GreenSky, Inc. GSKY $21.00-$23.00 34.1 million shares Underwriters: Goldman Sachs & Co., J.P. Morgan, Morgan Stanley, BofA Merrill Lynch, Citigroup, Credit Suisse, SunTrust Robinson Humphrey Co-Managers: Raymond James, Sandler O' Neill, Fifth Third Securities, Guggenheim Securities Proposed trade date of 5/24. They are a leading technology company that powers commerce at the point of sale.

GreenSky, Inc. GSKY

• 34,090,909 shares to be offered between $21.00 and $23.00 per share
• Underwriters: Goldman Sachs & Co., J.P. Morgan, Morgan Stanley, BofA Merrill Lynch, Citigroup, Credit Suisse, SunTrust Robinson Humphrey Co-Managers: Raymond James, Sandler O' Neill, Fifth Third Securities, Guggenheim Securities
• Proposed trade date of 5/24
• Rating = 3

Click here to view the prospectus.

https://www.sec.gov/Archives/edgar/data/1712923/000093041318001790/c88906_s1a.htm

Company Overview

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

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

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

•	Merchants. Merchants using their platform, which presently range from small, owner-operated home improvement contractors and healthcare providers to large national home improvement brands and retailers, rely on them to facilitate low or deferred interest promotional point-of-sale financing and payments solutions that enable higher sales volume. Their platform is designed to provide a seamless experience for their merchants with a mobile-native design that is intuitive and easy to use. Their technology integrates effortlessly with merchants’ existing payments systems, while also allowing merchants to access funds faster.
•	Consumers. Consumers on their platform, who to date primarily have super-prime or prime credit scores, find financing with promotional terms to be an attractive alternative to paying with cash, check, credit card, or general purpose revolving credit, particularly in the case of larger purchases. They provide a completely paperless, mobile-enabled experience that typically permits a consumer to apply and be approved for financing in less than 60 seconds at the point of sale.
•	Banks. They provide their Bank Partners with access to their proprietary technology solution and merchant network, enabling them to build a diversified portfolio of high quality consumer loans with attractive risk-adjusted yields. Their platform delivers significant loan volume, while requiring minimal upfront investment by their Bank Partners. Furthermore, their program is designed to adhere to the regulatory and compliance standards of their Bank Partners, which has helped them to gain their confidence, allowing them to outsource both loan facilitation and servicing functions to them.

Their platform is powered by a proprietary technology infrastructure that delivers stability, speed, scalability and security. It supports the full transaction lifecycle, including credit application, underwriting, real-time allocation to their Bank Partners, document distribution, funding, settlement, and servicing, and it can be easily expanded to additional industry verticals as they scale their business. They have cultivated strong relationships with manufacturers and trade associations (which they refer to as Sponsors) to amplify the reach of their technology, enabling them to efficiently and cost-effectively onboard large numbers of potential merchants underlying each Sponsor. They offer potential merchants a platform that they can adopt without friction—including no upfront fees, capital expenditure, or onerous systems integration. When their merchants offer their solution at the point of sale, they provide their Bank Partners with cost-effective access to a vast number of consumers. This ecosystem of merchants, consumers and Bank Partners allows them to generate recurring revenues with minimal customer acquisition and marketing costs, resulting in attractive unit economics and strong margins.

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

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

They have achieved significant growth in active merchants, transaction volume, total revenue, net income and Adjusted EBITDA. Their low-cost go-to-market strategy, coupled with their recurring revenue model, has helped them generate strong margins. Transaction volume (which they define as the dollar value of loans facilitated on their platform during a given period) was $3.8 billion in 2017, representing an increase of 31% from $2.9 billion in 2016. Further, transaction volume was $1.0 billion in the three months ended March 31, 2018, representing an increase of 47% from $0.7 billion in the three months ended March 31, 2017. Active merchants (which they define as home improvement merchants and healthcare providers that have submitted at least one consumer application during the 12 months ended at the date of measurement) totaled 12,231 as of March 31, 2018, representing an increase of 52% from 8,048 as of March 31, 2017.

IPO Detail

This is the initial public offering of GreenSky, Inc. and no public market currently exists for its common stock. GreenSky, Inc. is offering 34,090,909 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $21.00 and $23.00 per share. The company has applied to list its common stock on the NASDAQ Global Market under the symbol “GSKY.”

Class A common stock offered by the company

34,090,909   shares

Common stock to be outstanding immediately after this offering

41,196,485   shares of Class A common stock. If all outstanding Holdco Units held by the Continuing LLC Members were exchanged (with automatic cancellation of an equal number of shares of Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis, and all outstanding options were exercised, 189,294,306 shares of Class A common stock 

144,727,632 shares of Class B common stock, equal to one share per Holdco Unit (other than any Holdco Units owned by GreenSky, Inc.).

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

2.8%

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

97.2%

Each share of their Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. After this offering, the Continuing LLC Members will hold an equal number of shares of Class B common stock and Holdco Units. The shares of Class B common stock have no economic rights, but each share of Class B common stock initially entitles its holder to ten votes on all matters to be voted on by stockholders generally. Once the collective holdings of the Continuing LLC Members in the aggregate are less than 15% of the combined economic interest in them, each share of Class B common stock will entitle its holder to one vote per share on all matters to be voted upon by stockholders generally. Holders of their Class A and Class B common stock vote together as a single class on all matters presented to their stockholders for their vote or approval, except as otherwise required by applicable law.

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

Use of Proceeds

They estimate that the net proceeds to them from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by them, will be approximately $701.4 million. They will use the net proceeds from this offering to purchase common membership interests of GreenSky Holdings, LLC from certain holders including their Chief Executive Officer and certain of their other officers and directors; to redeem shares of their Class A common stock from equity holders of the Former Corporate Investors; and to redeem shares of their Class A common stock issued upon exercise of options by certain option holders of GS Holdings.

Competition

Company	Stock Symbol		Exchange.
Synchrony Financial	SYF		NYSE
Wells Fargo & Co.		WFC		NYSE
. JPMorgan Chase & Co.		JPM		NYSE
Social Finance Inc.		Private
Stripe Inc.		Private

Market Opportunity

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

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

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

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

Banks Seek Consumer Credit Exposure but are Not Well-Positioned to Lend at the Point of Sale They believe that banks seek attractive risk-adjusted yields and portfolio diversification through exposure to consumer credit. Banks’ traditional consumer lending advantages have included physical branch networks and trusted brands. However, their experience has demonstrated that consumers are increasingly comfortable using mobile devices to shop, make payments and manage finances. This has provided an opening at the point of sale for a new lending channel, but it is one that many banks to date have had a difficult time accessing.

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

	Year ended December 31,										Three months ended March 31,
	2017				2016			2015			2018				2017
	(dollars in thousands, except per unit data)
Consolidated Statements of Operations Data:
Revenue
Transaction fees		$	278,958			$	228,446		$	152,678		$	70,940			$	54,921
Servicing and other			46,929				35,419			20,779			14,386				10,416
Total revenue			325,887				263,865			173,457			85,326				65,337
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization shown separately below)			89,708				79,145			36,506			36,130				23,299
Compensation and benefits			54,650				39,836			27,738			16,343				12,430
Sales and marketing			2,198				1,085			861			828				233
Property, office and technology			10,062				8,000			4,283			2,722				2,526
Depreciation and amortization			3,983				3,708			2,356			970				966
General and administrative			14,876				10,602			7,071			4,173				3,780
Related party expenses			4,811				1,678			1,536			583				511
Total costs and expenses			180,288				144,054			80,351			61,749				43,745
Operating profit			145,599				119,811			93,106			23,577				21,592
Total other income/(expense), net			(6,931	)			4,653			713			(4,973	)			419
Net income		$	138,668			$	124,464		$	93,819		$	18,604			$	22,011
Net income attributable to participating interests			35,449				25,233			17,594			5,571				4,979
Net income attributable to Class A unit holders		$	103,219			$	99,231		$	76,225		$	13,033			$	17,032
Earnings per unit attributable to Class A unit holders^(1):
Basic		$	7.74			$	7.44		$	5.72		$	0.98			$	1.28
Diluted		$	7.49			$	7.19		$	5.54		$	0.95			$	1.21

	As of December 31,								As of March 31,
	2017				2016				2018
	(dollars in thousands)
Consolidated Balance Sheet Data:
Cash		$	224,614			$	185,243			$	277,501
Restricted cash			129,224				42,871				141,677
Loan receivables held for sale, net			73,606				41,268				67,291
Property, equipment and software, net			7,848				7,018				7,670
Total assets			462,889				302,205				521,326
Finance charge reversal liability			94,148				68,064				100,913
Term loan			338,263				—				388,555
Total liabilities			488,928				89,995				545,850
Total temporary equity			430,348				335,720				430,348
Total permanent equity (deficit)			(456,387	)			(123,510	)			(454,872	)

Target Markets

Grow Their Merchant Community They intend to continue building relationships with large Sponsors and independent, high-sales volume merchants in their existing core markets.

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

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

Leverage Their Current Customer Base and Bank Partner Relationships to Deliver New Solutions They believe they have a substantial opportunity to cross-market value-enhancing solutions to consumers and to their merchants. They believe that, as the number of transactions they facilitate increases, the data they accumulate from their technology platform will enable them to broaden their monetization model and leverage this data to attract incremental customers whom merchants may not have been able to source otherwise. They also believe that they can leverage their platform to efficiently connect consumers, including existing retail customers of their Bank Partners, with merchant-driven promotions, expanding GreenSky’s brand and driving incremental revenue in each of their industry verticals.

Company's Unique Strengths

Differentiated Technology Platform and Customer Experience

They believe that their proprietary, patent-pending technology is unique because it can deliver:

•	Frictionless setup and multiple promotional financing alternatives for their merchants
•	An intuitive, mobile-native user interface, and real-time “apply and buy” capabilities, for consumers
•	Instant digital loan underwriting and distribution mechanisms for their Bank Partners

They believe these capabilities will help them deepen their existing relationships and provide a competitive advantage in winning new business.

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

Trusted Relationship with their Bank Partners They have continually refined and upgraded their compliance, control, servicing and collections functions to meet the regulatory requirements, documentation and operating standards applicable to their Bank Partners, which include several of the largest banks in the United States, and to them.

Asset-Light Model Their Bank Partners originate and own the loans that they facilitate through their platform. They derive a substantial majority of their revenue and profitability from upfront transaction fees every time a merchant facilitates a transaction and receives a payment using their platform.

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

Efficient Go To Market Strategy and Recurring Revenue Model Drive Strong Operating Leverage They leverage their proprietary technology and strong Sponsor relationships to efficiently access and onboard a large network of merchants. Their merchants, once acquired, allow them to reach an even larger universe of consumers and facilitate repeat transactions at very low cost relative to the transaction fee they receive. Coupled with the highly scalable technology anchoring their platform, they deliver strong operating margins.

Company's Unique Risks

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

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

They derive a large percentage of their revenue from their top ten merchants. The loss of a significant merchant or Sponsor could have a negative impact on their business. Their top ten merchants (including certain groups of affiliated merchants) accounted for an aggregate of 30% of their total revenue in 2017 as well as in the three months ended March 31, 2018. The Home Depot is their most significant single merchant and represented approximately 6% of total revenue in 2017 and in the three months ended March 31, 2018

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

Changes in market interest rates could have an adverse effect on their business. The fixed interest rates charged on the loans that their Bank Partners originate are calculated based upon a margin above a market benchmark at the time of origination. Increases in the market benchmark would result in increases in the interest rates on new loans. Increased interest rates may adversely impact the spending levels of consumers and their ability and willingness to borrow money.

They are subject to certain additional risks in connection with promotional financing offered through the GreenSky program. Many of the loans originated by their Bank Partners provide promotional financing in the form of low or deferred interest. When a deferred interest loan is paid in full prior to the end of the promotional period (typically six to 24 months), any interest that has been billed on the loan by their Bank Partner to the consumer is reversed, which triggers an obligation on their part to make a payment to the Bank Partner that made the loan in order to fully offset the reversal.

Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting “disparate impact” claims. Antidiscrimination statutes, such as the Equal Credit Opportunity Act (the “ECOA”), prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments, including the U.S. Department of Justice (“DOJ”) and CFPB, take the position that these laws prohibit not only intentional discrimination, but also neutral practices that have a “disparate impact” on a group and that are not justified by a business necessity. These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are focusing greater attention on “disparate impact” claims. To the extent that the “disparate impact” theory continues to apply, they may face significant administrative burdens in attempting to identify and eliminate neutral practices that do have “disparate impact.”

Fraudulent activity could negatively impact their business and could cause their Bank Partners to be less willing to originate loans as part of the GreenSky program. Fraud is prevalent in the financial services industry and is likely to increase as perpetrators become more sophisticated. They are subject to the risk of fraudulent activity associated with their merchants, their customers and third parties handling customer information. Their resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud.

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

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

They are, and intend in the future to continue, expanding into new industry verticals, including elective healthcare, and their failure to comply with applicable regulations, or accurately predict demand or growth, in those new industries could have an adverse effect on their business. They recently expanded into the elective healthcare industry vertical, which involves consumer financing for elective medical procedures and products. Elective healthcare providers include doctors’ and dentists’ offices, outpatient surgery centers and clinics providing orthodontics, cosmetic and aesthetic dentistry, vision correction, bariatric surgery, cosmetic surgery, hair replacement, reproductive medicine, veterinary medicine and hearing aid devices. They make no assurance that they will achieve similar levels of success, if any, in this industry vertical, or that they will not face unanticipated challenges in their ability to offer their program in this industry vertical. In addition, the elective healthcare industry vertical is highly regulated and they, their merchants and their Bank Partners, as applicable, will be subject to significant additional regulatory requirements, including various healthcare and privacy laws. They may in the future further expand into other industry verticals. There is no assurance that they will be able to successfully develop consumer financing products and services for these new industries.

The contours of the Dodd-Frank UDAAP standard are still uncertain and there is a risk that certain features of the GreenSky program loans could be deemed to violate the UDAAP standard. The Dodd-Frank Act prohibits “Unfair, Deceptive, or Abusive Acts or Practices” (“UDAAP”) and authorizes the CFPB to enforce that prohibition. The CFPB has filed a large number of UDAAP enforcement actions against consumer lenders for practices that do not appear to violate other consumer finance statutes. There is a risk that the CFPB could determine that certain features of the GreenSky program loans are unfair, deceptive or abusive. On June 2, 2016, the CFPB issued proposed rules that would impose numerous restrictions on certain “high-cost installment loans.” It is not clear if or when the CFPB will publish the final version of these rules, or what their content will be. Among other things, the proposed rules would impose various obligations to determine a consumer’s ability to repay a consumer loan. It is possible that the final rules, if enacted, could impact the GreenSky program.

The owners of the Class B common stock, who also are the Continuing LLC Members, control them and their interests may conflict with yours in the future. Immediately following this offering and the application of net proceeds, the owners of the Class B common stock, who also are the Continuing LLC Members, will control them. In addition, immediately following this offering and the application of net proceeds to them therefrom, the owners of the Class B common stock, as Continuing LLC Members, will own 77.8% of the Holdco Units). Because they hold their economic ownership interest in their business through GS Holdings, rather than GreenSky, Inc., these existing unit holders may have conflicting interests with holders of their Class A common stock.

Bottom Line

Their total revenue was $173.5 million, $263.9 million and $325.9 million and their net income was $93.8 million, $124.5 million and $138.7 million in 2015, 2016, and 2017, respectively. In the first quarter of 2018, their total revenue increased 30.6% to $85.3 million and their net income decreased 15.5% to $18.6 million, compared to results in the same quarter the previous year, reflecting, in part approximately $4.5 million in interest expense in the first quarter of 2018 related to their term loan that was established in August 2017 and amended in March 2018.

Their platform facilitates merchant sales, while reducing the friction, and improving the economics, associated with a consumer making a purchase and a bank extending financing for that purchase. Merchants using their platform, which presently range from small, owner-operated home improvement contractors and healthcare providers to large national home improvement brands and retailers, rely on them to facilitate low or deferred interest promotional point-of-sale financing and payments solutions that enable higher sales volume. Consumers on their platform, who to date primarily have super-prime or prime credit scores, find financing with promotional terms to be an attractive alternative to paying with cash, check, credit card, or general purpose revolving credit, particularly in the case of larger purchases. They provide their Bank Partners with access to their proprietary technology solution and merchant network, enabling them to build a diversified portfolio of high quality consumer loans with attractive risk-adjusted yields. Their platform is powered by a proprietary technology infrastructure that delivers stability, speed, scalability and security. They have cultivated strong relationships with manufacturers and trade associations (which they refer to as Sponsors) to amplify the reach of their technology, enabling them to efficiently and cost-effectively onboard large numbers of potential merchants underlying each Sponsor. When their merchants offer their solution at the point of sale, they provide their Bank Partners with cost-effective access to a vast number of consumers. As they scale, network effects reinforce and support the growth of their ecosystem. As their solution becomes integral to the manner by which their merchants regularly drive sales, these merchants and their sales associates become more deeply engaged and frequent users. They believe these network effects reinforce an attractive virtuous cycle, whereby larger bank commitments allow them to facilitate more financing, which in turn enables them to serve more merchants and consumers. They derive most of their revenue and profitability from upfront transaction fees that merchants pay them every time they facilitate a transaction using their platform. In addition, they collect servicing fees on the loan portfolios they service for their Bank Partners. They have achieved significant growth in active merchants, transaction volume, total revenue, net income and Adjusted EBITDA.

They believe technology is transforming and streamlining commerce, reducing the traditional transaction frictions that merchants and consumers face and opening new payments and financing channels for banks. The home improvement market is large, fragmented and growing, representing approximately $315 billion in spending volume in 2017. From their inception through March 31, 2018, their Bank Partners have used their program to extend over $12 billion of financing, primarily including loans for home improvement sales and projects. In 2016, they began expanding into elective healthcare, which, like the home improvement market, is a large, fragmented market featuring creditworthy consumers who make large-ticket purchases. They believe the elective healthcare market rivals in size the home improvement market in terms of annual spending volume, based on the number and cost of annual procedures performed. They believe that because of population aging, innovations in medical technology and ongoing healthcare cost inflation, they are well-positioned to increase volume in the growing elective healthcare industry vertical. They continually evaluate opportunities for expansion into new industry verticals. For example, they have identified significant opportunities within verticals such as online retail, power sports, auto repair and jewelry. These markets are also large and fragmented, and they similarly feature. They believe that banks seek attractive risk-adjusted yields and portfolio diversification through exposure to consumer credit. Their experience has demonstrated that consumers are increasingly comfortable using mobile devices to shop, make payments and manage finances. This has provided an opening at the point of sale for a new lending channel, but it is one that many banks to date have had a difficult time accessing. Providers of installment loan financing to consumers traditionally have required paper-based applications for which consumers are required to gather burdensome amounts of information. Consequently, prime consumers tend to use credit cards as payment, rather than financing, solutions. Absent a simple, fast and cost-effective alternative to finance large-ticket purchases, many consumers resort to paying with cash, debit card or check, or avoiding purchases altogether.

They intend to continue building relationships with large Sponsors and independent, high-sales volume merchants in their existing core markets. They recently expanded into the elective healthcare industry vertical and intend to explore other large, fragmented markets with creditworthy consumers who tend to make large-ticket purchases online and in-store. They continue to evaluate opportunities to assist their merchants to drive more sales by extending financing to a wider range of consumer credit profiles. To facilitate this extension of their platform, they may work with their Bank Partners to offer near-prime and non-prime financing, leveraging their technology platform to offer merchants and consumers a “single application” user experience. They believe they have a substantial opportunity to cross-market value-enhancing solutions to consumers and to their merchants. They also believe that they can leverage their platform to efficiently connect consumers, including existing retail customers of their Bank Partners, with merchant-driven promotions, expanding GreenSky’s brand and driving incremental revenue in each of their industry verticals.

They believe their platform can deliver frictionless setup and multiple promotional financing alternatives for their merchants; and intuitive, mobile-native user interface and real-time capabilities for consumers; and instant digital loan underwriting and distribution for their Bank Partners. The powerful network effects of their platform strengthen this ecosystem, providing increasing value to GreenSky and each of their constituents as they scale. They have continually refined and upgraded their compliance, control, servicing and collections functions to meet the regulatory requirements, documentation and operating standards applicable to their Bank Partners, which include several of the largest banks in the United States, and to them. Their Bank Partners originate and own the loans that they facilitate through their platform. They derive a substantial majority of their revenue and profitability from upfront transaction fees every time a merchant facilitates a transaction and receives a payment using their platform. Consumers using their platform live in all 50 states and typically are or have been homeowners with super-prime or prime credit scores. They leverage their proprietary technology and strong Sponsor relationships to efficiently access and onboard a large network of merchants. Their merchants, once acquired, allow them to reach an even larger universe of consumers and facilitate repeat transactions at very low cost relative to the transaction fee they receive.

They operate in a highly regulated industry, and a failure to comply with applicable laws and regulations could subject them to lawsuits or governmental actions, which could adversely affect their business. Their agreements with their Bank Partners are non-exclusive, short-term in duration and subject to termination by their Bank Partners upon the occurrence of certain events. The loss of a significant merchant or Sponsor could have a negative impact on their business. Their top ten merchants (including certain groups of affiliated merchants) accounted for an aggregate of 30% of their total revenue in 2017 as well as in the three months ended March 31, 2018. If their merchants fail to fulfill their obligations to consumers or comply with applicable law, they may incur remediation costs. They may decide that it is beneficial to remediate the situation, either through assisting the consumers to get a refund, working with their Bank Partners to modify the terms of the loan or reducing the amount due, making a payment to the consumer or otherwise. Historically, the cost of remediation has not been material to their business, but they make no assurance that it will not be in the future. Increases in the market benchmark would result in increases in the interest rates on new loans. Increased interest rates may adversely impact the spending levels of consumers and their ability and willingness to borrow money. They are subject to certain additional risks in connection with promotional financing offered through the GreenSky program. When a deferred interest loan is paid in full prior to the end of the promotional period (typically six to 24 months), any interest that has been billed on the loan by their Bank Partner to the consumer is reversed, which triggers an obligation on their part to make a payment to the Bank Partner that made the loan in order to fully offset the reversal. Regulatory agencies and consumer advocacy groups are becoming more aggressive in asserting “disparate impact” claims. To the extent that the “disparate impact” theory continues to apply, they may face significant administrative burdens in attempting to identify and eliminate neutral practices that do have “disparate impact.” Fraudulent activity could negatively impact their business and could cause their Bank Partners to be less willing to originate loans as part of the GreenSky program. Cyber-attacks and other security breaches could have an adverse effect on their business. Because their business is heavily concentrated on consumer lending and payments in the U.S. home improvement industry, their results are more susceptible to fluctuations in that market than the results of a more diversified company would be. They are, and intend in the future to continue, expanding into new industry verticals, including elective healthcare, and their failure to comply with applicable regulations, or accurately predict demand or growth, in those new industries could have an adverse effect on their business. In addition, the elective healthcare industry vertical is highly regulated and they, their merchants and their Bank Partners, as applicable, will be subject to significant additional regulatory requirements, The contours of the Dodd-Frank UDAAP standard are still uncertain and there is a risk that certain features of the GreenSky program loans could be deemed to violate the UDAAP standard. . There is a risk that the CFPB could determine that certain features of the GreenSky program loans are unfair, deceptive or abusive. The owners of the Class B common stock, who also are the Continuing LLC Members, control them and their interests may conflict with yours in the future. Rating = 3