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.
On July 9, 2021 (the “Closing Date”), the Company consummated the transactions contemplated by that certain Business Combination Agreement (the “Business Combination Agreement”), dated as of January 23, 2021, by and among Spartan Acquisition Corp. II, a Delaware corporation incorporated on August 17, 2020 as a publicly-traded special purpose acquisition company sponsored by funds managed by an affiliate of Apollo Global Management, Inc. (the “Sponsor”) and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (“Spartan”), Sunlight Financial LLC and the Spartan Subsidiaries, FTV Blocker and Tiger Blocker (each as defined in the Business Combination Agreement). On the Closing Date, Spartan changed its name to “Sunlight Financial Holdings Inc.” and Sunlight Financial LLC became the operating subsidiary of Sunlight Financial Holdings Inc., organized in an “Up-C” structure (the “Business Combination”). As a result of the Business Combination, the Company’s trading symbol on the New York Stock Exchange (the “NYSE”) was changed from “SPRQ” to “SUNL.”
All activity for the period from August 17, 2020 (Spartan’s inception) to the Closing Date relates to the Company's formation, initial public offering and private placement of equity (Note 6), and search for a prospective business combination. The Company did not generate any operating revenues until after completion of the Business Combination. Upon completion of the Business Combination, the Company assumed the operations of, and began to consolidate, Sunlight Financial LLC. Refer to “Note 2 — Basis of Presentation” regarding the presentation of the Company’s financial statements before and after the Business Combination.
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 Sunlight’s issuing bank partner (“Bank Partner”). 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”).
Note 2. Summary of Significant Accounting Policies
Basis of Presentation — As a result of the Business Combination, for accounting purposes, Sunlight Financial Holdings Inc. is the acquirer and Sunlight Financial LLC is the acquiree and accounting predecessor. The financial statement presentation includes the financial statements of Sunlight Financial LLC as “Predecessor” for periods prior to the Closing Date and of the Company as “Successor” for the periods after the Closing Date, including the consolidation of Sunlight Financial LLC.
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 consolidated financial statements for the year ended December 31, 2021 and footnotes thereto included in Sunlight's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 29, 2022. Capitalized terms used herein, and not otherwise defined, are defined in Sunlight's consolidated financial statements for the year ended December 31, 2021.
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, as modified by 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.
As a result of the Business Combination, a wholly-owned subsidiary of Sunlight Financial Holdings Inc. is the managing member of Sunlight Financial LLC, in which existing unitholders hold a 36.1% and 35.0% noncontrolling interest, net of unvested Class EX Units (Note 6), at September 30, 2022 and December 31, 2021, 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.
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 and derivatives; 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 September 30, 2022:
| | | | | | | | | | | | | | |
| 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. |
| 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 September 30, 2022, Sunlight’s valuation process for Level 3 measurements, as described below, were 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) arranges Loans for the purchase and installation of home improvements other than residential solar energy systems (“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 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:
| | | | | | | | | | | | | | | |
| | Successor |
| | September 30, 2022 | | | December 31, 2021 |
| Cash and cash equivalents | | $ | 70,569 | | | | $ | 91,882 | |
| Restricted cash and cash equivalents | | 1,228 | | | | 2,018 | |
| Total cash, cash equivalents, and restricted cash shown in the Consolidated Statement of Cash Flows | | $ | 71,797 | | | | $ | 93,900 | |
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.
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. Upon consummation of the Business Combination, Sunlight adjusted the carrying value of loans and loan participations to their fair values at the Closing Date. 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 that management evaluates for impairment indicators at least quarterly using information obtained at least annually. In conjunction with this review, management assesses such factors as historical losses, changes in the nature and volume of financing receivables, overall portfolio quality, and existing economic conditions that may affect the customer’s ability to pay. In certain cases, management assigns a risk rating based on certain aforementioned factors.
The evaluation of these indicators of impairment requires significant judgment by management to determine whether failure to collect contractual amounts is probable as well as in estimating the resulting loss allowance. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change. 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.
At September 30, 2022 and December 31, 2021, Sunlight evaluated financing receivables collectively, based upon those financing receivables with similar characteristics. Sunlight individually evaluates nonaccrual loans with contractual balances of $50,000 or more and receivables whose terms have been modified in a troubled debt restructuring with contractual balances of $50,000 or more to establish specific allowances for such receivables, if required. Those financing receivables where impairment is indicated were evaluated individually for impairment, though such amounts were not material.
Advances — For advances made by Sunlight, management performs an evaluation of impairment 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, as part of its most recent annual impairment test during the fourth quarter of 2021, determined that it was more likely than not that the implied fair value of the reporting unit in which Sunlight recorded goodwill was less than its carrying value primarily based upon market activities impacting public companies similar to Sunlight. In September 2022, challenges in the macro-economic environment, such as rapidly rising interest rates impacting the financial and market performance of Sunlight and it’s peers, caused management to perform a goodwill impairment test and record an additional $384.4 million. The carrying value of Sunlight’s goodwill changed by the following amounts:
| | | | | | | | |
| December 31, 2021 (Successor) | | |
| Goodwill | | $ | 670,457 | |
| Accumulated impairment losses | | (224,701) | |
| | 445,756 | |
| | |
| | |
| Impairment losses | | (384,379) | |
| | |
| | |
| | |
| September 30, 2022 (Successor) | | |
| Goodwill | | 670,457 | |
| Accumulated impairment losses | | (609,080) | |
| | $ | 61,377 | |
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 |
| | | Successor |
| Asset | | | September 30, 2022 | | December 31, 2021 |
Contractor relationships(a) | | 11.5 | | | | $ | 350,000 | | | $ | 350,000 | |
Capital provider relationships(b) | | 0.8 | | | | — | | | 43,000 | |
Trademarks/ trade names(c) | | 10.0 | | | | 7,900 | | | 7,900 | |
Developed technology(d) | | 3.0 | — | 5.0 | | | | | | 10,383 | | | 8,193 | |
| | | | | | |
| | | | | | | | | | 368,283 | | | 409,093 | |
Accumulated amortization(e)(f)(g) | | | | | | | | | | (40,610) | | | (43,254) | |
| | | | | | | | | | $ | 327,673 | | | $ | 365,839 | |
a.Represents the value of existing contractor relationships of Sunlight estimated using a multi-period excess earnings methodology.
b.Represents the value of existing relationships with Direct Channel Partners and Indirect Channel Loan Purchasers that may be estimated by applying a with-and-without methodology.
c.Represents the trade names that Sunlight originated or acquired and valued using a relief-from-royalty method.
d.Represents technology developed by Sunlight for the purpose of generating income for Sunlight, and valued using a replacement cost method.
e.Amounts include amortization expense of $0.3 million, $0.3 million, and $0.0 million related to capitalized internally developed software costs for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021 and July 1, 2021 through
July 9, 2021 and $0.6 million and $1.5 million for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, respectively.
f.Includes amortization expense of $8.5 million, $20.5 million, and $0.1 million for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021 and July 1, 2021 through July 9, 2021 and $40.4 million and $1.4 million for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, respectively.
g.At September 30, 2022, 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 |
| October 1, through December 31, 2022 | | $ | 646 | | | $ | 7,864 | | | $ | 8,510 | |
| 2023 | | 2,573 | | | 31,199 | | | 33,772 | |
| 2024 | | 2,465 | | | 31,285 | | | 33,750 | |
| 2025 | | 1,689 | | | 31,199 | | | 32,888 | |
| 2026 | | 694 | | | 31,199 | | | 31,893 | |
| Thereafter | | — | | | 186,860 | | | 186,860 | |
| | $ | 8,067 | | | $ | 319,606 | | | $ | 327,673 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Useful Life
(in Years) | | Carrying Value |
| | | Successor |
| Asset Category | | | September 30, 2022 | | December 31, 2021 |
| Furniture, fixtures, and equipment | | 5 | | | | $ | 1,517 | | | $ | 1,020 | |
| Computer hardware | | 5 | | | | 1,308 | | | 1,108 | |
| Computer software | | 1 | — | 3 | | | | | | 352 | | | 250 | |
| Leasehold improvements | | Shorter of life of improvement or lease term | | — | | | 2,829 | |
| | | | | | | | | | 3,177 | | | 5,207 | |
Accumulated amortization and depreciation(a) | | | | | | | | | | (1,496) | | | (1,138) | |
| | | | | | | | | | $ | 1,681 | | | $ | 4,069 | |
a.Includes depreciation expense of $0.1 million, $0.1 million, $0.0 million, for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021, and July 1, 2021 through July 9, 2021 and $0.3 million and $0.2 million for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, respectively.for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, 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 $21.4 million and $22.7 million at September 30, 2022 and December 31, 2021, 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 December 31, 2020, Sunlight accrued $1.3 million, $1.2 million, and $5.0 million, or $4.38, $5.33, and $13.34 per unit, payable to Class A-1, A-2, and A-3 Units, respectively, of which Sunlight paid $7.5 million during the nine months ended September 30, 2021. As of September 30, 2022, Sunlight Financial LLC no longer expects to generate taxable income during the current tax year and expects to use tax distributions already declared during the current tax year to offset future estimated tax liability distributions, if any. Consequently, Sunlight Financial LLC did not declare any distributions during the three months ended September 30, 2022.
Other Assets and Accounts Payable, Accrued Expenses, and Other Liabilities — At each of September 30, 2022 and December 31, 2021, (a) other assets included Sunlight’s contract derivatives, prepaid expenses, accounts receivable, and interest receivable, and (b) accounts payable, accrued expenses, and other liabilities included Sunlight’s guarantee liability, accrued compensation, and other payables. Other assets at September 30, 2022 also included right-of-use assets arising from operating leases, and other liabilities at September 30, 2022 also included associated lease liabilities and contract derivative liabilities.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Successor | | | Predecessor |
| | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2022 | | | For the Period July 10, 2021 to September 30, 2021 | | | For the Period July 1, 2021 to July 9, 2021 | | For the Nine Months Ended September 30, 2022 | | | For the Period January 1, 2021 to July 9, 2021 |
| | | | | | | | | | | | | |
Platform fees, net(a) | | $ | 31,446 | | | | $ | 24,159 | | | | $ | 1,983 | | | $ | 85,473 | | | | $ | 50,757 | |
Other revenues(b) | | 1,819 | | | | 2,361 | | | | 91 | | | 5,613 | | | | 2,307 | |
| | $ | 33,265 | | | | $ | 26,520 | | | | $ | 2,074 | | | $ | 91,086 | | | | $ | 53,064 | |
a.Amounts presented net of variable consideration in the form of rebates to certain contractors. Includes platform fees from affiliates of $0.0 million, $0.0 million, $0.0 million, for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021, and July 1, 2021 through July 9, 2021 and $0.0 million and $0.2 million for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, respectively. (Note 9).
b.Includes loan portfolio management, administration, and other ancillary fees Sunlight earns that are incidental to its primary operations. Sunlight earned $0.0 million, $0.0 million, $0.0 million, for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021, and July 1, 2021 through July 9, 2021 and $0.1 million and $0.1 million for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, respectively, in administrative fees from an affiliate. (Note 9).
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 and (b) earns income from the prepayment of certain of those Indirect Channel Loans 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 $(0.3) million, $1.4 million, $0.0 million, for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021 and July 1, 2021 through July 9, 2021 and $3.7 million and $3.0 million for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, respectively, in connection with these contracts (Note 4). However, Sunlight recognized platform fee revenue for its facilitation of direct channel home improvement loans of $1.6 million, $0.0 million, $0.0 million, for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021, and July 1, 2021 through July 9, 2021 and $3.2 million, and $0.0 million for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, 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.
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.
Predecessor — Prior to the Business Combination, Sunlight Financial LLC granted equity-based compensation awards that vested contingent upon one or more of the following conditions: (a) time-based service, (b) performance conditions based upon Sunlight Financial LLC’s equity value, as determined by Sunlight Financial LLC’s board or directors or a qualifying sale of Sunlight Financial LLC’s equity, achieving certain contractual thresholds (“Threshold Equity Value”), and (c) whether Sunlight Financial LLC issued Class A Units in-kind to satisfy the preferred return on Class A Units during the award’s vesting period until May 25, 2023 (“PIK Vesting Requirement”). Sunlight generally expensed the grant-date fair value of these equity-based compensation awards using the following methods, recognizing forfeitures as they occur, based upon the following vesting contingencies:
•Time-Based Service — Sunlight Financial LLC expensed awards that only requires time-based service conditions ratably over the required service period or immediately if there was no required service period.
•PIK Vesting Requirement — Sunlight Financial LLC awarded equity-based compensation in the form of anti-dilution units. Such awards vested in an amount generally proportionate to the dilution of related Class C Units or LTIP Units that resulted from the issuance of additional Class A Units. Sunlight Financial LLC expensed awards in the period in which (a) dilution of related Class C Units or LTIP Units would otherwise occur and (b) the award had satisfied other vesting conditions.
•Performance-Based Conditions — Sunlight Financial LLC expensed awards in the period in which (a) it was probable that the performance-based condition was satisfied and (b) the award had satisfied other vesting conditions. For equity-based compensation awards in the form of Class C Units or long-term incentive plan units (“LTIP Units”) (Note 6), vesting would generally occur upon a qualifying sale of Sunlight’s equity.
Generally, Sunlight Financial LLC only expensed those awards that only required time-based service conditions since other awards only satisfied vesting requirements upon closing of the Business Combination. Awards that represented services performed prior to the Business Combination reduced the purchase consideration in Sunlight’s calculation of goodwill. Awards that were still subject to time-based service conditions upon closing of the Business Combination and represented future service were replaced with awards of restricted Class A Shares and restricted Class EX Units. Sunlight expensed the difference between the value of the existing awards and the replacement awards upon closing of the Business Combination. Sunlight expenses the value of the replacement awards over the remaining service period on a straight-line basis.
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 declared $2.7 million of distributions, of which it paid $1.2 million, during the nine months ended September 30, 2022. As of September 30, 2022, Sunlight Financial LLC no longer expects to generate taxable income during the current tax year and expects to use tax distributions already declared during the current tax year to offset future estimated tax liability distributions, if any. Consequently, Sunlight Financial LLC did not declare any distributions during the three months ended September 30, 2022. Sunlight did not declare any distributions for the three or nine months ended September 30, 2021.
Business Combination
The Business Combination among the parties to the Business Combination Agreement was completed on July 9, 2021. Sunlight accounted for the Business Combination as a business combination under ASC 805, Business Combinations. The acquisition of Sunlight Financial LLC constitutes the acquisition of a business for purposes of ASC 805, and due to the change in control, has been accounted for using the acquisition method with Sunlight Financial Holdings Inc. as the accounting acquirer and Sunlight Financial LLC as the accounting acquiree based on evaluation of the following factors:
•Sunlight Financial Holdings Inc. is the sole managing member of Sunlight Financial LLC having full and complete authority over of all the affairs of Sunlight Financial LLC while the non-managing member equity holders do not have substantive participating or kick out rights; and
•The predecessor controlling unitholders of Sunlight Financial LLC does not have a controlling interest in the Company as it held less than 50% of the voting interests after the Business Combination.
These factors support the conclusion that Sunlight Financial Holdings Inc. acquired a controlling interest in Sunlight Financial LLC and is the accounting acquirer. Sunlight Financial Holdings Inc. is the primary beneficiary of Sunlight Financial LLC, which is a variable interest entity, since it has the power to direct the activities of Sunlight Financial LLC that most significantly impact Sunlight Financial LLC's economic performance through its role as the managing member. Sunlight Financial Holdings Inc.’s variable interest in Sunlight Financial LLC includes ownership of Sunlight Financial LLC, which results in the right and obligation to receive benefits and absorb losses of Sunlight Financial LLC that could potentially be significant to Sunlight Financial Holdings Inc. Therefore, the Business Combination represented a change in control and is accounted for using the acquisition method. Under the acquisition method of accounting, the purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed from Sunlight Financial LLC based on their estimated acquisition-date fair values.
The cash consideration in the Business Combination included cash from (a) a trust account held by Spartan in the amount of $345.0 million which Spartan received in its initial public offering of 34,500,000 shares of Class A common stock, less $192.3 million withdrawal of funds from that account to fund the redemption of 19,227,063 shares of Class A common stock at approximately $10.00 per share, and (b) $250.0 million in proceeds from the investors purchasing an aggregate of 25,000,000 Class A common stock in connection with the Business Combination ("PIPE Investment"). The Company received $55.1 million, which includes $5.6 million used to pay tax withholding related to cash compensation paid to the Company's employees at the closing of the Business Combination.
The following is an estimate of the fair value of consideration transferred and the purchase price allocation in connection with the Business Combination:
| | | | | | | | |
| | Amount |
| Purchase Consideration | | |
Equity consideration paid to existing Sunlight Financial LLC ownership in Class A Common Stock, net(a) | | $ | 357,800 | |
| Rollover of Sunlight Financial LLC historical warrants | | 2,499 | |
| | |
Cash consideration to existing Sunlight Financial LLC interests, net(b) | | 296,281 | |
| Cash paid for seller transaction costs | | 8,289 | |
| | $ | 664,869 | |
| Fair Value of Net Assets Acquired | | |
| Cash and cash equivalents | | $ | 59,786 | |
| Restricted cash | | 3,844 | |
| Advances | | 42,622 | |
| Financing receivables | | 5,117 | |
Goodwill(c) | | 670,457 | |
Intangible assets(d) | | 407,600 | |
| Property and equipment | | 1,047 | |
| Due from affiliates | | 1,839 | |
| Other assets | | 4,561 | |
| Accounts payable and accrued expenses | | (19,210) | |
| Funding commitments | | (21,485) | |
| Debt | | (20,613) | |
| | |
| Due to affiliates | | (761) | |
| Warrants, at fair value | | — | |
| Deferred tax liability | | (42,212) | |
| Other liabilities | | (512) | |
Fair value of noncontrolling interests(e) | | (427,211) | |
| | $ | 664,869 | |
a.Equity consideration paid to Blocker Holders consisted of the following:
| | | | | | | | |
| Common Class A shares | | 38,151,192 | |
| Fair value per share | | $ | 9.46 | |
| Equity consideration paid to existing Blocker Holders | | $ | 360,910 | |
| Acceleration of post business combination expense | | (3,110) | |
| Equity consideration paid to existing Sunlight Financial LLC members, net | | $ | 357,800 | |
b.Net of $0.0 million acceleration of post business combination expense.
c.Goodwill, as a component of the step-up in tax basis from the Business Combination, is tax deductible for the Company in the estimated amount $149.7 million.
d.The fair value of the definite-lived intangible assets is as follows:
| | | | | | | | | | | | | | |
| | Weighted Average Useful Lives
(in Years) | | Fair Value |
| Contractor relationships | | 11.5 | | $ | 350,000 | |
| Capital provider relationships | | 0.8 | | 43,000 | |
| Trademarks/ trade names | | 10.0 | | 7,900 | |
| Developed technology | | 5.0 | | 6,700 | |
| | | | $ | 407,600 | |
e.Noncontrolling interests represent the 34.9% ownership in Sunlight Financial LLC not owned by Sunlight Financial Holdings Inc. as of the Closing Date. The fair value of the noncontrolling interests follows:
| | | | | | | | |
| Common Class EX units | | 46,216,054 | |
| Fair value per unit | | $ | 9.46 | |
| Fair value of Class EX units | | $ | 437,204 | |
| Less: Post-combination compensation expenses | | (9,993) | |
| Noncontrolling interests | | $ | 427,211 | |
The Company incurred $7.0 million of expenses directly related to the Business Combination from January 1, 2021 through July 9, 2021, which were included in acquisition-related expense in the Consolidated Statements of Operations. On the Closing Date, the Company paid $12.1 million of deferred underwriting costs related to Spartan's initial public offering. At the closing of the Business Combination, $7.5 million of fees related to the PIPE Investment were paid by the Company. Additionally, Sunlight paid $7.9 million of acquisition-related advisory fees related to the Business Combination at the closing of the Business Combination, which success fees were contingent upon the consummation of the Business Combination and not recognized in the Consolidated Statements of Operations of the Predecessor or Successor. The nature of these fees relate to advisory and investment banker fees that were incurred and dependent on the success of the Business Combination. The deferred underwriting commissions and costs pertaining to the cost of raising equity were treated as a reduction of equity while Business Combination costs were expensed in the period incurred.
Unaudited Pro Forma Operating Results — The following unaudited pro forma financial information presents the results of operations for each of the three and nine months ended September 30, 2022 and 2021, respectively, as if the Business Combination on July 9, 2021 had occurred as of January 1, 2021. The unaudited pro forma results may not necessarily reflect actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations. The unaudited pro forma results reflect the step-up amortization adjustments for the fair value of intangible assets acquired, transaction expenses, nonrecurring post-combination compensation expense and the related adjustment to the income tax provision.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| Revenue | | $ | 33,265 | | | $ | 28,594 | | | $ | 91,086 | | | $ | 53,064 | |
| Net income (loss) before income taxes | | (420,209) | | | 4,927 | | | (423,694) | | | (7,706) | |
| Income tax benefit (expense) | | 19,330 | | | (927) | | | 19,490 | | | 1,449 | |
| Noncontrolling interests in (income) loss of consolidated subsidiaries | | 151,696 | | | (2,040) | | | 152,954 | | | 3,191 | |
| Net income (loss) attributable to Class A shareholders | | (249,184) | | | 1,960 | | | (251,251) | | | (3,065) | |
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 of 1933, as amended (“Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (“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, 2022. 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, on its consolidated financial statements.
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). ASU No. 2016-13, as amended, is effective for Sunlight in the fiscal year ended December 31, 2023. Early adoption was permitted beginning in the first quarter of 2018. With limited exceptions, an entity should apply ASU No. 2016-13 by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Sunlight is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.
ASU No. 2022-02 Financial Instruments - Credit Losses (Topic 326) — Troubled Debt Restructuring and Vintage Disclosures — The FASB issued final guidance amending ASC 310 to eliminate the recognition and measurement guidance for a troubled debt restructuring for creditors that have adopted ASC 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. For entities that have adopted ASC 326, the guidance is effective for fiscal years beginning after December 15, 2022, and interim periods therein. Early adoption is permitted. Entities that have not yet adopted ASC 326 will apply the new guidance when they adopt ASC 326. Sunlight is currently evaluating the impact it may have on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
ASU No. 2016-02 Leases — In February 2016, FASB issued ASU No. 2016-02. The standard requires that lessees recognize a right-of-use asset and corresponding lease liability on the balance sheet for most leases. The guidance applied by a lessor under ASU No. 2016-02 is substantially similar to existing GAAP. ASU No. 2016-02, as amended, and was effective for Sunlight for the quarter ended March 31, 2022.
Sunlight adopted ASU No. 2016-02 using the simplified transition method. As a result, Sunlight did not restate comparative periods and used a modified retrospective approach to apply the standard beginning on January 1, 2022. Sunlight’s cumulative adjustment 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. Sunlight applied available practical expedient options, elected as a package whereby, among other things, Sunlight did not reassess historical conclusions related to contracts that contain leases, lease classification, and initial direct costs for leases that commenced prior to the adoption date. See Note 10 for additional information regarding Sunlight's leases.
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:
| | | | | | | | | | | | | | | | | | | | | | |
| | Advances(a) | | Loans and Loan Participations(b) | | | | Total |
| | | | | | | | |
| September 30, 2022 (Successor) | | | | | | | | |
| Amounts outstanding | | $ | 64,066 | | | $ | 4,095 | | | | | $ | 68,161 | |
| Unamortized discount | | — | | | (328) | | | | | (328) | |
| Allowance for credit losses | | (7,458) | | | (186) | | | | | (7,644) | |
| Carrying value | | $ | 56,608 | | | $ | 3,581 | | | | | $ | 60,189 | |
| December 31, 2021 (Successor) | | | | | | | | |
| Amounts outstanding | | $ | 67,077 | | | $ | 4,875 | | | | | $ | 71,952 | |
| Unamortized discount | | — | | | (414) | | | | | (414) | |
| Allowance for credit losses | | (238) | | | (148) | | | | | (386) | |
| Carrying value | | $ | 66,839 | | | $ | 4,313 | | | | | $ | 71,152 | |
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 $6.6 million and $9.0 million, net of allowances of $2.6 million and $0.0 million, to Sunlight contractors not associated with specific installation projects at September 30, 2022 and December 31, 2021, respectively.
b.Represents (i) Sunlight’s 5.0% participation interest in a pool of residential solar loans with an aggregate UPB of $3.8 million and $4.6 million at September 30, 2022 and December 31, 2021, respectively, and (ii) Indirect Channel Loans purchased by Sunlight with an aggregate UPB of $0.3 million and $0.3 million at September 30, 2022 and December 31, 2021, respectively. No loans or loan participations were individually evaluated for impairment at September 30, 2022 or December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Successor | | | Predecessor |
| | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2022 | | | For the Period July 10, 2021 to September 30, 2021 | | | For the Period July 1, 2021 to July 9, 2021 | | For the Nine Months Ended September 30, 2022 | | | For the Period January 1, 2021 to July 9, 2021 |
| | | | | | | | | | | | | |
| Allowance for Credit Losses — Advances | | | | | | | | |
| Beginning Balance | | $ | 3,487 | | | | $ | — | | | | $ | 211 | | | $ | 238 | | | | $ | 121 | |
| Provision for credit losses | | 36,587 | | | | — | | | | — | | | 39,836 | | | | 90 | |
Realized losses(a) | | (32,616) | | | | — | | | | — | | | (32,616) | | | | — | |
| Ending Balance | | $ | 7,458 | | | | $ | — | | | | $ | 211 | | | $ | 7,458 | | | | $ | 211 | |
| | | | | | | | | | | | | |
| Allowance for Credit Losses — Loans and Loan Participations | | | | | | | | |
| Beginning Balance | | $ | 146 | | | | $ | — | | | | $ | 111 | | | $ | 148 | | | | $ | 125 | |
| Provision for credit losses | | 660 | | | | 254 | | | | — | | | 2,091 | | | | 1,082 | |
| Realized losses | | (620) | | | | (254) | | | | — | | | (2,053) | | | | (1,096) | |
| Ending Balance | | $ | 186 | | | | $ | — | | | | $ | 111 | | | $ | 186 | | | | $ | 111 | |
| | | | | | | | | | | | | |
| Changes in Carrying Value — Loans and Loan Participations | | | | | | | | |
| Beginning Balance | | $ | 3,794 | | | | $ | 5,105 | | | | $ | 4,707 | | | $ | 4,313 | | | | $ | 5,333 | |
Purchases, net(b) | | 620 | | | | 254 | | | | — | | | 2,058 | | | | 1,170 | |
| Proceeds from principal repayments, net | | (194) | | | | (351) | | | | — | | | (780) | | | | (832) | |
| Accretion of loan discount | | 21 | | | | 35 | | | | 5 | | | 81 | | | | 123 | |
| Provision for credit losses | | (660) | | | | (254) | | | | — | | | (2,091) | | | | (1,082) | |
| Ending Balance | | $ | 3,581 | | | | $ | 4,789 | | | | $ | 4,712 | | | $ | 3,581 | | | | $ | 4,712 | |
a.Sunlight charged-off advances totaling $32.4 million attributable to the insolvency of one of Sunlight’s largest contractors.
b.During the periods July 10, 2021 through September 30, 2021, July 1, 2021 through July 9, 2021, and January 1, 2021 through July 9, 2021, Sunlight purchased (i) 5.0% participation interests in 0, 0, and 54 loans with an aggregate UPB of $0.0 million, $0.0 million and $0.1 million, respectively, as well as (ii) 8, 0, and 51 Indirect Channel Loans with an aggregate UPB of $0.1 million $0.0 million and $1.1 million, respectively. During three and nine months ended September 30, 2022, Sunlight purchased 19 and 67 Indirect Channel Loans with an aggregate UPB of $0.5 million and $1.6 million, respectively.
In September 2022, one of Sunlight’s largest contractors experienced a liquidity shortfall that caused the installer to substantially wind down its business by the end of that month and to begin liquidation of its business in October 2022. As a result, Sunlight determined it would be unable to collect $32.4 million Sunlight advanced to the contractor at September 30, 2022, representing the total net amounts advanced to the contractor at that time.
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Total |
Risk Tier(a) | | Contractors | | Amount Outstanding | | % of Amount Outstanding |
| September 30, 2022 (Successor) | | | | | | |
| 1 | Low risk | | 112 | | | $ | 15,019 | | | 23.4 | % |
| 2 | Low-to-medium risk | | 141 | | | 32,225 | | | 50.3 | |
| 3 | Medium risk | | 70 | | | 6,126 | | | 9.6 | |
| 4 | Medium-to-high risk | | 17 | | | 7,796 | | | 12.2 | |
| 5 | Higher risk | | 5 | | | 2,900 | | | 4.5 | |
| | | 345 | | | $ | 64,066 | | | 100.0 | % |
| December 31, 2021 (Successor) | | | | | | |
| 1 | Low risk | | 76 | | | $ | 14,575 | | | 21.7 | % |
| 2 | Low-to-medium risk | | 77 | | | 38,955 | | | 58.1 | |
| 3 | Medium risk | | 17 | | | 13,547 | | | 20.2 | |
| 4 | Medium-to-high risk | | — | | | — | | | — | |
| 5 | Higher risk | | — | | | — | | | — | |
| | | 170 | | | $ | 67,077 | | | 100.0 | % |
a.At September 30, 2022 and December 31, 2021, the average risk rating of Sunlight’s advances was 2.2 (“low-to-medium risk”) and 2.0 (“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 |
| September 30, 2022 (Successor) | | | | |
| Current | | $ | 43,721 | | | 76.0 | % |
| Less than 30 days | | 3,516 | | | 6.1 | |
| 30 days | | 2,911 | | | 5.1 | |
| 60 days | | 787 | | | 1.4 | |
90+ days(b) | | 6,576 | | | 11.4 | |
| | $ | 57,511 | | | 100.0 | % |
| December 31, 2021 (Successor) | | | | |
| Current | | $ | 54,586 | | | 94.0 | % |
| Less than 30 days | | 1,956 | | | 3.4 | |
| 30 days | | 534 | | | 0.9 | |
| 60 days | | 361 | | | 0.6 | |
90+ days(b) | | 640 | | | 1.1 | |
| | $ | 58,077 | | | 100.0 | % |
a.Excludes advances of $6.6 million and $9.0 million to Sunlight contractors not associated with specific installation projects and was not delinquent at September 30, 2022 and December 31, 2021, respectively.
b.As further discussed in Note 2, Sunlight generally evaluates amounts delinquent for 90 days or more for impairment. Advances to contractors may remain outstanding as a result of operational and various other factors that are unrelated to the contractor’s creditworthiness. 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 $1.2 million and $0.2 million at September 30, 2022 and December 31, 2021, respectively.
Concentrations — The following table presents the concentration of advances, by counterparty:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor |
| | | September 30, 2022 | | | December 31, 2021 |
| Contractor | | Amount Outstanding | | % of Total | | | Amount Outstanding | | % of Total |
| 1 | | | $ | 10,099 | | | 15.8 | % | | | $ | 9,496 | | | 14.2 | % |
| 2 | | | 6,560 | | | 10.2 | | | | 1,745 | | | 2.6 | |
| 3 | | | 6,155 | | | 9.6 | | | | 20,894 | | | 31.1 | |
| 4 | | | 3,873 | | | 6.0 | | | | 2,610 | | | 3.9 | |
| 5 | | | 3,441 | | | 5.4 | | | | 2,093 | | | 3.1 | |
| 6 | | | 2,808 | | | 4.4 | | | | 2,571 | | | 3.8 | |
| 7 | | | 2,130 | | | 3.3 | | | | 855 | | | 1.3 | |
| 8 | | | 1,109 | | | 1.7 | | | | 302 | | | 0.5 | |
| 9 | | | 1,071 | | | 1.7 | | | | 99 | | | 0.1 | |
| 10 | | | 963 | | | 1.5 | | | | 486 | | | 0.7 | |
Other(a) | | 25,857 | | | 40.4 | | | | 25,926 | | | 38.7 | |
| | | $ | 64,066 | | | 100.0 | % | | | $ | 67,077 | | | 100.0 | % |
a.At September 30, 2022 and December 31, 2021, Sunlight recorded advances receivable from 335 and 160 counterparties not individually listed in the table above with average balances of $0.1 million and $0.1 million, respectively. At December 31, 2021, Sunlight recorded advances receivable from individual counterparties of $12.5 million, $0.6 million, $0.6 million, $0.5 million, and $0.4 million that represent the largest advance concentrations included in “Other,” based on the amount outstanding.
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 |
| September 30, 2022 (Successor) |
| Current | | 3,391 | | | $ | 3,694 | | | 14 | | | $ | 238 | | | 3,405 | | | $ | 3,932 | | | 96.0 | % |
| Less than 30 days | | 74 | | | 92 | | | 2 | | | 40 | | | 76 | | | 132 | | | 3.2 | |
| 30 days | | 16 | | | 21 | | | — | | | — | | | 16 | | | 21 | | | 0.5 | |
| 60 days | | 4 | | | 4 | | | — | | | — | | | 4 | | | 4 | | | 0.1 | |
| 90+ days | | 5 | | | 6 | | | — | | | — | | | 5 | | | 6 | | | 0.2 | |
| | 3,490 | | | $ | 3,817 | | | 16 | | | $ | 278 | | | 3,506 | | | $ | 4,095 | | | 100.0 | % |
| December 31, 2021 (Successor) |
| Current | | 3,780 | | | $ | 4,442 | | | 14 | | | $ | 268 | | | 3,794 | | | $ | 4,710 | | | 96.6 | % |
| Less than 30 days | | 73 | | | 96 | | | 1 | | | 11 | | | 74 | | | 107 | | | 2.2 | |
| 30 days | | 15 | | | 23 | | | — | | | — | | | 15 | | | 23 | | | 0.5 | |
| 60 days | | 10 | | | 14 | | | — | | | — | | | 10 | | | 14 | | | 0.3 | |
| 90+ days | | 7 | | | 9 | | | 1 | | | 12 | | | 8 | | | 21 | | | 0.4 | |
| | 3,885 | | | $ | 4,584 | | | 16 | | | $ | 291 | | | 3,901 | | | $ | 4,875 | | | 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 September 30, 2022 and December 31, 2021, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | September 30, 2022 | | | December 31, 2021 |
| State | | UPB | | % of Total | | | UPB | | % of Total |
| Texas | | $ | 773 | | | 18.9 | % | | | $ | 930 | | | 19.1 | % |
| California | | 729 | | | 17.8 | | | | 867 | | | 17.8 | |
| Florida | | 350 | | | 8.5 | | | | 423 | | | 8.7 | |
| New York | | 278 | | | 6.8 | | | | 325 | | | 6.7 | |
| New Jersey | | 263 | | | 6.4 | | | | 302 | | | 6.2 | |
| Arizona | | 186 | | | 4.5 | | | | 220 | | | 4.5 | |
| Massachusetts | | 178 | | | 4.3 | | | | 201 | | | 4.1 | |
| Pennsylvania | | 170 | | | 4.2 | | | | 202 | | | 4.1 | |
| South Carolina | | 146 | | | 3.6 | | | | 178 | | | 3.7 | |
| Missouri | | 120 | | | 2.9 | | | | 135 | | | 2.8 | |
Other(a) | | 902 | | | 22.1 | | | | 1,092 | | | 22.3 | |
| | $ | 4,095 | | | 100.0 | % | | | $ | 4,875 | | | 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 September 30, 2022 and December 31, 2021, respectively.
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 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:
| | | | | | | | | | | | | | | | | | | | | |
| | | | Successor |
| | Balance Sheet Location | | September 30, 2022 | | | December 31, 2021 |
| Contract derivative 1 | | Other assets (Other liabilities) | | $ | (1,298) | | | | $ | 1,076 | |
| Contract derivative 2 | | Other assets | | 462 | | | | 335 | |
| | | | $ | (836) | | | | $ | 1,411 | |
The following table summarizes notional amounts related to derivatives:
| | | | | | | | | | | | | | | |
| | Successor |
| | September 30, 2022 | | | December 31, 2021 |
Contract derivative 1(a) | | $ | 82,251 | | | | $ | 38,879 | |
Contract derivative 2(b) | | 39,793 | | | | 37,891 | |
a.Represents the carrying value of Indirect Channel Loans for the purchase and installation of home improvements other than residential solar energy systems held by Sunlight’s Bank Partner.
b.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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Successor | | | Predecessor |
| | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2022 | | | For the Period July 10, 2021 to September 30, 2021 | | | For the Period July 1, 2021 to July 9, 2021 | | For the Nine Months Ended September 30, 2022 | | | For the Period January 1, 2021 to July 9, 2021 |
| | | | | | | | | | | | | |
| Change in fair value of contract derivatives, net | | | | | | | | | | |
| Contract derivative 1 | | $ | (2,167) | | | | $ | 509 | | | | $ | 88 | | | $ | (2,374) | | | | $ | (932) | |
| Contract derivative 2 | | (173) | | | | (20) | | | | 37 | | | 127 | | | | 270 | |
| | $ | (2,340) | | | | $ | 489 | | | | $ | 125 | | | $ | (2,247) | | | | $ | (662) | |
| Realized gains/(losses) on contract derivatives, net | | | | | | | | | | |
| Contract derivative 1 | | $ | (378) | | | | $ | 1,299 | | | | $ | 5 | | | $ | 3,429 | | | | $ | 2,950 | |
| Contract derivative 2 | | 100 | | | | 78 | | | | 1 | | | 257 | | | | 42 | |
| | $ | (278) | | | | $ | 1,377 | | | | $ | 6 | | | $ | 3,686 | | | | $ | 2,992 | |
Note 5. Debt Obligations
Debt consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | September 30, 2022 | | | December 31, 2021 |
| | 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 | | $ | 20,613 | | | $ | 20,613 | | | $ | 30,000 | | | Apr 2023 | | 9.8 | % | | 0.6 | | | $ | 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 a Lender and replaced the associated standby letter of credit. Borrowings under the current $30.0 million 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Successor | | | Predecessor |
| | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2022 | | | For the Period July 10, 2021 to September 30, 2021 | | | For the Period July 1, 2021 to July 9, 2021 | | For the Nine Months Ended September 30, 2022 | | | For the Period January 1, 2021 to July 9, 2021 |
| | | | | | | | | | | | | |
| Beginning Balance | | $ | 20,613 | | | | $ | 20,613 | | | | $ | 20,613 | | | $ | 20,613 | | | | $ | 14,625 | |
| Borrowings | | — | | | | — | | | | — | | | — | | | | 20,746 | |
| Repayments | | — | | | | — | | | | — | | | — | | | | (14,758) | |
Amortization of deferred financing costs(a) | | — | | | | — | | | | — | | | — | | | | — | |
| Ending Balance | | $ | 20,613 | | | | $ | 20,613 | | | | $ | 20,613 | | | $ | 20,613 | | | | $ | 20,613 | |
a.Excludes $0.0 million, $0.0 million and $0.0 million amortization of deferred financing costs for the periods July 10, 2021 through September 30, 2021, July 1, 2021 through July 9, 2021, and January 1, 2021 through July 9, 2021, respectively. Sunlight includes amortization of these costs within “Depreciation and Amortization” in the accompanying Unaudited Condensed Consolidated Statements of Operations. Unamortized deferred financing costs upon closing of the Business Combination did not qualify as acquired assets; therefore, Sunlight did not have any such unamortized costs at September 30, 2022 or December 31, 2021 and did not amortize any such costs for the three or nine months ended September 30, 2022.
Maturities — At September 30, 2022, all of Sunlight’s debt obligations contractually mature in 2023.
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 (“IPO Units”), including the issuance of 4,500,000 units as a result of the underwriters’ exercise in full of its over-allotment option, at $10.00 per unit, generating gross proceeds of approximately $345.0 million, and incurring offering costs of approximately $19.7 million, inclusive of approximately $12.1 million in deferred underwriting commissions. 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 Warrant”), at a price of $1.00 per Private Placement Warrant to Sponsor, generating proceeds of $9.9 million.
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.
Successor Equity
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”). At September 30, 2022 and December 31, 2021, there were 81,722,949 and 84,803,687 shares of Class A common stock issued and outstanding.
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”).
In August 2020, 11,500,000 Founder Shares were issued to Sponsor in exchange for the payment of $25,000 of certain offering costs on behalf of the Company, or approximately $0.002 per share. In October 2020, the Sponsor transferred 50,000 Founder Shares to each of the two independent director nominees at their original purchase price. In November 2020, the Sponsor returned to the Company at no cost an aggregate of 4,312,500 Founder Shares, which the Company cancelled. Also in November, 2020, the Company effected a stock dividend on the Class B common stock (which receipt of such dividends was waived by the independent director nominees), resulting in an aggregate of 8,625,000 shares of Class B common stock outstanding.
The Company cancelled 1,187,759 shares of Class B common stock upon Closing of the Business Combination in connection with the redemption of 19,227,063 shares of Class A common stock issued in the Initial Public Offering, and the remaining 7,437,241 shares of Class B common stock were automatically converted into Class A common stock at the Business Combination on a one-for-one basis. At September 30, 2022 and December 31, 2021, there were no shares of Class B common stock issued and outstanding.
The holders of the Founders Shares agreed, subject to limited exceptions, not to transfer, assign or sell any of their Founder Shares until the earlier to occur of (a) one year after the completion of the Business Combination, (b) the reported last sale price of the Company’s Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and similar activity) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination, or (c) the date on which the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of the Company’s stockholders having the right to exchange their shares of common stock for cash, securities or other property.
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”). At September 30, 2022 and December 31, 2021, there were 47,595,455 and 47,595,455 shares of Class C Common Stock issued and outstanding, 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.
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 September 30, 2022, Sunlight has authorized Class A Shares to cover the exercise of the following outstanding warrants on its equity:
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| 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.
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.
Share Repurchase Program — On May 16, 2022, Sunlight’s Board of Directors authorized a share repurchase program pursuant to which Sunlight may repurchase up to $50.0 million of Sunlight’s Class A common stock over an eighteen-month period from the date of authorization. Under the share repurchase program, Sunlight may purchase common stock in open market transactions, block, or privately-negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act or by any combination of such methods, in each case subject to compliance with all SEC rules and other legal requirements. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, debt covenant restrictions, general business conditions, the market price of Sunlight’s stock, self-imposed trading blackout periods, and the availability of alternative investment opportunities. There is no minimum number of shares required to be repurchased under the share repurchase program, and the share repurchase program may be suspended or discontinued at any time. In September 2022, the Company suspended share repurchases under the program to preserve liquidity in the current environment. The table below sets forth the Class A common shares that Sunlight has repurchased:
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| | Successor | | | Predecessor | | Successor | | | Predecessor |
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2022 | | For the Period July 10, 2021 to September 30, 2021 | | | For the Period July 1, 2021 to July 9, 2021 | | For the Nine Months Ended September 30, 2022 | | | For the Period January 1, 2021 to July 9, 2021 |
| | | | | | | | | | | | |
| Amount paid | | $ | 8,448 | | | $ | — | | | | $ | — | | | $ | 10,452 | | | | $ | — | |
| Common Class A shares repurchased | | 2,591,027 | | | — | | | | — | | | 3,036,259 | | | | — | |
| Price paid per common Class A share | | $ | 3.26 | | | n.a. | | | n.a. | | $ | 3.44 | | | | n.a. |
Predecessor Equity
Prior to the Business Combination, interests in Sunlight Financial LLC’s partnership equity consists of members’ preferred and subordinated units. Sunlight Financial LLC did not have a specific number of preferred or subordinated units authorized at December 31, 2020, but retained the corporate authority to issue sufficient units to meet its obligations. In addition to its partnership equity, Sunlight Financial LLC issued warrants, profits interests, and other economic interests as part of its long-term incentive plan. Upon the closing of the Business Combination, Sunlight became the managing member of Sunlight Financial LLC, which replaced its equity with common equity in the form of Class X units issued to Sunlight and Class EX Units issued to certain selling unitholders according to the Business Combination Agreement.
Temporary Equity Activities — Activities related to interests in Sunlight Financial LLC’s partnership equity units considered temporary equity were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Month of Issuance | | Class A-3 Units | | Class A-2 Units | | Class A-1 Units |
| Units at December 31, 2020 (Predecessor) | | 376,395 | | | 225,972 | | | 296,302 | |
| March 2021 | | 13,457 | | | 8,079 | | | 10,593 | |
| June 2021 | | 14,094 | | | 8,461 | | | 11,094 | |
| July 2021 | | 1,444 | | | 867 | | | 1,137 | |
| | | | | | |
| | 28,995 | | | 17,407 | | | 22,824 | |
| Units at July 9, 2021 (Predecessor) | | 405,390 | | | 243,379 | | | 319,126 | |
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Preferred Units — Prior to the Business Combination, the Class A-1, A-2 and A-3 Units (collectively, the “Class A Units”) were the most senior classes of equity units of Sunlight Financial LLC and represented convertible preferred securities that earn a preferred return. Sunlight Financial LLC’s board of directors elected to pay the preferred return by issuing additional Class A Units equal to 14.5%, on an annualized basis, of the members’ outstanding Class A Units (“Class A PIK Units”). At the Closing of the Business Combination, holders of Preferred Units sold certain Class A-2 Units and Class A-3 Units to wholly-owned subsidiaries of Sunlight in exchange for cash and Class A Shares while remaining Class A unitholders received cash and Class EX Units.
Subordinated Units — Prior to the Business Combination, the Class B Units were a class of equity units subordinate to Class A Units with regard to liquidation, and Sunlight’s payment of the preferred return to the Class A Units, in Class A PIK Units, diluted Class B Units’ interests in Sunlight’s equity. No Class B Units were issued, redeemed, or cancelled during the period January 1, 2021 through July 9, 2021. At the Closing of the Business Combination, holders of Class B Units exchanged their Class B Units for cash and Class EX Units.
Other Interests — Prior to the Business Combination, Sunlight had issued the following subordinated interests upon conversion of equity-based compensation awards upon vesting.
Class C Units — Sunlight Financial LLC had issued Class C Units that did not have voting rights or certain other equity-like features, were subordinate to the Class A Units and Class B Units, and only received distributions from Sunlight Financial LLC’s profits, based on the total number of outstanding units at such time, after Sunlight Financial LLC distributed the liquidation preference of Class A Units. At the Closing of the Business Combination, which occurred at a price above the Threshold Equity Value of each equity award, holders of vested Class C Units received cash and Class EX Units. Holders of unvested Class C Units received awards of Class C shares, Class EX Units, and cash subject to time vesting.
LTIP Units — In February 2016, Sunlight Financial LLC established a program pursuant to which it granted units to certain employees in a long-term incentive plan. In December 2017, Sunlight Financial LLC, at the direction of its board of directors, amended and restated its long-term incentive plan to provide clarity around certain items and to allow for the issuance of various classes of LTIP Units. All LTIP units issued between February 2018 and the Closing Date of the Business Combination were economically equivalent to corresponding classes of Class C units. At the Closing of the Business Combination, holders of vested LTIP Units received cash and Class A Shares. Holders of unvested LTIP Units received awards of Class A Shares and cash subject to time vesting.
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:
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| | Successor | | | |
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | For the Period July 10, 2021 to September 30, 2021 | | | | For the Nine Months Ended September 30, | | | |
| | 2022 | | | | | | 2022 | | | |
| Sunlight Financial LLC net income (loss) before income taxes | | $ | (422,434) | | | | $ | (26,115) | | | | | $ | (442,692) | | | | |
Sunlight Financial LLC as a percent of total(a) | | 35.7 | % | | | 34.9 | % | | | | 35.3 | % | | | |
| Sunlight Financial LLC net income (loss) attributable to the Class EX unitholders | | $ | (151,389) | | | | $ | (9,108) | | | | | $ | (158,478) | | | | |
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:
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| | Successor |
| | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | For the Period July 10, 2021 to September 30, 2021 | | | | For the Nine Months Ended September 30, | | | |
| | 2022 | | | | | | 2022 | | | |
| Transfers (to) from noncontrolling interests: | | | | | | | | | | | | |
| Decrease in Sunlight's shareholders' equity for the delivery of Class EX Units primarily in connection with vested provisionally-vested Class EX Units | | $ | (540) | | | | $ | — | | | | | $ | (2,048) | | | | |
| Dilution impact of equity transactions | | (540) | | | | — | | | | | (2,048) | | | | |
| Net income (loss) attributable to Class A shareholders | | (264,064) | | | | (11,323) | | | | | (273,922) | | | | |
| Change from transfers (to) from noncontrolling interests and from net income (loss) attributable to Class A shareholders | | $ | (264,604) | | | | $ | (11,323) | | | | | $ | (275,970) | | | | |
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 September 30, 2022:
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| | Service (in Years)(b) | | | | |
Award Class(a) | | Minimum | | Maximum | | | | | | Awards(c) |
| Provisionally-Vested Class A Shares | | 1.9 | | 3.6 | | | | | | 194,427 | | | | | | | |
| Provisionally-Vested Class EX Units | | 1.9 | | 1.9 | | | | | | 309,180 | | | | | | | |
| Director RSUs | | 1.0 | | 1.0 | | | | | | 200,228 | | | | | | | |
Employee RSUs(d) | | 3.0 | | 4.0 | | | | | | 3,230,882 | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | 3,934,717 | | | | | | | |
a.All awards subject solely to time-based vesting.
b.At time of grant.
c.Net of fully vested and forfeited awards.
d.Additionally, Sunlight granted $3.7 million of RSU awards that were outstanding at September 30, 2022 for which Sunlight accounts as liabilities and which vest over a period of 4 years from the date of grant. Sunlight will determine the number of awards granted based upon the traded price of its Class A Shares during 2022.
Compensation Unit Activities — Activities related to Sunlight’s equity-based compensation were as follows:
Successor
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| | Provisionally-Vested | | RSUs |
| | Class A Shares | | Class EX Units | | Directors | | Employees(a) |
| | Per Share | | Shares | | Per Unit | | Units | | Per Unit | | Units | | Per Unit | | Units |
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| December 31, 2021 (Successor) | | $ | 9.46 | | | 337,193 | | | $ | 9.46 | | | 974,447 | | | $ | 9.46 | | | 75,000 | | | $ | 8.97 | | | 2,136,129 | |
| Issued | | — | | | — | | | 5.04 | | | 70,991 | | | 4.37 | | | 200,228 | | | 3.61 | | | 2,010,907 | |
| Vested | | 9.46 | | | (111,851) | | | 8.91 | | | (573,329) | | | 9.46 | | | (75,000) | | | 9.46 | | | (424,997) | |
| Forfeited or Cancelled | | 9.46 | | | (30,915) | | | 9.46 | | | (162,929) | | | — | | | — | | | 7.52 | | | (491,157) | |
| September 30, 2022 (Successor) | | 9.46 | | | 194,427 | | | 9.46 | | | 309,180 | | | 4.37 | | | 200,228 | | | 5.63 | | | 3,230,882 | |
a.During the nine months ended September 30, 2022, Sunlight also granted $12.3 million of RSU awards classified as liabilities, of which $1.6 million was forfeited and $7.4 million was reclassified as equity.
Predecessor
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| | Class C | | LTIP |
| | Per Unit | | Units | | Per Unit | | Units |
| December 31, 2020 (Predecessor) | | $ | 14.51 | | | 234,403 | | | $ | 20.06 | | | 71,060 | |
| | | | | | | | |
| Converted to Class C-1 Units | | 16.19 | | | (181) | | | 18.96 | | | (377) | |
| Converted to Class C-2 Units | | 11.12 | | | (1,513) | | | 15.64 | | | (1,285) | |
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| July 9, 2021 (Predecessor) | | 14.53 | | | 232,709 | | | 20.14 | | | 69,398 | |
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Unrecognized Compensation Expense — At September 30, 2022, Sunlight has not yet recognized compensation expense for the following awards, all of which are subject solely to time-based service vesting conditions:
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Type(a) | | Weighted Average Recognition Period | | Awards | | Amount | | | | |
| Provisionally-Vested Class A Shares | | 0.8 years | | 194,427 | | | $ | 1,839 | | | | | |
| Provisionally-Vested Class EX Units | | 0.4 years | | 309,180 | | | 3,795 | | | | | |
| Director RSUs | | 0.3 years | | 200,228 | | | 775 | | | | | |
| Employee RSUs | | 1.5 years | | 3,230,882 | | | 15,351 | | | | | |
| | | | 3,934,717 | | | $ | 21,760 | | | | | |
a.In addition to the above, Sunlight has not yet recognized $0.1 million of compensation expense associated with employee subscriptions under Sunlight’s ESPP with a weighted-average recognition period of 0.2 years as well as $3.7 million of compensation expense associated with RSUs classified as liabilities with a weighted-average recognition period of 2 years.
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 does not present earnings per unit of Sunlight Financial LLC, Sunlight’s accounting predecessor, for periods prior to the Business Combination.
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:
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| | Successor |
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| | For the Three Months Ended September 30, | | For the Period July 10, 2021 to September 30, 2021 | | | | For the Nine Months Ended September 30, | | |
| | 2022 | | | | | 2022 | | |
| Net Income (Loss) Per Class A Shareholders, Basic | | | | | | | | | | |
| Net income (loss) available to Class A shareholders | | $ | (262,719) | | | $ | (11,216) | | | | | $ | (273,811) | | | |
| Total weighted average shares outstanding | | 83,049,291 | | 84,833,808 | | | | 84,157,718 | | |
| Net Income (Loss) Per Class A Shareholders, Basic | | $ | (3.16) | | | $ | (0.13) | | | | | $ | (3.25) | | | |
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| Net Income (Loss) Per Class A Shareholders, Diluted | | | | | | | | | | |
| Net income (loss) available to Class A shareholders | | $ | (262,719) | | | $ | (20,140) | | | | | $ | (273,811) | | | |
| Total weighted average shares outstanding | | 83,049,291 | | 131,088,438 | | | | 84,157,718 | | |
| Net Income (Loss) Per Class A Shareholders, Diluted | | $ | (3.16) | | | $ | (0.15) | | | | | $ | (3.25) | | | |
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| Net income (loss) available to Class A shareholders | | | | | | | | | | |
| Net Income (Loss) | | $ | (415,453) | | | $ | (20,431) | | | | | $ | (432,400) | | | |
| Noncontrolling interests in loss of consolidated subsidiaries | | 151,389 | | | 9,108 | | | | | 158,478 | | | |
| Other weighting adjustments | | 1,345 | | | 107 | | | | | 111 | | | |
| Net Income (Loss) Attributable to Class A Shareholders | | (262,719) | | | $ | (11,216) | | | | | (273,811) | | | |
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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) | | — | | | (8,924) | | | | | — | | | |
| Net income (loss) available to Class A shareholders, diluted | | $ | (262,719) | | | $ | (20,140) | | | | | $ | (273,811) | | | |
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| Weighted Average Units Outstanding | | | | | | | | | | |
| Class A shares outstanding | | 83,049,291 | | 84,833,808 | | | | 84,157,718 | | |
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| | | | | | | | | | |
Class EX units exchangeable into Sunlight Financial Holdings Inc. Class A shares(a) | | — | | 46,254,630 | | | | — | | |
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 | | 83,049,291 | | 131,088,438 | | | | 84,157,718 | | |
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 nine months ended September 30, 2022.
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. Sunlight determined the presentation of earnings per unit during the Predecessor periods is not meaningful. Therefore, the earnings per unit information has not been presented for the Predecessor periods.
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:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Period July 10, 2021 to September 30, 2021 | | | | For the Nine Months Ended September 30, | | |
| Common Shares From | | 2022 | | | | | 2022 | | |
| Class EX Units | | 46,976,713 | | | — | | | | | 46,803,950 | | | |
Warrants(a) | | 27,150,000 | | | 27,150,000 | | | | | 27,150,000 | | | |
| Other warrants | | 627,780 | | | 627,780 | | | | | 627,780 | | | |
| Unvested Class EX Units | | 618,742 | | | 1,340,825 | | | | | 791,505 | | | |
RSUs(b) | | 2,372,747 | | | 1,849,355 | | | | | 2,129,222 | | | |
ESPP(c) | | 38,661 | | | — | | | | | 107,716 | | | |
| | 77,784,643 | | | 30,967,960 | | | | | 77,610,173 | | | |
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 and nine months ended September 30, 2022.
Note 7. Fair Value Measurement
The carrying values and fair values of Sunlight’s assets and 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 September 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Balance or Notional Amount | | Carrying Value | | Fair Value |
| | | | Level 1 | | Level 2 | | Level 3 | | Total |
| September 30, 2022 (Successor) | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Financing Receivables: | | | | | | | | | | | | |
| Loan participations, held-for-investment | | $ | 3,817 | | | $ | 3,332 | | | $ | — | | | $ | — | | | $ | 3,160 | | | $ | 3,160 | |
| Loans, held-for-investment | | 278 | | | 249 | | | — | | | — | | | 220 | | | 220 | |
| Cash and cash equivalents | | 70,569 | | | 70,569 | | | 70,569 | | | — | | | — | | | 70,569 | |
| Restricted cash | | 1,228 | | | 1,228 | | | 1,228 | | | — | | | — | | | 1,228 | |
| Contract derivatives | | 39,793 | | | 462 | | | — | | | — | | | 462 | | | 462 | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Debt | | 20,613 | | | 20,613 | | | — | | | — | | | 20,613 | | | 20,613 | |
| Warrants | | 312,225 | | | 3,691 | | | — | | | — | | | 3,691 | | | 3,691 | |
| Contract derivatives | | 82,251 | | | 1,298 | | | | | | | 1,298 | | | 1,298 | |
| Guarantee obligation | | n.a. | | 2,299 | | | — | | | — | | | 2,299 | | | 2,299 | |
| | | | | | | | | | | | |
| December 31, 2021 (Successor) | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Financing Receivables: | | | | | | | | | | | | |
| Loan participations, held-for-investment | | 4,584 | | | 4,051 | | | — | | | — | | | 4,260 | | | 4,260 | |
| Loans, held-for-investment | | 291 | | | 262 | | | — | | | — | | | 250 | | | 250 | |
| Cash and cash equivalents | | 91,882 | | | 91,882 | | | 91,882 | | | — | | | — | | | 91,882 | |
| Restricted cash | | 2,018 | | | 2,018 | | | 2,018 | | | — | | | — | | | 2,018 | |
| Contract derivatives | | 76,770 | | | 1,411 | | | — | | | — | | | 1,411 | | | 1,411 | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Debt | | 20,613 | | | 20,613 | | | — | | | — | | | 20,613 | | | 20,613 | |
| Warrants | | 312,225 | | | 19,007 | | | — | | | — | | | 19,007 | | | 19,007 | |
| Guarantee obligation | | n.a. | | 418 | | | — | | | — | | | 418 | | | 418 | |
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 | | Contract Derivatives | | Warrants |
| December 31, 2021 (Successor) | | $ | 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 | | — | | | — | | | (15,316) | |
| Included in change in fair value of contract derivatives, net | | (949) | | | 1,298 | | | — | |
| Included in realized gains on contract derivatives, net | | 257 | | | 3,429 | | | — | |
| Payments, net | | (257) | | | (3,429) | | | — | |
| September 30, 2022 (Successor) | | $ | 462 | | | $ | 1,298 | | | $ | 3,691 | |
| | | | | | |
| December 31, 2020 (Predecessor) | | $ | 1,435 | | | $ | — | | | $ | 5,643 | |
Transfers(a) | | | | | | |
| Transfers to Level 3 | | — | | | — | | | 41,591 | |
| Transfers from Level 3 | | — | | | — | | | (11,148) | |
Gains (losses) included in net income(b) | | | | | | |
| Included in change in fair value of warrant liabilities | | — | | | — | | | 5,504 | |
| Included in change in fair value of contract derivatives, net | | (662) | | | — | | | — | |
| Included in realized gains on contract derivatives, net | | 2,992 | | | — | | | — | |
| Payments, net | | (2,992) | | | — | | | — | |
| July 9, 2021 (Predecessor) | | 773 | | | — | | | 41,590 | |
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 | | — | | | — | | | (10,116) | |
| Included in change in fair value of contract derivatives, net | | 489 | | | — | | | — | |
| Included in realized gains on contract derivatives, net | | 1,377 | | | — | | | — | |
| Payments, net | | (1,377) | | | — | | | — | |
| September 30, 2021 (Successor) | | $ | 1,262 | | | $ | — | | | $ | 31,474 | |
a.Transfers are assumed to occur at the beginning of the respective period, except transfers that occurred at the Closing Date of the Business Combination.
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 |
| 1 | | Inputs include expected cash flows from the financing and sale of applicable Indirect Channel Loans and discount rates that market participants would expect for the Indirect Channel Loans. Significant increases (decreases) in the discount rates in isolation would result in a significantly lower (higher) fair value measurement. |
| 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:
| | | | | | | | | | | | | | | |
| | Successor |
| | September 30, 2022 | | | December 31, 2021 |
| Contract Derivative 1 | | | | | |
| Discount rate | | 11.7 | % | | | 10.0 | % |
| Weighted average life (in years) | | 0.1 | | | 0.2 |
| 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:
| | | | | | | | | | |
| | Successor |
| Assumption | | September 30, 2022 |
| | | | |
Class A common share value per share(a) | | $ | 1.24 | | | |
Implied volatility(a) | | 79.2 | % | | |
Dividend yield(b) | | — | % | | |
Time to expiry (in years)(a) | | 3.8 | | | |
Risk free rate(a) | | 4.1 | % | | |
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.
Predecessor
To determine the grant-date value of each Class C Unit and LTIP Unit granted prior to the Business Combination, an independent third-party valuation firm (a) used an income valuation approach to determine the fair value of Sunlight’s equity on a quarterly basis and (b) allocated that fair value to each class of interest in Sunlight’s equity and warrants thereon on a per unit basis using an option pricing method. Sunlight determined the grant-date fair value of an award using the value at the quarter-end closest to the grant date of the award. Significant increases (decreases) in the cost of equity, volatility, tax rate, and equity term in isolation would result in a significantly lower (higher) fair value measurement.
To determine the fair value of warrants prior to the Business Combination, Sunlight applied a hybrid probability-weighted expected return valuation method, which incorporated two scenarios: (a) a scenario using a market valuation approach that assumed Sunlight completed the Business Combination and (b) a remain private scenario that used the aforementioned income valuation approach.
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 and (b) a market approach using publicly-traded companies similar to Sunlight.
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 $11.4 million for the nine months ended September 30, 2022. Sunlight Financial LLC, Sunlight’s accounting predecessor, is a limited liability company not subject to income taxes. Sunlight’s effective tax rate was 2.6% for the nine months ended September 30, 2022. The difference between Sunlight’s statutory and effective tax rate is primarily due to the permanent adjustments for goodwill impairment of $52.2 million, changes in the value of warrant liabilities of $2.1 million and noncontrolling interest in subsidiaries of $34.7 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. As of September 30, 2022 and December 31, 2021, the total amount of gross interest and penalties accrued was $0.1 million and $0.0 million, respectively, which is classified as other liabilities in the Unaudited Condensed Consolidated Balance Sheets, and Sunlight did not have any material uncertain tax positions. Any uncertain tax position taken by any of the Class EX unitholders is not an uncertain tax position of Sunlight Financial LLC.
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.
Founder Shares — In August 2020, 11,500,000 Founder Shares were issued to the Sponsor in exchange for the payment of $25,000 of certain offering costs on behalf of the Company, or approximately $0.002 per share. In October 2020, the Sponsor transferred 50,000 Founder Shares to each of the two independent director nominees at their original purchase price. In November 2020, the Sponsor returned to the Company at no cost an aggregate of 4,312,500 Founder Shares, which the Company cancelled. Also in November 2020, the Company effected a stock dividend on the Class B common stock (which receipt of such dividends was waived by the independent director nominees), resulting in an aggregate of 8,625,000 shares of Class B common stock outstanding. Of the 8,625,000 Founder Shares outstanding, up to 1,125,000 shares were subject to forfeiture to the extent that the over-allotment option was not exercised by the underwriters, so that the Founder Shares would represent 20.0% of the Company’s issued and outstanding shares after the Initial Public Offering. On November 30, 2020, the underwriters fully exercised the over-allotment option; thus, these 1,125,000 shares were no longer subject to forfeiture.
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.
Administrative Support Agreement — Commencing on the date the IPO Units were first listed on the NYSE, the Company agreed to pay the Sponsor a total of $10,000 per month for office space, utilities, and secretarial and administrative support. The Company paid the Sponsor $60,000 for such services during the period of January 1, 2021 through July 9, 2021. Upon closing of the Business Combination, the Administrative Support Agreement was terminated.
FTV Management V, LLC (“FTV”) — In May 2018, Sunlight entered into a management agreement with FTV. Under the terms of the agreement, FTV provided strategic financial services to Sunlight in exchange for a management fee of $50,000 per calendar quarter. This management agreement terminated upon closing of the Business Combination.
Hudson SL Portfolio Holdings LLC (“HSPH”) — In February 2018, Sunlight entered into an administrative services agreement with HSPH, indirectly owned by members of Sunlight and SL Investor III LLC, where Sunlight agreed to provide certain services to Solar Loan Management LLC, an affiliate of Hudson Sustainable Investment Management, LLC and HSPH. These services generally include special servicing administration, ongoing accounting work, all calculations related to the purchase and financing of certain Loans under the forward flow agreement and the senior financing, and other services that would be expected of the sponsor of a securitized pool of loans. During the three months ended September 30, 2021, Sunlight was paid $0.0 million for such services. During the nine months ended September 30, 2021, Sunlight was paid $0.1 million for such services. Upon departure of the former member of Sunlight’s board of directors upon closing of the Business Combination, Sunlight no longer considers HSPH a related party.
Tiger Infrastructure Partners (“Tiger”) — In September 2015, Sunlight entered into a management agreement with Tiger. Under the terms of the agreement, Sunlight pays Tiger a management fee of $50,000 per calendar quarter for strategic financial services provided by Tiger to Sunlight. In addition to the management fee, Sunlight reimbursed $0.0 million during the three months ended September 30, 2021. In addition to the management fee, Sunlight reimbursed $0.0 million during the nine months ended September 30, 2021. This management agreement terminated upon closing of the Business Combination.
Financing Program Agreement — In May 2018, Sunlight entered into a financing program agreement with Lumina Solar, Inc. (“Lumina”), pursuant to which Sunlight facilitates financing for consumers that purchase residential solar energy power systems from Lumina. A former member of Sunlight’s board of directors and a former officer of Sunlight are stockholders of, and actively involved in the management of, Lumina. Sunlight received approximately $0.2 million in revenue for the nine months ended September 30, 2021. Upon departure of the former member of Sunlight’s board of directors upon closing of the Business Combination, Sunlight no longer considers Lumina a related party.
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. As of September 30, 2022, Sunlight Financial LLC no longer expects to generate taxable income during the current tax year and expects to use tax distributions already declared during the current tax year to offset future estimated tax liability distributions, if any. Consequently, Sunlight Financial LLC did not declare any distributions during the three months ended September 30, 2022. Sunlight Financial LLC did not declare any distributions for the three or nine months ended September 30, 2021. Sunlight paid estimated tax distributions of $1.2 million and $7.5 million during the nine months ended September 30, 2022 and 2021, respectively.
Note 10. Commitments and Contingencies
Sunlight was subject to the following commitments and contingencies at September 30, 2022.
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 September 30, 2022, 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 September 30, 2022, Sunlight has committed to advance up to $272.5 million for unfunded, approved Loans submitted by eligible contractors and other contingently committed amounts, of which $64.1 million of outstanding advances are included in “Advances” in the accompanying Unaudited Condensed Consolidated Balance Sheets.
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 $21.4 million at September 30, 2022.
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 19, 9, and 0 loans, totaling $0.4 million, $0.2 million, and $0.0 million, for the three months ended September 30, 2022 and the periods from July 10, 2021 through September 30, 2021 and July 1, 2021 through July 9, 2021, respectively, as well as 70 and 60 loans, totaling $1.5 million and $1.3 million, for the nine months ended September 30, 2022 and the period from January 1, 2021 through July 9, 2021, respectively, associated with these guarantees. At September 30, 2022, the maximum potential amount of undiscounted future payments Sunlight could be required to make under these guarantees totaled $274.9 million, and Sunlight recorded a $1.1 million liability presented within “Other Liabilities” in the accompanying Unaudited Condensed Consolidated Balance Sheets. At September 30, 2022, 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 $0.5 million.
Additionally, 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 September 30, 2022, the maximum potential amount of undiscounted future payments Sunlight could be required to make under these guarantees totaled $49.2 million, and Sunlight recorded a $1.2 million liability presented within “Other Liabilities” in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Tax Receivable Agreement (“TRA”) — 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 September 30, 2022, Sunlight would be obligated to pay $4.2 million, and Sunlight recorded a liability of $2.6 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.
| | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | | | For the Nine Months Ended September 30, | | |
| | 2022 | | | | | | 2022 | | |
| Lease cost | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating | | $ | 536 | | | | | | | $ | 1,604 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | $ | 536 | | | | | | | $ | 1,604 | | | |
| | | | | | | | | | |
| Other information | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | | | |
| Operating cash flows | | $ | 485 | | | | | | | $ | 1,248 | | | |
| | | | | | | | | | |
| | | | | | | | Successor | | |
| | | | | | | | September 30, 2022 | | |
| Right-of-use assets obtained in exchange for new lease liabilities | | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | 7,367 | | |
| Weighted-average remaining lease term (in years) | | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | 6.4 | | |
| Weighted-average discount rate | | | | | | | | | | |
| | | | | | | | | | |
| Operating leases | | | | | | | | 7.2% | | |
At September 30, 2022, the approximate aggregate annual minimum future lease payments required on the operating leases are as follows:
| | | | | | | | |
| October 1, through December 31, 2022 | | $ | 488 | |
| 2023 | | 1,909 | |
| 2024 | | 1,553 | |
| 2025 | | 1,672 | |
| 2026 | | 1,790 | |
| Thereafter | | 4,856 | |
| Total future minimum lease payments | | 12,268 | |
| Less: imputed interest | | (5,019) | |
| Present value of future minimum lease payments | | $ | 7,249 | |
During the three and nine months ended September 30, 2022, total lease expense was $0.5 million and $1.6 million, respectively. During the periods from July 10, 2021 through September 30, 2021, July 1, 2021 through July 9, 2021, and January 1, 2021 through July 9, 2021, total lease expense was $0.4 million, $0.0 million and $0.9 million, respectively, which Sunlight paid in full.
Note 11. Subsequent Events
The following events occurred subsequent to September 30, 2022 through the issuance date of these Unaudited Condensed Consolidated Financial Statements. Events subsequent to that date have not been considered in these financial statements.
Unit Exchange
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.
Strategic Alternatives
Sunlight is currently considering a range of strategic alternatives that may be available to Sunlight to maximize stakeholder value, including but not limited to financings, strategic alliances, or a possible business combination or sale of the business. Sunlight has engaged a financial advisory firm to help explore available strategic alternatives.
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,” “Successor,” “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.