a substantial number of our smaller merchants, and we do not acquire new merchants of similar size and profitability, it would have a material adverse effect on our business and future growth. We have experienced some turnover in our merchants, as well as varying activation rates and volatility in usage of the GreenSky program by our merchants, and this may continue or even increase in the future. Program agreements generally are terminable by merchants at any time. Also, we generally do not have exclusive arrangements with our merchants, and they are free to use our competitors’ programs at any time and without notice to us. If a significant number of our existing merchants were to use other competing programs, thereby reducing their use of our program, it would have a material adverse effect on our business and results of operations.
Competition for new merchants also is significant, especially in industry verticals in which we do not have an established reputation, such as elective healthcare. As a result, our continued success and growth depend on our ability to attract new merchants, including in new verticals, and our failure to do so would limit our growth and our ability to continue generating revenue at current levels.
Our failure to retain existing, and attract and retain new, Bank Partners also wouldcould materially adversely affect our business and our ability to grow. We market our program to banks on the basis of the risk-adjusted yields available to them and geographic diversity of the loans that they are able to originate through the GreenSky program, as well as the absence of significant upfront and ongoing costs and the general attractiveness of the consumers that use the GreenSky program. Bank Partners have alternative sources for attractive, if not similar, loans, including internal loan generation, and they could elect to originate loans through those alternatives rather than through the GreenSky program.
Based upon current commitment levels, our four largest ongoing Bank Partners are SunTrust Bank, RegionsBMO Harris Bank, Fifth Third Bank, Truist Bank and Synovus Bank. As of June 30, 2018,March 31, 2020, they provided approximately 91%83% of the overall commitments to originate loans through our program. If any of our larger Bank Partners, or a substantial number of
our smaller Bank Partners, were to suspend, limit or otherwise terminate their relationships with us, it wouldcould have a material adverse effect on our business. If we need to enter into arrangements with a different bank to replace one of our Bank Partners, we may not be able to negotiate a comparable alternative arrangement.
See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations–Factors Affecting our Performance–Bank Partner Relationships; Other Funding" for more information regarding our Bank Partner relationships.
A large percentage of our revenue is concentrated with our top ten merchants, and the loss of a significant merchant could have a negative impact on our operating results.
Our top ten merchants (including certain groups of affiliated merchants) accounted for an aggregate of 30%23% of our total revenue in 2017 and 31% induring the sixthree months ended June 30, 2018.March 31, 2020. The Home Depot is our most significant single merchant and represented approximately 6%4% of total revenue in 2017 and 7% induring the sixthree months ended June 30, 2018.March 31, 2020. In addition, affiliates of Renewal by Andersen, our largest Sponsor, represented together approximately 19%16% of total revenue in 2017 and 20% induring the sixthree months ended June 30, 2018.March 31, 2020. Our agreement with Renewal by Andersen provides that Renewal by Andersen will promote the GreenSky program through notifying its dealers of the availability of the GreenSky program and providing them ancillary materials. Our agreement also provides that we will provide Renewal by Andersen a rebate if certain financing goals are met. Both parties have the right to terminate the agreement generally upon 90-days notice. If Renewal by Andersen terminates the agreement, Renewal by Andersen dealers would not be obligated to terminate their participation in the GreenSky program, although they could choose to do so. We expect to have significant concentration in our largest merchant relationships for the foreseeable future. In the event that (i) The Home Depot or one or more of our other significant merchants, or groups of merchants, or (ii) Renewal by Andersen or one or more of our other significant Sponsors, and their dealers, terminate their relationships with us, or elect to utilize an alternative source for financing, the number of loans originated through the GreenSky program wouldcould decline, which would materially adversely affect our business and, in turn, our revenue.
Our results depend, to a significant extent, on the active and effective promotion and support of the GreenSky program by our Sponsors and merchants.
Our success depends on the active and effective promotion of the GreenSky program by our Sponsors to their network of merchants and by our merchants to their customers. We rely on our Sponsors, including large franchisors within different home improvement industry sub-verticals, to promote the GreenSky program within their networks of merchants. A majority of our active merchants are affiliated with Sponsors. Although our Sponsors generally are under no obligation to promote the GreenSky program, many do so through direct mail, email campaigns and trade shows. The failure by our Sponsors to effectively promote and support the GreenSky program would have a material adverse effect on the rate at which we acquire new merchants and the cost thereof.
We also depend on our merchants, which generally accept most major credit cards and other forms of payment, to promote the GreenSky program, to integrate our platform and the GreenSky program into their business, and to educate their sales associates about the benefits of the GreenSky program so that their sales associates encourage customers to apply for and use our services. Our relationship with our merchants, however, generally is non-exclusive, and we do not have, or utilize, any recourse against merchants when they do not promote the GreenSky program. The failure by our merchants to effectively promote and support the GreenSky program would have a material adverse effect on our business.
If our merchants fail to fulfill their obligations to consumers or comply with applicable law, we may incur remediation costs.
Although our merchants are obligated to fulfill their contractual commitments to consumers and to comply with applicable law, from time to time they might not, or a consumer might allege that they did not. This, in turn, can result in claims against our Bank Partners and us or in loans being uncollectible. In those cases, we may decide that it is beneficial to remediate the situation, either through assisting the consumers to get a refund, working with our Bank Partners to modify the terms of the loan or reducing the amount due, making a payment to the consumer or otherwise. Historically, the cost of remediation has not been material to our business, but we make no assurance that it will notcould be in the future.
We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our operational, administrative and financial resources.
The number of loans originated through the GreenSky program grew from approximately 289,000 in 2015 to approximately 488,000 in 2017, and our total revenue grew from $173 million in 2015 to $326 million in 2017. Our rapid growth has caused significant demands on our operational, marketing, compliance and accounting infrastructure, and has resulted in increased expenses, which we expect to continue as we grow. In addition, we are required to continuously develop and adapt our systems and infrastructure in response to the increasing sophistication of the consumer finance market and regulatory developments relating to our existing and projected business activities and those of our Bank Partners. Our future growth will depend, among other things, on our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources.
As a result of our growth, we face significant challenges in:
•securing commitments from our existing and new Bank Partners to provide loans to customers of our merchants;
•maintaining existing and developing new relationships with merchants and Sponsors;
•maintaining adequate financial, business and risk controls;
•implementing new or updated information and financial and risk controls and procedures;
•training, managing and appropriately sizing our workforce and other components of our business on a timely and cost-effective basis;
•navigating complex and evolving regulatory and competitive environments;
•securing funding (including credit facilities and/or equity capital) to maintain our operations and future growth;
•increasing the number of borrowers in, and the volume of loans facilitated through, the GreenSky program;
•expanding within existing markets;
•entering into new markets and introducing new solutions;
•continuing to revise our proprietary credit decisioning and scoring models;
•continuing to develop, maintain and scale our platform;
•effectively using limited personnel and technology resources;
•maintaining the security of our platform and the confidentiality of the information (including personally identifiable information) provided and utilized across our platform; and
•attracting, integrating and retaining an appropriate number of qualified employees.
We may not be able to manage our expanding operations effectively, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.
If we experience negative publicity, we may lose the confidence of our Bank Partners, merchants and consumers who use the GreenSky program and our business may suffer.
Reputational risk, or the risk to us from negative publicity or public opinion, is inherent to our business. Recently, consumer financial services companies have been experiencing increased reputational harm as consumers and regulators take issue with certain of their practices and judgments, including, for example, fair lending, credit reporting accuracy, lending to members of the military, state licensing (for lenders, servicers and money transmitters) and debt collection. Maintaining a positive reputation is critical to our ability to attract and retain Bank Partners, merchants, consumers, investors and employees. Negative public opinion can arise from many sources, including actual or alleged misconduct, errors or improper business practices by employees, Bank Partners, merchants, outsourced service providers or other counterparties; litigation or regulatory actions; failure by us, our
Bank Partners, or merchants to meet minimum standards of service and quality; inadequate protection of consumer information; failure of merchants to adhere to the terms of their GreenSky program agreements or other contractual arrangements or standards; compliance failures; and media coverage, whether accurate or not. Negative public opinion cancould diminish the value of our brand and adversely affect our ability to attract and retain Bank Partners, merchants and consumers, as a result of which our results of operations may be materially harmed and we could be exposed to litigation and regulatory action.
We may be unable to successfully develop and commercialize new or enhanced products and services.
The consumer financial services industry is subject to rapid and significant changes in technologies, products and services. Our business is dependent upon technological advancement, such as our ability to process applications instantly, accept electronic signatures and provide other conveniences expected by borrowers and counterparties. We must ensure that our technology facilitates a consumer experience that is quick and easy and equals or exceeds the consumer experience provided by our competitors. Therefore, a key part of our financial success depends on our ability to develop and commercialize new products and services and enhancements to existing products and services, including with respect to mobile and point-of-sale technologies.
Realizing the benefit of such products and services is uncertain, and we may not assign the appropriate level of resources, priority or expertise to the development and commercialization of these new products, services or enhancements. Our ability to develop, acquire and commercialize competitive technologies, products and services on acceptable terms, or at all, may be limited by intellectual property rights that third parties, including competitors and potential competitors, may assert. In addition, our success is dependent on factors such as merchant and customer acceptance, adoption and usage, competition, the effectiveness of marketing programs, the availability of appropriate technologies and business processes and regulatory approvals. Success of a new product, service or enhancement also may depend upon our ability to deliver it on a large scale, which may require a significant investment.
We also could utilize and invest in technologies, products and services that ultimately do not achieve widespread adoption and, therefore, are not as attractive or useful to our merchants and their customers as we anticipate. Our merchants also may not recognize the value of new products and services or believe they justify any potential costs or disruptions associated with implementing them. Because our solution is typically marketed through our merchants, if our merchants are unwilling or unable to effectively implement or market new technologies, products, services or enhancements, we may be unable to grow our business. Competitors also may develop or adopt technologies or introduce innovations that change the markets they operate in and make our solution less competitive and attractive to our merchants and their customers. Moreover, we may not realize the benefit of new technologies, products, services or enhancements for many years, and competitors may introduce more compelling products, services or enhancements in the meantime.
Changes in market interest rates could have an adverse effect on our business.
The fixed interest rates charged on the loans that our Bank Partners originate are calculated based upon a margin above a market benchmark at the time of origination. Increases in the market benchmark would result in increases in the interest rates on new loans. Increased interest rates may adversely impact the spending levels of consumers and their ability and willingness to borrow money. Higher interest rates often lead to higher payment obligations, which may reduce the ability of customers to remain current on their obligations to our Bank Partners and, therefore, lead to increased delinquencies, defaults, customer bankruptcies and charge-offs, and decreasing
recoveries, all of which could have an adverse effect on our business. See Part I, Item 3 “Quantitative"Quantitative and Qualitative Disclosures about Market Risk.”"
Increases in loan delinquencies and default rates in the GreenSky program could cause us to lose amounts we place in escrow and may require us to deploy resources to enhance our collections and default servicing capabilities, which could adversely affect our ability to maintain loan volumes.
Loans funded by our Bank Partners generally are not secured by collateral, are not guaranteed or insured by any third party and are not backed by any governmental authority in any way, which limits the ability of our Bank Partners to collect on loans if a borrower is unwilling or unable to repay. A borrower’s ability to repay can be negatively impacted by increases in the borrower’s payment obligations to other lenders under home, credit card
and other loans; loss of employment or other sources of income; adverse health conditions; or for other reasons. Changes in a borrower’s ability to repay loans made by our Bank Partners also could result from increases in base lending rates or structured increases in payment obligations. While consumers using our platform to date have had high average credit scores, we may enter into new industry verticals in which consumers have lower average credit scores, leading to potentially higher rates of defaults.
Should delinquencies and default rates increase, we will need to expand our collections and default servicing capabilities, which will require skills and resources that we currently may not have. This will result in higher costs due to the time and effort required to collect payments from delinquent borrowers.
While we are not generally responsible for defaults by customers, we have agreed with each of our Bank Partners to fund an escrow in order to provide the Bank Partners limited protection against credit losses. If credit losses increase, we could lose a portion, or all, of these escrowed funds, which would have an adverse effect on our business.
Because the agreements we have with our Bank Partners are of short duration and because our Bank Partners generally may terminate their agreements or reduce their commitments to provide loans if credit losses increase, the overall volume of GreenSky program loans may decrease in the event of higher default rates. In addition, in certain limited circumstances, our Bank Partners may terminate the agreements under which we service their loan portfolios, in which case we will suffer a decrease in our revenues from loan servicing.
We own receivables for certain loans, and the non-performance, or even significant underperformance, of those receivables would adversely affect our business.
We hold some of the receivables underlying the loans originated by our Bank Partners, which we refer to as “R&D Receivables” and which are designated as loan receivables held for sale on our Unaudited Condensed Consolidated Balance Sheets. As of June 30, 2018,March 31, 2020, we had $43.5$21.1 million in loan receivables held for sale, net. Generally, we hold R&D Receivables that we purchase from an originating Bank Partner with the intent to hold the loan receivables only for a short period of time before we can transfer the loan receivables to a Bank Partner following its determination to purchase the loan receivables, which a Bank Partner might do in connection with an expansion of a newits credit policy. Our objective is to hold these receivables only until we have enough experience with the particular products or industry verticals for our Bank Partners to purchase the receivables. However, there is no assurance that our Bank Partners will expand their underwriting criteria andare not required to purchase the receivables underlying these loans and, during the period that we own the receivables, we bear the entire credit risk in the event that the borrowers default. In addition, we are obligated to purchase from our Bank Partners the receivables underlying any loans that were approved in error or otherwise involved customer or merchant fraud. Our ownership of receivables also requires us to commit or obtain corresponding funding. In addition, non-performance, or even significant underperformance, of the loan receivables held for sale that we own could have a materially adverse effect on our business.
We are subject to certain additional risks in connection with promotional financing offered through the GreenSky program.
Many of the loans originated by our Bank Partners provide promotional financing in the form of low or deferred interest. When a deferred interest loan is paid in full prior to the end of the promotional period (typically six to 24 months), any interest that has been billed on the loan by our Bank Partner to the consumer is reversed, which triggers an obligation on our part to make a payment to the Bank Partner that made the loan in order to fully offset the reversal (each event, a FCR)finance charge reversal or "FCR"). We record a FCR liability on our balance sheet
for interest billed during the promotional period that is expected to be reversed prior to the end of such period. As of June 30, 2018,March 31, 2020, this liability was $107.0 million, up from $94.1 million as of December 31, 2017.$213.2 million. See Note 3 to the unaudited consolidated financial statements includedNotes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for further information. If the rate at which deferred interest loans are paid in full prior to the end of the promotional period increases, resulting in increased payments by us to our Bank Partners, it would adversely affect our business.
Further, deferred interest loans are subject to enhanced regulatory scrutiny as a result of abusive marketing practices by some lenders, and the CFPB has initiated enforcement actions against both lenders and servicers alleging that they have engaged in unfair, deceptive or abusive acts or practices because of lack of clarity in disclosures with respect to such loans. Such scrutiny could reduce the attractiveness to consumers of deferred
interest loans or result in a general unwillingness on the part of our Bank Partners to make deferred interest loans. A reduction in the dollar volume of deferred interest loans offered through the GreenSky Programprogram would adversely affect our business.
The loss of the services of our senior management could adversely affect our business.
The experience of our senior management, including, in particular, David Zalik, our Chief Executive Officer, is a valuable asset to us. Our management team has significant experience in the consumer loan business and would be difficult to replace. Competition for senior executives in our industry is intense, and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management team or other key personnel. Failure to retain talented senior leadership could have a material adverse effect on our business. We do not maintain key life insurance policies relating to our senior management.
Our vendor relationships subject us to a variety of risks, and the failure of third parties to comply with legal or regulatory requirements or to provide various services that are important to our operations could have an adverse effect on our business.
We have significant vendors that, among other things, provide us with financial, technology and other services to support our loan servicing and other activities, including, for example, credit ratings and reporting, cloud-based data storage and other IT solutions, and payment processing. The CFPB has issued guidance stating that institutions under its supervision may be held responsible for the actions of the companies with which they contract. Accordingly, we could be adversely impacted to the extent our vendors fail to comply with the legal requirements applicable to the particular products or services being offered.
In some cases, third-party vendors are the sole source, or one of a limited number of sources, of the services they provide to us. Most of our vendor agreements are terminable on little or no notice, and if our current vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms (or at all). If any third-party vendor fails to provide the services we require, fails to meet contractual requirements (including compliance with applicable laws and regulations), fails to maintain adequate data privacy and electronic security systems, or suffers a cyber-attack or other security breach, we could be subject to CFPB, FTC and other regulatory enforcement actions and suffer economic and reputational harm that could have a material adverse effect on our business. Further, we may incur significant costs to resolve any such disruptions in service, which could adversely affect our business.
Litigation, regulatory actions and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and/or requirements resulting in increased expenses.
Our business is subject to increased risks of litigation and regulatory actions as a result of a number of factors and from various sources, including as a result of the highly regulated nature of the financial services industry and the focus of state and federal enforcement agencies on the financial services industry.
In the ordinary course of business, we have been named as a defendant in various legal actions, including arbitrations, class actions and other litigation. Generally, this litigation arises from the dissatisfaction of a consumer with the products or services of a merchant; some of this litigation, however, has arisen from other matters, including claims of discrimination, credit reporting and collection practices. Certain of those actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. From time to time, we also are involved in, or the subject of, reviews, requests for information, investigations and proceedings (both
(both formal and informal) by state and federal governmental agencies, including banking regulators and the CFPB, regarding our business activities and our qualifications to conduct our business in certain jurisdictions, which could subject us to significant fines, penalties, obligations to change our business practices and other requirements resulting in increased expenses and diminished earnings. Our involvement in any such matter also could cause significant harm to our reputation and divert management attention from the operation of our business, even if the matters are ultimately determined in our favor. We have in the past chosen to settle (and may in the future choose to settle) certain matters in order to avoid the time and expense of contesting them. Although none of the settlements has been material to our business, there is no assurance that, in the future, such settlements will notcould have a material adverse effect on our business. Moreover, any settlement, or any consent order or adverse judgment in connection with any formal or informal proceeding or investigation by a government agency, may prompt litigation or
additional investigations or proceedings as other litigants or other government agencies begin independent reviews of the same activities.
In addition, a number of participants in the consumer finance industry have been the subject of putative class action lawsuits; state attorney general actions and other state regulatory actions; federal regulatory enforcement actions, including actions relating to alleged unfair, deceptive or abusive acts or practices; violations of state licensing and lending laws, including state usury laws; actions alleging discrimination on the basis of race, ethnicity, gender or other prohibited bases; and allegations of noncompliance with various state and federal laws and regulations relating to originating and servicing consumer finance loans. The current regulatory environment, increased regulatory compliance efforts and enhanced regulatory enforcement have resulted in significant operational and compliance costs and may prevent us from providing certain products and services. There is no assurance that theseThese regulatory matters or other factors will not,could, in the future, affect how we conduct our business and, in turn, have a material adverse effect on our business. In particular, legal proceedings brought under state consumer protection statutes or under several of the various federal consumer financial services statutes subject to the jurisdiction of the CFPB may result in a separate fine for each violation of the statute, which, particularly in the case of class action lawsuits, could result in damages substantially in excess of the amounts we earned from the underlying activities.
We contest our liability and the amount of damages, as appropriate, in each pending matter. The outcome of pending and future matters could be material to our results of operations, financial condition and cash flows, and could materially adversely affect our business.
In addition, from time to time, through our operational and compliance controls, we identify compliance issues that require us to make operational changes and, depending on the nature of the issue, result in financial remediation to impacted customers. These self-identified issues and voluntary remediation payments could be significant, depending on the issue and the number of customers impacted, and also could generate litigation or regulatory investigations that subject us to additional risk. See “-Risks Related to Our Regulatory Environment.”
Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting “disparate impact” claims.
Antidiscrimination statutes, such as the Equal Credit Opportunity Act (the “ECOA”), prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments, including the U.S. Department of Justice (“DOJ”) and CFPB, take the position that these laws prohibit not only intentional discrimination, but also neutral practices that have a “disparate impact” on a group and that are not justified by a business necessity.
These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are focusing greater attention on “disparate impact” claims. To the extent that the “disparate impact” theory continues to apply, we may face significant administrative burdens in attempting to identify and eliminate neutral practices that do have “disparate impact.” The ability to identify and eliminate neutral practices that have “disparate impact” is complicated by the fact that often it is our merchants, over which we have limited control, that implement our practices. In addition, we face the risk that one or more of the variables included in the GreenSky program’s loan decisioning model may be invalidated under the disparate impact test, which would require us to revise the loan decisioning model in a manner that might generate lower approval rates or higher credit losses.
In addition to reputational harm, violations of the ECOA can result in actual damages, punitive damages, injunctive or equitable relief, attorneys’ fees and civil money penalties.
Fraudulent activity could negatively impact our business and could cause our Bank Partners to be less willing to originate loans as part of the GreenSky program.
Fraud is prevalent in the financial services industry and is likely to increase as perpetrators become more sophisticated. We are subject to the risk of fraudulent activity associated with our merchants, their customers and third parties handling customer information. Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. The level of our fraud charge-offs could increase and our results of operations could be materially adversely affected if fraudulent activity were to significantly increase. High profile fraudulent activity also could negatively impact our brand and reputation, which could negatively impact the
use of our services and products. In addition, significant increases in fraudulent activity could lead to regulatory intervention, which could increase our costs and also negatively impact our business.
Misconduct and errors by our employees and third-party service providers could harm our business and reputation.
We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and other third-party service providers. Our business depends on our employees and third-party service providers to facilitate the operation of our business, and if any of our employees or third-party service providers provide unsatisfactory service or take, convert or misuse funds, documents or data or fail to follow protocol when interacting with Bank Partners, Sponsors and merchants, the number of loans originated through the GreenSky program could decline, we could be liable for damages and we could be subject to complaints, regulatory actions and penalties.
While we have internal procedures and oversight functions to protect us against this risk, we also could be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability.
Any of these occurrences could result in our diminished ability to operate our business, potential liability, inability to attract future Bank Partners, Sponsors, merchants and consumers, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.
Cyber-attacks and other security breaches could have an adverse effect on our business.
In the normal course of our business, we collect, process and retain sensitive and confidential information regarding our Bank Partners, our merchants and consumers. We also have arrangements in place with certain of our third-party service providers that require us to share consumer information. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of our Bank Partners, merchants and third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, and other similar events. We, our Bank Partners, our merchants and our third-party service providers have experienced all of these events in the past and expect to continue to experience them in the future. We also face security threats from malicious third parties that could obtain unauthorized access to our systems and networks, which threats we anticipate will continue to grow in scope and complexity over time. These events could interrupt our business or operations, result in significant legal and financial exposure, supervisory liability, damage to our reputation and a loss of confidence in the security of our systems, products and services. Although the impact to date from these events has not had a material adverse effect on us, no assurance is given that this willmay not be the case in the future.
Information security risks in the financial services industry have increased recently, in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized criminals, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks and other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks that are designed to disrupt key business services, such as consumer-facing websites. We may not be able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ
detection and response mechanisms designed to contain and mitigate security incidents. Nonetheless, early detection efforts may be thwarted by sophisticated attacks and malware designed to avoid detection. We also may fail to detect the existence of a security breach related to the information of our Bank Partners, merchants and consumers that we retain as part of our business and may be unable to prevent unauthorized access to that information.
We also face risks related to cyber-attacks and other security breaches that typically involve the transmission of sensitive information regarding borrowers through various third parties, including our Bank Partners, our merchants and data processors. Some of these parties have in the past been the target of security breaches and cyber-attacks. Because we do not control these third parties or oversee the security of their systems, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. While we regularly conduct security assessments of significant third-party service providers, no assurance is given that our third-party information security protocols aremay not be sufficient to withstand a cyber-attack or other security breach.
The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding GreenSky program customers or our own proprietary information, software, methodologies and business secrets could interrupt our business or operations, result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services, all of which could have a material adverse impact on our business. In addition, there recently have been a number of well-publicized attacks or breaches affecting companies in the financial services industry that have heightened concern by consumers, which could also intensify regulatory focus, cause users to lose trust in the security of the industry in general and result in reduced use of our services and increased costs, all of which could also have a material adverse effect on our business.
Furthermore, in light of the COVID-19 pandemic, we have directed most of our personnel to work remotely and we have restricted on-site staff to those personnel and contractors who perform essential activities that must be completed on-site. This new working environment could increase our cyber-security risk, create data accessibility concerns, and make us more susceptible to communication disruptions, any of which could adversely impact our business operations. We continue to implement physical and cyber-security measures to ensure that our systems remain functional in order to serve our operational needs with a remote workforce and prevent disruptions to our business.
Disruptions in the operation of our computer systems and third-party data centers could have an adverse effect on our business.
Our ability to deliver products and services to our Bank Partners and merchants, service loans made by our Bank Partners and otherwise operate our business and comply with applicable laws depends on the efficient and uninterrupted operation of our computer systems and third-party data centers, as well as those of our Bank Partners, merchants and third-party service providers.
These computer systems and third-party data centers may encounter service interruptions at any time due to system or software failure, natural disasters, severe weather conditions, health pandemics, terrorist attacks, cyber-attacks or other events. Any of such catastrophes could have a negative effect on our business and technology infrastructure (including our computer network systems), on our Bank Partners and merchants and on consumers. Catastrophic events also could prevent or make it more difficult for customers to travel to our merchants’ locations to shop, thereby negatively impacting consumer spending in the affected regions (or in severe cases, nationally), and could interrupt or disable local or national communications networks, including the payment systems network, which could prevent customers from making purchases or payments (temporarily or over an extended period). These events also could impair the ability of third parties to provide critical services to us. All of these adverse effects of catastrophic events could result in a decrease in the use of our solution and payments to us, which could have a material adverse effect on our business.
In addition, the implementation of technology changes and upgrades to maintain current and integrate new systems may cause service interruptions, transaction processing errors or system conversion delays and may cause us to fail to comply with applicable laws, all of which could have a material adverse effect on our business. We expect that new technologies and business processes applicable to the consumer financial services industry will continue to emerge and that these new technologies and business processes may be better than those we currently
use. There is no assurance that we willWe may not be able to successfully adopt new technology as critical systems and applications become obsolete and better ones become available. A failure to maintain and/or improve current technology and business processes could cause disruptions in our operations or cause our solution to be less competitive, all of which could have a material adverse effect on our business.
If the credit decisioning, pricing, loss forecasting and credit scoring models we use contain errors, do not adequately assess risk or are otherwise ineffective, our reputation and relationships with our Bank Partners, our merchants and consumers could be harmed.
Our ability to attract consumers to the GreenSky program, and to build trust in the consumer loan products offered through the GreenSky program, is significantly dependent on our ability to effectively evaluate a consumer’s credit profile and likelihood of default in accordance with our Bank Partners’ underwriting policies. To conduct this evaluation, we use proprietary credit decisioning, pricing, loss forecasting and credit scoring models. If any of the credit decisioning, pricing, loss forecasting and credit scoring models we use contains programming or other errors, is ineffective or the data provided by consumers or third parties is incorrect or stale, or if we are unable to obtain accurate data from consumers or third parties (such as credit reporting agencies), our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans and possibly our having to repurchase the loan. This could damage our reputation and relationships with consumers, our Bank Partners and our merchants, which could have a material adverse effect on our business.
We depend on the accuracy and completeness of information about customers of our merchants, and any misrepresented information could adversely affect our business.
In evaluating loan applicants, we rely on information furnished to us by or on behalf of customers of our merchants, including credit, identification, employment and other relevant information. Some of the information regarding customers provided to us is used in our proprietary credit decisioning and scoring models, which we use to determine whether an application meets the applicable underwriting criteria. We rely on the accuracy and completeness of that information.
Not all customer information is independently verified. As a result, we rely on the accuracy and completeness of the information we are provided by consumers. If any of the information that is considered in the loan review process is inaccurate, whether intentional or not, and such inaccuracy is not detected prior to loan funding, the loan may have a greater risk of default than expected. Additionally, there is a risk that, following the date of the credit
report that we obtain and review, a customer may have defaulted on, or become delinquent in the payment of, a pre-existing debt obligation, taken on additional debt, lost his or her job or other sources of income, or experienced other adverse financial events. Where an inaccuracy constitutes fraud or otherwise causes us to incorrectly conclude that a loan meets the applicable underwriting criteria, we generally bear the risk of loss associated with the inaccuracy. Any significant increase in inaccuracies or resulting increases in losses would adversely affect our business.
We rely extensively on models in managing many aspects of our business. Any inaccuracies or errors in our models could have an adverse effect on our business.
In assisting our Bank Partners and merchants with the design of the products that are offered on our platform, we make assumptions about various matters, including repayment timing and default rates, and then utilize our proprietary modeling to analyze and forecast the performance and profitability of the products. Our assumptions may be inaccurate and our models may not be as predictive as expected for many reasons, including that they often involve matters that are inherently difficult to predict and beyond our control (e.g., macroeconomic conditions) and that they often involve complex interactions between a number of dependent and independent variables and factors. Any significant inaccuracies or errors in our assumptions could negatively impact the profitability of the products that are offered on our platform, as well as the profitability of our business, and could result in our underestimating potential FCRs.
If assumptions or estimates we use in preparing our financial statements are incorrect or are required to change, our reported results of operations and financial condition may be adversely affected.
We are required to make various assumptions and estimates in preparing our financial statements under GAAP and in determining certain disclosures required under GAAP, including for purposes of determining finance charge reversals, share-based compensation,compensation; asset impairment,impairment; reserves related to litigation and other legal matters and contingencies and other regulatory exposures andexposures; the amounts recorded for certain contractual payments to be paid to, or received from, our merchants and others under contractual arrangements. In addition, significant assumptions and estimates are involved in determining certain disclosures required under GAAP, including those involvingarrangements; fair value measurements.measurements of derivative instruments and servicing assets and liabilities; and measurement of financial guarantees. If the assumptions or estimates underlying our financial statements are incorrect, the actual amounts realized on transactions and balances subject to those estimates will be different, which could have a material adverse effect on our business.
The consumer finance and payments industry is highly competitive and is likely to become more competitive, and our inability to compete successfully or maintain or improve our market share and margins could adversely affect our business.
Our success depends on our ability to generate usage of the GreenSky program. The consumer financial services industry is highly competitive and increasingly dynamic as emerging technologies continue to enter the marketplace. Technological advances and heightened e-commerce activities have increased consumers’ accessibility to products and services, which has intensified the desirability of offering loans to consumers through digital-based solutions. In addition, because many of our competitors are large financial institutions that own the loans that they originate, they have certain revenue opportunities not currently available to us. We face competition in areas such as compliance capabilities, financing terms, promotional offerings, fees, approval rates, speed and simplicity of loan origination, ease-of-use, marketing expertise, service levels, products and services, technological capabilities and integration, customer service, brand and reputation. Many of our competitors are substantially larger than we are, which may give those competitors advantages we do not have, such as a more diversified product and customer base, the ability to reach more customers and potential customers, operational efficiencies, more versatile technology platforms, broad-based local distribution capabilities, and lower-cost funding. Commercial banks and savings institutions also may have significantly greater access to consumers given their deposit-taking and other services. In addition, because many of our competitors are large financial institutions that own the loans that they originate, they also have certain revenue opportunities not available to us.
Our existing and potential competitors may decide to modify their pricing and business models to compete more directly with our model. Any reduction in usage of the GreenSky program, or a reduction in the lifetime profitability of loans under the GreenSky program in an effort to attract or retain business, could reduce our
revenues and earnings. If we are unable to compete effectively for merchantsmerchant and customer usage, our business could be materially adversely affected.
Our revenue is impacted, to a significant extent, by the general economy and the financial performance of our merchants.
Our business, the consumer financial services industry and our merchants’ businesses are sensitive to macroeconomic conditions. Economic factors such as interest rates, changes in monetary and related policies, market volatility, consumer confidence and unemployment rates are among the most significant factors that impact consumer spending behavior. Weak economic conditions or a significant deterioration in economic conditions reduce the amount of disposable income consumers have, which in turn reduces consumer spending and the willingness of qualified borrowers to take out loans. Such conditions are also likely to affect the ability and willingness of borrowers to pay amounts owed to our Bank Partners, each of which would have a material adverse effect on our business.
The generation of new loans through the GreenSky program, and the transaction fees and other fee income to us associated with such loans, is dependent upon sales of products and services by our merchants. Our merchants’ sales may decrease or fail to increase as a result of factors outside of their control, such as the macroeconomic conditions referenced above, or business conditions affecting a particular merchant, industry vertical or region. Weak economic conditions also could extend the length of our merchants’ sales cycle and cause customers to delay making (or not make) purchases of our merchants’ products and services. The decline of sales by our merchants for any reason will generally result in lower credit sales and, therefore, lower loan volume and associated fee income
for us. This risk is particularly acute with respect to our largest merchants that account for a significant amount of our platform revenue.
In addition, if a merchant closes some or all of its locations or becomes subject to a voluntary or involuntary bankruptcy proceeding (or if there is a perception that it may become subject to a bankruptcy proceeding), GreenSky program borrowers may have less incentive to pay their outstanding balances to our Bank Partners, which could result in higher charge-off rates than anticipated. Moreover, if the financial condition of a merchant deteriorates significantly or a merchant becomes subject to a bankruptcy proceeding, we may not be able to recover amounts due to us from the merchant.
Because our business is heavily concentrated on consumer lending and payments in the U.S. home improvement industry, our results are more susceptible to fluctuations in that market than the results of a more diversified company would be.
Even though we recently expanded into the elective healthcare industry vertical and may continue expanding our services into other industry verticals, our business currently is heavily concentrated on consumer lending in the home improvement industry. As a result, we are more susceptible to fluctuations and risks particular to U.S. consumer credit, real estate and home improvements than a more diversified company would be as well as to factors that may drive the demand for home improvements, such as sales levels of existing homes and the aging of housing stock. We also are more susceptible to the risks of increased regulations and legal and other regulatory actions that are targeted at consumer credit, the specific consumer credit products that our Bank Partners offer (including promotional financing), real estate and home improvements. Our business concentration could have an adverse effect on our business.
We are, and intend in the future to continue, expanding into new industry verticals, including elective healthcare, and our failure to comply with applicable regulations, or accurately predictforecast demand or growth, in those new industries could have an adverse effect on our business.
We recentlyWithin the last several years, we expanded into the elective healthcare industry vertical, which involves consumer financing for elective medical procedures and products. Elective healthcare providers include doctors’ and dentists’ offices, outpatient surgery centers and clinics providing orthodontics, cosmetic and aesthetic dentistry, vision correction, bariatric surgery, cosmetic surgery, hair replacement, reproductive medicine, veterinary medicine and hearing aid devices. We make no assurance that we willmay not achieve similar levels of success, if any, in this industry vertical, or that we will not face unanticipated challenges in our ability to offer our program in this industry vertical. In addition, the elective healthcare industry vertical is highly regulated and we, our merchants and our Bank Partners, as applicable, will be subject to significant additional regulatory requirements, including various healthcare and privacy laws. We have limited experience in managing these risks and the compliance requirements attendant to these additional regulatory requirements. See “-Risks“–Risks Related to Our Regulatory Environment-TheEnvironment–The increased scrutiny of third-party medical financing by governmental agencies may lead to increased regulatory burdens and adversely affect our consolidated revenue or results of operations.” The costs of compliance and any failure by us, our merchants or our Bank Partners, as applicable, to comply with such regulatory requirements could have a material adverse effect on our business.
We may in the future further expand into other industry verticals. There is no assurance that we willWe may not be able to successfully develop consumer financing products and services for these new industries. Our investment of resources to develop consumer financing products and services for the new industries we enter may either be insufficient or result in expenses that are excessive in light of loans actually originated by our Bank Partners in those industries. Additionally, industry participants, including our merchants, their customers and our Bank Partners, may not be receptive to our solution in these new industries. The borrower profile of consumers in new verticals may not be as attractive, in terms of average FICO scores or other attributes, as in our current verticals, which may lead to higher levels of delinquencies or defaults than we have historically experienced. Industries change rapidly, and we make no assurance that we willmay not be able to accurately forecast demand (or the lack thereof) for our solution or that those industries willmay not grow. Failure to predictforecast demand or growth accurately in new industries could have a materiallymaterial adverse impact on our business.
Our business would suffer if we fail to attract and retain highly skilled employees.
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, particularly information technology and sales. Trained and experienced personnel are in high demand and may be in short supply. Many of the companies with which we compete for experienced employees have greater resources than we do and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors that may seek to recruit them. We may not be able to attract, develop and maintain the skilled workforce necessary to operate our business, and labor expenses may increase as a result of a shortage in the supply of qualified personnel.
The Amended Credit Agreement that governs our term loan and revolving loan facility contains various covenants that could limit our ability to engage in activities that may be in our best long-term interests.
We have a term loan and revolving loan facility that we may draw on to finance our operations and for other corporate purposes. The Amended Credit Agreement contains operating covenants, including customary limitations on the incurrence of certain indebtedness and liens, restrictions on certain intercompany transactions and limitations on dividends and stock repurchases. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under the Amended Credit Agreement and any future financial agreements into which we may enter. If we default on our credit obligations, our lenders may require repayment of any outstanding debt and terminate the Amended Credit Agreement.
If any of these events occurs, our ability to fund our operations could be seriously harmed. If not waived, defaults could cause any outstanding indebtedness under our Amended Credit Agreement and any future financing agreements that we may enter into to become immediately due and payable.
For more information on our term loan and revolving loan facility, see Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-LiquidityOperations–Liquidity and Capital Resources-Term loan and revolving loan facility”Resources–Borrowings” and Note 7 to the unaudited consolidated financial statementsNotes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1.
We may incur losses on interest rate swap and hedging arrangements.
We may periodically enter into agreements to reduce the risks associated with increases in interest rates, such as our June 2019 interest rate swap agreement. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline. Also, nonperformance by the other party to the arrangement may subject us to increased credit risks. For additional information regarding our June 2019 interest rate swap agreement, see Note 3 and Note 8to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1.
We may be unable to sufficiently protect our proprietary rights and may encounter disputes from time to time relating to our use of the intellectual property of third parties.
We rely on a combination of trademarks, service marks, copyrights, trade secrets, domain names and agreements with employees and third parties to protect our proprietary rights. In 2014, we submitted a patent application relating to our mobile application process and credit decisioning model, which application is currently pending. There is no assurance that ourOur patent application willmay not be granted. We have trademark and service mark registrations and pending applications for additional registrations in the United States. We also own the domain name rights for greensky.com, as well as other words and phrases important to our business. Nonetheless, third parties may challenge, invalidate or circumvent our intellectual property, and our intellectual property may not be sufficient to provide us with a competitive advantage.
Despite our efforts to protect these rights, unauthorized third parties may attempt to duplicate or copy the proprietary aspects of our technology and processes. Our competitors and other third parties independently may design around or develop similar technology or otherwise duplicate our services or products such that we could not assert our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property and confidential and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure. Measures in place may not prevent misappropriation or
infringement of our intellectual property or proprietary information and the resulting loss of competitive advantage, and we may be required to litigate to protect our intellectual property and proprietary information from misappropriation or infringement by others, which is expensive, could cause a diversion of resources and may not be successful.
We also may encounter disputes from time to time concerning intellectual property rights of others, and we may not prevail in these disputes. Third parties may raise claims against us alleging that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights. Some third-party intellectual property rights may be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid all alleged violations of such intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, an assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim, even if we ultimately prevail, pay significant money damages, lose significant revenues, be prohibited from using the relevant systems, processes, technologies or other intellectual property (temporarily or permanently), cease offering certain products or services, or incur significant license, royalty or technology development expenses.
Moreover, it has become common in recent years for individuals and groups to purchase intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims is time consuming and expensive and could result in the diversion of time and attention of our management and employees. In addition, although in some cases a third party may have agreed to indemnify us for such costs, such indemnifying party may refuse or be unable to uphold its contractual obligations. In other cases, our insurance may not cover potential claims of this type adequately or at all, and we may be required to pay monetary damages, which may be significant.
Our risk management processes and procedures may not be effective.
Our risk management processes and procedures seek to appropriately balance risk and return and mitigate our risks. We have established processes and procedures intended to identify, measure, monitor and control the types of risk to which we and our Bank Partners are subject, including credit risk, market risk, liquidity risk, strategic risk and operational risk. Credit risk is the risk of loss that arises when an obligor fails to meet the terms of an obligation. While our exposure to the direct economic cost of consumer credit risk is limited because, with the exception of R&D Receivables and other loans for which we purchase the receivables, we do not hold the loans or the receivables underlying the loans that our Bank Partners originate, we are exposed to consumer credit risk in the
form of both our finance charge reversalFCR liability and our limited escrow requirement, as well as our ability to maintain relationships with our existing Bank Partners and recruit new bank partners. Market risk is the risk of loss due to changes in external market factors such as interest rates. Liquidity risk is the risk that financial condition or overall safety and soundness are adversely affected by an inability, or perceived inability, to meet obligations and support business growth. Strategic risk is the risk from changes in the business environment, improper implementation of decisions or inadequate responsiveness to changes in the business environment. Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (e.g., natural disasters), compliance, reputational or legal matters and includes those risks as they relate directly to us as well as to third parties with whom we contract or otherwise do business.
Management of our risks depends, in part, upon the use of analytical and forecasting models. If these models are ineffective at predicting future losses or are otherwise inadequate, we may incur unexpected losses or otherwise be adversely affected. In addition, the information we use in managing our credit and other risks may be inaccurate or incomplete as a result of error or fraud, both of which may be difficult to detect and avoid. There also may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, including when processes are changed or new products and services are introduced. If our risk management framework does not effectively identify and control our risks, we could suffer unexpected losses or be adversely affected, which could have a material adverse effect on our business.
Some aspects of our platform include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Aspects of our platform include software covered by open source licenses. The terms of various open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our platform. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and loan products. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with the use of open source software cannot be eliminated and could adversely affect our business.
To the extent that we seek to grow through future acquisitions, or other strategic investments or alliances, we may not be able to do so effectively.
We may in the future seek to grow our business by exploring potential acquisitions or other strategic investments or alliances. We may not be successful in identifying businesses or opportunities that meet our acquisition or expansion criteria. In addition, even if a potential acquisition target or other strategic investment is identified, we may not be successful in completing such acquisition or integrating such new business or other investment. We may face significant competition for acquisition and other strategic investment opportunities from other well-capitalized companies, many of which have greater financial resources and greater access to debt and equity capital to secure and complete acquisitions or other strategic investments, than we do. As a result of such competition, we may be unable to acquire certain assets or businesses, or take advantage of other strategic investment opportunities that we deem attractive; the purchase price for a given strategic opportunity may be significantly elevated; or certain other terms or circumstances may be substantially more onerous. Any delay or failure on our part to identify, negotiate, finance on favorable terms, consummate and integrate any such acquisition, or other strategic investment, opportunity could impede our growth.
We may not be able to manage our expanding operations effectively or continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses. Furthermore, we may be responsible for any legacy liabilities of businesses we acquire or be subject to additional liability in connection with other strategic investments. The existence or amount of these liabilities may not be known at the time of acquisition, or other strategic investment, and may have a material adverse effect on our business.
The effect of comprehensive U.S. tax reform legislation or challenges to our tax positions could adversely affect our business.
We operate in multiple jurisdictions and are subject to tax laws and regulations of the United States federal, state and local governments. United States federal, state and local tax laws and regulations are complex and subject to varying interpretations. There is no assurance that our tax positions will not be successfully challenged by relevant tax authorities.
In addition, on December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”). Among a number of significant changes to the U.S. federal income tax rules, the Tax Act reduces the marginal U.S. corporate income tax rate from 35% to 21%, limits the deduction for net interest expense, and shifts the United States toward a more territorial tax system. While our analysis of the Tax Act’s impact on our cash tax liability and financial condition has not identified any overall material adverse effect, we are still evaluating the effects of the Tax Act on us and there are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the Tax Act. In the absence of guidance on these issues, we will use what we believe are reasonable interpretations and assumptions in interpreting and applying the Tax Act for purposes of determining our cash tax liabilities and results of operations, which may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves over time. It is possible that the Internal Revenue Service (“IRS”) could issue subsequent guidance or take positions on audit that differ from the interpretations and assumptions that we previously made, which could have a material adverse effect on our cash tax liabilities, results of operations and financial condition, or an indirect effect on our business through its impact on our Bank Partners, merchants and consumers. You are urged to consult your tax adviser regarding the implications of the Tax Act.
Future changes in financial accounting standards may significantly change our reported results of operations.
GAAP is subject to standard setting or interpretation by the FASB, the Public Company Accounting Oversight Board (the "PCAOB"), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change.
Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including revenue recognition, finance charge reversals,FCRs, and share-based compensation are highly complex and involve subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us (i) could require us to make changes to our accounting systems that could increase our operating costs and (ii) could significantly change our reported or expected financial performance.
Risks Related to Our Regulatory Environment
We are subject to federal and state consumer protection laws.
In connection with our administration of the GreenSky program, we must comply with various regulatory regimes, including those applicable to consumer credit transactions, various aspects of which are untested as applied to our business model. The laws to which we are or may be subject include:
•state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, money transmission, debt servicing and collection and unfair or deceptive business practices;
•the Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions;
•Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices (“UDAAP”) in connection with any consumer financial product or service;
•the ECOA and Regulation B promulgated thereunder, which prohibit creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the Federal Consumer Credit Protection Act or any applicable state law;
•the Fair Credit Reporting Act (the “FCRA”), as amended by the Fair and Accurate Credit Transactions Act, which promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies;
•the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, as well as state debt collection laws, all of which provide guidelines and limitations concerning the conduct of third-party debt collectors in connection with the collection of consumer debts;
•the Gramm-Leach-Bliley Act (the “GLBA”), which includes limitations on disclosure of nonpublic personal information by financial institutions about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;
•the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;
•the Servicemembers Civil Relief Act (the “SCRA”), which allows active duty military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;
•the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts;
•the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and
•the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures.
While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance is given that our compliance policies and procedures willmay not be effective. Failure to comply with these laws and with regulatory requirements applicable to our business could subject us to damages, revocation of licenses, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business.
Our industry is highly regulated and is undergoing regulatory transformation, which has created inherent uncertainty. Changing federal, state and local laws, as well as changing regulatory enforcement policies and priorities, may negatively impact our business.
In connection with our administration of the GreenSky program, we are subject to extensive regulation, supervision and examination under United States federal and state laws and regulations. We are required to comply with numerous federal, state and local laws and regulations that regulate, among other things, the manner in which we administer the GreenSky program, the terms of the loans that our Bank Partners originate and the fees that we may charge. A material or continued failure to comply with any of these laws or regulations could subject us to lawsuits or governmental actions and/or damage our reputation, which could materially adversely affect our business. Regulators, including the CFPB, have broad discretion with respect to the interpretation, implementation and enforcement of these laws and regulations, including through enforcement actions that could subject us to civil money penalties, customer remediations, increased compliance costs, and limits or prohibitions on our ability to
offer certain products and services or to engage in certain activities. In addition, to the extent that we undertake actions requiring regulatory approval or non-objection, regulators may make their approval or non-objection subject to conditions or restrictions that could have a material adverse effect on our business. Moreover, some of our competitors are subject to different, and in some cases less restrictive, legislative and regulatory regimes, which may have the effect of providing them with a competitive advantage over us.
Additionally, federal, state and local governments and regulatory agencies have proposed or enacted numerous new laws, regulations and rules related to personal loans. Federal and state regulators also are enforcing existing laws, regulations and rules more aggressively and enhancing their supervisory expectations regarding the management of legal and regulatory compliance risks. Consumer finance regulation is constantly changing, and new laws or regulations, or new interpretations of existing laws or regulations, could have a materially adverse impact on our ability to operate as we currently intend.
These regulatory changes and uncertainties make our business planning more difficult and could result in changes to our business model and potentially adversely impact our results of operations. New laws or regulations also require us to incur significant expenses to ensure compliance. As compared to our competitors, we could be subject to more stringent state or local regulations or could incur marginally greater compliance costs as a result of regulatory changes. In addition, our failure to comply (or to ensure that our agents and third-party service providers comply) with these laws or regulations may result in costly litigation or enforcement actions, the penalties for which could include: revocation of licenses; fines and other monetary penalties; civil and criminal liability; substantially reduced payments by borrowers; modification of the original terms of loans, permanent forgiveness of debt, or inability to, directly or indirectly, collect all or a part of the principal of or interest on loans; and increased purchases of receivables underlying loans originated by our Bank Partners and indemnification claims.
Proposals to change the statutes affecting financial services companies are frequently introduced in Congress and state legislatures that, if enacted, may affect our operating environment in substantial and unpredictable ways. In addition, numerous federal and state regulators have the authority to promulgate or change regulations that could have a similar effect on our operating environment. We cannot determine with any degree of certainty whether any such legislative or regulatory proposals will be enacted and, if enacted, the ultimate impact that any such potential legislation or implementing regulations, or any such potential regulatory actions by federal or state regulators, would have upon our business.
With respect to state regulation, although we seek to comply with applicable state loan, loan broker, loan originator, servicing, debt collection, money transmitter and similar statutes in all U.S. jurisdictions, and with licensing and other requirements that we believe may be applicable to us, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or penalties or be required to obtain a license in one or more such jurisdictions, which may have an adverse effect on our ability to make the GreenSky program available to borrowers in particular states and, thus, adversely impact our business.
We also are subject to potential enforcement and other actions that may be brought by state attorneys general or other state enforcement authorities and other governmental agencies. Any such actions could subject us to civil money penalties and fines, customer remediations and increased compliance costs, as well as damage our reputation and brand and limit or prohibit our ability to offer certain products and services or engage in certain business practices.
New laws, regulations, policy or changes in enforcement of existing laws or regulations applicable to our business, or our reexamination of our current practices, could adversely impact our profitability, limit our ability to continue existing or pursue new business activities, require us to change certain of our business practices or alter our relationships with GreenSky program customers, affect retention of our key personnel, or expose us to additional costs (including increased compliance costs and/or customer remediation). These changes also may require us to invest significant resources, and devote significant management attention, to make any necessary changes and could adversely affect our business.
The highly regulated environment in which our Bank Partners operate could have an adverse effect on our business.
Our Bank Partners are subject to federal and state supervision and regulation. Federal regulation of the banking industry, along with tax and accounting laws, regulations, rules and standards, may limit their operations significantly and control the methods by which they conduct business. In addition, compliance with laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance requirements. For example, the Dodd-Frank Act imposes significant regulatory and compliance changes on financial institutions. Regulatory requirements affect our Bank Partners’ lending practices and investment practices, among other aspects of their businesses, and restrict transactions between us and our Bank Partners. These requirements may constrain the operations of our Bank Partners, and the adoption of new laws and changes to, or repeal of, existing laws may have a further impact on our business.
In choosing whether and how to conduct business with us, current and prospective Bank Partners can be expected to take into account the legal, regulatory and supervisory regime that applies to them, including potential changes in the application or interpretation of regulatory standards, licensing requirements or supervisory expectations. Regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, certain risk management or other operational practices for financial services companies in a manner that impacts our Bank Partners. Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of the regulations and laws and their interpretation of the quality of our Bank Partners’ loan portfolios and other assets. If any regulatory agency’s assessment of the quality of our Bank Partners’ assets, operations, lending practices, investment practices or other aspects of their business changes, it may materially reduce our Bank Partners’ earnings, capital ratios and share price in such a way that affects our business.
Bank holding companies and financial institutions are extensively regulated and currently face an uncertain regulatory environment. Applicable state and federal laws, regulations, interpretations, including licensing laws and regulations, enforcement policies and accounting principles have been subject to significant changes in recent years, and may be subject to significant future changes. We cannot predict with any degree of certaintydo not know the substance or effect of pending or future legislation or regulation or the application of laws and regulations to our Bank Partners. Future changes may have a material adverse effect on our Bank Partners and, therefore, on us.
In January 2020, our Bank Partners became subject to a new reporting requirement, Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments),” which may affect how they reserve for losses on loans. At this time, we do not know what effect, if any, this new reporting requirement will have on participation in our program.
We are subject to regulatory examinations and investigations and may incur fines, penalties and increased costs that could negatively impact our business.
Federal and state agencies have broad enforcement powers over us, including powers to investigate our business practices and broad discretion to deem particular practices unfair, deceptive, abusive or otherwise not in accordance with the law. The continued focus of regulators on the consumer financial services industry has resulted, and could continue to result, in new enforcement actions that could, directly or indirectly, affect the manner in which we conduct our business and increase the costs of defending and settling any such matters, which could negatively impact our business. In some cases, regardless of fault, it may be less time-consuming or costly to settle these matters, which may require us to implement certain changes to our business practices, provide remediation to certain individuals or make a settlement payment to a given party or regulatory body. We have in the past chosen to
settle certain matters in order to avoid the time and expense of contesting them. There is no assurance that anyAny future settlements will notcould have a material adverse effect on our business.
In addition, the laws and regulations applicable to us are subject to administrative or judicial interpretation. Some of these laws and regulations have been enacted only recently and may not yet have been interpreted or may be interpreted infrequently. As a result of infrequent or sparse interpretations, ambiguities in these laws and regulations may create uncertainty with respect to what type of conduct is permitted or restricted under such laws and regulations. Any ambiguity under a law or regulation to which we are subject may lead to regulatory investigations, governmental enforcement actions and private causes of action, such as class action lawsuits, with respect to our compliance with such laws or regulations.
The CFPB is a relatively new agency, and there continues to be uncertainty as to how its actions will impact our business; the agency’s actions have had, and may continue to have, an adverse impact on our business.
The CFPB has broad authority over the businesses in which we engage. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority and to remediate violations of numerous consumer protection laws in a variety of ways, including collecting civil money penalties and fines and providing for customer restitution. The CFPB is charged, in part, with enforcing certain federal laws involving consumer financial products and services and is empowered with examination, enforcement and rulemaking authority. The CFPB has taken an active role in regulating lending markets. For example, the CFPB sends examiners to banks and other financial institutions that service and/or originate consumer loans to determine compliance with applicable federal consumer financial laws and to assess whether consumers’ interests are protected. In addition, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including those included in the GreenSky program.
There continues to be uncertainty as to how the CFPB’s strategies and priorities will impact our business and our results of operations going forward. Actions by the CFPB could result in requirements to alter or cease offering affected products and services, making them less attractive or restricting our ability to offer them. Although we have committed significant resources to enhancing our compliance programs, changes by the CFPB in regulatory expectations, interpretations or practices could increase the risk of additional enforcement actions, fines and penalties.
In March 2015, the CFPB issued a report scrutinizing pre-dispute arbitration clauses and, in May 2016, it published a proposed rule that would substantially curtail our ability to enter into voluntary pre-dispute arbitration clauses with consumers. In July 2017, the CFPB issued a final rule banning bars on class action arbitration (but not arbitration generally). Pre-dispute arbitration clauses currently are contained in all of the loan agreements processed through the GreenSky program. The new rule was subsequently challenged in Congress and, on November 1, 2017, President Trump approved a resolution repealing the rule. In the future, if a similar rule were to become effective, we expect that our exposure to class action arbitration would increase significantly, which could have a material adverse effect on our business.
On January 16, 2018, aOctober 5, 2017, the CFPB rulereleased its final “Payday, Vehicle Title, and Certain High-Cost Lending Rule,” commonly referred to as the “Payday Loan Rule” became effective. Most ofRule.” On February 6, 2019, the substantiveCFPB issued proposed revisions to the Payday Loan Rule. On June 7, 2019, the CFPB announced a 15-month delay in the Payday Loan Rule's August 19, 2019 compliance date to November 19, 2020 that applies only to the proposed rescinded ability-to-pay provisions. The mandatory compliance deadline for certain other provisions of the rule require compliance byPayday Loan Rule still stands at August 19, 2019. Resolutions areRelatedly, the Community Financial Services Association of America sued the CFPB in April 2018 over the Payday Loan Rule. As a result, the court suspended the CFPB’s August 19, 2019 implementation of the 2019 proposed revisions pending further order of the court. On August 6, 2019, the court issued an order that leaves the compliance date stay in Congress to cancel the rule through the Congressional Review Act.effect. While the rulePayday Loan Rule does not appear to be targeted at businesses like ours, some of its provisions are broad and potentially could be triggered by the promotional loans that our Bank Partners extend that require increases in payments at specified points in time. We are continuing to reviewmonitor developments associated with the implicationsPayday Loan Rule and are working toward compliance with the Payday Loan Rule requirements ahead of the rule. We currently believe that the promotional loan products can be structured in a manner that does not implicate the rule in any meaningful respect, but we have not yet finalized any plans for responding to the rule.ultimate compliance date.
Future actions by the CFPB (or other regulators) against us or our competitors that discourage the use of our or their services could result in reputational harm and adversely affect our business. If the CFPB changes
regulations that were adopted in the past by other regulators and transferred to the CFPB by the Dodd-Frank Act, or modifies through supervision or enforcement past regulatory guidance or interprets existing regulations in a different or stricter manner than they have been interpreted in the past by us, the industry or other regulators, our compliance costs and litigation exposure could increase materially. If future regulatory or legislative restrictions or prohibitions are imposed that affect our ability to offer promotional financing for certain of our products or that require us to make significant changes to our business practices, and if we are unable to develop compliant alternatives with acceptable returns, these restrictions or prohibitions could have a material adverse effect on our business.
The Dodd-Frank Act generally permits state officials to enforce regulations issued by the CFPB and to enforce its general prohibition against unfair, deceptive or abusive practices. This could make it more difficult than in the past for federal financial regulators to declare state laws that differ from federal standards to be preempted. To the extent that states enact requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that differ from those adopted by the CFPB, we may be required to alter or cease offering products or services in some jurisdictions, which would increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide, and we may be subject to a higher risk of state enforcement actions.
The contours of the Dodd-Frank UDAAP standard are still uncertain and there is a risk that certain features of the GreenSky program loans could be deemed to violate the UDAAP standard.
The Dodd-Frank Act prohibits UDAAPunfair, deceptive or abusive acts or practices and authorizes the CFPB to enforce that prohibition. The CFPB has filed a large number of UDAAP enforcement actions against consumer lenders for practices that do not appear to violate other consumer finance statutes. There is a risk that the CFPB could determine that certain features of the GreenSky program loans are unfair, deceptive or abusive. The CFPB has filed actions alleging that deferred interest programs can be unfair, deceptive or abusive if lenders do not adequately disclose the terms of the deferred interest loans.
On June 2, 2016, the CFPB issued proposed rules that would impose numerous restrictions on certain “high-cost installment loans.” It is not clear if or when the CFPB will publish the final version of these rules, or what their content will be. Among other things, the proposed rules would impose various obligations to determine a consumer’s ability to repay a consumer loan. It is possible that the final rules, if enacted, could impact the GreenSky program. It is also possible that, depending on the form of the final rules, changes would be necessary to the GreenSky program, which changes could have a material adverse effect on the revenue that we derive from certain loans made by our Bank Partners, including transaction fee revenue, in particular.
Our use of third-party vendors and our other ongoing third-party business relationships isare subject to increasing regulatory requirements and attention.
We regularly use third-party vendors and subcontractors as part of our business. We also depend on our substantial ongoing business relationships with our Bank Partners, merchants and other third parties. These types of third-party relationships, particularly with our Bank Partners, are subject to increasingly demanding regulatory requirements and oversight by federal bank regulators (such as the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) and the CFPB. The CFPB has enforcement authority with respect to the conduct of third parties that provide services to financial institutions. The CFPB has made it clear that it expects non-bank entities to maintain an effective process for managing risks associated with third-party vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we are expected to perform due diligence reviews of potential vendors, review their policies and procedures and internal training materials to confirm compliance-related focus, include enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations.
In certain cases, we may be required to renegotiate our agreements with our vendors and/or our subcontractors to meet these enhanced requirements, which could increase the costs of operating our business. It is expected that regulators will hold us responsible for deficiencies in our oversight and control of third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over third-party vendors and subcontractors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, as well as requirements for customer remediation.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by them. For example, in connection with our administration of the GreenSky program, we are subject to the GLBA and implementing regulations and guidance. Among other things, the GLBA (i) imposes certain limitations on the ability to share consumers’ nonpublic personal information with nonaffiliated third parties and (ii) requires certain disclosures to consumers about their information collection, sharing and security practices and their right to “opt out” of the institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions).
Furthermore, legislators and/or regulators are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices; our collection, use, sharing, retention and safeguarding of
consumer and/or employee information; and some of our current or planned business activities. This also could increase our costs of compliance and business operations and could reduce income from certain business initiatives.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer and/or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services (such as products or services that involve us sharing information with third parties or storing sensitive credit card information), which could materially and adversely affect our profitability. Privacy requirements, including notice and opt out requirements, under the GLBA and FCRA are enforced by the FTC and by the CFPB through UDAAP and are a standard component of CFPB examinations. State entities also may initiate actions for alleged violations of privacy or security requirements under state law. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory investigations and government actions, litigation, fines or sanctions, consumer, Bank Partner or merchant actions and damage to our reputation and brand, all of which could have a material adverse effect on our business.
The California Consumer Privacy Act (the “CCPA”) became effective on January 1, 2020.The CCPA requires, among other things, covered companies to provide new disclosures to California consumers and afford such consumers with expanded protections and control over the collection, maintenance, use and sharing of personal information.The CCPA continues to be subject to new regulations and legislative amendments.Although we have implemented a compliance program to address obligations under the CCPA, it remains unclear what future modifications will be made or how the CCPA will be interpreted in the future.The CCPA provides for civil penalties for violations and a private right of action for data breaches.
Non-compliance with Payment Card Industry Data Security Standards (“PCI DSS”) may subject us to fines, penalties and civil liability and may result in the loss of our ability to accept credit and debit card payments.
We settle and fund transactions on a national credit card network and, thus, are subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, including PCI DSS, a security standard applicable to companies that collect, store or transmit certain data regarding credit and debit cards, holders and transactions. We currently are not, and in the future may not be, compliant with PCI DSS and are taking steps to achieve such compliance. No assurance is given that we will be successful in that regard.
Any failure to comply fully or materially with PCI DSS now or at any point in the future (i) may violate payment card association operating rules, federal and state laws and regulations, and the terms of certain of our contracts with payment processors and our Bank Partners,third parties, (ii) may subject us to fines, penalties, damages and civil liability, and (iii) may result in the loss of our ability to accept credit card payments. Even if we achieve compliance with PCI DSS, we still may not be able to prevent security breaches involving customer transaction data. In addition, there is no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will notcould result in a compromise or breach of the processes that we use to protect customer data. If any such compromise or breach were to occur, it could have a material adverse effect on our business.
The increased scrutiny of third-party medical financing by governmental agencies may lead to increased regulatory burdens and may adversely affect our business.
We recently expanded the GreenSky program intooperate in the elective healthcare industry vertical, which includes consumer financing for elective medical procedures. Recently, regulators have increased scrutiny of third-party providers of financing for medical procedures that are generally not covered by health insurance. In addition, the CFPB and attorneys general in New York and Minnesota have conducted investigations of alleged abusive lending practices or exploitation regarding third-party medical financing services.
If, in the future, any of our practices in this space were found to be deficient, it could result in fines, penalties or increased regulatory burdens. Additionally, any regulatory inquiry could damage our reputation and limit our ability to conduct operations, which could adversely affect our business. Moreover, the adoption of any law, rule or regulation affecting the industry may also increase our administrative costs, require us to modify our practices to comply with applicable regulations or reduce our ability to participate competitively, which could have a material adverse effect on our business.
In recent years, federal regulators and the United States DOJ have increased their focus on enforcing the SCRA against servicers. Similarly, state legislatures have taken steps to strengthen their own state-specific versions of the SCRA.
The DOJ and federal regulators have entered into significant settlements with a number of loan servicers alleging violations of the SCRA. Some of the settlements have alleged that the servicers did not correctly apply the SCRA’s 6% interest rate cap, while other settlements have alleged, without limitation, that servicers did not comply with the SCRA’s default judgment protections when seeking to collect payment of a debt. Recent settlements indicate that the DOJ and federal regulators broadly interpret the scope of the substantive protections under the
SCRA and are moving aggressively to identify instances in which loan servicers have not complied with the SCRA. Recent SCRA-related settlements continue to make this a significant area of scrutiny for both regulatory examinations and public enforcement actions.
In addition, most state legislatures have their own versions of the SCRA. In most instances, these laws extend some or all of the substantive benefits of the federal SCRA to members of the state National Guard who are in state service, but certain states also provide greater substantive protections to National Guard members or individuals who are in federal military service. In recent years, certain states have revised their laws to increase the potential benefits to individuals, and these changes pose additional compliance burdens on our Bank Partners and us as we seek to comply with both the federal and relevant state versions of the SCRA.
No assurance is given that ourOur efforts and those of our Bank Partners to comply with the SCRA willmay not be effective, and our failure to comply could subject us to liability, damages and reputational harm, all of which could have an adverse effect on our business.
Anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.
We maintain an enterprise-wide program designed to enable us to comply with all applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the Patriot Act. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering and terrorist financing. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary instruments. No assurance is given that ourOur programs and controls willmay not be effective to ensure compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations, and our failure to comply with these laws and regulations could subject us to significant sanctions, fines, penalties and reputational harm, all of which could have a material adverse effect on our business.
If we were found to be operating without having obtained necessary state or local licenses, it could adversely affect our business.
Certain states have adopted laws regulating and requiring licensing by parties that engage in certain activity regarding consumer finance transactions, including facilitating and assisting such transactions in certain
circumstances. Furthermore, certain states and localities have also adopted laws requiring licensing for consumer debt collection or servicing. While we believe we have obtained all necessary licenses, the application of some consumer finance licensing laws to the GreenSky program is unclear. If we were found to be in violation of applicable state licensing requirements by a court or a state, federal, or local enforcement agency, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas), criminal penalties and other penalties or consequences, and the loans originated through the GreenSky program could be rendered void or unenforceable in whole or in part, any of which could have a material adverse effect on our business.
If loans originated through the GreenSky program are found to violate applicable state usury laws or other lending laws, it could adversely affect our business.
Because the loans originated through the GreenSky program are originated by and held by our Bank Partners, under principles of federal preemption the terms and conditions of the loans are not subject to most state consumer finance laws, including state licensing and usury restrictions. If a court, or a state or federal enforcement agency, were to deem GreenSky-rather than our Bank Partners-the “true lender” for loans originated through the GreenSky program, and if for this reason (or any other reason) the loans were deemed subject to and in violation of certain state consumer finance laws, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas), and other penalties or consequences, and the loans could be rendered void or enforceableunenforceable in whole or in part, any of which could have a material adverse effect on our business.
We have been in the past and may in the future be subject to federal and state regulatory inquiries regarding our business.
We have, from time to time in the normal course of our business, received, and may in the future receive or be subject to, inquiries or investigations by state and federal regulatory agencies and bodies such as the CFPB, state Attorneys General,attorneys general, state financial regulatory agencies, and other state or federal agencies or bodies regarding the GreenSky program, including the origination and servicing of consumer loans, practices by merchants or other third parties, and licensing and registration requirements. For example, we have entered into regulatory agreements with state agencies regarding issues including merchant conduct and oversight and loan pricing and may enter into similar agreements in the future. We have also received inquiries from state regulatory agencies regarding requirements to obtain licenses from or register with those states, including in states where we have determined that we are not required to obtain such a license or be registered with the state, and we expect to continue to receive such inquiries. Any such inquiries or investigations could involve substantial time and expense to analyze and respond to, could divert management’s attention and other resources from running our business, and could lead to public enforcement actions or lawsuits and fines, penalties, injunctive relief, and the need to obtain additional licenses that we do not currently possess. Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation, lead to additional investigations and enforcement actions from other agencies or litigants, and further divert management attention and resources from the operation of our business. As a result, the outcome of legal and regulatory actions arising out of any state or federal inquiries we receive could be material to our business, results of operations, financial condition and cash flows and could have a material adverse effect on our business, financial condition or results of operations.
Risks Related to Our Organizational Structure
We are a holding company with no operations of our own and, as such, depend on our subsidiaries for cash to fund all of our operations and expenses, including future dividend payments, if any.
We are a holding company and have no material assets other than our deferred tax assets and our equity interest in GS Holdings, which has the sole equity interest in GSLLC. We have no independent means of generating revenue or cash flow. We have determined that GS Holdings is a VIEvariable interest entity ("VIE") and that we are the primary beneficiary of GS Holdings. Accordingly, pursuant to the VIE accounting model, we consolidatebegan consolidating GS Holdings in our consolidated financial statements.statements following the IPO closing. In the event of a change in accounting guidance or amendments to the operating agreement of GS Holdings resulting in us no longer having a
controlling interest in GS Holdings, we may not be able to continue consolidating its results of operations with our own, which would have a material adverse effect on our results of operations.
GS Holdings is treated as a partnership for United States federal income tax purposes, and GSLLC is treated as an entity disregarded as separate from GS Holdings for United States federal income tax purposes. As a result, neither GS Holdings nor GSLLC is subject to United States federal income tax. Instead, taxable income is allocated to the members of GS Holdings, including us. Accordingly, we incur income taxes on our proportionate share of any net taxable income of consolidated GS Holdings. We intend to cause GSLLC to make distributions to GS Holdings and to cause GS Holdings to make distributions to its unit holders in an amount sufficient to cover all applicable taxes payable by such unit holders determined according to assumed rates, payments owing under the TRAtax receivable agreement ("TRA") and dividends, if any, declared by us. The ability of GSLLC to make distributions to GS Holdings, and of GS Holdings to make distributions to us, is limited by their obligations to satisfy their own obligations to their creditors. Further, future and current financing arrangements of GSLLC and GS Holdings contain, and future obligations could contain, negative covenants limiting such distributions. Additionally, our right to receive assets upon the liquidation or reorganization of GS Holdings, or indirectly from GSLLC, will be effectively subordinated to the claims of each entity’s creditors. To the extent that we are recognized as a creditor of GS Holdings or GSLLC, our claims may still be subordinate to any security interest in, or other lien on, its assets and to any of its debt or other obligations that are senior to our claims.
To the extent that we need funds and GSLLC or GS Holdings are restricted from making such distributions under applicable law or regulation, or are otherwise unable to provide such funds, it could materially and adversely affect our liquidity and financial condition. In addition, because tax distributions are based on an assumed tax rate,
GS Holdings may be required to make tax distributions that, in the aggregate, may exceed the amount of taxes that GS Holdings would have paid if it were itself taxed on its net income (loss) at the assumed rate.
Funds used by GS Holdings to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, the tax distributions that GS Holdings will be required to make may be substantial and may exceed (as a percentage of GS Holdings’ income) the overall effective tax rate applicable to a similarly situated corporate taxpayer.
We may be required to pay additional taxes as a result of the new partnership audit rules.
The Bipartisan Budget Act of 2015 changed the rules applicable to U.S. federal income tax audits of partnerships, including entities such as GS Holdings that are taxed as a partnership. Under these rules (which generally are effective for taxable years beginning after December 31, 2017), subject to certain exceptions, audit adjustments to items of income, gain, loss, deduction, or credit of an entity (and any member’s share thereof) is determined, and taxes, interest, and penalties attributable thereto, are assessed and collected, at the entity level. Although it is uncertain how these rules will be implemented, it is possible that they could result in GS Holdings being required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a member of GS Holdings, could be required to indirectly bear the economic burden of those taxes, interest, and penalties even though we may not otherwise have been required to pay additional corporate-level taxes as a result of the related audit adjustment.
Under certain circumstances, GS Holdings may be eligible to make an election to cause members (including us) to take into account the amount of any understatement, including any interest and penalties, in accordance with their interests in GS Holdings in the year under audit. We cannot provide any assurance that GS Holdings willmay not be able to make this election, in which case current members (including us) would economically bear the burden of the understatement even if they had a different percentage interest in GS Holdings during the year under audit, unless, and only to the extent, GS Holdings is able to recover such amounts from current or former impacted members. If the election is made, members would be required to take the adjustment into account in the taxable year in which the adjusted Schedule K-1s are issued.
The changes created by these new rules are sweeping and in many respects dependent on the promulgation of future regulations or other guidance by the U.S. Department of the Treasury.
The owners of the Class B common stock, who also are the Continuing LLC Members, control us and their interests may conflict with yours in the future.
The owners of the Class B common stock, who also are the Continuing LLC Members, control us. Each share of our Class B common stock initially entitles its holders to ten votes on all matters presented to our stockholders generally. Once the collective holdings of those owners in the aggregate are less than 15% of the combined economic interest in us, each share of Class B common stock will entitle its holder to one vote per share on all matters to be voted upon by our stockholders.
The owners of the Class B common stock owned the vast majority of the combined voting power of our Class A and Class B common stock as of June 30, 2018.March 31, 2020. Accordingly, those owners, if voting in the same manner, will be able to control the election and removal of our directors and thereby determine our corporate and management policies, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our certificate of incorporation and bylaws and other significant corporate transactions for so long as they retain significant ownership of us. This concentration of ownership may delay or deter possible changes in control of our Company, which may reduce the value of an investment in our Class A common stock. So long as they continue to own a significant amount of our combined voting power, even if such amount is less than 50%, they will continue to be able to strongly influence or effectively control our decisions.
In addition, the owners of the Class B common stock, as Continuing LLC Members, owned approximately 69%had a weighted average ownership of the Holdco Units as of June 30, 2018.approximately 64% for the three months ended March 31, 2020. Because they hold the majority of their economic ownership interest in our business through GS Holdings, rather than GreenSky, Inc., these existing unit holders may have conflicting interests with holders of our Class A common stock. For example, the Continuing LLC Members may have different tax positions from us, which could influence their decisions regarding whether and when to dispose of assets and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the TRA. In addition,
the structuring of future transactions may take into account the tax considerations of the Continuing LLC Members even where no similar benefit would accrue to us. It is through their ownership of Class B common stock that they may be able to influence, if not control, decisions such as these.
We will be required to pay for certain tax benefits we may claim arising in connection with the merger of the Former Corporate Investors, our purchase of Holdco Units and future exchanges of Holdco Units under the Exchange Agreement, which payments could be substantial.
On the date of our IPO, we were treated for United States federal income tax purposes as having directly purchased Holdco Units from the Exchanging Members. In the future, the Continuing LLC Members will be able to exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of Class A common stock on a one-for-one basis, subject to adjustments for certain subdivisions (stock splits), combinations, or purchases of Class A common stock or Holdco Units, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors). As a result of these transactions, and our acquisition of the equity of certain of the Former Corporate Investors, we are and will become entitled to certain tax basis adjustments with respect to GS Holdings’ tax basis in its assets. As a result, the amount of income tax that we would otherwise be required to pay in the future may be reduced by the increase (for income tax purposes) in depreciation and amortization deductions attributable to our interests in GS Holdings. An increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain assets to the extent tax basis is allocated to those assets. The IRS, however, may challenge all or part of that tax basis adjustment, and a court could sustain such a challenge.
We entered into the TRA with the TRA Parties that will provide for the payment by us of 85% of the amount of cash savings, if any, in United States federal, state and local income tax that we realize or are deemed to realize, as a result of (i) the tax basis adjustments referred to above, (ii) any incremental tax basis adjustments attributable to payments made pursuant to the TRA, and (iii) any deemed interest deductions arising from payments made by us pursuant to the TRA. While the actual amount of the adjusted tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including the basis of our proportionate share of GS Holdings’ assets on the dates of exchanges, the timing of exchanges, the price of shares of our Class A common stock at the time of each exchange, the extent to which such exchanges are taxable, the
deductions and other adjustments to taxable income to which GS Holdings is entitled, and the amount and timing of our income, we expect that during the anticipated term of the TRA, the payments that we may make could be substantial. Payments under the TRA may give rise to additional tax benefits and, therefore, to additional potential payments under the TRA. In addition, the TRA provides for interest accrued from the due date (without extensions) of the corresponding tax return for the taxable year with respect to which the payment obligation arises to the date of payment under the TRA.
Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we expect that the tax savings associated with the purchase of Holdco Units in connection with the IPO and future exchanges of Holdco Units (and(assuming such future exchanges occurred at March 31, 2020 and assuming automatic cancellation of an equal number of shares of Class B common stock) as described above (assuming such future exchanges occurred at June 30, 2018) would aggregate to approximately $1,061.6$497.0 million over 15 years from June 30, 2018 based on the closing price on June 29, 2018March 31, 2020 of $21.15$3.82 per share of our Class A common stock. Under such scenario, assuming future payments are made on the date each relevant tax return is due, without extensions, we would be required to pay approximately 85% of such amount, or $902.4 million, over the 15-year period from June 30, 2018.$422.5 million.
There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the TRA exceed the actual benefits we realize in respect of the tax attributes subject to the TRA and/or (ii) distributions to us by GS Holdings are not sufficient to permit us to make payments under the TRA after paying our other obligations. For example, were the IRS to challenge a tax basis adjustment or other deductions or adjustments to taxable income of GS Holdings, we will not be reimbursed for any payments that may previously have been made under the TRA, except that excess payments will be netted against payments otherwise to be made, if any, after our determination of such excess. As a result, in certain circumstances we could make payments under the TRA in excess of our ultimate cash tax savings. In addition, the payments under the TRA are not conditioned upon any recipient’s continued ownership of interests in us or GS Holdings, and the right to receive payments can be assigned.
In certain circumstances, including certain changes of control of our Company, payments by us under the TRA may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the TRA.
The TRA provides that (i) in the event that we materially breach any of our material obligations under the TRA, whether as a result of failure to make any payment, failure to honor any other material obligation required thereunder or by operation of law as a result of the rejection of the TRA in a bankruptcy or otherwise, (ii) if, at any time, we elect an early termination of the TRA, or (iii) upon certain changes of control of our Company, our (or our successor’s) obligations under the TRA (with respect to all Holdco Units, whether or not such units have been exchanged or acquired before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions. These assumptions, includeincluding that (i) we (or our successor) willwould have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions, and tax basis and other benefits subject to the TRA, (ii) we (or our successor) will utilize (subject to any applicable limitations) any loss carryovers generated by the increased tax deductions and tax basis and other benefits on a pro rata basis through the scheduled expiration date of such loss carryovers, or if such carryforwards do not have an expiration date, over the 15-year period after such carryforwards were generated, and (iii) GS Holdings and its subsidiaries will sell certain nonamortizable assets (and realize certain related tax benefits) no later than a specified date. TRA.
As a result of the foregoing, if we breach a material obligation under the TRA, if we elect to terminate the TRA early or if we undergo a change of control, we would be required to make an immediate lump-sum payment equal to the present value of the anticipated future tax savings, which payment may be required to be made significantly in advance of the actual realization of such future tax savings, and the actual cash tax savings ultimately realized may be significantly less than the corresponding TRA payments. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity. There is no assurance that we willWe may not be able to fund or finance our obligations under the TRA. Additionally, the obligation to make a lump sum payment on a change of control may deter potential acquirers, which could negatively affect our stockholders’ potential returns. If we had elected to terminate the TRA as of June 30, 2018,March 31, 2020, based on the closing price on June 29, 2018March 31, 2020 of $21.15$3.82 per share of our Class A common stock, and a discount rate equal to 5.91%4.26% per annum, compounded annually, we estimate that we would have been required to pay $589.0$302.6 million in the aggregate under the TRA.
If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of our ownership of GS Holdings and GSLLC, applicable restrictions could make it impractical for us to continue our business as currently contemplated and could have an adverse effect on our business.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.
Because GreenSky, Inc. is the managing member of GS Holdings, and GS Holdings is the managing member of GSLLC, we indirectly operate and control all of the business and affairs of GS Holdings and its subsidiaries, including GSLLC. On that basis, we believe that our interest in GS Holdings and GSLLC is not an “investment security,” as that term is used in the 1940 Act. However, if we were to cease participation in the management of GS Holdings and GSLLC, our interest in such entities could be deemed an “investment security” for purposes of the 1940 Act.
We, GS Holdings and GSLLC intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Our certificate of incorporation provides, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to bring a claim in a judicial forum that it findsthey find more favorable for disputes with us or our directors, officers, employees or stockholders.
Pursuant to our certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine. The forum selection clause in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our stockholders’ ability to bring a claim in a judicial forum that it findsthey find more favorable for disputes with us or any of our directors, officers, other employees or stockholders. The exclusive forum provision does not apply to any actions under United States federal securities laws.
By purchasing shares of our Class A common stock, you will have agreed and consented to the provisions set forth in our certificate of incorporation related to choice of forum. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Risks Related to our Class A Common Stock
We are subject to risks and uncertainties related to our review of strategic alternatives.
In August 2019, we announced that GreenSky’s Board of Directors, working together with its senior management team and legal and financial advisors, commenced a process to explore, review and evaluate a range of potential strategic alternatives focused on maximizing stockholder value. We will incur expenses in connection with the review and our future results may be affected by the pursuit or consummation of any specific transaction or other strategic alternative resulting from the review. This review may not result in a specific transaction or other strategic alternative. In addition, the pendency of this review exposes us to certain risks and uncertainties, including
potential risks and uncertainties in retaining and attracting employees during the review process; the diversion of management’s time during the review process; exposure to potential litigation in connection with the review process or any specific transaction or other strategic alternative resulting therefrom; and risks and uncertainties with respect to suppliers, clients and other business relationships, all of which could disrupt and negatively affect our business. Speculation regarding any developments related to the review of strategic alternatives and perceived uncertainties related to the future of the Company could cause our stock price to fluctuate significantly. The Company expects to make an announcement regarding this review no later than the reporting of the Company's second quarter 2020 financial results. Any resulting transaction or other strategic alternative may not have a positive impact on our results of operations or financial condition.
An active trading market for our Class A common stock may not be sustained, which may make it difficult to sell shares of Class A common stock.
Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “GSKY.” An active trading market for our Class A common stock may not be sustained, which would make it difficult for you to sell your shares of Class A common stock at an attractive price (or at all).
The market price of our Class A common stock has been and will likely continue to be volatile.
Our stock price has declined significantly since our May 2018 IPO and has exhibited substantial volatility. Our stock price may be volatile, which could cause the value of our Class A common stockcontinue to decline.
The market price of our Class A common stock may become highly volatile and subject to wide fluctuations. In addition, the trading volumefluctuate in our Class A common stock may fluctuate and cause significant price variations to occur. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market and political conditions, could reduce the market price of shares of our Class A common stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors dueresponse to a number of potentialevents and factors, including the COVID-19 pandemic and the social distancing measures in response thereto, variations in our quarterly or annual results of operations, additions or departures of key management personnel, the loss of key Bank Partners, merchants or Sponsors, changes in our earnings estimates (if provided) or failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or the investment community with respect to us or our industry, adverse announcements by us or others and developments affecting us, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, actions by institutional stockholders, and increases in market interest rates that may lead investors in our shares to demand a higher yield, and in response the market price of shares of our Class A common stock could decrease significantly. You may be unable to resell your shares of Class A common stock at or above the price you paid for them (or at all).
These broad marketWe are currently subject to putative securities class action litigation and industry factorsa putative stockholder derivative action in connection with our IPO and may decrease the market price of our Class A common stock, regardless of our actual operating performance. The stock market in general has, from timebe subject to time, experienced extreme price and volume fluctuations. In addition,similar litigation in the past,future. If the outcome of this litigation is unfavorable, it could have a material adverse effect on our financial condition, results of operations and cash flows.
The Company, together with certain of its officers and directors and one of its former directors, have been named as defendants in litigation related to the Company's IPO. See Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for a description of such litigation. In the future, especially following periods of volatility in the overall market and the market price of a company’s securities, securitiesour shares of Class A common stock, other purported class action or derivative complaints may be filed against us. In addition to diverting financial and management resources, this type of litigation has often been instituted against
these companies. Such litigation, if instituted against us, couldcan result in substantial costsadverse publicity that could harm our brand or reputation, regardless of its merits or whether we are ultimately held liable, and a diversionjudgment or settlement in connection with any such litigation that is not covered by, or is significantly in excess of, our management’s attentioninsurance coverage could materially and resources.adversely affect our financial condition, results of operations and cash flows.
As a newly public company, we are incurring, and will continue to incur, increased costs and are subject to additional regulations and requirements, and our management is required to devote substantial time to new compliance matters, which could lower profits and make it more difficult to run our business.
As a newly public company, we are incurring, and will continue to incur, significant legal, accounting, reporting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements and costs of recruiting and retaining non-executive directors. We also are incurring
costs associated with compliance with the rules and regulations of the SEC and various other costs of a public company. The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty.costs. Our management is devoting a substantial amount of time to ensure that we comply with all of these requirements. These laws and regulations also could make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations also could make it more difficult to attract and retain qualified persons to serve on our board of directors and board committees and serve as executive officers.
Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation.
We no longer qualify as an “emerging growth company”, and as a result, we are required to comply with increased disclosure and compliance requirements.
Prior to December 31, 2019, we were an “emerging growth company” as defined in the JOBS Act. Now, as a large accelerated filer, we are subject to certain disclosure and compliance requirements that apply to other public companies but did not previously apply to us due to our prior status as an emerging growth company. These requirements include, but are not limited to:
•the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002;
•the requirement that we provide full and more detailed disclosures regarding executive compensation; and
•the requirement that we hold a non-binding advisory vote on executive compensation and obtain stockholder approval of any golden parachute payments not previously approved.
We expect that the loss of emerging growth company status and compliance with the additional requirements of being a large accelerated filer will increase our legal and financial compliance costs and cause management and other personnel to divert attention from operational and other business matters to devote substantial time to public company reporting requirements. In addition, if we are not able to comply with changing requirements in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources.
Failure to comply with the requirements to design, implement and maintain effective internal controls could have an adverse effect on our business and stock price.
As a public company, we are subject to significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environment and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
If we are unable to establish and maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our operating results. In addition, beginning with our annual report for the fiscal year ending December 31, 2019, we will be required pursuant to SEC rules to furnish a report by management on, among other things, the effectiveness of
We concluded that our internal control over financial reporting. This assessment will need to include disclosurewas effective as of any material weaknesses identified by our management in internal control over financial reporting. In addition, our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to the SEC rules commencing the later of the year following our first annual report required to be filed with the SEC or the date on which we are no longer an “emerging growth company” (as defined in the JOBS Act). See “-We are an ‘emerging growth company,’ as defined under the federal securities laws, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.” Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business.December 31, 2019. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the SEC rules or our independent registered public accounting firm may not issue an unqualified opinion. If, in a future period, either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could
lose confidence in our reported financial information, which could cause the price of our Class A common stock to decline and could subject us to investigation or sanctions by the SEC.
We are an “emerging growth company,” as defined under the federal securities laws, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Securities Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, among other things, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a non-binding stockholder advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information that they may deem important.
An emerging growth company can utilize the extended transition period provided in the Securities Act for complying with new or revised accounting standards. However, we chose to “opt out” of such extended transition period and, thus, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
We could be an emerging growth company until December 31, 2023, although circumstances could cause us to lose that status earlier, including if our total annual gross revenues exceed $1.07 billion, if we issue more than $1.0 billion in non-convertible debt during any three-year period or if the market value of our Class A common stock held by non-affiliates exceeds $700 million as of June 30, 2019 or any June 30 thereafter. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock, our stock price may be more volatile and the price of our Class A common stock may decline.
You may be diluted by the future issuance of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise.
Our certificate of incorporation authorizes us to issue authorized but unissued shares of Class A common stock and rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 24,000,000 shares for issuance under our 2018 Omnibus Incentive Compensation Plan, subject to adjustment in certain events. Any Class A common stock that we issue, including under our 2018 Omnibus Incentive Compensation Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by existing investors.
Because we have no current plans to pay cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.
We have no current plans to pay cash dividends on our Class A common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash, current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, implications on the payment of dividends by us to our stockholders or by our subsidiaryGS Holdings to us and such other factors as our board of directors may deem relevant. In addition, the terms of our existing financing arrangements restrict or limit our ability to pay cash dividends. Accordingly, we may not pay any dividends on our Class A common stock in the foreseeable future.
Future offerings of debt or equity securities by us may adversely affect the market price of our Class A common stock.
In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our Class A common stock or offering debt or other equity securities, including commercial paper, medium-term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to obtain the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness and/or cash from operations.
Issuing additional shares of our Class A common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our Class A common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our Class A common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing and nature of our future offerings.
Future sales, or the expectation of future sales, of shares of our Class A common stock, including sales by Continuing LLC Members, could cause the market price of our Class A common stock to decline.
The sale of a substantial number of shares of our Class A common stock in the public market, or the perception that such sales could occur, including sales by the Continuing LLC Members, could adversely affect the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price we deem appropriate. In addition, subject to certain limitations and exceptions, pursuant to certain provisions of the Exchange Agreement, the Continuing LLC Members may exchange Holdco Units (with automatic cancellation of an equal
number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for certain subdivisions (stock splits), combinations, or purchases of Class A common stock or Holdco Units, 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). All of the Holdco Units and shares of Class B common stock are exchangeable for shares of our Class A common stock or cash, at our option (such determination to be made by the disinterested members of our board of directors), subject to the terms of the Exchange Agreement.
Our certificate of incorporation authorizes us to issue additional shares of Class A common stock and rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion. In accordance with the DGCL and the provisions of our certificate of incorporation, we also may issue preferred stock that has designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to shares of Class A common stock. Similarly, GS Holdings Agreement permits GS Holdings to issue an unlimited number of additional limited liability company interests of GS Holdings with designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to the Holdco Units, and which may be exchangeable for shares of our Class A common stock.
Each of our directors and officers, and substantially all of our pre-IPO equity holders, have entered into lock-up agreements with the underwriters of the IPO that restrict their ability to sell or transfer their shares of Class A common stock until November 20, 2018. The underwriters of the IPO, however, may, in their sole discretion, permit our officers, directors and other current equity holders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements.
After the lock-up agreements expire and assumingAssuming the Continuing LLC Members exchange all of their Holdco Units for shares of our Class A common stock, up to an additional 128,983,353113,301,368 shares of Class A common stock will be eligible for sale in the public market, the majority of which are held by our executive officers, directors and their affiliated entities, and will be subject to volume limitations under Rule 144 and various vesting agreements. Additionally, certain of our executive officers and directors own options exercisable for shares of Class A common stock.
We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of ourAs unvested Class A common stock or securities convertible into, or exchangeable for, shares of our Class A common stockawards issued pursuant to our 2018 Omnibus Incentive Compensation Plan. Any such Form S-8 registration statement automatically will become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover shares of our Class A common stock.
As restrictions on resale end,Plan vest, the market price of our shares of Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
These factors also could make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.
Our capital structure may have a negative impact on our stock price.
In July 2017, S&P Dow Jones, a provider of widely-followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likelyis not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recently stated that it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common stock. There is no assurance that otherOther stock indices will notmay take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.
Certain provisions of our certificate of incorporation and bylaws could hinder, delay or prevent a change in control of us, which could adversely affect the price of our Class A common stock.
Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions:
•authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;
•prohibit stockholder action by written consent, requiring all stockholder actions be taken at a meeting of our stockholders;
•provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;
•establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
•establish a classified board of directors, as a result of which our board of directors is divided into three classes, with each class serving for staggered three-year terms, which prevents stockholders from electing an entirely new board of directors at an annual meeting.
In addition, these provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management or our board of directors. Stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is favorable to them. These anti-takeover provisions could substantially impede your ability to benefit from a change in control or change our management and board of directors and, as a result, may adversely affect the market price of our Class A common stock and your ability to realize any potential change of control premium.
If securities and industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our Class A common stock depends, in part, on the research and reports that securities and industry analysts publish about us and our business. If securities and industry analysts do not cover our Company, the trading price of our stock would likely be negatively impacted. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (Dollars in thousands, unless otherwise stated)
UsePurchases of Proceeds from Initial Public Offering of Class A Common StockEquity Securities by the Issuer
On May 29, 2018, we completed the IPOThe following table presents information with respect to our purchases of our Class A common stock pursuantduring the three months ended March 31, 2020. See Note 11 to a registration statement (File No. 333-224505) (the “Registration Statement”), which was declared effective on May 24, 2018. We offered 43,700,000 sharesthe Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional discussion of our Class A common stock for an aggregate price of approximately $1.0 billion, which equatedrepurchases.
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| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs |
| January 1, 2020 through January 31, 2020 | | — | | | $ | — | | | — | | | $ | — | |
| February 1, 2020 through February 29, 2020 | | — | | | $ | — | | | — | | | $ | — | |
| March 1, 2020 through March 31, 2020 | | 107,043 | | | $ | 6.11 | | | — | | | $ | — | |
| Total | | 107,043 | | | | | — | | | |
(1)For the periods presented, represents shares surrendered to $23.00 per share. We received net proceeds of approximately $954.8 million, after deducting underwriting discounts and commissions. In conjunction with our IPO, we also completed Reorganization Transactions that resulted in an additional 15,816,268 shares of Class A common stock being issued in exchange for units held in GS Holdings. The principal underwriters in our IPO were Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC.
We used the net proceeds from the IPOus to purchase 2,426,198 shares of Class A common stock and 41,273,802 common units directly from GS Holdings at a price per unit equal to the IPO price per share of Class A common stock sold in the IPO, less underwriting discounts and commissions. Thus, as of the date of this Quarterly Report on Form 10-Q, we have used all of the net proceeds from our IPO.
There has been no material change in the use of proceeds as described in the Final IPO Prospectus.
Recent Sales of Unregistered Securities
Prior to the IPO, the Company effected the Reorganization Transactions, as described in the Registration Statement.
In connection with the Reorganization Transactions, the Company issued an aggregate of 128,983,353 shares of Class B common stock to the Continuing LLC Members, for consideration in the amount of $0.001 per share. The aggregate consideration received by the Company for the Class B common stock was $129. The Class B common stock initially entitles holders to ten votes per share and will vote as a single class with the Class A common stock, but the Class B common stock does not have any economic rights. The issuance of those shares of Class B common stock was made in reliance on Section 4(a)(2) of the Securities Act.
Additionally,satisfy tax withholding obligations in connection with the Reorganization Transactions, (i) Holdco Units received by certain Profits Interests Holders were contributed to the Company in exchange for 383,231 sharesvesting of Class A common stock; and (ii) equity holders of the Former Corporate Investors contributed their equity in the Former Corporate Investors to the Company in exchange for 15,433,037 shares of Class A common stock and the right to certain payments under the TRA, and Former Corporate Investors merged with and into subsidiaries of the Company. The issuances of those shares of Class A common stock were made in reliance on Section 3(a)(9) or Section 4(a)(2) of the Securities Act or other exemptions from registration.awards.
In connection with the Reorganization Transactions, the Company also issued 125,398 shares of Class A common stock to certain option holders of GS Holdings upon exercise of options pursuant to Rule 701 or Section 4(a)(2) of the Securities Act.
Contemporaneous with our IPO, we issued 434,783 shares of Class A common stock to FTP Securities LLC, with a value of $23.00 per share, as compensation for financial advisory services rendered in connection with the IPO, pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicableapplicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicableapplicable.
ITEM 5. OTHER INFORMATION
Not applicable
applicable.
ITEM 6. EXHIBITS
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| Exhibit Number | Exhibit Description |
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| 101 | The following financial information from GreenSky, Inc.'s Quarterly Report on Form 10-Q for the three months ended March 31, 2020, formatted in Inline XBRL (Inline Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited), (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019 (unaudited), (iv) Condensed Consolidated Statements of Changes in Equity (Deficit) for the three months ended March 31, 2020 and 2019 (unaudited), (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited), and (vi) Notes to Unaudited Condensed Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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| * | Filed herewith. |
| # | Certain portions of this exhibit have been excluded because they are both not material and would likely cause competitive harm to the Company if publicly disclosed. |
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| Exhibit Number | | Exhibit Description | | Form | | File Number | | Date of Filing | | Exhibit Number |
| | Certificate of Incorporation, dated May 23, 2018 | | 8-K | | 001-38506 | | May 29, 2018 | | 3.1 |
| | Bylaws, dated May 23, 2018 | | 8-K | | 001-38506 | | May 29, 2018 | | 3.2 |
| | Specimen Stock Certificate for shares of Class A common stock | | S-1 | | 333-224505 | | April 27, 2018 | | 4.1 |
| | Registration Rights Agreement, dated May 23, 2018 | | 8-K | | 001-38506 | | May 29, 2018 | | 4.1 |
| | GreenSky, Inc. 2018 Omnibus Incentive Compensation Plan | | | | | | | | |
| | Form of Incentive Stock Option Agreement under GreenSky, Inc. 2018 Omnibus Incentive Compensation Plan | | S-1/A | | 333-224505 | | May 7, 2018 | | 10.22(a) |
| | Form of Non-Qualified Stock Option Agreement under GreenSky, Inc. 2018 Omnibus Incentive Compensation Plan | | S-1/A | | 333-224505 | | May 7, 2018 | | 10.22(b) |
| | Form of Restricted Stock Agreement under GreenSky, Inc. 2018 Omnibus Incentive Compensation Plan | | S-1/A | | 333-224505 | | May 7, 2018 | | 10.22(c) |
| | Form of Restricted Stock Unit Agreement under GreenSky, Inc. 2018 Omnibus Incentive Compensation Plan | | S-1/A | | 333-224505 | | May 7, 2018 | | 10.22(d) |
| | Amendment No. 4 to Servicing Agreement, dated June 29, 2018, with Fifth Third Bank | | | | | | | | |
| | Amendment No. 4 to Loan Origination Agreement, dated April 30, 2018, with Fifth Third Bank | | S-1/A
| | 333-224505 | | May 7, 2018 | | 10.14(a) |
| | Fifth Amendment to Loan Origination Agreement, dated May 21, 2018, with Synovus Bank | | 8-K | | 001-38506 | | May 29, 2018 | | 10.6
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| | Fourth Amendment to Servicing Agreement, dated May 21, 2018, with Synovus Bank | | 8-K | | 001-38506 | | May 29, 2018 | | 10.7
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| | Tax Receivable Agreement, dated May 23, 2018 | | 8-K | | 001-38506 | | May 29, 2018 | | 10.1 |
| | Exchange Agreement, dated May 23, 2018 | | 8-K | | 001-38506 | | May 29, 2018 | | 10.2 |
| | Operating Agreement of GS Holdings, dated May 23, 2018 | | 8-K | | 001-38506 | | May 29, 2018 | | 10.3 |
| | Form of Indemnification Agreement with each of GreenSky, Inc’s directors and executive officers | | S-1 | | 333-224505 | | April 27, 2018 | | 10.7 |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) | | | | | | | | |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) | | | | | | | | |
| | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | | | | | | | | |
| | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | | | | | | | | |
| 101.INS* | | XBRL Instance Document | | | | | | | | |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
| 101.PRE* | | XBRL Taxonomy Presentation Linkbase Document | | | | | | | | |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
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| * | | Filed herewith. | | | | | | | | |
| # | | Confidential treatment requested as to certain portions of this exhibit, which portions have been omitted and filed separately with the SEC. |
| ^ | | Confidential treatment has been granted as to certain portions of this exhibit, which portions have been omitted and filed separately with the SEC. |
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | GREENSKY, INC. | | |
| | GREENSKY, INC. | | |
| May 11, 2020 | | By | |
August 10, 2018 | | By | /s/ David Zalik |
| | | | David Zalik Chief Executive Officer and Chairman of the Board of Directors |
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| | GREENSKY, INC. | | |
| | GREENSKY, INC. | | |
| May 11, 2020 | | By | |
August 10, 2018 | | By | /s/ Robert Partlow |
| | | | Robert Partlow Executive Vice President and Chief Financial Officer |