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10-Q
GREENSKY, INC. filed this Form 10-Q on 11/09/2018
Entire Document
 
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________

FORM 10-Q
ý
Quarterly REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38506
GreenSky, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
82-2135346
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
5565 Glenridge Connector, Suite 700, Atlanta, Georgia
 
30342
(Address of principal executive offices)
 
(Zip Code)
 
(678) 264-6105
 
(Registrant’s telephone number, including area code)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer ý
Smaller reporting company o
Emerging growth company ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the Registrant’s Class A common stock as of November 8, 2018 was 57,797,385 shares(1).
(1) Includes 378,025 shares of unvested Class A common stock awards.




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









CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, our operations and financial performance. You generally can identify these statements by the use of words such as “outlook,” “potential,” “continue,” “may,” “seek,” “approximately,” “predict,” “believe,” “expect,” “plan,” “intend,” “estimate” or “anticipate” and similar expressions or the negative versions of these words or comparable words, as well as future or conditional verbs such as “will,” “should,” “would,” “likely” and “could.” These statements may be found under Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. These risks and uncertainties include, but are not limited to, those risks described under Part II, Item 1A “Risk Factors.” The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.



PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 
 
 
Assets
 
 
 
 
Cash
$
294,336

 
$
224,614

 
Restricted cash
160,909

 
129,224

 
Loan receivables held for sale, net
14,765

 
73,606

 
Accounts receivable, net
18,623

 
18,358

 
Related party receivables
122

 
218

 
Property, equipment and software, net
9,768

 
7,848

 
Deferred tax assets, net
297,983

 

 
Other assets
4,989

 
9,021

 
Total assets
$
801,495

 
$
462,889

 
 
 
 
 
 
Liabilities, Temporary and Permanent Equity (Deficit)
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
$
6,134

 
$
6,845

 
Accrued compensation and benefits
5,525

 
7,677

 
Other accrued expenses
1,013

 
1,606

 
Finance charge reversal liability
117,202

 
94,148

 
Term loan
387,401

 
338,263

 
Tax receivable agreement liability
255,823

 

 
Related party liabilities
937

 
1,548

 
Other liabilities
39,649

 
38,841

 
Total liabilities
813,684

 
488,928

 
 
 
 
 
 
       Commitments, Contingencies and Guarantees (Note 12)

 

 
Temporary Equity (Note 16)
 
 
 
 
Redeemable preferred units

 
430,348

 
Permanent Equity (Deficit)
 
 
 
 
Class A common stock, par value $0.01 and 57,797,385 shares issued and outstanding at September 30, 2018 and 0 shares issued and outstanding at December 31, 2017
576

 

 
Class B common stock, par value $0.001 and 128,826,614 shares issued and outstanding at September 30, 2018 and 0 shares issued and outstanding at December 31, 2017
129

 

 
Additional paid-in capital
11,429

 
(554,906
)
 
Retained earnings
17,210

 
98,519

 
Noncontrolling interest
(41,533
)
 

 
Total permanent equity (deficit)
(12,189
)
 
(456,387
)
 
Total liabilities, temporary and permanent equity (deficit)
$
801,495

 
$
462,889


The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

4



GreenSky, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
2018

2017

2018

2017
Revenue
 

 

 

 
Transaction fees
$
96,770


$
76,170


$
257,907


$
202,543

Servicing and other
17,142


12,146


47,035


33,530

Total revenue
113,912


88,316


304,942


236,073

Costs and expenses
 

 

 

 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
35,374


22,036


105,269


68,528

Compensation and benefits
14,326


14,880


46,254


40,477

Sales and marketing
975


328


2,841


900

Property, office and technology
3,792


2,752


9,651


8,032

Depreciation and amortization
1,192


923


3,229


2,798

General and administrative
3,132


4,225


11,379


12,231

Related party expenses
864


3,080


1,677


4,084

Total costs and expenses
59,655


48,224


180,300


137,050

Operating profit
54,257


40,092


124,642


99,023

Other income/(expense), net
 

 

 

 
Interest income
1,912


1,627


4,714


4,158

Interest expense
(6,013
)

(2,189
)

(17,391
)

(2,363
)
Other gains/(losses)
(1,069
)

(1,368
)

(1,864
)

(2,052
)
Total other income/(expense), net
(5,170
)

(1,930
)

(14,541
)

(257
)
Income before income tax expense
49,087


38,162


110,101


98,766

Income tax expense
3,375




4,969



Net income
$
45,712


$
38,162


$
105,132


$
98,766

Less: Net income attributable to noncontrolling interests
33,711


N/A


87,581


N/A

Net income attributable to GreenSky, Inc.
$
12,001


N/A


$
17,551


N/A









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

 

 

 
Basic
$
0.21


N/A


$
0.31


N/A

Diluted
$
0.20


N/A


$
0.30


N/A


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








The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

5



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

$
(456,387
)
$
430,348



$

$

$

$

$

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

38,213

38,213









38,213

Issuances prior to Reorganization Transactions
339


339









339

Redemptions prior to Reorganization Transactions
(496
)

(496
)








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


2,132









2,132

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







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


6









6

Effect of Reorganization Transactions
590,905

(79,729
)
511,176

(413,990
)
15,816,268


158


(97,344
)



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




43,700,000


437


950,553



950,990

Class A common stock option exercises in connection with IPO




125,398


1


(1
)



Purchases of GreenSky Holdings, LLC units in connection with IPO








(901,833
)


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





128,983,353


129




129

Class A common stock repurchases in connection with IPO




(2,426,198
)

(24
)

(52,988
)


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




434,783


4


(4
)



Initial effect of the Reorganization Transactions and IPO on noncontrolling interest








69,299


(69,299
)

Net income subsequent to Reorganization Transactions









17,551

49,368

66,919

Forfeited share-based compensation awards subsequent to IPO





(156,739
)






Issuance of unvested Class A common stock awards subsequent to IPO




137,170








Share-based compensation subsequent to Reorganization Transactions








2,172



2,172

Equity-based payments to non-employees subsequent to Reorganization Transactions








6



6

Impact on noncontrolling interest of change in ownership during period








(5,433
)

5,433


Distributions subsequent to Reorganization Transactions









(341
)
(27,035
)
(27,376
)
Class A common stock option exercises subsequent to Reorganization Transactions




9,964




(127
)


(127
)
Deferred tax adjustments related to Reorganization Transactions








47,129



47,129

Balance at September 30, 2018
$

$

$

$

57,797,385

128,826,614

$
576

$
129

$
11,429

$
17,210

$
(41,533
)
$
(12,189
)





6



GreenSky, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued, Unaudited)
(Dollars in thousands, except share data)


 
GreenSky Holdings, LLC (Prior to Reorganization Transactions)
GreenSky, Inc. Stockholders Equity
 
Additional Paid-in Capital
Retained Earnings
Total
Permanent
Equity
(Deficit)
Temporary
Equity
Class A Shares
Class B Shares
Class A Amount
Class B Amount
Additional Paid-in Capital
Retained Earnings
Noncontrolling Interest
Total
 
Balance at December 31, 2016
$
(283,529
)
$
160,019

$
(123,510
)
$
335,720



$

$

$

$

$

$
212,210

Net income

98,766

98,766









98,766

Redemptions
(249
)

(249
)








(249
)
Distributions
(275,197
)
(76,611
)
(351,808
)
(63,353
)







(415,161
)
Unit option exercises
15


15









15

Share-based compensation
3,032


3,032









3,032

Equity-based payments to non-employees
297


297









297

Balance at September 30, 2017
$
(555,631
)
$
182,174

$
(373,457
)
$
272,367



$

$

$

$

$

$
(101,090
)


The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

7



GreenSky, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
Nine Months Ended September 30,
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
105,132

 
$
98,766

Adjustments to reconcile net income to net cash provided by/(used in) operating activities
 
 
 
Depreciation and amortization
3,229

 
2,798

Provision for bad debt expense
1,367


802

Share-based compensation expense
4,304


3,032

Equity-based payments to non-employees
12


297

Impairment losses


78

Non-cash rent expense
(293
)

(283
)
Amortization of debt related costs
1,262


270

Loss on extinguishment of debt


254

Fair value change in assets and liabilities
621


800

Original issuance discount on term loan payment
(20
)


Deferred tax expense
4,969

 

Changes in assets and liabilities:
 
 
 
(Increase)/decrease in loan receivables held for sale
58,731

 
(63,582
)
(Increase)/decrease in accounts receivable
(1,521
)
 
(646
)
(Increase)/decrease in related party receivables
96

 
156

(Increase)/decrease in other assets
4,032

 
(1,031
)
Increase/(decrease) in accounts payable
(711
)
 
2,037

Increase/(decrease) in finance charge reversal liability
23,054

 
14,688

Increase/(decrease) in related party liabilities
(933
)
 
(645
)
Increase/(decrease) in other liabilities
90

 
9,794

Net cash provided by operating activities
203,421

 
67,585

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(4,849
)

(2,575
)
Net cash used in investing activities
(4,849
)
 
(2,575
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from IPO, net of underwriters discount and commissions
954,845

 

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

Purchases of Class A common stock
(53,012
)
 

Issuances of Class B common stock
129

 

Redemptions of GreenSky Holdings, LLC units prior to Reorganization Transactions
(496
)
 
(249
)
Proceeds from term loan
399,000

 
346,500

Repayments of term loan
(351,105
)
 

Member distributions
(141,019
)
 
(405,653
)
Option and warrant exercises prior to Reorganization Transactions
339

 
15

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

Payment of tax withholdings upon option exercises after Reorganization Transactions
(126
)
 

Payment of IPO related expenses
(3,855
)
 

Payment of debt issuance costs

 
(8,155
)
Net cash used in financing activities
(97,165
)
 
(67,542
)
 
 
 
 
Net increase/(decrease) in cash and restricted cash
101,407

 
(2,532
)
Cash and restricted cash at beginning of period
353,838

 
228,114

Cash and restricted cash at end of period
$
455,245

 
$
225,582

 
 
 
 
Supplemental non-cash investing and financing activities
 
 
 
Leasehold improvements acquired but not paid
$
300

 
$

Distributions accrued but not paid
10,887

 
9,508

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

8

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


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

9

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


and, through GS Holdings and its subsidiaries, conduct GS Holdings’ business.
As of September 30, 2018, the Company had an economic interest in GS Holdings of 31.3%, after adjusting for unvested units. The Company consolidates the financial results of GS Holdings and reports a noncontrolling interest in its Unaudited Consolidated Financial Statements representing the GS Holdings interests held by Continuing LLC Members.
Summary of Significant Accounting Policies
Basis of Presentation
The balance sheet data as of December 31, 2017 was derived from the audited Consolidated Financial Statements included in our Final IPO Prospectus. The Unaudited Consolidated Financial Statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial statements. Accordingly, the Unaudited Consolidated Financial Statements do not include all information and disclosures required by accounting principles generally accepted in the United States that would be required for complete financial statements. In the opinion of management, the Unaudited Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of our statements of operations for the three and nine months ended September 30, 2018 and 2017, our balance sheets at September 30, 2018 and December 31, 2017, and our cash flows for the nine months ended September 30, 2018 and 2017.
We condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these interim statements should be read in conjunction with our Final IPO Prospectus. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of results that may be expected for the full year.
See Note 1 to the audited Consolidated Financial Statements included in our Final IPO Prospectus for additional information about our significant accounting policies.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles ("GAAP") requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, share-based compensation and income taxes. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Cash and Restricted Cash
The following table provides a reconciliation of cash and restricted cash reported within the Unaudited Consolidated Balance Sheets to the total included within the Unaudited Consolidated Statements of Cash Flows as of the periods indicated.
 
September 30, 2018
 
September 30, 2017
 
Cash
$
294,336

 
$
105,293

Restricted cash
160,909

 
120,289

Cash and restricted cash in Unaudited Consolidated Statements of Cash Flows
$
455,245

 
$
225,582

Recently Adopted Accounting Standards
Revenue from contracts with customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard, which is codified in ASC 606, Revenue from Contracts with Customers. Under this new standard, an entity should recognize revenue to depict the

10

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


transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB also issued several updates to ASU 2014-09. We elected to early adopt this standard and to apply its provisions as of January 1, 2017 to all open contracts existing as of that date using the modified retrospective approach. We determined that the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings was immaterial. Further, our adoption of the new standard did not have a material impact on any balance sheet or income statement line items in the period of adoption and, as such, we did not record any adjustments to the consolidated financial statements related to our adoption of this standard.
Disaggregated revenue
Revenue disaggregated by type of service was as follows for the periods presented:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Merchant fees
$
82,909

 
$
63,934

 
$
217,850

 
$
169,702

Interchange fees
13,861

 
12,236

 
40,057

 
32,841

Transaction fees
96,770

 
76,170


257,907


202,543

Servicing fees
17,101

 
12,071

 
46,890

 
33,245

Other(1)
41

 
75

 
145

 
285

Servicing and other
17,142

 
12,146


47,035


33,530

Total revenue
$
113,912

 
$
88,316


$
304,942


$
236,073

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

11

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


election to estimate award forfeitures. Our adoption of this standard did not have a material impact on our Unaudited Consolidated Financial Statements.
Scope of modification accounting
In May 2017, the FASB issued ASU 2017-09 to provide clarity and reduce both diversity in practice and the cost and complexity to an entity when applying the guidance in ASC 718, Compensation—Stock Compensation, to a change in the terms or conditions of a share-based payment award. The standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. We adopted the standard for the reporting period beginning January 1, 2018, and will apply its provisions prospectively to any award modified on or after the adoption date. Our adoption of this standard did not have any impact on our Unaudited Consolidated Financial Statements.
Disclosure framework - changes to the disclosure requirements for fair value measurement
In August 2018, the FASB issued ASU 2018-13 to modify certain disclosure requirements about recurring and nonrecurring fair value measurements to improve disclosure effectiveness. We adopted the standard for the reporting period beginning July 1, 2018. As a result of adopting this standard, we replaced our previously disclosed quantitative sensitivity analyses for unobservable inputs used to develop our Level 3 fair value measurements with narrative descriptions of the uncertainty of our fair value measurements to changes in unobservable inputs, and added explanations of how we calculated the weighted averages of the significant unobservable inputs used to develop our Level 3 fair value measurements. Our adoption of this standard did not have any impact on our Unaudited Consolidated Financial Statements.
Accounting Standards Issued, But Not Yet Adopted
Leases
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize leases with terms greater than twelve months on the balance sheet as right-of-use assets and corresponding liabilities. Lessees will continue to classify leases as either operating leases, using a straight-line expense pattern, or financing leases, using a front-loaded expense pattern. The standard also requires enhanced quantitative and qualitative disclosures related to the lease arrangements. The standard is effective for us on January 1, 2019, with early adoption permitted, using a modified retrospective approach.
We are evaluating the potential impact of adopting this standard by reviewing our existing lease contracts, all of which are operating leases wherein the Company is the lessee. For the future minimum lease payments of $16.8 million as of September 30, 2018 required under our existing operating leases (as disclosed in Note 12) and for other similar leases we may enter into prior to adopting this standard, we expect to gross up our Unaudited Consolidated Balance Sheets at their present values to recognize the right-of-use assets and lease liabilities. The quantitative impact of adopting this standard remains under evaluation; however, we do not expect material changes to the recognition, measurement and presentation of rent expense, which is included within property, office and technology expenses and related party expenses in our Unaudited Consolidated Statements of Operations. Similarly, we do not expect a material impact to our Unaudited Consolidated Statements of Cash Flows.
In July 2018, the FASB issued ASU 2018-10, which clarifies certain aspects of the guidance issued in ASU 2016-02. Upon adoption of this standard, we, as the lessee, will be required to reassess lease classification upon modification based on the facts and circumstances and the modified terms and conditions, if applicable, as of the date of reassessment. The remaining provisions of the standard are either not applicable to us or already satisfied in our disclosures. The standard is effective for us on January 1, 2019, with early adoption permitted, using a modified retrospective approach. We are currently evaluating the potential impact of adopting this standard; however, we do not expect material changes to the classification of leases or to the recognition of rent expense.
In July 2018, the FASB issued ASU 2018-11, which provides an additional (and optional) transition method to adopt ASU 2016-02 by applying its provisions at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, rather than applying the provisions of ASU

12

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


2016-02 at the beginning of the earliest period presented in the financial statements. Entities that elect this additional transition method must provide the required ASC 840, Leases, disclosures for all periods that continue to be in accordance with ASC 840. The remaining provisions of the standard are not applicable to us, as the provisions relate only to lessors. The standard is effective for us on January 1, 2019 in conjunction with our adoption of ASU 2016-02.
Measurement of credit losses on financial instruments
In June 2016, the FASB issued ASU 2016-13, which is intended to better align the timing of recognition of credit losses on financial instruments with management’s expectations. The standard requires a financial asset (or group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. Management must determine expected credit losses for all financial instruments held at the reporting date based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts, the latter of which broadens current guidance. The standard requires enhanced disclosures to help investors and other financial statement users to better understand the significant estimates and judgments used in estimating credit losses. The standard is effective for us on January 1, 2020, with early adoption permitted, but not before January 1, 2019. The majority of this standard's provisions must be applied using a modified retrospective approach. We are currently evaluating the potential impact of adopting this standard.
Improvements to nonemployee share-based payment accounting
In June 2018, the FASB issued ASU 2018-07 to simplify certain aspects of the accounting for non-employee share-based payment transactions. Under the new standard, all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards are within the scope of ASC 718. Consistent with the accounting requirement for employee share-based payment awards, non-employee share-based payment awards within the scope of ASC 718 are measured at grant-date fair value of the equity instruments, and the requirement to reassess classification of non-employee share-based payment awards upon vesting is eliminated. The standard is effective for us on January 1, 2019, with early adoption permitted, using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption to remeasure equity-classified awards for which a measurement date has not been established and liability-classified awards that have not been settled by the date of adoption. We are currently evaluating the potential impact of adopting this standard; however, we do not expect adoption to have a material impact, as the Company has a limited number of non-employee share-based payment transactions outstanding and does not anticipate material non-employee share-based payment transactions in the future.
Customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract
In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. This standard also requires entities to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and to apply the existing impairment guidance in ASC 350-40 to the capitalized implementation costs as if the costs were long-lived assets. The standard clarifies that such capitalized implementation costs are also subject to the guidance on abandonment in ASC 360, Property, Plant, and Equipment.
In addition, this standard requires alignment in presentation between: (1) the expense related to the capitalized implementation costs and the fees associated with the hosting element (service) of the arrangement on the statement of operations, (2) the capitalized implementation costs and any prepayment for the fees of the associated hosting arrangement on the balance sheet, and (3) the payments for capitalized implementation costs and the payments made for fees associated with the hosting element in the statement of cash flows. The standard is effective for us on January 1, 2020, with early adoption permitted, and should be applied either retrospectively or prospectively to all

13

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


implementation costs incurred after the date of adoption. We are refining our inventory of existing cloud computing arrangements to identify hosting arrangements that are service contracts and will evaluate how to account for the implementation costs of such arrangements.
2. Earnings per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to GreenSky, Inc. by the weighted average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GreenSky, Inc., adjusted for the assumed exchange of all potentially dilutive Holdco Units for Class A common stock, by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements.
Prior to the IPO, the GS Holdings membership structure included Class A, B, and C Units and Profits Interests. The Company analyzed the calculation of earnings per unit for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of these Unaudited Consolidated Financial Statements. Therefore, earnings per share information has not been presented for the three and nine months ended September 30, 2017.

14

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


The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three and nine months ended September 30, 2018. The basic and diluted earnings per share for the nine months ended September 30, 2018 represents only the period from May 24, 2018 to September 30, 2018, the period wherein we had outstanding Class A common stock.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2018
 
2018
Numerator:
 
 
 
Income before income tax expense
$
49,087

 
$
110,101

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

 
38,213

Less: Net income attributable to noncontrolling interests subsequent to the Reorganization Transactions
33,711

 
49,368

Less: Income tax expense
3,375

 
4,969

Net income attributable to GreenSky, Inc. - basic
$
12,001

 
$
17,551

Add: Reallocation of net income attributable to noncontrolling interests after the Reorganization Transactions from the assumed exchange of common units of GS Holdings for Class A common stock
33,711

 
49,368

Less: Income tax expense on reallocation of net income attributable to noncontrolling interests(1)
7,400

 
10,893

Net income attributable to GreenSky, Inc. - diluted
$
38,312

 
$
56,026

Denominator:
 
 
 
Weighted average shares of Class A common stock outstanding - basic
57,412,673

 
57,408,861

Add: Dilutive effects as shown separately below
 
 
 
Holdco Units exchangeable for Class A common stock
128,052,758

 
128,155,169

Class A common stock options
2,813,764

 
2,646,827

Holdco warrants exchangeable for Class A common stock
707,414

 
635,436

Unvested Class A common stock(2)
169,315

 
179,339

Weighted average shares of Class A common stock outstanding - diluted
189,155,924

 
189,025,632

 
 
 
 
Earnings per share of Class A common stock outstanding - basic
$
0.21

 
$
0.31

Earnings per share of Class A common stock outstanding - diluted(3)(4)
$
0.20

 
$
0.30

(1)
For the three and nine months ended September 30, 2018 periods, we assumed effective tax rates of 22.0% and 22.1%, respectively.
(2)
Includes both Class A common stock issued as part of the Reorganization Transactions and unvested Class A common stock awards issued subsequent to the Reorganization Transactions.
(3) 
Year-to-date results do not agree to the sum of individual quarter-to-date results due to rounding.
(4)
Our calculation of diluted earnings per share excludes 1,184,029 Class A common stock options and 134,170 unvested Class A common stock awards for the three and nine months ended September 30, 2018, as their inclusion would have been anti-dilutive. These amounts represent the number of instruments outstanding at the end of the period. Application of the treasury stock method would reduce these amounts if they had a dilutive effect and were included in the computation of diluted earnings per share.
Shares of the Company’s Class B common stock do not participate in the earnings or losses of the Company and, therefore, are not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.


15

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


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

16

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


 
Aggregate Unpaid Balance
 
Proceeds
Bank Partner
loans
 
Loan
receivables
held for sale
 
Total(1)
 
Bank Partner
loans
 
Loan
receivables
held for sale
 
Total
Three months ended September 30, 2018
$
67,455

 
$
841

 
$
68,296

 
$
9,039

 
$
113

 
$
9,152

Three months ended September 30, 2017
73,494

 
1,061

 
74,555

 
5,914

 
86

 
6,000

Nine months ended September 30, 2018
142,350

 
2,124

 
144,474

 
19,039

 
284

 
19,323

Nine months ended September 30, 2017
73,494

 
1,061

 
74,555

 
5,914

 
86

 
6,000

(1) 
During the three and nine months ended September 30, 2018, $3,952 and $10,632, respectively, of the aggregate unpaid balance on cumulative transferred Charged-Off Receivables were recovered through our servicing efforts on behalf of our Charged-Off Receivables investors. During the three and nine months ended September 30, 2017, such recoveries totaled $498 and $498, respectively.
Financial guarantee
Under the terms of the contracts with our Bank Partners, we provide limited protection in the event of excessive Bank Partner portfolio credit losses and record a financial guarantee liability at fair value based on historical experience and the amount of current customer delinquencies expected to convert into Bank Partner portfolio credit losses. Refer to Note 12 for additional information.
Servicing liabilities
We elected the fair value method to account for our servicing liabilities to more appropriately reflect the value of the obligation in the consolidated financial statements. As a result of this election, our servicing liabilities are carried at fair value on a recurring basis within other liabilities in the Unaudited Consolidated Balance Sheets and are estimated using a discounted cash flow model. Servicing liabilities are classified within Level 3 of the fair value hierarchy, as the primary component of the fair value is obtained from unobservable inputs based on peer market data, reasonably adjusted for assumptions that would be used by market participants to service our transferred Charged-Off Receivables portfolios, for which market data is not available. Changes in the fair value of our servicing liabilities are recorded within other gains/(losses) in the Unaudited Consolidated Statements of Operations.
The following table summarizes, by level within the fair value hierarchy, the carrying amounts and estimated fair values of our assets and liabilities measured at fair value on a recurring or nonrecurring basis or disclosed, but not carried, at fair value in the Unaudited Consolidated Balance Sheets as of the dates presented. There were no transfers into, out of, or between levels within the fair value hierarchy during any of the periods presented. Refer to Note 4, Note 7 and Note 8 for additional information on these assets and liabilities.
 
Level
 
September 30, 2018
 
December 31, 2017
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Loan receivables held for sale, net(1)
2
 
$
14,765

 
$
15,459

 
$
73,606

 
$
74,190

Liabilities:
 
 
 
 
 
 
 
 
 
Finance charge reversal liability(2)
3
 
$
117,202

 
$
117,202

 
$
94,148

 
$
94,148

Servicing liabilities(2)
3
 
2,692

 
2,692

 
2,071

 
2,071

Term loan(3)
2
 
387,401

 
397,073

 
338,263

 
345,820

(1) 
Measured at fair value on a nonrecurring basis.
(2) 
Measured at fair value on a recurring basis. Servicing liabilities are presented within other liabilities in the Unaudited Consolidated Balance Sheets. The cash flow impacts of our liabilities that are measured at fair value on a recurring basis are included within net cash provided by operating activities in the Unaudited Consolidated Statements of Cash Flows.
(3) 
Disclosed, but not carried, at fair value. The amounts disclosed as of September 30, 2018 relate to the modified term loan and amounts disclosed as of December 31, 2017 relate to the original term loan. Refer to Note 7 for additional information. The carrying value of our

17

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


term loan is net of unamortized debt discount and debt issuance costs. The fair value of our term loan was determined using a discounted cash flow model based on observable market factors (such as changes in credit spreads for comparable benchmark companies) and credit factors specific to us.
Finance charge reversals
The following table reconciles the beginning and ending fair value measurements of our FCR liability, which is classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs, during the periods indicated.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Beginning balance
$
107,047

 
$
76,319

 
$
94,148

 
$
68,064

Receipts(1)
38,520

 
30,675

 
100,355

 
75,014

Settlements(2)
(47,211
)
 
(33,830
)
 
(136,883
)
 
(95,363
)
Fair value changes recognized in cost of revenue(3)
18,846

 
9,588

 
59,582

 
35,037

Ending balance
$
117,202

 
$
82,752

 
$
117,202

 
$
82,752

(1) 
Represents cash received from deferred payment loans during the promotional period (incentive payments), as well as the proceeds received from transferring our rights to Charged-Off Receivables attributable to previously charged-off Bank Partner loans. We consider all monthly incentive payments from Bank Partners during the period to be related to billed finance charges on deferred interest products until monthly incentive payments exceed total billed finance charges on deferred products, which did not occur during any of the periods presented.
(2) 
Represents the reversal of previously billed finance charges associated with deferred payment loan principal balances that paid off within the promotional period.
(3) 
A fair value adjustment is made based on the expected reversal percentage of billed finance charges (expected settlements), which is estimated at each reporting period. The fair value adjustment is recognized in cost of revenue in the Unaudited Consolidated Statements of Operations.
The following table presents the estimated reversal rate for billed interest on deferred loan products, which is the significant unobservable input used to value the Level 3 FCR liability, as of the dates indicated.
Reversal rate
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
 
Range
 
80.5% – 98.0%

 
85.5% – 98.0%

Weighted average
 
88.9
%
 
89.0
%
As of September 30, 2018 and December 31, 2017, we estimated reversal rates depending on the length of the interest-free promotional period (less than 12 months, 18 months and 24 months) and whether or not loan principal payments were required to be paid during the interest-free promotional period. We made the loan principal payment distinction for the 24-month promotional product as of both reporting dates, and for all interest-free promotional periods as of September 30, 2018. The weighted averages in the above table were calculated by first determining the percentage of the reporting date FCR liability attributable to each of the product groups noted above. We then multiplied these weights by the unique reversal rate for each product group and summed the resulting products.
A significant increase or decrease in the estimated reversal rates could result in a significantly higher or lower, respectively, calculation of our expected future payments to our Bank Partners, resulting in a higher or lower, respectively, fair value measurement of our FCR liability as of September 30, 2018 and December 31, 2017.

18

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


Servicing liabilities
Significant assumptions used in valuing our servicing liabilities were as follows:
Cost of servicing: The cost of servicing represents the servicing rate a willing market participant would require to service loans with similar characteristics as the Charged-Off Receivables.
Discount rate: The discount rate reflects the time value of money adjusted for a risk premium and is within an observable range based on peer market data.
Recovery period: Our recovery period was determined based on a reasonable recovery period for loans of these sizes and characteristics based on historical experience. We assumed that collection efforts for these loans will cease after five years, and the run-off of the portfolio will follow a straight-line methodology, adjusted for actual cash recoveries over time.
The following table reconciles the beginning and ending fair value measurements of our servicing liabilities associated with transferring our rights to Charged-Off Receivables, which are classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs, during the periods presented.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Beginning balance
$
2,272

 
$

 
$
2,071

 
$

Initial obligation from transfer of Charged-Off Receivables(1)
826

 
886

 
1,737

 
886

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

 

 

 

Other changes in fair value(1)(2)
(406
)
 
(86
)
 
(1,116
)
 
(86
)
Ending balance
$
2,692

 
$
800

 
$
2,692

 
$
800

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

 
62.5

 
62.5

 
62.5

Discount rate
 
18.0
%
 
18.0
%
 
18.0
%
 
18.0
%
Recovery period (years)
 
3.8 – 4.9

 
4.4

 
4.6 – 4.9

 
4.8


19

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


The recovery period is weighted by the unpaid balance of previously transferred Charged-Off Receivables as of September 30, 2018 and December 31, 2017. The recovery period reflects the length of time over which we expect to perform servicing activities and has an inverse correlation with the amount by which the servicing liability is reduced each reporting period. As such, a significant increase or decrease in the expected recovery period could have resulted in a higher or lower, respectively, servicing liability as of September 30, 2018 and December 31, 2017.
A significant increase or decrease in the market cost of servicing could have resulted in a significantly higher or lower, respectively, servicing liability as of September 30, 2018 and December 31, 2017. We only use one cost of servicing assumption; therefore, the weighted average only includes a singular basis points cost of servicing.
Finally, a significant increase or decrease in the discount rate could have resulted in a lower or higher, respectively, servicing liability as of September 30, 2018 and December 31, 2017. The discount rate impact on our servicing liability is much less compared to the recovery period and cost of servicing assumptions. We only use one discount rate assumption; therefore, the weighted average only includes a singular discount rate.
4. Loan Receivables Held for Sale
The following table summarizes the activity in the balance of loan receivables held for sale at lower of cost or fair value during the periods indicated.
 
Nine Months Ended
September 30,
2018
 
2017
 
 
 
 
Beginning balance
$
73,606

 
$
41,268

Additions
70,805

 
104,573

Proceeds from sales and customer payments(1)
(126,981
)
 
(33,554
)
Loss on sale

 
(88
)
Decrease/(increase) in valuation allowance
(110
)
 

Transfers(2)
22

 
(4,956
)
Write offs and other(3)
(2,577
)
 
(2,393
)
Ending balance
$
14,765

 
$
104,850

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

 
June 29
 
$
17,900

June 27
 
50,614

 
 
 
 
September 27
 
48,176

 
 
 
 
Total
 
$
108,342

 
Total
 
$
17,900

(2) 
We temporarily hold certain loan receivables, which are originated by a Bank Partner, while non-originating Bank Partner eligibility is being determined. Once we determine that a loan receivable meets the investment requirements of an eligible Bank Partner, we transfer the loan to the Bank Partner at cost plus any accrued interest. The reported amount also includes loans that have been placed on non-accrual and non-payment status while we investigate consumer loan balance inquiries.
(3) 
We received recovery payments of $9 and $29 during the three months ended September 30, 2018 and 2017, respectively, and $42 and $218 during the nine months ended September 30, 2018 and 2017, respectively, which are included within other income/(expense), net in the Unaudited Consolidated Statements of Operations. Separately, during the three months ended September 30, 2018 and 2017, write offs and other were reduced by $113 and $86, respectively, related to cash proceeds received from transferring our rights to Charged-Off

20

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


Receivables attributable to loan receivables held for sale. During the nine months ended September 30, 2018 and 2017, write offs and other were reduced by $284 and $86, respectively, related to such cash proceeds. The cash proceeds received were recorded within other income/(expense), net in the Unaudited Consolidated Statements of Operations.
Recoveries of principal and finance charges and fees on previously written off loan receivables held for sale are recognized on a collected basis as other gains and interest income, respectively.
The following table presents activities associated with our loan receivable sales and servicing activities during the periods indicated.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Gain/(loss) on sold loan receivables held for sale
$

 
$

 
$

 
$
(88
)
Cash Flows
 
 
 
 
 
 
 
Sales of loans
$
48,176

 
$

 
$
108,342

 
$
17,900

Servicing fees
546

 
550

 
1,645

 
2,261

The following table presents information about the principal balances of sold loan receivables that are not recorded in our Unaudited Consolidated Balance Sheets, but with which we have a continuing involvement through our servicing arrangements with our Bank Partners. The sold loan receivables are pooled with other loans originated by the Bank Partners for purposes of determining escrow balances and incentive payments. The escrow balances represent our only direct exposure to potential losses associated with these sold loan receivables.
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Total principal balance
$
350,296

 
$
305,748

Delinquent loans (unpaid principal balance)
24,841

 
20,409

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net charge-offs (unpaid principal balance)
$
2,017

 
$
2,265

 
$
6,729

 
$
5,270

5. Accounts Receivable
Accounts receivable consisted of the following as of the dates indicated.
 
Accounts
Receivable,
Gross
 
Allowance
for
Losses
 
Accounts
Receivable,
Net
September 30, 2018
 
 
 
 
 
Transaction related
$
17,605

 
$
(369
)
 
$
17,236

Servicing related
1,387

 

 
1,387

Total
$
18,992

 
$
(369
)
 
$
18,623

 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
Transaction related
$
15,997

 
$
(276
)
 
$
15,721

Servicing related
2,637

 

 
2,637

Total
$
18,634

 
$
(276
)
 
$
18,358


21

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


6. Property, Equipment and Software
Property, equipment and software were as follows as of the dates indicated.
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Furniture
$
2,813

 
$
2,704

Leasehold improvements
4,114

 
3,659

Computer hardware
3,012

 
2,987

Software
7,244

 
4,836

Total property, equipment and software, at cost
17,183

 
14,186

Less: accumulated depreciation
(5,162
)
 
(4,060
)
Less: accumulated amortization
(2,253
)
 
(2,278
)
Total property, equipment and software, net
$
9,768

 
$
7,848


7. Borrowings
Credit Agreement
In August 2017, we entered into a $450.0 million credit agreement (“Credit Agreement”), which provided for a $350.0 million term loan (“original term loan”) maturing on August 25, 2024 and a $100.0 million revolving loan facility maturing on August 25, 2022.
Original term loan. The original term loan incurred interest, due quarterly in arrears, at an adjusted LIBOR rate, which represented the one-month LIBOR rate multiplied by the statutory reserve rate, as defined in the Credit Agreement, plus a margin of 4.00% per annum. An original issuance discount of $3,500 and debt issuance costs of $7,949 were recorded as a direct deduction from the face amount of the original term loan and were being amortized into interest expense over the term of the loan using the effective interest method.
The net proceeds from the term loan of $338.6 million, along with $7.9 million of cash, were set aside for a subsequent $346.5 million payment (which is occurring in stages) to certain equity holders and a related party. With the exception of the payments to the related party, which are related party expenses, the payments were accounted for as distributions. As of September 30, 2018, $340.7 million of the reserved payment was paid in cash. The remaining $5.8 million of the reserved payment was included within other liabilities and related party liabilities in the Unaudited Consolidated Balance Sheets as of September 30, 2018.
The distribution to GS Holdings unit holders and GS Holdings holders of profits interests was made on a basis generally proportionate to their equity interests in GS Holdings. GS Holdings' members approved the Credit Agreement and the distribution of the proceeds of the original term loan to the GS Holdings unit holders, holders of profits interests and a related party. The purpose of the distribution was to provide a cash return on investment to the GS Holdings members and holders of profits interests.
Revolving loan facility. Under the revolving loan facility, revolving loans incur interest at our election at either (i) a base rate, which represents, for any day, a rate per annum equal to the greater of (a) the prime rate on such day, (b) the federal funds rate on such day plus 0.50%, and (c) the adjusted LIBOR for a one-month interest period on such day plus 1.00%, plus a margin of 3.00% per annum or (ii) an adjusted LIBOR rate, as discussed below, plus a margin of 4.00% per annum. If our first lien net leverage ratio, as discussed further below, is equal to or below 1.50 to 1.00, these interest margins are reduced to 2.75% and 3.75% for base rate loans and Eurodollar loans, respectively. As of September 30, 2018 and December 31, 2017, we had no borrowings under the revolving loan facility.
We are required to pay a quarterly commitment fee at a per annum rate of 0.50% on the daily unused amount of the revolving loan facility, inclusive of the aggregate amount available to be drawn under all outstanding letters of credit, of which there were $10.0 million as of September 30, 2018 and $0.0 million as of December 31, 2017 as

22

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


discussed further below. This rate is reduced to 0.375% for any quarterly period in which our first lien net leverage ratio is equal to or below 1.50 to 1.00. For the three months ended September 30, 2018 and 2017, we recognized $96 and $49, respectively, of commitment fees within interest expense in the Unaudited Consolidated Statements of Operations. For the nine months ended September 30, 2018 and 2017, we recognized $317 and $49, respectively, of commitment fees within interest expense in the Unaudited Consolidated Statements of Operations.
Amended Credit Agreement
In March 2018, we amended certain terms of our Credit Agreement ("Amended Credit Agreement"). The term loan and revolving loan facility under the Amended Credit Agreement are collectively referred to as the "Credit Facility."
Term loan. The Amended Credit Agreement replaced the original term loan with a $400.0 million term loan (“modified term loan”) and extended the maturity date to March 29, 2025. Further, the interest margin on the modified term loan was reduced to 3.25% per annum.
We contemporaneously settled the outstanding principal balance on the original term loan of $349.1 million with the issuance of the $400.0 million modified term loan. An original issuance discount of $1.0 million was reported in the Unaudited Consolidated Balance Sheets as a direct deduction from the face amount of the modified term loan. Therefore, the gross proceeds of the modified term loan were $399.0 million. The proceeds from the modified term loan were primarily used to repay the outstanding principal balance on the original term loan and to pay $1.1 million of third party costs, including legal and debt arrangement costs, which were immediately expensed and recorded within general and administrative expense in the Unaudited Consolidated Statements of Operations on the modification date. The remaining $48.8 million of proceeds were used to provide for distributions to certain equity holders and a related party prior to the IPO. As of September 30, 2018, $46.9 million of the distribution was paid in cash. The remaining $1.8 million and $0.1 million of the reserved payment were included within other liabilities and related party liabilities, respectively, in the Unaudited Consolidated Balance Sheets as of September 30, 2018.
Key details of the term loans are as follows:
 
 
September 30, 2018(1)
 
December 31, 2017(1)
 
 
 
 
 
Term loan, face value(2)
 
$
398,000

 
$
349,125

Unamortized debt discount(3)
 
(3,882
)
 
(3,321
)
Unamortized debt issuance costs(3)
 
(6,717
)
 
(7,541
)
Term loan
 
$
387,401

 
$
338,263


(1) 
Amounts reported reflect details of the original term loan as of December 31, 2017, and details of the modified term loan as of September 30, 2018.
(2) 
The principal balance of the original term loan was scheduled to be repaid on a quarterly basis at an amortization rate of 0.25% per quarter. We made the first principal payment in December 2017. The principal balance of the modified term loan is scheduled to be repaid on a quarterly basis at an amortization rate of 0.25% per quarter, with the balance due at maturity. We made the first principal payment on the modified term loan in June 2018. For each of the next five years, principal repayments on the modified term loan are expected to be $4,000.
(3) 
For the three months ended September 30, 2018 and 2017, $155 and $52 of debt discount and $267 and $119 of debt issuance costs, respectively, were amortized into interest expense in the Unaudited Consolidated Statements of Operations. For the nine months ended September 30, 2018 and 2017, $438 and $52 of debt discount and $824 and $119 of debt issuance costs, respectively, were amortized into interest expense in the Unaudited Consolidated Statements of Operations.
Revolving loan facility. Under the Amended Credit Agreement, the maturity date of the $100.0 million revolving loan facility was extended to March 29, 2023. Further, the interest margin applied to revolving loans that incur interest at a base rate was modified to 2.00% per annum and the margin applied to revolving loans that incur interest at an adjusted LIBOR rate was modified to 3.00% per annum. However, if our first lien net leverage ratio is equal to or above 1.50 to 1.00, these interest margins are raised to 2.25% and 3.25%, respectively. As of September 30, 2018, we had no borrowings under the revolving loan facility. Lastly, the Amended Credit

23

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


Agreement provided for a $10.0 million letter of credit, which, to the extent drawn upon, would reduce the amount of availability under the revolving loan facility by the same amount. We did not draw on our available letter of credit as of September 30, 2018. The Credit Agreement commitment fee rates on the revolving loan facility (inclusive of the letter of credit), as disclosed above, were not changed.
Covenants
The Amended Credit Agreement contains certain financial and non-financial covenants with which we must comply. The financial covenant requires a first lien net leverage ratio equal to or below 3.50 to 1.00 for any measurement date at which the principal amounts of outstanding revolving loans and letters of credit exceed 25% of the aggregate principal amount of the revolving loan facility. The first lien net leverage ratio is calculated as the ratio of (i) the aggregate principal amount of indebtedness, minus the aggregate amount of consolidated cash (exclusive of restricted cash), as of the measurement date to (ii) consolidated EBITDA, as defined in the Amended Credit Agreement, for the four prior quarters.
The non-financial covenants include, among other things, restrictions on indebtedness, liens, fundamental changes to the business (such as acquisitions, mergers, liquidations or changes in the nature of the business, asset dispositions, restricted payments, transactions with affiliates and other customary matters).
The Amended Credit Agreement also includes various negative covenants, including one that restricts GS Holdings from making non-tax distributions unless certain financial tests are met. In general, GS Holdings is restricted from making distributions unless (a) after giving effect to the distribution it would have, as of a measurement date, a total net leverage ratio of no more than 3.00 to 1.00, and (b) the source of such distributions is retained excess cash flow, certain equity issuance proceeds and certain other sources.
We were in compliance with all covenants, both financial and non-financial, as of September 30, 2018 and December 31, 2017.
The Amended Credit Agreement defines events of default, the breach of which could require early payment of all borrowings under, and termination of, the Amended Credit Agreement or similar actions.
Any borrowings under the Amended Credit Agreement are unconditionally guaranteed by our subsidiaries. Further, the lenders have a security interest in substantially all of the assets of GS Holdings and the other guarantors thereunder.
Initial Credit Facility
On February 10, 2017, GSLLC entered into an agreement (“Initial Credit Facility Agreement”) for a two-year, $50.0 million bank revolving credit facility (“Initial Credit Facility”), which was expandable, upon our request and successful syndication, to $100.0 million. The Initial Credit Facility Agreement also allowed us to request the issuance of letters of credit denominated in United States dollars as the applicant thereof for the support of our or our subsidiaries’ obligations. In conjunction with the Credit Agreement, on August 25, 2017, we terminated the Initial Credit Facility, at which time we had no borrowings under the facility, nor requests for letters of credit.
During the three and nine months ended September 30, 2017, we recorded commitment fees on the daily unused amount of each lender’s commitment under the Initial Credit Facility of $61 and $159, respectively, which were recorded within interest expense in the Unaudited Consolidated Statements of Operations. Further, we recorded up-front and other fees associated with the Initial Credit Facility within other assets in the Unaudited Consolidated Balance Sheet, which were amortized on a straight-line basis over the remaining term of the Initial Credit Facility into interest expense in the Unaudited Consolidated Statements of Operations. For the three and nine months ended September 30, 2017, we recorded $24 and $99, respectively, of amortization of such fees within interest expense in the Unaudited Consolidated Statements of Operations. We incurred debt extinguishment costs of $254 during the three and nine months ended September 30, 2017 upon termination of the Initial Credit Facility, which were recorded within other gains/(losses) in the Unaudited Consolidated Statements of Operations.


24

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


8. Other Liabilities
The following table details the components of other liabilities in the Unaudited Consolidated Balance Sheets as of the dates indicated.
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Deferred lease liabilities
$
2,618

 
$
2,819

Transaction processing liabilities
18,741

 
16,435

Servicing liabilities(1)
2,692

 
2,071

Distributions payable(2)
10,565

 
13,189

Accruals and other liabilities
5,033

 
4,327

Total other liabilities
$
39,649

 
$
38,841

(1) 
Refer to Note 3 for additional information on servicing liabilities.
(2) 
Related party distributions payable are not included in this balance, but rather are included within related party liabilities.
9. Noncontrolling Interests
GreenSky, Inc. is the sole managing member of GS Holdings and consolidates the financial results of GS Holdings. Therefore, the Company reports a noncontrolling interest based on the common units of GS Holdings held by the Continuing LLC Members. Changes in GreenSky, Inc.’s ownership interest in GS Holdings, while GreenSky, Inc. retains its controlling interest in GS Holdings, are accounted for as equity transactions. As such, future redemptions or direct exchanges of common units of GS Holdings by the Continuing LLC Members will result in a change in ownership and reduce or increase the amount recorded as noncontrolling interest and increase or decrease additional paid-in capital when GS Holdings has positive or negative net assets, respectively.
As of September 30, 2018, GreenSky, Inc. had 57,797,385 shares of Class A common stock outstanding, which resulted in an equivalent amount of ownership of GS Holdings common units. When adjusted for unvested units, GreenSky, Inc. had a 31.3% economic ownership interest in GS Holdings.
10. Share-Based Compensation
In anticipation of our IPO, the Company adopted the 2018 Omnibus Incentive Compensation Plan (the "2018 Plan") in April 2018. The Company reserved a total of 24,000,000 shares of Class A common stock for issuance pursuant to the 2018 Plan. The Company currently has three types of share-based compensation awards outstanding; namely, Class A common stock options, unvested Holdco Units and unvested Class A common stock awards.

25

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


Class A Common Stock Options
Class A common stock option ("Options") activity was as follows during the periods indicated:
 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
 
Number of
Options
 
Weighted
Average
Exercise Price
 
Number of
Options
 
 
 
 
 
 
 
 
Outstanding at beginning of period
9,821,884

 
$
2.65

 
10,006,890

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

 
14.95

 
450,000

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

 
(202,000
)
 
Forfeited prior to Reorganization Transactions and IPO
(260,000
)
 
6.41

 
(400,500
)
 
Effect of Reorganization Transactions and IPO
(186,772
)
 
7.56

 
N/A

 
Granted after the Reorganization Transactions and IPO(1)
1,014,029

 
21.72

 
N/A

 
Exercised after Reorganization Transactions and IPO(3)
(42,000
)
 
1.39

 
N/A

 
Forfeited after Reorganization Transactions and IPO
(202,000
)
 
19.34

 
N/A

 
Outstanding at end of period(4)
10,215,141

 
$
4.43

 
9,854,390

 
Exercisable at end of period(4)
7,237,582

 
$
1.54

 
6,718,500

(1) 
Weighted average grant date fair value of Options granted during the nine months ended September 30, 2018 and 2017 was $6.29 and $3.42, respectively.
(2) 
The total intrinsic value of Options exercised, which is defined as the amount by which the market value of the stock on the date of exercise exceeds the exercise price, during the nine months ended September 30, 2018 and 2017 was $1,475 and $396, respectively.
(3) 
Employees paid $339 during the nine months ended September 30, 2018 to the Company to exercise Options, which resulted in the issuance of 30,516 Holdco Units prior to the Reorganization Transactions and IPO. Additionally, during the nine months ended September 30, 2018, 252,000 Options were exercised by means of a cashless net exercise procedure, which resulted in the issuance of 38,637 Holdco Units prior to the Reorganization Transactions and IPO and the issuance of 9,964 shares of Class A common stock subsequent to the Reorganization Transactions and IPO.
(4) 
The aggregate intrinsic value and weighted average remaining contractual terms of Options outstanding and Options exercisable were as follows as of September 30, 2018:
 
September 30, 2018
 
 
Aggregate intrinsic value (in millions)
 
Unit Options outstanding
$
56.1

Unit Options exercisable
$
45.7

Weighted average remaining term (in years)
 
Unit Options outstanding
5.42

Unit Options exercisable
4.41


26

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


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

 

 
 
 
Outstanding at beginning of period
14,061,530

 
$
8.23

 
12,616,890

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

 
14.31

 
420,000

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

 
(880,000
)
 
Redeemed prior to Reorganization Transactions and IPO

 
N/A

 

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

 
N/A

 
Outstanding at end of period(2)

 
N/A

 
12,156,890

(1) Weighted average grant date fair value of profits interests granted during the nine months ended September 30, 2018 and 2017 was $4.47 and $2.71, respectively.
(2) The total fair value based on grant date fair value of profits interests that vested was $371 and $1,204 during the nine months ended September 30, 2018 and 2017, respectively.
Unvested Holdco Units
As part of the Reorganization Transactions and the IPO, 15,241,530 profits interests in GS Holdings were converted into 2,941,139 and 3,172,843 vested and unvested Holdco Units, respectively, based on the prevailing profits interests thresholds and the IPO price of $23.00 per share. The converted Holdco Units remain subject to the same service vesting requirements of the original profits interests. Unvested Holdco Units activity was as follows during the periods indicated:
 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
 
Holdco Units
 
Weighted Average Grant Date Fair Value
 
Holdco Units
 
 
 
 
 
 
 
 
Unvested at beginning of period

 
N/A

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

 
$
23.00

 
N/A
 
Granted

 
N/A

 
N/A
 
Forfeited
(156,739
)
 
23.00

 
N/A
 
Vested(1)
(118,082
)
 
23.00

 
N/A
 
Unvested at end of period
2,898,022

 
$
23.00

 
N/A
(1) 
The total fair value, based on grant date fair value, of previously unvested Holdco Units that vested during the nine months ended September 30, 2018 was $2,716.
Unvested Class A Common Stock Awards
As part of the Reorganization Transactions and the IPO, 940,000 profits interests in GS Holdings were converted into 127,327 and 255,904 vested and unvested Class A common stock awards, respectively, based on the prevailing profits interests thresholds and the IPO price of $23.00 per share. The converted unvested Class A common stock awards are subject to the same service vesting requirements of the original profits interests.

27

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


Subsequent to the Reorganization Transactions and the IPO, we granted unvested Class A common stock awards to certain employees that vest ratably over a four-year period based on continued employment at the Company. Unvested Class A common stock awards are valued based on the closing stock price of the Company's Class A common stock on the date of grant, and the total value of the awards is expensed ratably over the requisite service period. Unvested Class A common stock award activity was as follows during the periods indicated:
 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
 
Class A common stock
 
Weighted Average Grant Date Fair Value
 
Class A common stock
 
 
 
 
 
 
 
 
Unvested at beginning of period

 
N/A

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

 
$
23.00

 
N/A
 
Granted
137,170

 
19.71

 
N/A
 
Forfeited

 
N/A

 
N/A
 
Vested(1)
(15,049
)
 
23.00

 
N/A
 
Unvested at end of period
378,025

 
$
21.81

 
N/A
(1) 
The total fair value, based on grant date fair value, of previously unvested Class A common stock awards that vested during the nine months ended September 30, 2018 was $346.
Historical information prior to the Reorganization Transactions has been restated above to account for the 10 to 1 stock split that occurred immediately prior to the IPO in connection with the Reorganization Transactions. We recorded share-based compensation expense of $4,304 and $3,032 for the nine months ended September 30, 2018 and 2017, respectively, which is included within compensation and benefits expense in the Unaudited Consolidated Statements of Operations.
At September 30, 2018, unrecognized compensation costs related to nonvested Options totaled $9.7 million, which will be recognized over a weighted average remaining requisite service period of 4.1 years.
At September 30, 2018, unrecognized compensation costs related to unvested Holdco Unit awards totaled $14.4 million, which will be recognized over a weighted average remaining requisite service period of 3.8 years.
At September 30, 2018, unrecognized compensation costs related to unvested Class A common stock totaled $4.1 million, which will be recognized over a weighted average remaining requisite service period of 4.0 years.
11. Taxation
GreenSky, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from GS Holdings based upon GreenSky, Inc.’s economic interest held in GS Holdings. GS Holdings is treated as a pass-through partnership for income tax reporting purposes. GS Holdings’ members, including GreenSky, Inc., are liable for federal, state and local income taxes based on their share of GS Holdings’ pass-through taxable income.     
The Company’s effective tax rate for the three and nine months ended September 30, 2018 was 6.9% and 4.5%, respectively, and the Company recorded $3,375 and $4,969 of income tax expense for the three and nine months ended September 30, 2018, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2018 were less than our combined federal and state statutory tax rate of 23.5%, primarily because the Company is not liable for income taxes on the portion of GS Holdings’ earnings that are attributable to noncontrolling interests. Further, prior to the Reorganization Transactions, GS Holdings' earnings were completely exempt from federal corporate income taxation. The results from the three and nine months ended September 30, 2017 do not reflect income tax expense because, prior to the Reorganization Transactions, the consolidated GS Holdings pass-through entity was not subject to corporate tax.

28

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


The Company regularly monitors its uncertain tax benefits and, as of September 30, 2018, there were no material uncertain tax benefits that if realized would affect the estimated annual effective tax rate, nor were there positions for which it is reasonably possible that the total amount of uncertain tax benefits would significantly increase or decrease within the next 12 months.
As a result of the IPO and Reorganization Transactions, the Company recognized a net deferred tax asset in the amount of $245,836 primarily associated with the basis difference in our investment in GS Holdings. During the nine months ended September 30, 2018, we also recognized $57,116 of deferred tax assets related to additional tax basis increases generated from expected future payments under a TRA with certain of the then-existing members of GS Holdings and related deductions for imputed interest on such payments. See "Tax receivable agreement liability" below for more information. We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized.
As of September 30, 2018, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets are more likely than not to be realized. As such, no additional valuation allowance was recognized. The Company did not recognize any change to the valuation allowance through the provision for income tax for the three or nine months ended September 30, 2017 because, prior to the Reorganization Transactions, GreenSky, Inc., did not have any operations or investments and, therefore, did not have any deferred tax assets.
Tax receivable agreement liability
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of GS Holdings when Holdco Units are redeemed or exchanged by the Continuing LLC Members of GS Holdings. We intend to treat any redemptions and exchanges of Holdco Units as direct purchases of Holdco Units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On May 23, 2018, we entered into a TRA that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of GS Holdings resulting from any redemptions or exchanges of Holdco Units and from our acquisition of the equity of certain of the Former Corporate Investors, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the "TRA Payments"). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in GS Holdings or us. The rights of each member of GS Holdings that is a party to the TRA are assignable to transferees of their respective Holdco Units. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable.
As of September 30, 2018, the Company had a liability of $255.8 million related to its projected obligations under the TRA, which is captioned as tax receivable agreement liability in our Unaudited Consolidated Balance Sheets.
12. Commitments, Contingencies and Guarantees
Commitments
We primarily lease our premises under multi-year, non-cancelable operating leases with terms expiring through 2024, exclusive of renewal option periods. Our lease agreement expiring in 2024 also contains a renewal option, at our election, to extend the lease for five consecutive three-year periods. Base rent is subject to rent escalations on each annual anniversary from the lease commencement dates. Rental payments, as well as any step rent provisions specified in the lease agreements, are aggregated and charged evenly to expense over the lease term. Certain of these operating leases contain rent holidays and tenant allowances that may be applied toward leasehold

29

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


improvements or other lease concessions. Capital improvement funding and other lease concessions provided by the landlord are recorded as deferred liabilities and are amortized evenly over the lease term as a reduction of rent expense. In most circumstances, we expect that in the normal course of business, leases will be renewed or replaced by other leases.
Rent expense is recognized on a straight-line basis over the life of the lease and is included within property, office and technology and related party expenses in the Unaudited Consolidated Statements of Operations. Refer to Note 13 for additional information regarding office space leased from a related party. Rent expense was $810 and $759 for the three months ended September 30, 2018 and 2017, respectively. Rent expense was $2,366 and $2,234 for the nine months ended September 30, 2018 and 2017, respectively.
As of September 30, 2018, future minimum lease payments under our leases for the periods presented are as follows:
 
September 30, 2018
 
 
Remainder of 2018
$
907

2019
3,725

2020
3,815

2021
3,878

2022
2,827

2023 and thereafter
1,647

Total minimum lease payments
$
16,799

Our transaction processor imposes certain financial covenants upon our wholly owned subsidiary, GSLLC.
The financial covenants with our transaction processor apply only to GSLLC and include the following:
Tangible net worth, as defined in the agreement, of no less than $7.5 million;
Minimum aggregate net income of $5.0 million for the trailing four fiscal quarters; and
Ratio of total liabilities to total equity not to exceed 3.00:1.00.
As of September 30, 2018, GSLLC was in compliance with all financial covenants.
As of September 30, 2018, our outstanding open and unused line of credit on approved loan receivables held for sale was $3.8 million. We did not record a provision for these unfunded commitments, but believe we have adequate cash on hand to fund these commitments.
For certain Bank Partners, we maintain a restricted cash balance based on a contractual percentage of the total interest billed on outstanding deferred interest loans that are within the promotional period less previous FCR on such outstanding loans. As of September 30, 2018, restricted cash in the Unaudited Consolidated Balance Sheets includes $44.7 million associated with these arrangements.
Contingencies
In limited instances, the Company may be subject to operating losses if we make certain errors in managing credit programs and we determine that a customer is not liable for a loan originated by a Bank Partner. We evaluated this contingency in accordance with ASC 450, Contingencies, and determined that it is reasonably possible that losses could result from errors in underwriting. However, in management’s opinion, it is not possible to estimate the likelihood or range of reasonably possible future losses related to errors in underwriting based on currently available information. Therefore, we have not established a liability for this loss contingency.
Further, from time to time, we place Bank Partner loans on non-accrual and non-payment status (“Pended Status”) while we investigate consumer loan balance inquiries, which may arise from disputed charges related to work performed by third-party merchants. As of September 30, 2018, Bank Partner loan balances in Pended Status were $15.7 million. While it is management’s expectation that most of these loan balance inquiries will be resolved without incident, in certain instances we may determine that it is appropriate for the Company to permanently

30

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


reverse the loan balance and assume the economic responsibility for the loan balance itself. We record a liability for these instances. As of September 30, 2018, our liability for potential Pended Status future losses was $2.7 million.
From time to time, we may become a party to civil claims and lawsuits. As of September 30, 2018, we were not a party as a defendant to any litigation that we believed was material to our operations or results.
Financial guarantees
Under the terms of the contracts with our Bank Partners, a contractual percentage of the Bank Partners’ monthly originations and month-end outstanding portfolio balance is held and maintained in restricted, interest-bearing escrow accounts to serve as limited protection to the Bank Partners in the event of excess Bank Partner portfolio credit losses. The Company’s maximum exposure to Bank Partner portfolio credit losses is limited to the contractual restricted cash balance, which was $91.2 million as of September 30, 2018. The recorded fair value of the financial guarantee related to these contracts was $0.5 million as of September 30, 2018, which was recorded within other liabilities in the Unaudited Consolidated Balance Sheets. Recorded financial guarantees are typically settled within one year of the initial measurement of the liability. In determining the measured liabilities, we consider a variety of factors, including historical experience and management’s expectations of current customer delinquencies converting into Bank Partner portfolio losses. We do not expect to directly recover any losses associated with this financial guarantee.
13. Related Party Transactions
We lease office space from a related party under common management control for which rent expenses are recognized within related party expenses in the Unaudited Consolidated Statements of Operations. Total rent expenses related to this office space were $439 and $373 for the three months ended September 30, 2018 and 2017, respectively, and $1,252 and $1,118 for the nine months ended September 30, 2018 and 2017, respectively.
In April 2018, we entered into an agreement with an affiliate of a member of the board of directors whereby we receive certain executive search and recruiting services in exchange for a fee. We incurred expenses related to this arrangement of $375 and $375 during the three and nine months ended September 30, 2018, respectively, which are presented within related party expenses in the Unaudited Consolidated Statements of Operations. We have a payable related to this arrangement of $61 as of September 30, 2018, which is presented within related party payables in the Unaudited Consolidated Balance Sheets.
We entered into non-interest bearing loan agreements with certain non-executive employees for which the remaining outstanding balances will be forgiven ratably over designated periods based on continual employment with the Company. As of September 30, 2018 and December 31, 2017, the remaining outstanding balances on these loan agreements were $122 and $210, respectively, which are presented within related party receivables in the Unaudited Consolidated Balance Sheets.
There were no equity-based payments to non-employees that resulted in related party expenses for the three and nine months ended September 30, 2018. Equity-based payments to non-employees resulted in related party expenses of $95 and $285 for the three and nine months ended September 30, 2017, respectively.
In May 2018, we declared a special operating distribution of $26.2 million. As of September 30, 2018, $25.1 million of the declared distribution was paid in cash, including $1.0 million to an affiliate of a related party. The remaining portion of the declared distribution will be paid in stages upon vesting events and is recorded within related party liabilities ($0.2 million) and other liabilities ($0.9 million) in the Unaudited Consolidated Balance Sheets as of September 30, 2018.
In August 2017, we incurred fees of $2.6 million due to an affiliate of one of the members of the board of managers in connection with finalizing our August 2017 term loan transaction. These costs were not directly attributable to the original term loan and were, therefore, expensed as incurred rather than deferred against the term loan balance. The unpaid portion of these fees of $0.5 million is recorded within related party liabilities in the Unaudited Consolidated Balance Sheets as of September 30, 2018.

31

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


In November 2016, we executed a $20.0 million Bank Partner agreement (“2016 Agreement”) with affiliates of two members of our board of directors. The agreement was structured similarly to the origination and servicing arrangements with the other Bank Partners, wherein the Company was required to hold restricted cash based on monthly originations and the month-end outstanding portfolio balance. In June 2018, the outstanding loans owned by this related party were sold to another Bank Partner, which is not a related party, and continue to be serviced by us. In connection with that loan sale, the related party financing partner ended its servicing agreement with us. As of September 30, 2018, we no longer have any related party financing partner agreements.
We were entitled to collect fixed servicing fees in conjunction with the 2016 Agreement. As of September 30, 2018 and December 31, 2017, our related party financing partners had committed balances in the aggregate of $0.0 million and $11.7 million, respectively.
Unaudited Consolidated Balance Sheets effects associated with our related party financing partners were as follows at the dates indicated:
 
September 30, 2018
 
December 31, 2017
Related party receivables(1)
$

 
$
8

Related party liabilities(2)

 
445

Restricted cash

 
437

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