Item 8.01 Other Events.
In its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2022, the Company reported an unrestricted cash balance of $70.6 million at September 30, 2022. At that time,
the Company reported that it believed that it could continue to generate cash flow from its operations which, together with funds available
under its credit facility and cash on hand, would be sufficient to meet its liquidity needs during the next 12 months from the date of
the Quarterly Report on Form 10-Q. The Company cautioned that, given the current economic environment this could change in the future.
Since the filing of its Form 10-Q, the market for sales of its Indirect Channel Loans (defined below) has continued to deteriorate. As
a result, the Company now expects to experience greater than anticipated losses when the Backbook Loans (as defined below) are sold, which
will result in a greater use of cash, materially lower cash balance and less available liquidity than previously anticipated (after taking
into account payment of other liabilities on the Company’s balance sheet including the funding commitments).
Ongoing Strategic Alternatives Process
As previously announced on November 14, 2022,
the Company, with the assistance of its advisors and under the supervision of an Independent Committee of the Board of Directors of the
Company, continues to review strategic alternatives and explore available options for the Company, including selling the Company, raising
additional capital to finance its operations and/or implementing cost saving measures to preserve cash. Sunlight has received interest from parties both in investing in the Company and in acquiring the Company.
While there is no certainty that the Company will complete a transaction, Sunlight currently believes the strategic alternatives process
will be concluded in the first quarter of 2023.
Impact of Sales of Certain Funded Indirect
Channel Loans
The Bank
Partner originates solar and home improvement loans on its balance sheet through Sunlight’s proprietary technology platform, Orange®
(“Indirect Channel Loans”), that it holds on its balance sheet until directed by the Company in the ordinary course of its
business to sell them to investors, including credit funds, insurance companies and pension funds. While the Bank Partner is the owner
of the loans, Sunlight retains economic exposure to them until they are sold. The Company profits when the price that investors pay for
the Indirect Channel Loans exceeds the Bank Partner’s cost basis in the loans and incurs a loss when the price that investors pay
for the Indirect Channel Loans is less than the Bank Partner’s cost basis in the loans.
The Bank Partner currently holds, pursuant to
the Bank Partner Agreements, a portfolio of funded but unsold loans, a significant portion of which were credit approved prior to certain
pricing actions that the Company took in the third and fourth quarters (such loans, “Backbook Loans”). Sunlight plans
to sell a material portion of the Backbook Loans in December 2022 to comply with the Bank Partner Agreements and other similar agreements
with capital providers. Losses associated with the sale of Backbook Loans are recorded by the Company as negative platform fees. As a
result of the anticipated sale of a portion of the Backbook Loans in December, the Company expects that total platform fees in the fourth
quarter will be in a range of $0 to $5 million as compared to approximately $31 million reported for the quarter ended September 30, 2022.
After giving effect to the planned loan sales in December, the Company expects the aggregate principal amount of loans held by the Bank
Partner pursuant to the Bank Partner Agreements will be $350 million to $400 million, of which $275 million to $300 million will be Backbook
Loans. The Company expects to sell the remaining Backbook Loans in the first and second quarters of 2023 which may result in additional
losses and negative platform fees.
The Company is actively working to minimize the
negative impact of sales of the Backbook Loans on the Company’s platform fee revenue, its cash balance and liquidity. However, losses
of platform fee revenue in the fourth quarter of 2022 resulting from the December sale of the Backbook Loans will significantly reduce
the Company’s cash balance and may result in materially less available liquidity through the first half of 2023.
The additional impact of sales of the remaining
$275 million to $300 million of Backbook Loans in the first half of 2023 on the Company’s platform fee revenue and its cash balance
and liquidity will depend on many factors (including prevailing market prices for Indirect Channel Loans at the time of the sales) and
which could be mitigated by the results of the strategic alternatives process.
Possible Material Repurchase of Loans from
an Indirect Capital Provider
Sunlight is currently a party to an agreement
with a third party capital provider that requires Sunlight to repurchase loans from that capital provider under certain circumstances.
Based on the contractual requirements of the agreement, approximately $19 million of loans
are subject to possible repurchases by Sunlight. The Company is currently negotiating with this party to minimize the impact of this possible
repurchase through a waiver of, or other relief from, these requirements.
Revolving Credit Facility Covenants
Sunlight is a party to the Loan and Security Agreement,
dated as of April 26, 2021 (the “Loan and Security Agreement”), with a revolving credit lender (the “Lender”)
that requires Sunlight to maintain minimum liquidity and EBITDA levels on a quarterly basis. As a result of the expected platform fee
losses in the fourth quarter of 2022 described above, Sunlight likely will not meet the EBITDA requirements as of December 31, 2022 (which
is measured by the Lender on January 31, 2023). Additionally, breaches of other significant agreements, including the Bank Partner Agreements,
could also potentially trigger a cross default under the Loan and Security Agreement. As of the date of this report, Sunlight has borrowed
approximately $20.6 million of the permitted $25.1 million aggregate permitted borrowings under the Loan and Security Agreement, which
matures in April 2023. The Company is currently in discussions with the Lender regarding waiving the minimum quarterly EBITDA requirement
as well as extending the maturity of the revolving credit facility.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS AND RISK FACTORS SUMMARY
This report contains certain “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks
and uncertainties. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability
of our earnings, our financing needs, and the size and attractiveness of market opportunities. Forward-looking statements are generally
identifiable by the use of forward-looking terminology such as “may,” “will,” “should,” “potential,”
“expect,” “endeavor,” “seek,” “anticipate,” “outlook,” “intend,”
“estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,”
“predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions;
discuss future expectations; describe future plans and strategies; contain projections of results of operations, cash flows, or financial
condition; or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies
is inherently limited. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These
forward-looking statements involve risks, uncertainties, and other factors that may cause our actual results in future periods to differ
materially from forecasted results.
Our ability to implement our business strategy
is subject to numerous risks described below as well as the risks fully described under Item 1A. “Risk Factors” in our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2022:
| · | Sunlight is currently considering
a range of strategic alternatives including selling the Company, raising additional capital to finance its operations and/or the enactment
of cost saving measures to preserve cash; the failure to consummate a suitable strategic alternative could have a material adverse impact
on Sunlight’s securities prices, business, financial condition, cash balances, liquidity and results of operations. |
| · | Sunlight has incurred net losses
in the past, and Sunlight may be unable to sustain profitability in the future. |
| · | Worsening economic conditions
from a rising rate of inflation, rapidly changing interest rates or other potential causes of economic distress could materially and adversely
impacting Sunlight’s business, cash flows and liquidity, financial condition and results of operations including raising Sunlight’s
cost of capital and/or reduce or eliminate the ability of Sunlight’s direct or indirect capital providers to continue funding loan
volume at historical levels. |
| · | If Sunlight fails to manage
its operations, cash balances and liquidity effectively, Sunlight may be unable to execute its business plan, maintain high levels of
customer service and support or adequately address competitive challenges. |
| · | If Sunlight is unable to facilitate
the sale of loans held on its Bank Partner’s balance sheet to comply with the current Bank Partner Agreements, Sunlight will need
to pursue an additional waiver or amendment with the Bank Partner. In the event that the Bank Partner is unwilling to grant another waiver
or amendment, Sunlight may be required to purchase all or a portion of these loans (for which it will require capital from another bank
or source of liquidity) and/or may be unable to fund future Indirect Channel Loans. The failure to obtain another waiver or amendment
or to find another capital provider to replace the Bank Partner to buy any loans that the Company may be required to purchase from the
Bank Partner could have a material adverse impact on Sunlight’s securities prices, business, financial condition, cash balances,
liquidity and results of operations. |
| · | Failure to obtain a waiver under,
or to amend or extend the Loan and Security Agreement, could have a material adverse effect on Sunlight’s results of operations,
financial condition, cash balances, liquidity and results of operations. |
| · | Various factors may negatively
affect installers of solar systems or the demand for solar systems, which could have an adverse impact on Sunlight’s business, results
of operations, financial condition, cash flow and liquidity. |
| · | Sunlight may in the future expand
to new industry verticals outside of the U.S. solar system and home improvement industries, and failure to comply with applicable regulations,
accurately predict demand or growth, or build a process valued in those new industries could have an adverse effect on Sunlight’s
business. |
| · | To the extent that Sunlight
seeks to grow or strengthen its business and competitive position through future acquisitions, or other strategic investments, transactions
or alliances, Sunlight may not be able to do so effectively. |
| · | The reduction, modification
or elimination of government incentives could cause Sunlight’s revenue to decline and harm its financial results. |
| · | Existing regulations and policies
and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar
power products, which may significantly reduce demand for our loan products and services. |
| · | The industries that Sunlight
operates in are highly competitive and are likely to become more competitive. Additionally, if new entrants join these markets who have
ready access to cheaper capital, competing successfully would become more difficult for Sunlight. Sunlight’s inability to compete
successfully or maintain or improve Sunlight’s market share and margins could adversely affect its business. |
| · | Disruptions in the operation
of Sunlight’s computer systems and those of its critical third-party service providers and capital providers could have an adverse
effect on Sunlight’s business. |
| · | Sunlight’s growth is dependent
on its contractor network and in turn the quality of the products and services they provide to their customers, and Sunlight’s failure
to retain or replace existing contractors, to grow its contractor network or the number of Sunlight loans offered through its existing
network, or increases in loan delinquencies due to any deficiencies in Sunlight’s contractor underwriting practices, could adversely
impact Sunlight’s business. |
| · | Sunlight’s capital advance
program exposes it to potential losses in the event that a contractor fails to fully perform under its agreements with Sunlight or becomes
insolvent prior to completion of the underlying installation or construction, which losses could have an adverse impact on Sunlight’s
business, results of operations and financial condition. |
| · | If contractors fail to fulfill
their obligations to consumers or fail to comply with applicable law, Sunlight may incur remediation costs. |
| · | Sunlight’s revenue is
impacted, to a significant extent, by the general economy, including supply chain disruptions, and the financial performance of its capital
providers and contractors. |
| · | Sunlight’s results of
operations could be adversely affected by economic and political conditions globally and the effects of these conditions on our clients’
businesses and levels of business activity. |
| · | Sunlight has never paid cash
dividends on its capital stock, and does not anticipate paying dividends in the foreseeable future. |
| · | Sunlight cannot
guarantee that it will repurchase its common stock pursuant to Sunlight’s share
repurchase program or that Sunlight’s share repurchase program will enhance
long-term shareholder value. Share repurchases could also increase the volatility of the price of Sunlight’s common
stock and could diminish Sunlight’s cash reserves. |
| · | If assumptions or estimates
Sunlight uses in preparing its financial statements are incorrect or are required to change, Sunlight’s reported results of operations,
liquidity and financial condition may be adversely affected. |