NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in tables in thousands, except share, per share, unit, and per unit data)
Note 1. Organization and Business
Sunlight Financial Holdings Inc. (together with its consolidated subsidiaries, the “Company” or “Sunlight”) is a premier, technology-enabled point-of-sale finance company. Sunlight Financial LLC, its accounting predecessor and wholly-owned subsidiary, was organized as a Delaware limited liability company on January 23, 2014.
Business — Sunlight operates a technology-enabled financial services platform within the United States of America, using a nationwide network of contractors at the point-of-sale, to offer homeowners secured and unsecured loans (“Loans”), originated by third-party lenders, for the purchase and installation of residential solar energy systems and other home improvements. Sunlight arranges for the origination of Loans by third-party lenders in two distinct ways:
Direct Channel Loans — Sunlight arranges for certain Loans (“Direct Channel Loans”) to be originated and retained by third parties (“Direct Channel Partners”). The Direct Channel Partners originate the Direct Channel Loans directly, using their own credit criteria. These Direct Channel Partners pay for Direct Channel Loans by remitting funds to Sunlight, and Sunlight is thereafter responsible for making the appropriate payments to the relevant contractor. Sunlight earns income from the difference between the cash amount paid by a Direct Channel Partner to Sunlight for a given Direct Channel Loan and the dollar amount due to the contractor for such Direct Channel Loan. Sunlight does not participate in the ongoing economics of the Direct Channel Loans and, generally, does not retain any obligations with respect thereto except for certain ongoing fee-based administrative services and loan servicing performed by Sunlight.
Indirect Channel Loans — Sunlight arranges for other Loans (“Indirect Channel Loans”) to be originated by Cross River Bank, Sunlight’s issuing bank partner (“Bank Partner” or “CRB”). Sunlight has entered into program agreements with its Bank Partner that govern the terms and conditions with respect to originating and servicing the Indirect Channel Loans and Sunlight pays its Bank Partner a fee based on the principal balance of Loans originated by Sunlight’s Bank Partner. Sunlight’s Bank Partner funds these Loans by remitting funds to Sunlight, and Sunlight is thereafter responsible for making the appropriate payments to the relevant contractor. Sunlight arranges for the sale of certain Indirect Channel Loans, or participations therein, to third parties (“Indirect Channel Loan Purchasers”).
Liquidity and Going Concern — Sunlight has evaluated whether there are certain conditions and events, considered in the aggregate, that raised substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
As more fully described in Note 5, Sunlight borrows under a revolving credit facility with Silicon Valley Bank (“SVB”) that was due to mature on April 26, 2023. Prior to the SVB receivership and entry into a new Secured Term Loan with the Bank Partner (Note 11), Sunlight was in negotiations with SVB to extend the maturity date and to address Sunlight’s noncompliance with certain terms of the revolving credit facility. Prior to the issuance of these financial statements, these negotiations and the ability of Sunlight to amend and extend (or to replace) this revolving credit facility were uncertain, which could have had a material impact on Sunlight’s liquidity, cash and ability to attract new capital if not resolved on a timely basis.
Additionally, Sunlight’s Bank Partner holds Indirect Channel Loans on its balance sheet until directed by Sunlight in the ordinary course of its business to sell them to investors, including credit funds, insurance companies, and pension funds. While Sunlight’s Bank Partner is the owner of the loans, Sunlight retains economic exposure to them until they are sold. Sunlight profits when the price that investors pay for the Indirect Channel Loans exceeds the Bank Partner’s cost basis in the loans and incurs a loss when the price that investors pay for the Indirect Channel Loans is less than the Bank Partner’s cost basis in the loans. Prior to the execution of amendments (Note 11) to the loan agreements between Sunlight and its Bank Partner (“Bank Partner Agreements”), the Bank Partner Agreements capped the total amount of Indirect Channel Loans held by the Bank Partner at $450.0 million. However, the Indirect Channel Loans held by Sunlight’s Bank Partner included a significant amount of funded but unsold loans which were credit approved prior to certain pricing actions that Sunlight took in the third and fourth quarters of 2022 (the “Backbook Loans”). Despite the completion of the previously disclosed loan sale in December 2022, Sunlight was not in compliance with certain provisions of the Bank Partner Agreements, including the total loan cap.
Sunlight believes that the aforementioned conditions, considered in the aggregate, raised substantial doubt about its ability to continue as a going concern; however, on April 2, 2023, Sunlight entered into a Commitment and Transaction Support Agreement (“Commitment & Transaction Support Agreement”) with Sunlight’s Bank Partner and effective April 25, 2023 consummated the transactions agreed to under the agreement including, among other things, amendments to the Bank Partner Agreements (“Amended Bank Partner Agreements”) and entry into a Secured Term Loan with the Bank Partner (the “Secured Term Loan”), after March 31, 2023 that Sunlight believes alleviates such conditions as the Secured Term Loan, among other things, replaces the revolving credit facility with SVB with increased borrowing amounts and was used to pay off the SVB facility and the Amended Bank Partner Agreements, increasing the total amount of Indirect Channel Loans that Sunlight’s Bank Partner may hold (Note 11).
Sunlight believes such transactions, in addition to pricing actions that Sunlight took in the third and fourth quarters of 2022, provide cash and cash equivalents that will be reasonably sufficient to fund its operating expenses, capital expenditure requirements, and debt service payments through at least twelve months from the date that these consolidated financial statements were issued.
The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the consolidated financial statements have been prepared on a basis that assumes Sunlight will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation — The accompanying consolidated financial statements and related notes, prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), include the accounts of Sunlight and its consolidated subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation of Sunlight’s financial position, results of operations, and cash flows have been included and are of a normal and recurring nature. All intercompany balances and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared under GAAP may be condensed or omitted for interim financial reporting, and the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year.
These financial statements should be read in conjunction with Sunlight’s audited financial statements for the year ended December 31, 2022 and footnotes thereto included in Sunlight's annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 4, 2023. Capitalized terms used herein, and not otherwise defined, are defined in Sunlight's consolidated financial statements for the year ended December 31, 2022.
Certain prior period amounts have been reclassified to conform to the current period's presentation.
Emerging Growth Company — The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company that is neither an
emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Consolidation — Sunlight consolidates those entities over which it controls significant operating, financial, and investing decisions of the entity as well as those entities deemed to be variable interest entities (“VIEs”) in which the Company is determined to be the primary beneficiary.
The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary beneficiary in entities in which Sunlight has a variable interest. These analyses involve estimates, based on the assumptions of management, as well as judgments regarding significance and the design of entities.
VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Sunlight monitors investments in VIEs and analyzes the potential need to consolidate the related entities pursuant to the VIE consolidation requirements. These analyses require considerable judgment in determining whether an entity is a VIE and determining the primary beneficiary of a VIE since they involve subjective determinations of significance with respect to both power and economics. The result could be the consolidation of an entity that otherwise would not have been consolidated or the deconsolidation of an entity that otherwise would have been consolidated.
A wholly-owned subsidiary of Sunlight Financial Holdings Inc. is the managing member of Sunlight Financial LLC, in which existing unitholders hold a 34.4% and 35.9% noncontrolling interest, net of unvested Class EX Units (Note 6), at March 31, 2023 and December 31, 2022, respectively.
Through its indirect managing member interest, Sunlight Financial Holdings Inc. directs substantially all of the day-to-day activities of Sunlight Financial LLC. The third-party investors in Sunlight Financial LLC do not possess substantive participating rights or the power to direct the day-to-day activities that most directly affect the operations of Sunlight Financial LLC. However, these third-party investors hold both voting, noneconomic Class C shares in Sunlight Financial Holdings Inc. on a one-for-one basis along with nonvoting, economic Class EX Units issued by Sunlight Financial LLC. No single third-party investor, or group of third-party investors, possesses the substantive ability to remove the managing member of Sunlight Financial LLC. Sunlight considers Sunlight Financial LLC a VIE for consolidation purposes and its managing member holds the controlling interest and is the primary beneficiary. Therefore, Sunlight consolidates Sunlight Financial LLC and reflects Class EX unitholder interests in Sunlight Financial LLC held by third parties as noncontrolling interests.
Sunlight conducts substantially all operations through Sunlight Financial LLC and its consolidated subsidiary.
Segments — Sunlight operates through one operating and reportable segment, which reflects how the chief operating decision maker allocates resources and assesses performance. Sunlight arranges for the origination of Loans by third-party lenders using a predominately single expense pool.
Risks and Uncertainties — In the normal course of business, Sunlight primarily encounters credit risk, which is the risk of default on Sunlight’s investments that results from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments, and interest rate risk, which impacts the value of Indirect Channel Loans for which Sunlight facilitates sales.
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes subjective estimates of: pending loan originations and sales, which significantly impacts revenues; determinations of fair value, including goodwill, derivatives, and servicing rights; estimates regarding loan performance, which impacts impairments and allowances for loan losses; project installations, which impacts guarantee obligations; and the useful lives of intangible assets. Actual results may differ from those estimates.
Fair Value — GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation.
| | | | | | | | |
| Level | | Measurement |
| 1 | | Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
| 2 | | Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. |
| 3 | | Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. |
Sunlight follows this hierarchy for its financial instruments, with classifications based on the lowest level of input that is significant to the fair value measurement. The following summarizes Sunlight’s financial instruments hierarchy at March 31, 2023:
| | | | | | | | | | | | | | |
| Level | | Financial Instrument | | Measurement |
| 1 | | Cash and cash equivalents and restricted cash | | Estimates of fair value are measured using observable, quoted market prices, or Level 1 inputs |
| | Public Warrants | | Estimates of fair value are measured using observable, quoted market prices of Sunlight’s warrants. |
| 2 | | Servicing liabilities | | Estimates of fair value are measured based upon observable market data. |
| 3 | | Loans and loan participations, held-for-investment | | Estimated fair value is generally determined by discounting the expected future cash flows using inputs such as discount rates. |
| | Contract derivative | | Estimated fair value based upon discounted expected future cash flows arising from the contract. |
| | Private Placement Warrants | | Estimated fair value based upon quarterly valuation estimates of warrant instruments, based upon quoted prices of Sunlight’s Class A shares and warrants thereon as well as fair value inputs provided by an independent valuation firm. |
Valuation Process — On a quarterly basis, with assistance from an independent valuation firm, management estimates the fair value of Sunlight’s Level 3 financial instruments. Sunlight’s determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are management’s best estimates after consideration of a variety of internal and external factors. When an independent valuation firm expresses an opinion on the fair value of a financial instrument in the form of a range, management selects a value within the range provided by the independent valuation firm to assess the reasonableness of management’s estimated fair value for that financial instrument. At March 31, 2023, Sunlight’s valuation process for Level 3 measurements, as described below, was conducted internally or by an independent valuation firm and reviewed by management.
Valuation of Loans and Loan Participations — Management generally considers Sunlight's loans and loan participations Level 3 assets in the fair value hierarchy as such assets are illiquid investments that are specific to the loan product, for which there is limited market activity. On a quarterly basis, management engages an independent valuation firm to estimate the fair value of each loan or loan participation categorized as a Level 3 asset.
Valuation of Contract Derivative — Management considers Sunlight's contracts under which Sunlight (a) arranged Indirect Channel Loans for the purchase and installation of home improvement other than residential solar energy systems until December 2022 (“Contract Derivative 1”) and (b) earns income from the prepayment of certain of those Loans sold to an Indirect Channel Loan Purchaser (“Contract Derivative 2”), both considered derivatives under GAAP, as Level 3 financial instruments in the fair value hierarchy as such instruments represent bilateral, nontraded agreements for which there is limited market activity. On a quarterly basis, management engages an independent valuation firm to estimate the fair value of the contracts.
Valuation of Servicing Liabilities — Sunlight assumes an obligation to service certain loans when originated. Sunlight evaluates compensation it receives to service these loans, if any, against the servicing costs a willing market participant
would require to service loans with similar characteristics to service such loans. At March 31, 2023 and December 31, 2022, Sunlight determined that the compensation it receives for certain servicing agreements are less than the estimated market cost to service and recognized a liability reported within Other Liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheet. Servicing liabilities are considered Level 2 financial instruments, as the primary components of the fair value are obtained from observable inputs based on market data, reasonably adjusted for assumptions that would be used by market participants to service our Bank Partner loans, for which market data is not available.
Valuation of Warrants — Management considers the Private Placement Warrants (Note 6) redeemable for Sunlight’s equity as Level 3 liabilities in the fair value hierarchy as liquid markets do not exist for such liabilities. On a quarterly basis, management engages an independent valuation firm to estimate the fair value of Sunlight’s warrants, which includes models that include estimates of volatility, contractual terms, discount rates, dividend rates, expiration dates, and risk-free rates.
Other Valuation Matters — For Level 3 financial assets acquired and financial liabilities assumed during the calendar month immediately preceding a quarter end that were conducted in an orderly transaction with an unrelated party, management generally believes that the transaction price provides the most observable indication of fair value given the illiquid nature of these financial instruments, unless management is aware of any circumstances that may cause a material change in the fair value through the remainder of the reporting period. For instance, significant changes in a counterparty’s intent or ability to make payments on a financial asset may cause material changes in the fair value of that financial asset.
See Note 7 for additional information regarding the valuation of Sunlight's financial assets and liabilities.
Sales of Financial Assets and Financing Agreements — Sunlight will, from time to time, facilitate the sale of Indirect Channel Loans. In each case, the transferred loans are legally isolated from Sunlight and control of the transferred loans passes to the transferee, who may pledge or exchange the transferred asset without constraint of Sunlight. Sunlight neither recognizes any financial assets nor incurs any liabilities as a result of the sale, but does recognize revenue based upon the difference between proceeds received from the transferee and the proceeds paid to the transferor.
Leases — Sunlight recognizes right-of-use assets and lease liabilities at the commencement date of the lease based on the present value of remaining fixed and determinable lease payments over the lease term. Sunlight calculates the present value of future payments by using an estimated incremental borrowing rate, which approximates the rate at which Sunlight would borrow on a secured basis and over a similar term, and recognizes lease expense for operating leases on a straight-line basis over the lease term. Right-of-use assets represent Sunlight’s right to control the use of an identified asset for the lease term and lease liabilities represent Sunlight’s obligation to make lease payments arising from the lease. Sunlight uses the incremental borrowing rate on the commencement date in determining the present value of the lease payments.
Balance Sheet Measurement
Cash and Cash Equivalents and Restricted Cash — Cash and cash equivalents consist of bank checking accounts and money market accounts. Sunlight considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Sunlight maintains cash in restricted accounts pursuant to various lending agreements and considers other cash amounts restricted under certain agreements with other counterparties. Substantially all amounts on deposit with major financial institutions exceed insured limits. Cash and cash equivalents and restricted cash are carried at cost, which approximates fair value. Sunlight reported cash and cash equivalents and restricted cash in the following line items of its Unaudited Condensed Consolidated Balance Sheets, which totals the aggregate amount presented in Sunlight’s Unaudited Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | |
| | |
| | March 31, 2023 | | | December 31, 2022 |
| Cash and cash equivalents | | $ | 75,518 | | | | $ | 47,515 | |
| Restricted cash and cash equivalents | | 4,350 | | | | 4,272 | |
| Total cash, cash equivalents, and restricted cash shown in the Consolidated Statement of Cash Flows | | $ | 79,868 | | | | $ | 51,787 | |
Financing Receivables — Sunlight records financing receivables for (a) advances that Sunlight remits to contractors to facilitate the installation of residential solar systems and the construction or installation of other home improvement projects and (b) loans and loan participations.
Advances — In certain circumstances, Sunlight will provide a contractually agreed upon percentage of cash to a contractor related to a Loan that has not yet been funded by either a Direct Channel Partner or its Bank Partner as well as amounts funded to contractors in anticipation of loan funding. Such advances are generally repaid upon the earlier of (a) a specified number of days from the date of the advance outlined within the respective contractor contract or (b) the substantial installation of the residential solar system or the construction or installation of other home improvement projects. In either case, Sunlight will net such amounts advanced from payments otherwise due to the related contractor. Sunlight carries advances at the amount advanced, net of allowances for losses and charge-offs. In the first quarter of 2023, Sunlight suspended its advance program and has significantly reduced outstanding advances.
Loans and Loan Participations — Sunlight recognizes Indirect Channel Loans purchased from Sunlight’s Bank Partner as well as its 5.0% participation interests in Indirect Channel Loans as financing receivables held-for-investment based on management's intent, and Sunlight's ability, to hold those investments through the foreseeable future or contractual maturity. Financing receivables that are held‑for‑investment are carried at their aggregate outstanding face amount, net of applicable (a) unamortized acquisition premiums and discounts, (b) allowance for losses and (c) charge-offs or write-downs of impaired receivables. If management determines a loan or loan participation is impaired, management writes down the loan or loan participation through a charge to the provision for losses. See “— Impairment” for additional discussion regarding management’s determination for loan losses. Sunlight applies the interest method to amortize acquisition premiums and discounts or on a straight-line basis when it approximates the interest method. Sunlight has not acquired any material loans with deteriorated credit quality that were not charged off upon purchase.
Impairment — Sunlight holds financing receivables carried at amortized cost for which management evaluates credit quality indicators at least quarterly to establish allowance for credit losses for advances, loans, and loan participations that represent management's estimate of expected credit losses over the remaining expected life of those financial assets after considering contractual terms, expected prepayments, and cancellation features. The income statement effect of all changes in the allowance for credit losses is recognized in the provision for credit losses. Determining the appropriateness of the allowance for credit losses is complex and requires significant judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of credit exposures, considering the macroeconomic conditions, forecasts, and other factors then prevailing, may result in significant changes in the allowance for credit losses in future periods.
To the extent Sunlight’s credit exposures share risk characteristics with other similar exposures, such credit exposure is collectively assessed for impairment, which includes Sunlight’s loan and loan participations and certain advances. If an exposure does not share risk characteristics with other exposures, Sunlight generally estimates expected credit losses on an individual basis, considering expected repayment and conditions impacting that individual credit exposure, which primarily applies to advances to certain contractors. The assessment of risk characteristics is subject to significant management judgment. Emphasizing one characteristic over another or considering additional characteristics could affect the allowance. Refer to Note 3 for risk characteristics applicable to Sunlight’s financing receivables.
Estimating the timing and amounts of future cash flows is highly judgmental as these cash flow projections rely upon estimates such as loss severities, asset valuations, default rates, the amounts and timing of interest or principal payments (including any expected prepayments) or other factors that are reflective of current and expected market conditions. These estimates are, in turn, dependent on factors such as the duration of current overall economic conditions, industry, portfolio, or borrower-specific factors as well as, in certain circumstances, other economic factors. All of these estimates and assumptions require significant management judgment and certain assumptions are highly subjective. Actual losses, if any, could materially differ from these estimates.
If management deems that it is probable that Sunlight will be unable to collect all amounts owed according to the contractual terms of a receivable, impairment of that receivable is indicated. Consistent with this definition, all receivables for which the accrual of interest has been discontinued (nonaccrual loans) are considered impaired. If management considers a receivable to be impaired, management establishes an allowance for losses through a valuation provision in earnings, which reduces the carrying value of the receivable to (a) the amounts management expects to collect, for receivables due within 90 days, or (b) the present value of expected future cash flows discounted at the receivable’s contractual effective rate. Impaired financing receivables are charged off against the allowance for losses when a financing receivable is more than 120 days past due or when management believes that collectability of the principal is remote, if earlier. Sunlight credits subsequent recoveries, if any, to the allowance when received.
Sunlight individually evaluates nonaccrual loans with contractual balances of $50,000 or more to establish specific allowances for such receivables, if required.
Advances — For advances made by Sunlight, management performs an evaluation of credit quality indicators using financial information obtained from its counterparties and third parties as well as historical experience. Such indicators may include the borrower’s financial wherewithal and recent operating performance as well as macroeconomic trends. Management rates the potential for advance receivables by reviewing the counterparty. The counterparty is rated by overall risk tier on a scale of “1” through “5,” from least to greatest risk, which management reviews and updates on at least an annual basis. Counterparties may be granted advance approval within any overall risk tier, however tier “5” advance approvals are approved on an exception basis. A subset category of the overall risk tier is the financial risk of the counterparty. As with the overall risk tier, counterparties may be granted advance approval within any financial risk tier; however financial risk tier “5” advance approvals are approved on an exception basis. As part of that approval, management will set an individual counterparty advance dollar limit, which cannot be exceeded prior to additional review and approval. The overall risk tiers are defined as follows:
| | | | | | | | | | | | | | |
| 1 | | Low Risk | | The counterparty has demonstrated low risk characteristics. The counterparty is a well-established company within the applicable industry, with low commercial credit risk, excellent reputational risk (e.g. online ratings, low complaint levels), and an excellent financial risk assessment. |
| 2 | | Low-to-Medium Risk | | The counterparty has demonstrated low to medium risk characteristics. The counterparty is a well-established company within the applicable industry, with low to medium commercial credit risk, excellent to above average reputational risk (e.g. online ratings, lower complaint levels), and/or an excellent to above average financial risk assessment. |
| 3 | | Medium Risk | | The counterparty has demonstrated medium risk characteristics. The counterparty may be a less established company within the applicable industry than risk tier "1" or "2", with medium commercial credit risk, excellent to average reputational risk (e.g., online ratings, average complaint levels), and/or an excellent to average financial risk assessment. |
| 4 | | Medium-to-High Risk | | The counterparty has demonstrated medium to high risk characteristics. The counterparty is likely to be a less established company within the applicable industry than risk tiers "1" through "3," with medium to high commercial credit risk, excellent to below average reputational risk (e.g. online ratings, higher complaint levels), and/or an excellent to below average financial risk assessment. |
| 5 | | Higher Risk | | The counterparty has demonstrated higher risk characteristics. The counterparty is a less established company within the applicable industry, with higher commercial credit risk, and/or below average reputational risk (e.g. online ratings, higher complaint levels), and/or below average financial risk assessment. Tier "5" advance approvals will be approved on an exception basis. |
Loans and Loan Participations, Held-For-Investment — Sunlight aggregates performing loans and loan participations into pools for the evaluation of impairment based on like characteristics, such as loan type and acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of borrowers, and historical trends in defaults and loss severities for the type and seasoning of loans and loan participations under evaluation.
Goodwill — Goodwill represents the excess of the purchase price over the estimated fair values of the net tangible and intangible assets of acquired entities. Sunlight performs a goodwill impairment test annually during the fourth quarter of the fiscal year and more frequently if an event or circumstance indicates that impairment may have occurred. Triggering events that may indicate a potential impairment include, but are not limited to, significant adverse changes in customer demand or business climate and related competitive considerations. Sunlight first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If so, Sunlight performs a two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized by the applicable reporting unit(s). If Sunlight determines that the implied fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. Sunlight has one reporting unit and fully impaired any remaining carrying value of goodwill at December 31, 2022.
Intangible Assets, Net — Sunlight identified the following intangible assets, recorded at fair value at the Closing Date of the Business Combination, and carried at a value net of amortization over their estimated useful lives on a straight-line basis. Sunlight’s intangible assets are evaluated for impairment on at least a quarterly basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Useful Life
(in Years) | | Carrying Value |
| | | |
| Asset | | | March 31, 2023 | | December 31, 2022 |
Contractor relationships(a) | | 11.5 | | | | $ | 350,000 | | | $ | 350,000 | |
| | | | | | | | |
Trademarks/ trade names(b) | | 10.0 | | | | 7,900 | | | 7,900 | |
Developed technology(c) | | 3.0 | — | 5.0 | | | | | | 12,247 | | | 11,163 | |
| | | | | | |
| | | | | | | | | | 370,147 | | | 369,063 | |
Accumulated amortization(d)(e)(f) | | | | | | | | | | (57,558) | | | (49,143) | |
| | | | | | | | | | $ | 312,589 | | | $ | 319,920 | |
a.Represents the value of existing contractor relationships of Sunlight estimated using a multi-period excess earnings methodology.
b.Represents the trade names that Sunlight originated or acquired and valued using a relief-from-royalty method.
c.Represents technology developed by Sunlight for the purpose of generating income for Sunlight, and valued using a replacement cost method.
d.Amounts include amortization expense of $0.4 million and $0.1 million related to capitalized internally developed software costs for the three months ended March 31, 2023 and 2022, respectively.
e.Includes amortization expense of $8.4 million and $22.3 million for the three months ended March 31, 2023 and 2022, respectively.
f.At March 31, 2023, the approximate aggregate annual amortization expense for definite-lived intangible assets, including capitalized internally developed software costs as a component of capitalized developed technology, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Developed Technology | | Other Identified Intangible Assets | | Total |
| April 1, through December 31, 2023 | | $ | 2,175 | | | $ | 23,506 | | | $ | 25,681 | |
| 2024 | | 3,091 | | | 31,285 | | | 34,376 | |
| 2025 | | 2,496 | | | 31,199 | | | 33,695 | |
| 2026 | | 777 | | | 31,199 | | | 31,976 | |
| 2027 | | — | | | 31,199 | | | 31,199 | |
| Thereafter | | — | | | 155,662 | | | 155,662 | |
| | $ | 8,539 | | | $ | 304,050 | | | $ | 312,589 | |
Property and Equipment, Net — Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives:
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| | Estimated Useful Life
(in Years) | | Carrying Value |
| | | |
| Asset Category | | | March 31, 2023 | | December 31, 2022 |
| Furniture, fixtures, and equipment | | 5 | | | | $ | 1,512 | | | $ | 1,512 | |
| Computer hardware | | 5 | | | | 1,328 | | | 1,328 | |
| Computer software | | 1 | — | 3 | | | | | | 278 | | | 338 | |
| | | | | | |
| | | | | | | | | | 3,118 | | | 3,178 | |
Accumulated amortization and depreciation(a) | | | | | | | | | | (1,735) | | | (1,689) | |
| | | | | | | | | | $ | 1,383 | | | $ | 1,489 | |
a.Includes depreciation expense of $0.1 million and $0.1 million the three months ended March 31, 2023 and 2022, respectively.
Funding Commitments — Pursuant to Sunlight’s contractual arrangements with its Bank Partner, Direct Channel Partners, and contractors, each of Sunlight’s Direct Channel Partners and its Bank Partner periodically remits to Sunlight the cash related to loans the funding source has originated. Sunlight has committed to funding such amounts, less any amounts Sunlight is entitled to retain, to the relevant contractor when certain milestones relating to the installation of residential solar systems or the construction of installation of other home improvement projects underlying the consumer receivable have been reached. Sunlight presents any amounts that Sunlight retains in anticipation of a contractor completing an installation milestone as “Funding Commitments” on the accompanying Unaudited Condensed Consolidated Balance Sheets, which totaled $29.4 million and $20.4 million at March 31, 2023 and December 31, 2022, respectively.
Guarantees — Sunlight records a liability for the guarantees it makes for certain Loans if it determines that it is probable that it will have to repurchase those loans, in an amount based on the likelihood of such repurchase and the loss, if any, Sunlight expects to incur in connection with its repurchase of Loans that may have experienced credit deterioration since the time of the loan’s origination.
Warrants — The Company has public and private placement warrants classified as liabilities as well as warrants issued to a capital provider classified as equity. The Company classifies as equity any equity-linked contracts that (a) require
physical settlement or net-share settlement or (b) give the Company a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement). Warrants classified as equity are initially measured at fair value. Subsequent changes in fair value are not recognized as long as the warrants continue to be classified as equity.
The Company classifies as assets or liabilities any equity-linked contracts that (a) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the Company’s control) or (b) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). For equity-linked contracts that are classified as liabilities, the Company records the fair value of the equity-linked contracts at each balance sheet date and records the change in the statements of operations as a gain (loss) from change in fair value of warrant liability. The Company’s public warrant liability is valued using observable market prices for those public warrants. The Company’s private placement warrants are valued using a binomial lattice pricing model when the warrants are subject to the make-whole table, or otherwise are valued using a Black-Scholes pricing model. The Company’s warrants issued to a capital provider are valued using a Black-Scholes pricing model based on observable market prices for public shares and warrants. The assumptions used in preparing these models include estimates such as volatility, contractual terms, discount rates, dividend yield, expiration dates and risk-free rates.
Distributions Payable — Sunlight Financial LLC accrues estimated tax payments to holders of its members’ equity when earned in accordance with Sunlight Financial LLC’s organizational agreements. On March 31, 2022, Sunlight accrued $1.4 million, or $0.03 per Class EX Unit, to its noncontrolling interests. Ratable estimated tax payments from Sunlight Financial LLC to members consolidated by Sunlight are eliminated in consolidation. As of March 31, 2023, Sunlight Financial LLC did not generate taxable income during the year ended March 31, 2023 and expects to use tax distributions already declared during the current tax year to offset future estimated tax liability distributions, if any.
Other Assets and Accounts Payable, Accrued Expenses, and Other Liabilities — At March 31, 2023 and December 31, 2022, (a) other assets included Sunlight’s contract derivatives, right-of-use assets arising from operating leases, prepaid expenses, accounts receivable, deferred financing costs, and interest receivable, and (b) accounts payable, accrued expenses, and other liabilities included Sunlight’s guarantee liability, lease liabilities, servicing liabilities, accrued compensation, and other payables.
Noncontrolling Interests in Consolidated Subsidiaries — Noncontrolling interests represent the portion of Sunlight Financial LLC that the Company controls and consolidates but does not own. The Company recognizes each noncontrolling holder’s respective share of the estimated fair value of the net assets at the date of formation or acquisition. Noncontrolling interests are subsequently adjusted for the noncontrolling holder’s share of additional contributions, distributions, and their share of the net earnings or losses of each respective consolidated entity. The Company allocates net income or loss to noncontrolling interests based on the weighted average ownership interest during the period. The net income or loss that is not attributable to the Company is reflected in net income (loss) attributable to noncontrolling interests in the Unaudited Condensed Consolidated Statements of Operations. The Company does not recognize a gain or loss on transactions with a consolidated entity in which it does not own 100% of the equity, but the Company reflects the difference in cash received or paid from the noncontrolling interests carrying amount as additional paid-in-capital.
Class EX Units issued by Sunlight Financial LLC are exchangeable, along with the Company’s Class C shares on a one-for-one basis, into the Company’s Class A common stock. Class A common stock issued upon exchange of a holder’s noncontrolling interest is accounted for at the carrying value of the surrendered limited partnership interest and the difference between the carrying value and the fair value of the Class A common stock issued is recorded to additional paid-in-capital.
Treasury Stock — Sunlight accounts for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid-in-capital. When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that there are previously recorded gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of treasury stock are recorded as a reduction of retained earnings.
Income Recognition
Revenue Recognition — Sunlight recognizes revenue from (a) platform fees on the Direct Channel Loans when the Direct Channel Partner funds the Loans and on the Indirect Channel Loans when the Indirect Channel Loan Purchaser buys the Loans from the balance sheet of Sunlight’s Bank Partner and (b) loan portfolio management, servicing, and administration services on a monthly basis as Sunlight provides such services for that month. Sunlight’s contracts include the following groups of similar services, which do not include any significant financing components:
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| | | | | | | | | | | |
| | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | | | | | | | | | | |
| | | | | | | | | | |
| 2023 | | 2022 | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Platform fees, net(a) | $ | 17,909 | | | $ | 26,154 | | | | | | | | | | | | |
Other revenues(b) | 2,556 | | | 2,077 | | | | | | | | | | | | |
| $ | 20,465 | | | $ | 28,231 | | | | | | | | | | | | |
a.Amounts presented net of variable consideration in the form of rebates to certain contractors.
b.Includes loan portfolio management, administration, and other ancillary fees Sunlight earns that are incidental to its primary operations.
Platform Fees, Net — Sunlight arranges Loans for the purchase and installation of residential solar energy systems on behalf of its Direct Channel Partners, Bank Partner, and Indirect Channel Loan Purchasers. As agent, Sunlight presents platform fees on a net basis at the time that Direct Channel Partners or Indirect Channel Loan Purchasers obtain control of the service provided to facilitate their origination or purchase of a Loan, which is no earlier than when Sunlight delivers loan documentation to the customer. Sunlight wholly satisfies its performance obligation to Direct Channel Partners, Bank Partner, and Indirect Channel Loan Purchasers, as it relates to such platform fees, upon origination or purchase of a Loan. Sunlight considers rebates offered by Sunlight to certain contractors in exchange for volume commitments as variable components to transaction prices; such variability resolves upon the contractor’s satisfaction of their volume commitment.
The contracts under which Sunlight (a) arranges Indirect Channel Loans for the purchase and installation of home improvements other than residential solar energy systems until December 2022 and (b) earns income from the prepayment of certain Indirect Channel Loans for the purchase and installation of home improvements other than residential solar energy systems sold to an Indirect Channel Loan Purchaser are considered derivatives under GAAP. As such, Sunlight’s revenues exclude the platform fees that Sunlight earns in connection with these contracts. Instead, Sunlight records realized gains on the derivatives within “Realized Gains on Contract Derivative, Net” in the accompanying Unaudited Condensed Consolidated Statements of Operations. Sunlight realized gains (losses) of $0.1 million, and $1.9 million, for the three months ended March 31, 2023 and 2022, respectively (Note 4). Sunlight recognized platform fee revenue for its facilitation of Direct Channel Loans for the purchase and installation of home improvements other than residential solar energy systems of $1.6 million and $0.5 million, for the three ended March 31, 2023 and 2022, respectively.
Other Revenues — Sunlight provides monthly services in connection with the portfolio management, servicing, and administration of Loans originated by certain Direct Channel Partners, Sunlight’s Bank Partner, and an Indirect Channel Loan Purchaser. Such services may include the reporting of loan performance information, administration of servicing performed by third parties, and portfolio management services.
Interest Income — Loans where management expects to collect all contractually required principal and interest payments are considered performing loans. Sunlight accrues interest income on performing loans based on the unpaid principal balance (“UPB”) and contractual terms of the loan. Interest income also includes discounts associated with the loans purchased as a yield adjustment using the effective interest method over the loan term. Sunlight expenses direct loan acquisition costs for loans acquired by Sunlight as incurred. Sunlight does not accrue interest on loans placed on non-accrual status or on loans where the collectability of the principal or interest of the loan are deemed uncertain.
Loans are considered past due or delinquent if the required principal and interest payments have not been received as of the date such payments are due. Generally, loans, including impaired loans, are placed on non-accrual status when (a) either principal or interest payments are 90 days or more past due based on contractual terms or (b) an individual analysis of a borrower’s creditworthiness indicates a loan should be placed on non-accrual status. When a loan owned by Sunlight (each, a “Balance Sheet Loan”) is placed on non-accrual status, Sunlight ceases to recognize interest income on the loans and reverses previously accrued and unpaid interest, if any. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Sunlight may return a loan to accrual status when repayment of principal and interest is reasonably assured under the terms of the restructured loan. Advances are created at par and do not bear, and therefore do not accrue, interest income. In addition to loans and loan participations, Sunlight recognizes interest income on a specified proportion of the contractual interest and original issue discount on Indirect Channel Loans held by Sunlight’s Bank Partner.
Expense Recognition
Cost of Revenues — Sunlight’s cost of revenues includes the aggregate costs of the services that Sunlight performs to satisfy its contractual performance obligations to customers as well as variable consideration that Sunlight pays for its fee revenue that do not meet the criteria necessary for netting against gross revenues.
Sunlight Rewards™ Program — The Sunlight Rewards™ Program is a proprietary loyalty program that Sunlight offers to salespeople selling residential solar systems for Sunlight’s network of contractors. Sunlight records a contingent liability using the estimated incremental cost of each point based upon the points earned, the redemption value, and an estimate of probability of redemption consistent with Sunlight’s historical redemption experience under the program. When a salesperson redeems points from Sunlight’s third-party loyalty program vendor, Sunlight pays the stated redemption value of the points redeemed to the vendor.
Compensation and Benefits — Management expenses salaries, benefits, and equity-based compensation as services are provided. “Compensation and Benefits” in the accompanying Unaudited Condensed Consolidated Statements of Operations includes expenses not otherwise included in Sunlight’s cost of revenues, such as compensation costs associated with information technology, sales and marketing, product management, and overhead.
Equity-Based Compensation — Sunlight granted awards of restricted stock units (“RSUs”) to employees and directors under Sunlight’s 2021 Equity Incentive Plan (“Equity Plan”). RSUs are Class A restricted share units which entitle the holder to receive Class A Shares on various future dates if the applicable service conditions, if any, are met. Sunlight expenses the grant-date fair value of awards on a straight-line basis over the requisite service period. Sunlight does not estimate forfeitures, and records actual forfeitures as they occur.
Selling, General, and Administrative — Management expenses selling, general, and administrative costs, including legal, audit, other professional service fees, travel and entertainment, and insurance premiums as incurred. Sunlight recognizes expenses associated with co-marketing agreements when earned by the counterparty.
Property and Technology — Management expenses rent, information technology and telecommunication services, and noncapitalizable costs to internally develop software as incurred.
Income Taxes — The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates that are expected to be in effect when the differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Unaudited Condensed Consolidated Statements of Operations in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized.
The Company accounts for uncertain tax positions by reporting a liability for unrecognizable tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
In accordance with the operating agreement of Sunlight Financial LLC, to the extent possible without impairing its ability to continue to conduct its business and activities, and in order to permit its member to pay taxes on the taxable income allocated to those members, Sunlight Financial LLC is required to make distributions to the member in the amount equal to the estimated tax liability of the member computed as if the member paid income tax at the highest marginal federal
and state rate applicable to a corporate entity or individual resident in New York, New York to the extent Sunlight’s operations generate taxable income allocable to the applicable member. Sunlight Financial LLC did not declare any distributions during the three months ended March 31, 2023, and declared $1.4 million of distributions during the three months ended March 31, 2022. As of March 31, 2023, Sunlight Financial LLC does not expect to generate taxable income during the current tax year and expects to use unpaid tax distributions already declared to offset future estimated tax liability distributions, if any. Consequently, Sunlight Financial LLC did not declare any further distributions through March 31, 2023.
Recent Accounting Pronouncements Issued, But Not Yet Adopted
The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standard Updates (“ASUs”) that may materially impact Sunlight’s financial position and results of operations, or may impact the preparation of, but not materially affect, Sunlight’s consolidated financial statements.
As an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act, Sunlight is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Unless otherwise stated, Sunlight elected to adopt recent accounting pronouncements using the extended transition period applicable to private companies.
ASU No. 2020-06 Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity — In August 2020, the FASB issued ASU No. 2020-06, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP, removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and simplifies the diluted earnings per share calculations. While Sunlight remains a smaller reporting company, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. Sunlight is currently evaluating the impact of the adoption of ASU 2020-06 on its consolidated financial statements.
ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting — In March 2020, the FASB issued ASU No. 2020-04, which provides optional expedients for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective for all entities as of March 12, 2020 through December 31, 2024. An entity can elect to apply the amendments as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to that date that the financial statements are available to be issued. Sunlight is currently evaluating the impact of the adoption of ASU 2020-04, as updated by ASU 2021-01 Reference Rate Reform (Topic 848): Scope, and ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
ASU No. 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments — The FASB issued ASU No. 2016-13 in June 2016. The standard amends the existing credit loss model to reflect a reporting entity’s current estimate of all expected credit losses and requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at a net amount expected to be collected through deduction of an allowance for credit losses from the amortized cost basis of the financial asset(s).
Sunlight adopted ASU No. 2016-13, as amended, as of January 1, 2023. Sunlight’s cumulative adjustment of $0.5 million to the opening balance of retained earnings was not material and adoption of the standard did not have a material effect on the statements of operations or statements of cash flows. See Note 3 for additional information regarding Sunlight’s application of this accounting standard.
ASU No. 2022-02 Financial Instruments — Credit Losses (Topic 326) — Troubled Debt Restructuring and Vintage Disclosures — The FASB issued final guidance amending Topic 310 to eliminate the recognition and measurement guidance for a troubled debt restructuring for creditors that have adopted Topic 326 and requiring them to make enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. The guidance also requires public business entities to present gross write-offs by year of origination in their vintage disclosures.
Sunlight adopted ASU No. 2022-02 as of January 1, 2023, and included the additional disclosures as prescribed by this ASU in Note 3.
Note 3. Financing Receivables
Sunlight recognizes receivables primarily related to (a) advances that Sunlight remits to contractors to facilitate the installation of residential solar and home improvement equipment and (b) loans and loan participations. Loans and loan participations primarily include Sunlight’s undivided 5.0% participation in certain Indirect Channel Loans and Indirect Channel Loans purchased from its Bank Partner. The following tables summarize Sunlight’s financing receivables and changes thereto:
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| | Advances(a) | | Loans and Loan Participations(b) | | | | Total |
| | | | | | | | |
| March 31, 2023 | | | | | | | | |
| Amounts outstanding | | $ | 20,349 | | | $ | 3,707 | | | | | $ | 24,056 | |
| Unamortized discount | | — | | | (287) | | | | | (287) | |
| Allowance for credit losses | | (2,319) | | | (151) | | | | | (2,470) | |
| Carrying value | | $ | 18,030 | | | $ | 3,269 | | | | | $ | 21,299 | |
| December 31, 2022 | | | | | | | | |
| Amounts outstanding | | $ | 52,129 | | | $ | 3,944 | | | | | $ | 56,073 | |
| Unamortized discount | | — | | | (310) | | | | | (310) | |
| Allowance for credit losses | | (6,736) | | | (102) | | | | | (6,838) | |
| Carrying value | | $ | 45,393 | | | $ | 3,532 | | | | | $ | 48,925 | |
a.Represents advance payments made by Sunlight to certain contractors, generally on a short-term basis, in anticipation of a project’s substantial completion, including advances of $1.5 million and $1.5 million, net of allowances of $0.1 million and $0.1 million, to Sunlight contractors not associated with specific installation projects at March 31, 2023 and December 31, 2022, respectively.
b.Represents (i) Sunlight’s 5.0% participation interest in a pool of residential solar loans with an aggregate UPB of $3.4 million and $3.6 million at March 31, 2023 and December 31, 2022, respectively, and (ii) Indirect Channel Loans purchased by Sunlight with an aggregate UPB of $0.3 million and $0.3 million at March 31, 2023 and December 31, 2022, respectively. No loans or loan participations were individually evaluated for impairment at March 31, 2023 or December 31, 2022.
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| | For the Three Months Ended March 31, | | | | | | | | |
| | | | | | | | | | | | | |
| | 2023 | | | 2022 | | | | | | | | |
| Allowance for Credit Losses — Advances | | | | | | | | |
| Beginning Balance | | $ | 6,736 | | | | $ | 238 | | | | | | | | | |
Provision for credit losses(a) | | (499) | | | | 267 | | | | | | | | | |
Realized losses(b) | | (3,918) | | | | — | | | | | | | | | |
| Ending Balance | | $ | 2,319 | | | | $ | 505 | | | | | | | | | |
| | | | | | | | | | | | | |
| Allowance for Credit Losses — Loans and Loan Participations | | | | | | | | |
| Beginning Balance | | $ | 102 | | | | $ | 148 | | | | | | | | | |
Provision for credit losses | | 2,209 | | | | 371 | | | | | | | | | |
| Realized losses | | (2,160) | | | | (446) | | | | | | | | | |
| Ending Balance | | $ | 151 | | | | $ | 73 | | | | | | | | | |
| | | | | | | | | | | | | |
| Changes in Carrying Value — Loans and Loan Participations | | | | | | | | |
| Beginning Balance | | $ | 3,532 | | | | $ | 4,313 | | | | | | | | | |
Purchases, net(c) | | 2,161 | | | | 448 | | | | | | | | | |
| Proceeds from principal repayments, net | | (237) | | | | (307) | | | | | | | | | |
| Accretion of loan discount | | 22 | | | | 43 | | | | | | | | | |
| Provision for credit losses | | (2,209) | | | | (371) | | | | | | | | | |
| Ending Balance | | $ | 3,269 | | | | $ | 4,126 | | | | | | | | | |
a.Includes an adjustment of $0.5 million to provision for credit losses during the three months ended March 31, 2023 upon adoption of ASC 326.
b.Sunlight charged-off advances totaling $3.9 million for the three months ended March 31, 2023, mostly attributable to one of Sunlight’s contractors.
c.During the three months ended March 31, 2023 and 2022, Sunlight purchased 80 and 24 Indirect Channel Loans with an aggregate UPB of $2.5 million and $0.5 million, respectively.
Advances — The following section presents certain characteristics of Sunlight’s advances.
Risk Ratings — As further described in Note 2, management evaluates Sunlight’s advances for impairment using risk ratings assigned on a scale of “1” (low risk) through “5” (higher risk). The following table allocates the advance amount outstanding based on Sunlight’s internal risk ratings:
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| | | Total |
Risk Tier(a) | | Contractors | | Amount Outstanding | | % of Amount Outstanding |
| March 31, 2023 | | | | | | |
| 1 | Low risk | | 77 | | | $ | 5,833 | | | 28.7 | % |
| 2 | Low-to-medium risk | | 101 | | | 8,962 | | | 44.0 | |
| 3 | Medium risk | | 43 | | | 1,282 | | | 6.3 | |
| 4 | Medium-to-high risk | | 24 | | | 4,072 | | | 20.0 | |
| 5 | Higher risk | | 8 | | | 200 | | | 1.0 | |
| | | 253 | | | $ | 20,349 | | | 100.0 | % |
| December 31, 2022 | | | | | | |
| 1 | Low risk | | 130 | | | $ | 14,585 | | | 28.0 | % |
| 2 | Low-to-medium risk | | 152 | | | 23,686 | | | 45.4 | |
| 3 | Medium risk | | 70 | | | 3,868 | | | 7.4 | |
| 4 | Medium-to-high risk | | 28 | | | 9,793 | | | 18.8 | |
| 5 | Higher risk | | 8 | | | 197 | | | 0.4 | |
| | | 388 | | | $ | 52,129 | | | 100.0 | % |
a.At March 31, 2023 and December 31, 2022, the average risk rating of Sunlight’s advances was 2.2 (“low-to-medium risk”) and 2.2 (“low-to-medium risk”), weighted by total advance amounts outstanding, respectively.
Delinquencies — The following table presents the payment status of advances held by Sunlight:
| | | | | | | | | | | | | | |
| Payment Delinquency | | Amount Outstanding(a) | | % of Amount Outstanding |
| March 31, 2023 | | | | |
| Current | | $ | 8,933 | | | 47.4 | % |
| Less than 30 days | | 912 | | | 4.8 | |
| 30 days | | 1,163 | | | 6.2 | |
| 60 days | | 1,336 | | | 7.1 | |
90+ days(b) | | 6,505 | | | 34.5 | |
| | $ | 18,849 | | | 100.0 | % |
| December 31, 2022 | | | | |
| Current | | $ | 27,257 | | | 53.8 | % |
| Less than 30 days | | 7,456 | | | 14.7 | |
| 30 days | | 5,197 | | | 10.3 | |
| 60 days | | 3,099 | | | 6.1 | |
90+ days(b) | | 7,620 | | | 15.1 | |
| | $ | 50,629 | | | 100.0 | % |
a.Excludes advances of $1.5 million and $1.5 million to Sunlight contractors not associated with specific installation projects and was not delinquent at March 31, 2023 and December 31, 2022, respectively.
b.As further discussed in Note 2, Sunlight generally evaluates amounts delinquent for 90 days or more for impairment. Sunlight assessed advances 90 days or more, along with other factors that included the contractor’s risk tier and historical loss experience, and established loss allowances of $2.0 million and $2.0 million at March 31, 2023 and December 31, 2022, respectively.
Concentrations — The following table presents the concentration of advances, by counterparty:
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| | | |
| | | March 31, 2023 | | | December 31, 2022 |
| Contractor | | Amount Outstanding | | % of Total | | | Amount Outstanding | | % of Total |
| 1 | | | $ | 3,412 | | | 16.8 | % | | | $ | 4,326 | | | 8.3 | % |
| 2 | | | 2,804 | | | 13.8 | | | | 7,348 | | | 14.1 | |
| 3 | | | 2,054 | | | 10.1 | | | | 4,098 | | | 7.9 | |
| 4 | | | 565 | | | 2.8 | | | | 554 | | | 1.1 | |
| 5 | | | 504 | | | 2.5 | | | | 1,004 | | | 1.9 | |
| 6 | | | 504 | | | 2.5 | | | | 2,711 | | | 5.2 | |
| 7 | | | 372 | | | 1.8 | | | | 992 | | | 1.9 | |
| 8 | | | 271 | | | 1.3 | | | | 83 | | | 0.2 | |
| 9 | | | 253 | | | 1.2 | | | | 416 | | | 0.8 | |
| 10 | | | 243 | | | 1.2 | | | | 511 | | | 1.0 | |
Other(a) | | 9,367 | | | 46.0 | | | | 30,086 | | | 57.6 | |
| | | $ | 20,349 | | | 100.0 | % | | | $ | 52,129 | | | 100.0 | % |
a.At March 31, 2023 and December 31, 2022, Sunlight recorded advances receivable from 243 and 378 counterparties not individually listed in the table above with average balances of $0.0 million and $0.1 million, respectively. At December 31, 2022, Sunlight recorded advances receivable from individual counterparties of $3.9 million, $1.4 million, $0.9 million and $0.8 million that represent the largest advance concentrations included in “Other,” based on the amount outstanding.
Vintage — The following table presents the amortized cost basis by year of origination and credit quality indicators of advances held by Sunlight at March 31, 2023:
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| | Year of Origination(a) |
| 2023 | | 2022 | | 2021 | | Prior | | Total |
| | | | | | | | | | |
| Risk Tier | | | | | | | | | | |
| 1 | Low risk | | $ | 4,028 | | | $ | 1,279 | | | $ | 26 | | | $ | — | | | $ | 5,333 | |
| 2 | Low-to-medium risk | | 6,985 | | | 1,935 | | | 42 | | | — | | | 8,962 | |
| 3 | Medium risk | | 775 | | | 507 | | | — | | | — | | | 1,282 | |
| 4 | Medium-to-high risk | | 74 | | | 2,775 | | | 77 | | | 146 | | | 3,072 | |
| 5 | Higher risk | | 19 | | | 181 | | | — | | | — | | | 200 | |
| | | $ | 11,881 | | | $ | 6,677 | | | $ | 145 | | | $ | 146 | | | $ | 18,849 | |
| | | | | | | | | | | |
| | |
| | | | | | | | | |
| | | | | | | | | | |
| Payment Delinquency | | | | | | | | | | |
| Current | | $ | 8,933 | | | $ | — | | | $ | — | | | $ | — | | | $ | 8,933 | |
| Less than 30 days | | 847 | | | 65 | | | — | | | — | | | 912 | |
| 30 days | | 1,011 | | | 152 | | | — | | | — | | | 1,163 | |
| 60 days | | 1,090 | | | 247 | | | — | | | — | | | 1,337 | |
90+ days(b) | | — | | | 6,213 | | | 145 | | | 146 | | | 6,504 | |
| | | $ | 11,881 | | | $ | 6,677 | | | $ | 145 | | | $ | 146 | | | $ | 18,849 | |
| | | | | | | | | | | |
Current-period gross write-offs(c) | | $ | 373 | | | $ | 3,890 | | | $ | — | | | $ | 182 | | | $ | 4,445 | |
a.Excludes advances of $1.5 million and $1.5 million to Sunlight contractors not associated with specific installation projects and was not delinquent at March 31, 2023 and December 31, 2022, respectively.
b.As discussed in Note 2, Sunlight generally evaluates amounts 90 days or more past due for impairment. Sunlight assessed advances 90 days or more past due, along with other factors that included the contractor’s risk tier and historical loss experience, and established loss allowances of $2.0 million and $2.0 million at March 31, 2023 and December 31, 2022, respectively.
c.Excludes $0.5 million of recoveries during the three months ended March 31, 2023.
Loans and Loan Participations — The following section presents certain characteristics of Sunlight’s investments in loans and loan participations. Unless otherwise indicated, loan participation amounts are shown at Sunlight’s 5.0% interest in the underlying loan pool.
Delinquencies — The following table presents the payment status of loans and loan participations held by Sunlight:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Delinquency(a) | | Loan Participations | | Bank Partner Loans | | Total |
| Loans | | UPB | | Loans | | UPB | | Loans | | UPB | | % of UPB |
| March 31, 2023 |
| Current | | 3,226 | | | $ | 3,320 | | | 15 | | | $ | 238 | | | 3,241 | | | $ | 3,558 | | | 96.0 | % |
| Less than 30 days | | 73 | | | 82 | | | 1 | | | 32 | | | 74 | | | 114 | | | 3.1 | |
| 30 days | | 18 | | | 19 | | | — | | | — | | | 18 | | | 19 | | | 0.5 | |
| 60 days | | 4 | | | 6 | | | — | | | — | | | 4 | | | 6 | | | 0.2 | |
| 90+ days | | 6 | | | 10 | | | — | | | — | | | 6 | | | 10 | | | 0.2 | |
| | 3,327 | | | $ | 3,437 | | | 16 | | | $ | 270 | | | 3,343 | | | $ | 3,707 | | | 100.0 | % |
| December 31, 2022 |
| Current | | 3,302 | | | $ | 3,502 | | | 14 | | | $ | 240 | | | 3,316 | | | $ | 3,742 | | | 94.9 | % |
| Less than 30 days | | 89 | | | 101 | | | 3 | | | 69 | | | 92 | | | 170 | | | 4.3 | |
| 30 days | | 15 | | | 17 | | | — | | | — | | | 15 | | | 17 | | | 0.4 | |
| 60 days | | 6 | | | 9 | | | — | | | — | | | 6 | | | 9 | | | 0.2 | |
| 90+ days | | 6 | | | 6 | | | — | | | — | | | 6 | | | 6 | | | 0.2 | |
| | 3,418 | | | $ | 3,635 | | | 17 | | | $ | 309 | | | 3,435 | | | $ | 3,944 | | | 100.0 | % |
a.As further described in Note 2, Sunlight places loans delinquent greater than 90 days on nonaccrual status. Such loans had carrying values of $0.0 million and $0.0 million at March 31, 2023 and December 31, 2022, respectively. Sunlight does not consider the average carrying values and interest income recognized (including interest income recognized using a cash-basis method) material.
Loan Collateral Concentrations — The following table presents the UPB of Balance Sheet Loans, including Sunlight’s relevant participation percentage of the Indirect Channel Loans underlying the participation interests held by Sunlight, based upon the state in which the borrower lived at the time of loan origination:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | March 31, 2023 | | | December 31, 2022 |
| State | | UPB | | % of Total | | | UPB | | % of Total |
| Texas | | $ | 696 | | | 18.8 | % | | | $ | 732 | | | 18.6 | % |
| California | | 662 | | | 17.9 | | | | 698 | | | 17.7 | |
| Florida | | 315 | | | 8.5 | | | | 371 | | | 9.4 | |
| New York | | 255 | | | 6.9 | | | | 269 | | | 6.8 | |
| New Jersey | | 245 | | | 6.6 | | | | 256 | | | 6.5 | |
| Arizona | | 172 | | | 4.6 | | | | 178 | | | 4.5 | |
| Massachusetts | | 170 | | | 4.6 | | | | 174 | | | 4.4 | |
| Pennsylvania | | 147 | | | 4.0 | | | | 159 | | | 4.0 | |
| South Carolina | | 130 | | | 3.5 | | | | 137 | | | 3.5 | |
| Missouri | | 105 | | | 2.8 | | | | 111 | | | 2.8 | |
Other(a) | | 810 | | | 21.8 | | | | 859 | | | 21.8 | |
| | $ | 3,707 | | | 100.0 | % | | | $ | 3,944 | | | 100.0 | % |
a.Sunlight only participates in residential solar loans originated within the United States, including 31 and 31 states not individually listed in the table above, none of which individually amount to more than 2.7% and 2.6% of the UPB at March 31, 2023 and December 31, 2022, respectively.
Vintage — The following table presents the amortized cost basis by year of origination and credit quality indicators of Loans and Loan Participations held by Sunlight at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year of Origination |
| 2023 | | 2022 | | 2021 | | Prior | | Total |
| | | | | | | | | | |
| FICO | | | | | | | | | | |
| 780 and greater | | $ | — | | | $ | — | | | $ | 14 | | | $ | 899 | | | $ | 913 | |
| 720-779 | | — | | | — | | | 3 | | | 1,293 | | | 1,296 | |
660-719(a) | | — | | | — | | | 6 | | | 1,133 | | | 1,139 | |
| 600-659 | | — | | | — | | | — | | | 72 | | | 72 | |
| Less than 600 | | — | | | — | | | — | | | — | | | — | |
| | $ | — | | | $ | — | | | $ | 23 | | | $ | 3,397 | | | $ | 3,420 | |
| | | | | | | | | | | |
Current-period gross write-offs(b) | | $ | — | | | $ | 1,883 | | | $ | 224 | | | $ | 53 | | | $ | 2,160 | |
a.This bucket includes all Bank Partner Loans (originated prior to 2021).
b.Includes gross write-offs of $0.0 million related to Sunlight’s 5.0% participation interest in a pool of residential solar loans and $2.1 million related to Indirect Channel Loans during the three months ended March 31, 2023.
Note 4. Derivatives
Sunlight has entered into two agreements considered derivatives under GAAP that are subject to interest rate, credit, and/ or prepayment risks. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, as well as other factors. Credit risk includes a borrower’s inability or unwillingness to make contractually required payments. Prepayment risk includes a borrower’s payment, or lack of payment, of contractual Loan amounts prior to the date such amounts are contractually due.
In January 2019, Sunlight entered into an agreement with its Bank Partner to arrange Indirect Channel Loans for the purchase and installation of home improvements other than residential solar energy systems. The agreement (a) entitles Sunlight to cash flows collected from the portfolio of Indirect Channel Loans held by its Bank Partner in excess of a contractual rate, based upon one-month LIBOR plus a fixed spread, and (b) requires Sunlight to pay its Bank Partner for portfolio cash flows below such contractual rate. This contractual arrangement incorporates interest rate and credit risks related to the risk of default on Indirect Channel Loans held by its Bank Partner that results from a borrower’s inability or unwillingness to make contractually required payments. In December 2022, Sunlight and Bank Partner amended the agreement, which removed the indexed contractual rate and the agreement was no longer considered a derivative under GAAP.
In February 2021, Sunlight entered into an agreement with an Indirect Channel Loan Purchaser to purchase Indirect Channel Loans for the installation of home improvements other than residential solar energy systems. As part of that agreement, Sunlight is entitled to additional sale proceeds upon the prepayment of certain Indirect Channel Loans sold. This contractual arrangement incorporates prepayment risk related to loan prepayment rates below Sunlight’s expectations.
Sunlight’s contract derivatives are recorded at fair value in the accompanying Unaudited Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | Balance Sheet Location | | March 31, 2023 | | | December 31, 2022 |
| | | | | | | |
| Contract derivative 2 | | Other assets | | $ | 293 | | | | $ | 449 | |
| | | | | | | |
| | | | | | | |
The following table summarizes notional amounts related to derivatives:
| | | | | | | | | | | | | | | |
| | |
| | March 31, 2023 | | | December 31, 2022 |
| | | | | |
Contract derivative 2(a) | | 25,202 | | | | 38,805 | |
| | | | | |
a.Represents the unpaid principal balance of the Loans at time of sale to the Indirect Channel Loan Purchaser for which Sunlight is entitled to income in the event of prepayment of the Indirect Channel Loans.
The following table summarizes all income (loss) recorded in relation to derivatives:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | | | | | | | |
| | | | | | | | | | | | | |
| | 2023 | | | 2022 | | | | | | | | |
| Change in fair value of contract derivatives, net | | | | | | | | | | |
| Contract derivative 1 | | $ | — | | | | $ | (421) | | | | | | | | | |
| Contract derivative 2 | | (156) | | | | 194 | | | | | | | | | |
| | | | | | | | | | | | | |
| | $ | (156) | | | | $ | (227) | | | | | | | | | |
| Realized gains (losses) on contract derivatives, net | | | | | | | | | | |
| Contract derivative 1 | | $ | — | | | | $ | 1,831 | | | | | | | | | |
| Contract derivative 2 | | 123 | | | | 78 | | | | | | | | | |
| | | | | | | | | | | | | |
| | $ | 123 | | | | $ | 1,909 | | | | | | | | | |
Note 5. Debt Obligations
Debt consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | March 31, 2023 | | | December 31, 2022 |
| | Month Issued | | Outstanding Face Amount | | Carrying Value | | Maximum Facility Size | | Final Stated Maturity | | Weighted Average | | | Carrying Value(a) |
| | | | | | | Funding Cost | | Life (Years) | | |
Revolving credit facility(a) | | Apr 2021 | | $ | 7,694 | | | $ | 7,694 | | | $ | 30,000 | | | Apr 2023 | | 9.9 | % | | 0.1 | | | $ | 20,613 | |
a.In March 2016, Sunlight entered into a Loan and Security Agreement with a lender (“Prior Lender”). In May 2019, Sunlight and Prior Lender amended and restated the agreement to provide Sunlight a $15.0 million revolving credit facility (“Prior Facility”). In April 2021, Sunlight paid the Prior Facility in full using proceeds from a Loan and Security Agreement into which Sunlight entered with Silicon Valley Bank (“SVB”) and replaced the associated standby letter of credit. Borrowings under the current revolving credit facility, secured by the net assets of Sunlight Financial LLC, bear interest at a per annum rate equal to the sum of (i) a floating rate index and (ii) a fixed margin. The facility includes unused facility costs, and amounts borrowed under this facility are nonrecourse to Sunlight Financial Holdings Inc.
Sunlight’s debt obligations are subject to customary loan covenants and event of default provisions, including event of default provisions triggered by a failure to maintain minimum liquidity and earnings as well as maintaining capacity to fund Loans.
Activities — Activities related to the carrying value of Sunlight’s debt obligations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | | | | | | | |
| | | | | | | | | | | | | |
| | 2023 | | | 2022 | | | | | | | | |
| Beginning Balance | | $ | 20,613 | | | | $ | 20,613 | | | | | | | | | |
| Borrowings | | — | | | | — | | | | | | | | | |
| Repayments | | (12,919) | | | | — | | | | | | | | | |
| Amortization of deferred financing costs | | — | | | | — | | | | | | | | | |
| Ending Balance | | $ | 7,694 | | | | $ | 20,613 | | | | | | | | | |
Maturities — At March 31, 2023, all of Sunlight’s debt obligations contractually mature in 2023.
Covenants — Sunlight is required to maintain minimum liquidity, EBITDA, and available takeout commitment levels on a quarterly basis under the Loan and Security Agreement. As a result of the platform fee losses in the fourth quarter of 2022, Sunlight did not meet the EBITDA requirement at March 31, 2023. Additionally, without the benefit of the Commitment & Transaction Support Agreement, breaches of other significant agreements, including the Bank Partner Agreements, could also potentially trigger a cross default under the Loan and Security Agreement. Due to this financial covenant breach, SVB was contractually entitled to request for immediate repayment of the outstanding debt obligation (Note 11).
As of March 31, 2023, Sunlight’s financial covenants and calculated amounts were as follows (in millions):
| | | | | | | | | | | | | | |
| | |
| | March 31, 2023 |
| Covenant | | Minimum | | Amount |
EBITDA Covenant(a) | | $ | 5 | | | $ | (37) | |
Liquidity(b) | | 10 | | | 76 | |
Available takeout commitment(c) | | 200 | | | 626 | |
a.EBITDA Covenant for the six-month period ended each quarter of at least $5.0 million.
b.Unrestricted cash equal to, or greater than, the greater of (i) 35% of amounts borrowed under the revolving credit facility and (ii) $10.0 million.
c.Aggregate Direct Channel Partners' and Bank Partner's unused committed obligation to purchase and hold Loans of at least $200.0 million.
Note 6. Equity and Earnings per Share
The registration statement for the Company’s initial public offering (“IPO”) was declared effective on November 24, 2020. On November 30, 2020, the Company consummated its IPO of 34,500,000 units, including the issuance of 4,500,000 units as a result of the underwriters’ exercise in full of its over-allotment option (“IPO Units”). Each IPO Unit consisted of one share of the Company’s Class A common stock and one-half of one warrant (“Public Warrant”). Simultaneously with the closing of the IPO, the Company consummated the private placement (the “Private Placement”) of 9,900,000 warrants (“Private Placement Warrants”).
On July 9, 2021, in connection with the closing of the Business Combination, a number of investors (collectively, the “Subscribers”) purchased an aggregate of 25,000,000 shares of Class A common stock, par value $0.0001 per share (“Class A common stock” and such shares purchased by the Subscribers, the “PIPE Shares”), at a purchase price of $10.00 per share for an aggregate purchase price of $250.0 million in a private placement, pursuant to separate subscription agreements, dated as of January 23, 2021 (collectively, the “Subscription Agreements”). Pursuant to the Subscription Agreements, Sunlight gave certain registration rights to the Subscribers with respect to the PIPE Shares.
Sunlight has three classes of common stock and no classes of preferred stock. Holders of each of the Class A, Class B, and Class C common stock vote together as a single class on all matters submitted to a vote of the stockholders, except as required by law. Each share of common stock has one vote on all such matters.
Class A Common Stock — The Company is authorized to issue 420,000,000 shares of Class A common stock with a par value of $0.0001 per share (“Class A Share”). There were 85,401,353 and 82,307,760 shares of Class A common stock issued and outstanding at March 31, 2023 and December 31, 2022, respectively.
Class B Common Stock — The Company is authorized to issue 20,000,000 shares of Class B common stock with a par value of $0.0001 per share (“Class B Share” or “Founder Share”). There were no shares of Class B common stock issued and outstanding at March 31, 2023 and December 31, 2022, respectively.
Class C Common Stock — The Company is authorized to issue 65,000,000 shares of Class C common stock with a par value of $0.0001 per share (“Class C Common Stock”). There were 44,973,227 and 47,287,370 shares of Class C Common Stock issued and outstanding at March 31, 2023 and December 31, 2022, respectively. Each Class C share, along with one Class EX Unit, can be exchanged for one Class A Share, subject to certain limitations. Upon exchange, Sunlight redeems and cancels the Class C Common Stock and Sunlight Financial LLC redeems and cancels the Class EX Unit. Class C shares have no dividend or liquidation rights, but do have voting rights on a pari passu basis with the Class A Shares. In October 2022, holders of 308,085 Class EX units of Sunlight Financial LLC exchanged their Class EX units, along with a corresponding number of Class C shares of the Company, for 308,085 Class A shares of the Company at $1.25 per Class A share. In January 2023, holders of 2,314,143 Class EX units of Sunlight Financial LLC exchanged their Class EX units, along with a corresponding number of Class C shares of the Company, for 2,305,426 Class A shares of the Company at $1.29 per Class A share. The Company issued 997,399 Class A shares, net of applicable tax withholding, and delivered 1,308,027 Class A shares held in treasury in connection with this exchange.
Preferred Stock — The Company is authorized to issue 35,000,000 shares of preferred stock, par value $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Sunlight’s board of directors. Sunlight’s board of directors is able, without stockholder approval, to issue Preferred Stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the common stock and could have anti-takeover effects. The Company has not issued any shares of preferred stock.
Warrants — At March 31, 2023, Sunlight has authorized Class A Shares to cover the exercise of the following outstanding warrants on its equity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Type | | Date of Issuance | | | | Exercise Price per Share | | | | | | | | Shares |
| Public Warrants | | Nov-20 | | | | | | $ | 11.50 | | | | | | | | | 17,250,000 | |
| Private Placement Warrants | | Nov-20 | | | | 11.50 | | | | | | | | | 9,900,000 | |
| Other | | Feb-21 | | | | 7.72 | | | | | | | | | 627,780 | |
Refer to Notes 2 and 7 regarding the accounting treatment for warrants and the valuation thereof, respectively, as well as Note 11 for warrants issued after March 31, 2023.
Public Warrants — Public Warrants may only be exercised for a whole number of shares of common stock. No fractional Public Warrants are issued upon separation of the Units and only whole Public Warrants trade. The Public Warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire upon the earlier of redemption or five years after the completion of the Business Combination. The warrants are exercisable, provided the Company has an effective registration statement under the Securities Act covering the shares of Class A common stock issuable upon exercise of the Public Warrants and a current prospectus relating to them is available (or the Company permits holders to exercise their Public Warrants on a cashless basis and such cashless exercise is exempt from registration under the Securities Act). Notwithstanding the above, if the Company’s shares of Class A common stock are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, it will not be required to file or maintain in effect a registration statement, and in the event the Company does not so elect, it will use its best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
Private Placement Warrants — The Private Placement Warrants are not redeemable by the Company, subject to certain limited exceptions, so long as they are held by the Sponsor or its permitted transferees. The Sponsor, or its permitted transferees, has the option to exercise the Private Placement Warrants for cash or on a cashless basis. Except as described in “— Company Redemption of Public Warrants and Private Placement Warrants,” the Private Placement Warrants have terms and provisions that are identical to those of the Public Warrants, including as to exercise price, exercisability, and exercise period. If the Private Placement Warrants are held by holders other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by the holders on the same basis as the Public Warrants. The Private Placement Warrants will be non-redeemable and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees.
Other Warrants — In February 2021, Sunlight Financial LLC issued a warrant exercisable for 7,000 of its Class A-3 Units at an exercise price of $691.90 per unit that expires upon the earlier of redemption or ten years from date of issuance. In connection with the Business Combination, Sunlight and the holder of that warrant amended the warrant to permit the holder to exercise its warrant for 627,700 Class A common stock at an exercise price of $7.715 per share. Sunlight reclassified the warrant, historically classified as a liability but no longer exercisable for redeemable equity, as equity at a fair value of $2.5 million just prior to reclassification. Upon Closing of the Business Combination, holders of warrants exercisable in Sunlight Financial LLC’s Class A-1 and A-2 Units exercised their warrants for an aggregate of $2.3 million in cash and 635,641 Class A common shares.
Company Redemption of Public Warrants and Private Placement Warrants — Sunlight may redeem Public Warrants and Private Placement Warrants on terms that vary according to the trading price of its Class A Shares.
Redemption of Warrants When the Price per Share of Class A Common Stock Equals or Exceeds $18.00 — Once the warrants become exercisable, the Company may redeem the outstanding warrants:
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon a minimum of 30 days’ prior written notice of redemption, or the 30-day redemption period, to each warrant holder; and
•if, and only if, the reported last sale price of the Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
The Company will not redeem the warrants as described above unless a registration statement under the Securities Act covering the shares of Class A common stock issuable upon exercise of the warrants is effective and a current prospectus relating to those shares of Class A common stock is available throughout the 30-day redemption period. If and when the warrants become redeemable by the Company, it may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
The Company has established the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time of the call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the warrants, each warrant holder will be entitled to exercise its warrant prior to the scheduled redemption date. However, the price of the Class A common stock may fall below the $18.00 redemption trigger price (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) as well as the $11.50 (for whole shares) warrant exercise price after the redemption notice is issued.
Redemption of Warrants When the Price per Share of Class A Common Stock Equals or Exceeds $10.00 — Once the warrants become exercisable, the Company may redeem the outstanding warrants:
•in whole and not in part;
•at a price of $0.10 per warrant, provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares of Class A common stock determined in part by the redemption date and the “fair market value” of the Class A common stock except as otherwise described below;
•upon a minimum of 30 days’ prior written notice to each warrant holder; and
•if, and only if, the reported last sale price of the Class A common stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which the Company sends notice of redemption to the warrant holders.
The “fair market value” of the Class A common stock for the purpose of the redemption terms above is the average reported last sale price of the Class A common stock for the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of warrants. In no event will the warrants be exercisable on a cashless basis in connection with this redemption feature for more than 0.361 shares of Class A common stock per whole warrant (subject to adjustment). This redemption feature differs from the typical warrant redemption features.
Non-Controlling Interests in Consolidated Subsidiaries — These amounts relate to equity interests in Sunlight's consolidated, but not wholly-owned subsidiaries, which are held by the Class EX unitholders.
The Sunlight Financial LLC portion of noncontrolling interests is computed as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | | | | | | |
| | 2023 | | | 2022 | | | | | | | |
| Sunlight Financial LLC net income (loss) before income taxes | | $ | (34,512) | | | | $ | (24,617) | | | | | | | | |
Sunlight Financial LLC as a percent of total(a) | | 34.6 | % | | | 35.1 | % | | | | | | | |
| Sunlight Financial LLC net income (loss) attributable to the Class EX unitholders | | $ | (11,862) | | | | $ | (8,632) | | | | | | | | |
a.Represents the weighted average percentage of total Sunlight shareholders' net income (loss) in Sunlight Financial LLC attributable to the Class EX unitholders.
The following discloses the effects of changes in Sunlight's ownership interest in Sunlight Financial LLC on Sunlight's equity:
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | | | | | | |
| | 2023 | | | 2022 | | | | | | | |
| Transfers (to) from noncontrolling interests: | | | | | | | | | | | | |
| Decrease in Sunlight's shareholders' equity for the delivery of Class EX Units | | $ | (7,488) | | | | $ | (394) | | | | | | | | |
| Increase in Sunlight's shareholders' equity for the exchange of Class EX Units for Class A Shares | | 6,622 | | | | — | | | | | | | | |
| Dilution impact of equity transactions | | (866) | | | | (394) | | | | | | | | |
| Net income (loss) attributable to Class A shareholders | | (22,947) | | | | (13,974) | | | | | | | | |
| Change from transfers (to) from noncontrolling interests and from net income (loss) attributable to Class A shareholders | | $ | (23,813) | | | | $ | (14,368) | | | | | | | | |
Equity-Based Compensation — On June 17, 2021, the board of directors of the Company adopted the Equity Plan and the Sunlight Financial Holdings Inc. Employee Stock Purchase Plan (“ESPP”), both of which the Company's stockholders approved on July 8, 2021. 25,500,000 shares of Class A common stock are reserved for issuance under the Equity Plan, which amount is increased annually pursuant to an “evergreen” provision in the Equity Plan which provides that on the first day of each fiscal year, an additional number of shares equal to the lesser of (a) two percent (2.0%) of the total issued and outstanding common shares of Sunlight on the first day of such fiscal year, or (b) such lesser amount determined by the board of directors, will be added to the shares of Class A common stock authorized for issuance under the Equity Plan. In addition, 3,400,000 shares of Class A common stock are reserved for issuance under the ESPP.
Sunlight has granted the following outstanding awards (“Compensation Awards”) to certain employees and members of Sunlight’s Board at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Service (in Years)(b) | | | | |
Award Class(a) | | Minimum | | Maximum | | | | | | Awards(c) |
| Provisionally-Vested Class A Shares | | 1.9 | | 3.6 | | | | | | 112,360 | | | | | | | |
| Provisionally-Vested Class EX Units | | 1.9 | | 1.9 | | | | | | 52,114 | | | | | | | |
| Director RSUs | | 1.0 | | 1.0 | | | | | | 171,624 | | | | | | | |
| Employee RSUs | | 3.0 | | 4.0 | | | | | | 4,188,747 | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | 4,524,845 | | | | | | | |
a.All awards subject solely to time-based vesting.
b.At time of grant.
c.Net of fully vested and forfeited awards.
Compensation Unit Activities — Activities related to Sunlight’s equity-based compensation were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Provisionally-Vested | | RSUs |
| | Class A Shares | | Class EX Units | | Directors | | Employees |
| | Per Share | | Shares | | Per Unit | | Units | | Per Unit | | Units | | Per Unit | | Units |
| December 31, 2021 | | $ | 9.46 | | | 337,193 | | | $ | 9.46 | | | 974,447 | | | $ | 9.46 | | | 75,000 | | | $ | 8.97 | | | 2,136,129 | |
| Issued | | — | | | — | | | 5.04 | | | 70,991 | | | — | | | — | | | — | | | — | |
| Vested | | 9.46 | | | (38,547) | | | 9.46 | | | (171,959) | | | — | | | — | | | — | | | — | |
| Forfeited or Cancelled | | 9.46 | | | (30,915) | | | 9.46 | | | (162,929) | | | — | | | — | | | 9.22 | | | (343,261) | |
| March 31, 2022 | | 9.46 | | | 267,731 | | | 9.02 | | | 710,550 | | | 9.46 | | | 75,000 | | | 8.92 | | | 1,792,868 | |
| | | | | | | | | | | | | | | | |
| December 31, 2022 | | $ | 9.46 | | | 145,970 | | | $ | 9.46 | | | 189,158 | | | $ | 4.37 | | | 171,624 | | | $ | 3.97 | | | 5,703,195 | |
| | | | | | | | | | | | | | | | |
| Vested | | 9.46 | | | (33,610) | | | 9.46 | | | (137,044) | | | — | | | — | | | 1.55 | | | (1,058,653) | |
| Forfeited or Cancelled | | — | | | — | | | — | | | — | | | — | | | — | | | 3.82 | | | (455,795) | |
| March 31, 2023 | | 9.46 | | | 112,360 | | | 9.46 | | | 52,114 | | | 4.37 | | | 171,624 | | | 4.38 | | | 4,188,747 | |
Unrecognized Compensation Expense — At March 31, 2023, Sunlight has not yet recognized compensation expense for the following awards, all of which are subject solely to time-based service vesting conditions:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Type | | Weighted Average Recognition Period | | Awards | | Amount | | | | |
| Provisionally-Vested Class A Shares | | 0.7 years | | 112,360 | | | $ | 1,063 | | | | | |
| Provisionally-Vested Class EX Units | | 0.1 years | | 52,114 | | | 493 | | | | | |
| Director RSUs | | 0.1 years | | 171,624 | | | 126 | | | | | |
| Employee RSUs | | 1.3 years | | 4,188,747 | | | 11,909 | | | | | |
| | | | 4,524,845 | | | $ | 13,591 | | | | | |
Refer to Notes 2 and 7 regarding the accounting treatment for compensation units and the valuation thereof.
Earnings (Loss) Per Share — Sunlight is required to present both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period.
Sunlight’s potentially dilutive equity instruments fall primarily into three general categories: (a) instruments that Sunlight has issued as part of its compensation plan, (b) ownership interests in Sunlight’s subsidiary, Sunlight Financial LLC, that are owned by the Class EX unitholders (except the RSUs) and are convertible into Class A Shares, and (c) derivatives exercisable in Class A Shares. Based on the rules for calculating earnings per share, there are two general ways to measure dilution for a given instrument: (a) calculate the net number of shares that would be issued assuming any related proceeds are used to buy back outstanding shares (the treasury stock method), or (b) assume the gross number of shares are issued and calculate any related effects on net income available for shareholders (the if-converted and two-class methods). Sunlight has applied these methods as prescribed by the rules to each of its outstanding equity instruments as shown below.
The following table summarizes the basic and diluted earnings per share calculations:
| | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | |
| | For the Three Months Ended March 31, | | | | | | |
| | 2023 | | 2022 | | | | | | |
| Net Income (Loss) Per Class A Shareholders, Basic | | | | | | | | | | |
| Net income (loss) available to Class A shareholders | | $ | (22,837) | | | $ | (13,756) | | | | | | | |
| Total weighted average shares outstanding | | 85,123,344 | | 84,798,918 | | | | | | |
| Net Income (Loss) Per Class A Shareholders, Basic | | $ | (0.27) | | | $ | (0.16) | | | | | | | |
| | | | | | | | | | |
| Net Income (Loss) Per Class A Shareholders, Diluted | | | | | | | | | | |
| Net income (loss) available to Class A shareholders | | $ | (22,837) | | | $ | (13,756) | | | | | | | |
| Total weighted average shares outstanding | | 85,123,344 | | 84,798,918 | | | | | | |
| Net Income (Loss) Per Class A Shareholders, Diluted | | $ | (0.27) | | | $ | (0.16) | | | | | | | |
| | | | | | | | | | |
| Net income (loss) available to Class A shareholders | | | | | | | | | | |
| Net Loss | | $ | (34,809) | | | $ | (22,606) | | | | | | | |
| Noncontrolling interests in loss of consolidated subsidiaries | | 11,862 | | | 8,632 | | | | | | | |
| Other weighting adjustments | | 110 | | | 218 | | | | | | | |
| Net Income (Loss) Attributable to Class A Shareholders | | (22,837) | | | $ | (13,756) | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Noncontrolling interests in income (loss) of Sunlight Financial LLC, net of assumed corporate income taxes at enacted rates, attributable to Class EX units exchangeable into Sunlight Financial Holdings Inc. Class A shares(a) | | — | | | — | | | | | | | |
| Net income (loss) available to Class A shareholders, diluted | | $ | (22,837) | | | $ | (13,756) | | | | | | | |
| | | | | | | | | | |
| Weighted Average Units Outstanding | | | | | | | | | | |
| Class A shares outstanding | | 85,123,344 | | 84,798,918 | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Class EX units exchangeable into Sunlight Financial Holdings Inc. Class A shares(a) | | — | | — | | | | | | |
Incremental Class A Shares attributable to dilutive effect of warrants(b) | | — | | — | | | | | | |
Class A restricted share units granted to employees and directors (eligible for dividend and dividend equivalent payments)(c) | | — | | — | | | | | | |
| Total weighted average shares outstanding, diluted | | 85,123,344 | | 84,798,918 | | | | | | |
a.The Class EX Units not held by Sunlight (that is, those held by noncontrolling interests) are exchangeable into Class A Shares on a one-to-one basis. These units are not included in the computation of basic earnings per share. These units enter into the computation of diluted net
income (loss) per Class A Share when the effect is dilutive using the if-converted method. To the extent charges, particularly tax related charges, are incurred by Sunlight Financial Holdings Inc., the effect may be anti-dilutive.
b.Sunlight uses the treasury stock method to determine the dilutive effect, if any, of warrants exercisable in Sunlight’s Class A Shares. Such warrants were out-of-the-money during the three months ended March 31, 2023 and 2022, respectively.
c.Restricted Class A share units granted to directors and employees are eligible to receive dividend or dividend equivalent payments when dividends are declared and paid on Sunlight’s Class A Shares and therefore participate fully in the results of Sunlight’s operations from the date they are granted.
The Class C shares have no net income (loss) per share as they do not participate in Sunlight’s earnings (losses) or distributions.
The following table summarizes the weighted-average potential common shares excluded from diluted income (loss) per common share as their effect would be anti-dilutive:
| | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | |
| | For the Three Months Ended March 31, | | | | | | |
| Common Shares From | | 2023 | | 2022 | | | | | | |
| Class EX Units | | 44,657,275 | | | 46,628,474 | | | | | | | |
Warrants(a) | | 27,150,000 | | | 27,150,000 | | | | | | | |
| Other warrants | | 627,780 | | | 627,780 | | | | | | | |
| Unvested Class EX Units | | 315,952 | | | 966,981 | | | | | | | |
RSUs(b) | | 5,212,382 | | | 1,904,217 | | | | | | | |
ESPP(c) | | — | | | 4,355 | | | | | | | |
| | 77,963,389 | | | 77,281,807 | | | | | | | |
a.Includes Public Warrants and Private Placement Warrants.
b.Includes RSUs awards to directors and employees.
c.Class A Shares deliverable to employees in satisfaction of subscriptions under Sunlight’s ESPP.
There were no dividends declared for Sunlight’s Class A common stock during the three months ended March 31, 2023 and 2022, respectively.
Note 7. Fair Value Measurement
The carrying values and fair values of Sunlight’s assets or liabilities recorded at fair value on a recurring or non-recurring basis, as well as other financial instruments for which fair value is disclosed, at March 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Balance or Notional Amount | | Carrying Value | | Fair Value |
| | | | Level 1 | | Level 2 | | Level 3 | | Total |
| March 31, 2023 | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Financing Receivables: | | | | | | | | | | | | |
| Loan participations, held-for-investment | | $ | 3,437 | | | $ | 3,028 | | | $ | — | | | $ | — | | | $ | 2,960 | | | $ | 2,960 | |
| Loans, held-for-investment | | 270 | | | 241 | | | — | | | — | | | 220 | | | 220 | |
| Cash and cash equivalents | | 75,518 | | | 75,518 | | | 75,518 | | | — | | | — | | | 75,518 | |
| Restricted cash | | 4,350 | | | 4,350 | | | 4,350 | | | — | | | — | | | 4,350 | |
| Contract derivatives | | 25,202 | | | 293 | | | — | | | — | | | 293 | | | 293 | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Debt | | 7,694 | | | 7,694 | | | — | | | — | | | 7,694 | | | 7,694 | |
| Warrants | | 312,225 | | | 931 | | | — | | | — | | | 931 | | | 931 | |
| | | | | | | | | | | | |
| Guarantee obligation | | n.a. | | 15,128 | | | — | | | — | | | 15,128 | | | 15,128 | |
| Servicing liability | | n.a. | | 1,010 | | | — | | | 1,010 | | | — | | | 1,010 | |
| | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Financing Receivables: | | | | | | | | | | | | |
| Loan participations, held-for-investment | | 3,635 | | | 3,254 | | | — | | | — | | | 3,110 | | | 3,110 | |
| Loans, held-for-investment | | 309 | | | 278 | | | — | | | — | | | 260 | | | 260 | |
| Cash and cash equivalents | | 47,515 | | | 47,515 | | | 47,515 | | | — | | | — | | | 47,515 | |
| Restricted cash | | 4,272 | | | 4,272 | | | 4,272 | | | — | | | — | | | 4,272 | |
| Contract derivatives | | 38,805 | | | 449 | | | — | | | — | | | 449 | | | 449 | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Debt | | 20,613 | | | 20,613 | | | — | | | — | | | 20,613 | | | 20,613 | |
| Warrants | | 312,225 | | | 4,297 | | | — | | | — | | | 4,297 | | | 4,297 | |
| Guarantee obligation | | n.a. | | 8,024 | | | — | | | — | | | 8,024 | | | 8,024 | |
| Servicing liability | | n.a. | | 512 | | | — | | | 512 | | | — | | | 512 | |
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value.
Sunlight’s assets and liabilities measured at fair value on a recurring basis using Level 3 inputs changed as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Assets | | | | Liabilities | | | | |
| | Contract Derivatives | | | | Warrants | | | | |
| December 31, 2022 | | $ | 449 | | | | | $ | 4,297 | | | | | |
Transfers(a) | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Transfers to Level 3 | | — | | | | | — | | | | | |
| Transfers from Level 3 | | — | | | | | — | | | | | |
Gains (losses) included in net income(b) | | | | | | | | | | |
| Included in change in fair value of warrant liabilities | | — | | | | | (3,366) | | | | | |
| Included in change in fair value of contract derivatives, net | | (156) | | | | | — | | | | | |
| Included in realized gains on contract derivatives, net | | 123 | | | | | — | | | | | |
| Payments, net | | (123) | | | | | — | | | | | |
| March 31, 2023 | | $ | 293 | | | | | $ | 931 | | | | | |
| | | | | | | | | | |
| December 31, 2021 | | $ | 1,411 | | | | | $ | 19,007 | | | | | |
Transfers(a) | | | | | | | | | | |
| Transfers to Level 3 | | — | | | | | — | | | | | |
| Transfers from Level 3 | | — | | | | | — | | | | | |
Gains (losses) included in net income(b) | | | | | | | | | | |
| Included in change in fair value of warrant liabilities | | — | | | | | 4,884 | | | | | |
| Included in change in fair value of contract derivatives, net | | (227) | | | | | — | | | | | |
| Included in realized gains on contract derivatives, net | | 1,909 | | | | | — | | | | | |
| Payments, net | | (1,909) | | | | | — | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| March 31, 2022 | | $ | 1,184 | | | | | $ | 23,891 | | | | | |
a.Transfers are assumed to occur at the beginning of the respective period.
b.Increases in the fair value of liabilities represent losses included in net income.
Contract Derivative Valuation — Fair value estimates of Sunlight's contract derivatives are based on an internal pricing model that uses a discounted cash flow valuation technique, incorporates significant unobservable inputs, and includes assumptions that are inherently subjective and imprecise. Significant inputs used in the valuation of Sunlight’s contract derivatives include:
| | | | | | | | |
| Contract Derivative | | Significant Inputs |
| | |
| 2 | | Inputs include expected prepayment rate of applicable Indirect Channel Loans sold to the Indirect Channel Loan Purchaser. Significant increases (decreases) in the expected prepayment rate in isolation would result in a significantly higher (lower) fair value measurement. |
| | |
The following significant assumptions were used to value Sunlight’s contract derivative:
| | | | | | | | | | | | | | | |
| | |
| | March 31, 2023 | | | December 31, 2022 |
| | | | | |
| | | | | |
| | | | | |
| Contract Derivative 2 | | | | | |
| Expected prepayment rate | | 75.0 | % | | | 75.0 | % |
| | | | | |
| | | | | |
| | | | | |
Compensation Unit and Warrant Valuation — Sunlight uses the observed market price of its publicly-traded Class A Shares and the warrants thereon to measure the value of RSU awards on the grant date and the value of Public Warrants, respectively. For Private Placement Warrants, Sunlight uses an independent third-party valuation firm to value those warrants using a Monte Carlo option pricing model, which includes the following estimates of underlying asset value, volatility, dividend rates, expiration dates, and risk-free rates:
| | | | | | | | | | |
| | |
| Assumption | | March 31, 2023 |
| | | | |
Class A common share value per share(a) | | $ | 0.31 | | | |
Implied volatility(a) | | 113.2 | % | | |
Dividend yield(b) | | — | % | | |
Time to expiry (in years)(a) | | 3.3 | | | |
Risk free rate(a) | | 3.8 | % | | |
a.Significant increases in these assumptions in isolation would result in a higher fair value measurement.
b.Significant increases in these assumptions in isolation would result in a lower fair value measurement.
Goodwill — In connection with Sunlight’s goodwill assessment (Note 2), the Company valued its single reporting unit using an equal-weighted valuation methodology, which incorporated (a) an income approach using a discounted cash flow analysis (b) a market approach using publicly-traded companies similar to Sunlight and (c) a market capitalization approach.
Note 8. Taxes
Sunlight calculates the provision for income taxes during interim periods by applying an estimate of the forecasted annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The income tax benefit was $0.0 million and $2.4 million for the three months ended March 31, 2023 and 2022, respectively. Sunlight’s effective tax rate was 0.0% and 9.6% for the three months ended March 31, 2023 and 2022, respectively. The difference between Sunlight’s statutory and effective tax rate is primarily due to the permanent adjustments for noncontrolling interest in subsidiaries of $7.0 million and changes in valuation allowance of $6.1 million.
Sunlight recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in Sunlight's Unaudited Condensed Consolidated Statements of Operations. Any uncertain tax position taken by any of the Class EX unitholders is not an uncertain tax position of Sunlight Financial LLC.
As of March 31, 2023 and December 31, 2022, Sunlight had net deferred tax liabilities of $0.7 million and $0.7 million, comprised of $20.1 million and $14.0 million gross deferred tax assets, less valuation allowances of $16.5 million and $10.4 million, and $4.3 million and $4.3 million of gross deferred tax liability, respectively.
Note 9. Transactions with Affiliates and Affiliated Entities
Sunlight has entered into agreements with the following affiliates, including equity members and those who serve on Sunlight’s board of directors.
Private Placement Warrants — Simultaneously with the closing of the Initial Public Offering, the Company consummated the Private Placement of 9,900,000 Private Placement Warrants, at a price of $1.00 per Private Placement Warrant to the Sponsor, generating proceeds of $9.9 million.
Each whole Private Placement Warrant is exercisable for one whole share of the Company’s Class A common stock at a price of $11.50 per share. A portion of the purchase price of the Private Placement Warrants was added to the proceeds from the Initial Public Offering held in the Trust Account. The Private Placement Warrants will be non-redeemable and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees.
Estimated Tax Distributions — Sunlight Financial LLC distributes cash to its unitholders using allocations of estimated taxable income it expects to generate. As Sunlight revises its estimate of taxable income or loss, the allocation of taxable income to its unitholders may change, resulting in amounts due to, or from, certain unitholders. For the year ended March 31, 2023, Sunlight Financial LLC did not generate taxable income and expects to use tax distributions already declared during the current tax year to offset future estimated tax liability distributions, if any. At March 31, 2023, Sunlight Financial LLC did not declare tax distributions. Sunlight Financial LLC declared tax distributions of $1.4 million at March 31, 2022, that it had not yet paid, shown as “Other Liabilities” in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Refer to Note 11 for transactions between Sunlight and its Bank Partner after March 31, 2023.
Note 10. Commitments and Contingencies
Sunlight was subject to the following commitments and contingencies at March 31, 2023.
Litigation — Sunlight may be involved in various claims and legal actions arising in the ordinary course of business. Sunlight establishes an accrued liability for legal proceedings only when those matters present loss contingencies that are both probable and reasonably estimable.
At March 31, 2023, Sunlight was not involved in any material legal proceedings regarding claims or legal actions against Sunlight.
Indemnifications — In the normal course of business, Sunlight enters into contracts that contain a variety of representations and warranties and that provide general indemnifications. Sunlight’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against Sunlight that have not yet occurred. However, based on Sunlight’s experience, Sunlight expects the risk of material loss to be remote.
Advances — Sunlight provides a contractually agreed upon percentage of cash to a contractor related to a Loan that has not yet been funded by either a Direct Channel Partner or its Bank Partner as well as amounts funded to contractors in anticipation of loan funding. At March 31, 2023, $20.3 million of committed and outstanding advances are included in “Advances” in the accompanying Unaudited Condensed Consolidated Balance Sheets. In the first quarter of 2023, Sunlight suspended the advances program and has significantly reduced outstanding advances.
Funding Commitments — Pursuant to Sunlight’s contractual arrangements with contractors, Direct Channel Partners, and Bank Partner, the funding source periodically remits to Sunlight the cash related to Loans it has originated. Sunlight has committed to funding such amounts to the relevant contractor when certain milestones have been reached relating to the installation of residential solar system, or other home improvement equipment, underlying the consumer receivable. Any amounts retained by Sunlight in anticipation of an installation milestone being reached are included in “Funding Commitments” in the accompanying Unaudited Condensed Consolidated Balance Sheets, totaling $29.4 million at March 31, 2023.
Loan Guarantees — Sunlight is required to guarantee the performance of certain Indirect Channel Loans, which it is required to repurchase in the event Sunlight is unable to facilitate the sale of such loans, and certain Direct Channel Loans. Upon repurchase, Sunlight may attempt to recover any contractual amounts owed by the borrower or from the contractor (in the event of a contractor’s nonperformance). Sunlight repurchased and wrote off 80 and 24 loans, totaling $2.1 million and $0.5 million, for the three months ended March 31, 2023 and 2022, respectively, associated with these guarantees. At March 31, 2023, the maximum potential amount of undiscounted future payments Sunlight could be required to make under these guarantees totaled $588.0 million, and Sunlight recorded a $5.5 million liability presented within “Other Liabilities” in the accompanying Unaudited Condensed Consolidated Balance Sheets. At March 31, 2023, the unpaid principal balance of loans, net of applicable discounts, for guaranteed loans held by Sunlight’s Bank Partner and certain Direct Channel Partners that were delinquent more than 90 days was $2.3 million.
Additionally, Sunlight is required to repurchase a limited amount of nonperforming Indirect Channel Loans sold to third parties. At March 31, 2023, the maximum potential amount of undiscounted future payments Sunlight could be required to make under these guarantees totaled $1.3 million, and Sunlight recorded a $1.3 million liability presented within “Other Liabilities” in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Finally, Sunlight may be required to repurchase solar loans from Indirect Channel Loan Purchasers, or refund platform fees to Direct Channel Partners, when contractors do not complete solar installations within a certain period of time. Generally, solar contractors are responsible to return loan proceeds they receive for such Loans. At March 31, 2023, the maximum potential amount of undiscounted future payments Sunlight could be required to make under these guarantees totaled $28.8 million, and Sunlight recorded a $8.1 million liability presented within “Other Liabilities” in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Tax Receivable Agreement (“TRA”) Liability — If Sunlight were to exercise its right to terminate the TRA or certain other acceleration events occur, Sunlight would be required to make immediate cash payments. Such cash payments will be equal to the present value of the assumed future realized tax benefits based on a set of assumptions and using an agreed upon discount rate, as defined in the TRA. The early termination payment may be made significantly in advance of the actual realization, if any, of those future tax benefits. Such payments will be calculated based on certain assumptions, including that Sunlight expects to have sufficient taxable income to utilize the full amount of any tax benefits subject to the TRA over the period specified therein. The payments that Sunlight would be required to make will generally reduce the amount of the overall cash flow that might have otherwise been available, but Sunlight expects the cash tax savings it would realize from the utilization of the related tax benefits will exceed the amount of any required payments.
Sunlight Rewards™ Program — Sunlight Rewards™ allows salespeople to earn points for selling Sunlight-facilitated loans. These individuals can gain “status” for their own overall loyalty, track their points, and choose to redeem points for quality awards. If all points earned under the Sunlight Rewards™ Program were redeemed at March 31, 2023, Sunlight would be obligated to pay $2.2 million, and Sunlight recorded a liability of $1.2 million.
Non-Cancelable Operating Leases — Sunlight's non-cancelable operating leases consist of office space leases at two locations: (a) 101 N. Tryon Street, Suite 1000, Charlotte, North Carolina 28246 (the “North Carolina Office Space”) that expires in June 2029 and (b) 234 West 39th Street, 7th Floor, New York, New York 10018 (the “New York Office Space”) that expires in October 2023. Certain lease agreements include rent concessions and leasehold improvement incentives. In addition to base rentals, certain lease agreements are subject to escalation provisions and rent expense is recognized on a straight‑line basis over the term of the lease agreement. None of Sunlight’s leases contain extension options.
On January 1, 2022, Sunlight recorded $7.6 million of right-of-use assets, included in “Other Assets” in the accompanying Unaudited Condensed Consolidated Balance Sheets, as well as $7.6 million of operating lease liabilities, included in “Other Liabilities” in the accompanying Unaudited Condensed Consolidated Balance Sheets, for lease obligations that were historically classified as operating leases.
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | |
| | | | | | | | For the Three Months Ended March 31, | | |
| | | | | | | | 2023 | | |
| Lease cost | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating | | | | | | | | $ | 536 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | $ | 536 | | | |
| | | | | | | | | | |
| Other information | | | | | | | | | | |
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| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | | | |
| Operating cash flows | | | | | | | | $ | 496 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | March 31, 2023 | | |
| Right-of-use assets obtained in exchange for new lease liabilities | | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | 6,642 | | |
| Weighted-average remaining lease term (in years) | | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | 6.1 | | |
| Weighted-average discount rate | | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | 7.2% | | |
At March 31, 2023, the approximate aggregate annual minimum future lease payments required on the operating leases are as follows:
| | | | | | | | |
| April 1, through December 31, 2023 | | $ | 1,414 | |
| 2024 | | 1,553 | |
| 2025 | | 1,672 | |
| 2026 | | 1,790 | |
| 2027 | | 1,839 | |
| Thereafter | | 3,017 | |
| Total future minimum lease payments | | 11,285 | |
| Less: imputed interest | | (4,769) | |
| Present value of future minimum lease payments | | $ | 6,516 | |
During the three months ended March 31, 2023 total lease expense was $0.5 million, which Sunlight paid in full. During the three months ended March 31, 2022 total lease expense was $0.5 million, of which Sunlight had not yet paid $0.1 million at March 31, 2022.
Note 11. Subsequent Events
The following events occurred subsequent to March 31, 2023 through the issuance date of these Unaudited Condensed Consolidated Financial Statements. Events subsequent to that date have not been considered in these financial statements.
Strategic Alternatives
As previously discussed, Sunlight engaged a financial advisory firm to help explore available strategic alternatives. As a result of the strategic alternatives process, Sunlight entered into transactions with the Bank Partner described below under Commitment & Transaction Support Agreement, Amended Bank Partner Agreements, Secured Term Loan, and Bank Partner Warrant. These transactions align with the goals of the strategic alternatives process. The Board continues to consider additional actions that are in the best interest of the Company and its shareholders.
Commitment & Transaction Support Agreement
On April 2, 2023 Sunlight Financial LLC, and the Bank Partner, entered into the Commitment & Transaction Support Agreement pursuant to which the parties agreed to undertake the transactions (“Transactions”) described in the Commitment & Transaction Support Agreement, including amendments to the Bank Partner Agreements, entry into a new secured term loan facility with the Bank Partner, and issuance of equity warrants entitling the Bank Partner or its designees to purchase shares of Sunlight’s Class A common stock.
Effective April 25, 2023 (the “CRB Closing Date”), Sunlight, Sunlight Financial LLC, and other subsidiary entities, as applicable, closed the Transactions contemplated by the Commitment & Transaction Support Agreement and entered into a Secured Term Loan with the Bank Partner, the Amended Bank Partner Agreements, a Warrant Purchase Agreement with CRB Group, Inc. (the “Purchaser”), an affiliate of the Bank Partner (the “Warrant Purchase Agreement”) and issued the associated warrant to purchase shares of Sunlight’s Class A common stock (the “Warrant”) to the Purchaser.
Amended CRB Agreements
The Amended CRB Agreements provide, among other things:
• a requirement that the Company establish a pricing and capital markets committee responsible for setting dealer discounts, interest rates, capital markets activity, policies relating to hedging, and other terms related to the Company’s loan products and executing any sales of loans held by CRB pursuant to the Amended CRB Agreements, and to provide the Bank Partner with observer rights and a right to attend all meetings held by the committee, subject to exclusions where CRB is the loan purchaser.
• modifications to the procedures for submitting credit approvals.
• a modification to the cap on the total loans held by CRB at any time as provided below, measured on the last day of the calendar month, with a grace period election for loan sales executed during the seven (7) business days following the last day of a calendar month. The Company will be entitled to six (6) grace period elections in any twelve-month period:
| | | | | | | | |
Month(s) Ending | | Bank Cap |
April 30, 2023 and May 31, 2023 | | Waived |
June 30, 2023 and July 31, 2023 | | $550 million |
August 31, 2023, September 30, 2023, and October 31, 2023 | | $500 million |
November 30, 2023 and each month thereafter | | $400 million (plus the Additional Capacity, if any). Additional Capacity is the lesser of (i) the Cash Collateral Amount divided by 5% and (ii) $100 million. |
• modifications to the Loan Purchase Trigger Date (as defined in the Amended Solar Loan Sale Agreement) related to each loan held on CRB’s balance sheet.
• a revised tiered fee structure and provision for certain fees accrued through June 30, 2023 to be payable in additional Tranche 1 Loans (as defined below).
• the Company will use best efforts to amend the Master Services Agreement dated January 13, 2020, between CRB, the Company, and Turnstile Capital Management, LLC (the “Servicer”) on or before July 1, 2023 to cause the Servicer to remit various cash payments associated with loans into an account held by CRB.
• effective on the CRB Closing Date and continuing until full repayment to CRB of all outstanding obligations, the Company will provide CRB with a pari passu first lien security interest in all assets of Sunlight as defined in the Secured Term Loan.
• waiver by CRB of any defaults known by CRB to be existing under the CRB Agreements.
Secured Term Loan
On the CRB Closing Date, Sunlight Financial LLC, as borrower, entered into a Loan and Security Agreement with CRB, and with SL Financial Holdings Inc. as guarantor (the “Secured Term Loan”). The Secured Term Loan consists of loan commitments for two tranches of loans providing for Tranche 1 Loans and Tranche 2 Loans (each as defined below). The Secured Term Loan, and all other obligations of Sunlight Financial LLC to CRB are secured by a first lien perfected security interest in all Sunlight Financial LLC’s and Company assets. The Secured Term Loan matures on October 25, 2025 (the “Maturity Date”). The Secured Term Loan provides loan commitments under two sub-facilities. The $38.8 million Tranche 1 facility (the “Tranche 1 Loans”) will be used to repay all outstanding borrowings under the SVB Facility, pay fees and accrued interest due under the Loan Program Agreements and for general corporate purposes. The $49.8 million Tranche 2 facility (the “Tranche 2 Loans” and, collectively with the “Tranche 1 Loans” the “Facility Loans”) will be used for deferred loan sale proceeds and to pay fees and capitalized interest.
No scheduled principal payments are due until the first anniversary of the CRB Closing Date. Commencing with the first full month after the first anniversary of the CRB Closing Date, Sunlight Financial LLC is required to make equal monthly principal payments in an amount equal to 4% of the aggregate amount of the Facility Loans funded or deemed funded through the first anniversary of the CRB Closing Date. On the Maturity Date, all remaining unpaid amounts of principal and interest must be repaid in full.
An upfront fee equal to $2,658,000, payable upon the closing date of the Secured Term Loan will be paid in kind and added to the outstanding amount of the Facility Loans. An unused fee equal to 14% per annum of the difference between (a) the Maximum Covered Loan Sale Amount (as defined in the Secured Term Loan) minus any commitment reductions with respect to Tranche 2 Term Loans since the CRB Closing Date and (b) the aggregate principal amount of Tranche 2 Term Loans then outstanding will be payable monthly in kind and added to the outstanding amount of Tranche 2 Loans.
The aggregate principal outstanding amount of loans under the Secured Term Loan (including capitalized or accrued and unpaid interest and any fees, the upfront fee and the unused fee) shall not exceed $100 million. The Secured Term Loan is subject to mandatory prepayment under certain conditions, which prepayments may be allocated to Tranche 1 or Tranche 2 loans at the option of Sunlight. Additionally, the Sunlight will be required to prepay the Secured Term Loan in full upon a liquidation, winding up, change of control, merger, sale of all or substantially all of the assets of Sunlight, or a transaction that results in the Company becoming privately held. Sunlight may, at its option, prepay the Secured Term Loan and/or permanently reduce and terminate unused loan commitments, in each case, in part or full at any time prior to the maturity date with no penalties; which prepayments and/or commitment reductions may be allocated to Tranche 1 Loans and/or Tranche 2 loans at the option of Sunlight.
The Secured Term Loan contains customary restrictive covenants for facilities of its type, which include, among other things, limitations on use of proceeds, dispositions, changes in business, management or business locations, change of control, mergers or acquisitions, indebtedness, liens, restricted payments, dividends or any other payments to equity, investments, transactions with affiliates, and capital expenditures, subject to certain customary baskets and exceptions. The Secured Term Loan also includes a financial covenant requiring minimum liquidity (unrestricted and unencumbered cash and cash equivalents held by Sunlight) in deposit accounts or securities accounts in an amount equal to or greater than $20 million, measured as of the end of each calendar month and requires that Sunlight maintain unrestricted cash in an aggregate amount of not less than (a) during the two-week period after the CRB Closing Date, $20 million, and (b) thereafter, the greater of (x) $20 million and (y) 75% of Sunlight’s cash, in accounts with CRB or its affiliates.
The Secured Term Loan also contains customary events of default that would permit the lenders to accelerate the loans, including, among other things, the failure to make timely payments when due under the Secured Term Loan or other material indebtedness as described in the Secured Term Loan, the failure to satisfy covenants contained in the Secured Term Loan, specified events of bankruptcy and insolvency, a material event of default under the Amended Loan Program Documents or any other agreement with CRB.
CRB Warrant
On the CRB Closing Date the Company entered into the Warrant Purchase Agreement (the “Purchase Agreement”) with CRB Group, Inc. (“Purchaser”), pursuant to which the Company issued to Purchaser a stock purchase warrant (the “Warrant”) exercisable for up to 25,944,541 shares (“Warrant Shares”) subject to certain adjustments, of Class A common stock, par value $0.0001 per share, of the Company (the “Common Stock”) at a per share price of $0.01, subject to certain adjustments and vesting as described below. On the CRB Closing Date, a portion of the Warrant vested and became exercisable with respect to 12,907,080 Warrant Shares. The remaining portion of the Warrant with respect to 13,037,461 Warrant Shares, subject to certain adjustments, will vest and become exercisable on April 27, 2024; provided, however, if the payment in full of the Secured Term is paid in full prior to such date or a Change of Control (as defined in the Secured Term Loan) occurs prior to such date, such number of Warrant Shares equal to the product of the following equation shall immediately vest and become exercisable and the remainder of the unvested Warrant Shares shall be forfeited and not be exercisable: (i) (A) the number of days that elapsed between the date hereof and the Acceleration Date (inclusive of the Acceleration Date) divided by (B) 366, multiplied by (ii) 13,037,461.
SVB Receivership and Facility
On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation (the “FDIC”) was appointed as receiver of SVB. SVB is Sunlight’s primary bank and the sole lender for Sunlight’s revolving credit facility (Note 5). Most of Sunlight’s unrestricted cash as of March 10, 2023 was deposited with SVB ($64.0 million out of a total of $73.2 million). On March 12, 2023, the Department of the Treasury, Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation issued a joint statement noting that, among other things, the resolution of SVB would fully protect all depositors and that depositors would have full access to all of their money on deposit with SVB on Monday, March 13, 2023. While SVB’s receivership had a short-term impact on Sunlight’s business and its ability to make payments to its installer base, Sunlight resumed payments to installers within a few days.
Indirect Channel Loan Sale
On April 28, 2023, Sunlight arranged for the sale of Indirect Channel Loans totaling $296.0 million, reducing the quantity of Backbook Loans held by Sunlight’s Bank Partner.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of Sunlight Financial Holdings Inc.’s (the “Company,” “Sunlight,” “we,” “our” and “us”) consolidated results of operations and financial condition. The discussion should be read in conjunction with Sunlight’s consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “Sunlight” is intended to mean the business and operations of Sunlight Financial Holdings Inc. and its consolidated subsidiaries.