SUNLIGHT FINANCIAL HOLDINGS INC. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding ofSunlight Financial Holdings Inc.'s (the "Company," "Sunlight," "Successor" or "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 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 ofSunlight Financial Holdings Inc. and its consolidated subsidiaries. 41 --------------------------------------------------------------------------------
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,"
"intend," "expect," "endeavor," "seek," "anticipate," "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, as
more fully described under Item 1A. "Risk Factors." These risks include, among
others:
•Sunlight has incurred net losses in the past, and Sunlight may be unable to
sustain profitability in the future.
•The ongoing COVID-19 pandemic and other health epidemics and outbreaks could
adversely affect Sunlight's business, results of operations and financial
condition.
•If Sunlight fails to manage its operations and growth effectively, Sunlight may
be unable to execute its business plan, maintain high levels of customer
services and support or adequately address competitive challenges.
•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 through future acquisitions, or other
strategic investments or alliances, Sunlight may not be able to do so
effectively.
•A material reduction in the retail price of electricity charged by electric
utilities, other retail electricity providers, or other energy sources as
compared to potential savings for purchasing and using a solar system or an
increase in pricing for purchasing and using a solar system above the cost of
other energy sources could result in a lower demand for solar systems, which
could have an adverse impact on Sunlight's business, results of operations and
financial condition.
•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.
•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 energy systems, which may significantly reduce demand for our loan
products.
•Sunlight's growth is dependent on its contractor network and in turn the
quality of the service and products 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 revenue is impacted, to a significant extent, by the general economy
and the financial performance of its capital providers and contractors.
•Sunlight has never paid cash dividends on its capital stock, and does not
anticipate paying dividends in the foreseeable future.
•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.
•A significant portion of Sunlight's total outstanding shares are restricted
from immediate resale but may be sold into the market in the near future. This
could cause the market price of its Class A common stock to drop significantly,
even if its business is doing well.
42
--------------------------------------------------------------------------------Business Overview
Sunlight is a business-to-business-to-consumer, technology-enabled point-of-sale
("POS") financing platform that provides residential solar and home improvement
contractors the ability to offer seamless POS financing to their customers when
purchasing residential solar systems or other home improvements. The resulting
loans are funded by Sunlight's network of capital providers who, by partnering
with Sunlight, gain access to a difficult-to-reach loan market, best-in-class
consumer credit underwriting, and attractive risk adjusted returns. These loans
are facilitated by Sunlight's proprietary technology platform, Orange® (the
"Platform"), through which Sunlight offers instant credit decisions to
homeowners nationwide at the POS on behalf of Sunlight's various capital
providers. Since Sunlight's founding in 2014 through September 30, 2021 ,
Sunlight has facilitated over $5.4 billion of loans through the Sunlight
Platform in partnership with its contractor relationships.
Sunlight's success is fueled by its strong and intentional culture based on core
values such as honesty, fairness, and scrappiness. Sunlight's culture encourages
Sunlight teammates to work collaboratively with Sunlight's contractor and
capital provider partners, and the consumers they serve, to find the right
result to business challenges and to deliver white-glove service. Also core to
Sunlight's values is a passion for Sunlight's business and the societal benefits
that the business funds. To date, Sunlight has facilitated loans to more than
135,000 homeowners who, as a result, have had the opportunity to save money on
their utility bills and choose renewable energy over carbon-producing
traditional sources of power. As of September 30, 2021 , residential solar
systems and energy-efficient home improvement products, facilitated through
Sunlight financings, have eliminated an estimated 13.5 million metric tons of
carbon dioxide from the atmosphere. Sunlight has also executed the United
Nations Climate Neutral Now Pledge, and its business was certified as carbon
neutral for its fiscal year 2020. Sunlight will continue to pursue certification
for carbon neutrality in the future.
Sunlight's core business is facilitating loans made by Sunlight's various
capital providers to the consumer customers of residential solar contractors.
Sales of Sunlight-facilitated loan products are made by contractors in the
context of selling residential solar systems to consumers, allowing homeowners
to go solar with no money down, and in most cases, immediately saving money on
their utility bills and often saving a significant amount of money over the life
of their solar system. While only approximately 20% of residential solar system
sales were financed with solar loans in 2015, an estimated 63% of residential
solar loan sales were financed with solar loans in 2020. Solar loans made to
finance residential solar systems through Sunlight's Platform are made
exclusively to homeowners. Sunlight believes that homeowners generally have
better credit characteristics than other consumer groups. As of September 30,
2021 , the average FICO score of all solar borrowers financed through Sunlight's
Platform is 747. Both the generally strong credit profile of solar loan
borrowers and attractive risk-adjusted returns on solar loans to capital
providers have enabled Sunlight to build a diversified network of capital
providers to fund the solar loans facilitated by Sunlight's Platform.
Loan providers in the residential solar industry compete primarily on process
(customer and contractor experience), pricing and products. Orange® offers
contractors robust tools to sell more solar systems and home improvements and
homeowners a fast, fully-digital and frictionless experience. Because Sunlight
has diverse funding sources, Sunlight is able to offer a large suite of
competitive loan products that include multiple loan structures and combinations
of interest rates and tenors.
Sunlight's revenue is primarily from platform fees earned on each solar and home
improvement loan facilitated through Orange®. The platform fee is generally
equal to the margin between the contractor fee charged to the contractor by
Sunlight for each loan facilitated through Orange® and the discount at which
Sunlight's capital provider either funds or purchases such loan (as described in
more detail below). The best-in-class credit quality of Sunlight-facilitated
loans attracts diverse and attractively-priced capital (the "price" to Sunlight
being the amount that a capital provider will pay to originate or purchase a
Sunlight-facilitated loan), ensuring that Sunlight can offer competitive pricing
to its network of contractors while still earning attractive margins. Sunlight's
business model is asset light and therefore Sunlight has minimal consumer credit
risk. Sunlight does not earn material revenue from loans maintained on its
balance sheet.
43
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On July 9, 2021 (the "Closing Date"), Sunlight 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 ("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").
For the periods prior to the Business Combination, Sunlight presents the results
of operations for Sunlight Financial LLC and its consolidated subsidiary (the
"Predecessor"), which does not include the results of operations for Spartan.
For the periods after the Business Combination, Sunlight presents the results of
operations for Sunlight Financial Holdings Inc. and its consolidated
subsidiaries, including Sunlight Financial LLC , (the "Successor"). The three
months ended September 30, 2021 (the "Combined Quarterly Period") includes the
results of operations for the Successor during the period of July 10, 2021
through September 30, 2021 (the "Successor Period") and the results of operation
for the Predecessor during the period July 1, 2021 through July 9, 2021 (the
"Predecessor Quarterly Period"). Similarly, the nine months ended September 30,
2021 (the "Combined Year-to-Date Period") includes the results of operations for
the Successor during the Successor Period and the results of operation for the
Predecessor during the period January 1, 2021 through July 9, 2021 (the
"Predecessor Year-to-Date Period").
Executive Overview
Sunlight's revenue is primarily attributable to platform fees earned by Sunlight for facilitating the origination of solar and home improvement loans by its capital providers. Sunlight believes that revenue and resulting Adjusted EBITDA will increase over time as the solar and home improvement markets grow organically, as Sunlight adds solar and home improvement contractors to its network, and as Sunlight continues to expand its relationship with its existing contractor partners.
The Combined Quarterly Period Compared to the Three Months Ended
•Sunlight facilitated the origination of$639.5 million of loans during the Combined Quarterly Period, representing an increase of 77.4% from$360.4 million of loans during the three months endedSeptember 30, 2020 . •Revenue was$28.6 million for the Combined Quarterly Period, representing an increase of 65.8% from$17.2 million for the three months endedSeptember 30, 2020 . •Net income (loss) was$(22.2) million for the Combined Quarterly Period, representing a decrease from$4.1 million in income for the three months endedSeptember 30, 2020 . •Adjusted EBITDA was$11.4 million for the Combined Quarterly Period, representing an increase of 97.4% from$5.8 million for the three months endedSeptember 30, 2020 .
The Combined Year-to-Date Period Compared to the Nine Months Ended
•Sunlight facilitated the origination of$1.9 billion of loans during the Combined Year-to-Date Period, representing an increase of 126.7% from$832.3 million of loans during the nine months endedSeptember 30, 2020 . •Revenue was$79.6 million for the Combined Year-to-Date Period, representing an increase of 96.4% from$40.5 million for the nine months endedSeptember 30, 2020 . •Net income (loss) was$(14.3) million for the Combined Year-to-Date Period, representing a decrease from$3.4 million for the nine months endedSeptember 30, 2020 . •Adjusted EBITDA was$34.4 million for the Combined Year-to-Date Period, representing an increase of 315.6% from$8.3 million for the nine months endedSeptember 30, 2020 . 44 --------------------------------------------------------------------------------
Adjusted EBITDA
Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a
reconciliation of Adjusted EBITDA to net income, the most comparable GAAP
measure, is included in "- Non-GAAP Financial Measures." The following charts
depict adjusted EBITDA and other key performance measures for the Combined
Quarterly Period, the Combined Year-to-Date Period, and the three and nine
months ended
[[Image Removed: sunl-20210930_g2.jpg]][[Image Removed: sunl-20210930_g3.jpg]][[Image Removed: sunl-20210930_g4.jpg]][[Image Removed: sunl-20210930_g5.jpg]][[Image Removed: sunl-20210930_g6.jpg]] [[Image Removed: sunl-20210930_g7.jpg]][[Image Removed: sunl-20210930_g8.jpg]][[Image Removed: sunl-20210930_g9.jpg]][[Image Removed: sunl-20210930_g10.jpg]][[Image Removed: sunl-20210930_g11.jpg]]
a.Includes the results of operations for the Successor during the period of
Highlights
In the Combined Quarterly Period, Sunlight continued to experience strong growth including: •Number of borrowers increased to 18,189, up 65% from 11,020 borrowers in the prior-year period •Contractor relationships grew 54% relative to the prior-year period, with 30 new solar contractors and 62 new home improvement contractors joining the Sunlight platform in the third quarter of 2021 •Battery attachment rate grew to 24%, compared with 14% in the prior-year period •Average loan balance increased 8% year-over-year to$35,398 , with a record-high average solar loan balance of$40,991 in the third quarter of 2021 •As ofSeptember 30, 2021 , Sunlight had a cumulative funded loan total of$5.4 billion Key Performance Measures Sunlight reviews several key performance measures, discussed below, to evaluate its business and results, measure performance, identify trends, formulate plans and make strategic decisions. Sunlight believes that the presentation of such metrics is useful to its investors and counterparties because they are used to measure and model the performance of companies such as Sunlight using similar metrics. 45 -------------------------------------------------------------------------------- The following table sets forth key performance measures for the Successor Period, the Predecessor Quarterly Period, the Predecessor Year-to-Date Period, and the three and nine months endedSeptember 30, 2020 (in thousands, except percentages): Successor Predecessor Predecessor For the Period For the Three For the Nine July 10, 2021 to For the Period Months Ended For the Period Months Ended September 30, July 1, 2021 to September 30, Percentage January 1, 2021 to September 30, Percentage 2021 July 9, 2021 2020 Change(a) July 9, 2021 2020 Change(b) Funded Loans$ 577,197 $ 62,268 $ 360,379 77.4 %$ 1,309,504 $ 832,326 126.7 % Direct Channel Funded Loans 425,953 44,693 328,260 43.4 1,048,232 644,141 128.9 Indirect Channel Funded Loans 151,244 17,575 32,119 425.6 261,272 188,185 119.2 Platform Fee Loans 591,715 44,693 373,325 70.5 1,318,644 841,967 126.9 Direct Channel Platform Fee Loans 425,953 44,693 328,260 43.4 1,048,232 644,141 128.9 Indirect Channel Platform Fee Loans 165,762 - 45,065 267.8 270,412 197,826 120.5 Revenue 26,520 2,074 17,247 65.8 53,064 40,519 96.4 Net Income (Loss) (20,431) (1,772) 4,072 n.m. 6,131 3,371 n.m. Adjusted EBITDA 11,096 276 5,760 97.4 23,260 8,266 315.6 a.Change represents the Combined Quarterly Period compared to the three months endedSeptember 30, 2020 . b.Change represents the Combined Year-to-Date Period compared to the nine months endedSeptember 30, 2020 . Funded Loans. Sunlight refers to the aggregate principal balance of the loans facilitated through Orange®, and funded by Sunlight's capital providers, during a given period, as "funded loans." Direct channel capital providers fund Sunlight-facilitated solar or home improvement loans one-by-one directly onto their balance sheet via Orange®. Sunlight's direct channel capital providers are depository institutions with the power and authority to originate loans such as banks and credit unions. In the indirect channel, Sunlight's solar loan allocation engine directs the solar loans to be funded on the balance sheet of Sunlight's intermediary bank partner. These loans are aggregated, pooled and sold to indirect channel capital providers that cannot, or do not wish to, directly originate solar loans. The indirect channel capital provider relationship allows Sunlight to access a broader range of capital, which may include, among others, credit funds, insurance companies and pension funds. The home improvements line of business represents an immaterial portion of the funded loans.
Platform Fee Loans. Indicates loans facilitated by Sunlight on which it earns platform fees in a given period (as described further under "Revenue" below).
Revenue. Sunlight earns revenue in two primary streams: platform fees earned on funded loans, as described above, and fees for loan portfolio management and administration services. For loans originated through Sunlight's direct channel, Sunlight earns platform fees when the direct channel capital provider funds a particular loan and, for loans originated through Sunlight's indirect channel, Sunlight earns platform fees when the indirect channel capital provider purchases a particular loan from Sunlight's bank partner. Fees earned by Sunlight for loan portfolio management and administration services are paid to Sunlight by the capital providers for which such services are performed on a monthly basis or such other period as the parties agree.
Net Income. Net income is a financial measure used to measure Sunlight's performance from period-to-period on a consistent basis.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure used by Sunlight's management to evaluate operating performance, generate future operating plans and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Please see "- Non-GAAP Financial Measures" for a further description of the calculation of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.
46
--------------------------------------------------------------------------------Loan Characteristics
The following table sets forth the average characteristics of loans Sunlight
facilitated for the Successor Period, the Predecessor Quarterly Period, the
Predecessor Year-to-Date Period, and the three and nine months ended
Successor Predecessor
For the
For the For the Three Period For the Nine
For the Period Period July Months Ended January 1, Months Ended
July 10, 2021 to
1, 2021 to
September 30, 2021 July 9, 2021 2020 9, 2021 2020
Solar
Loan Term (in months) 234 231 231 231 224
Customer Interest Rate 2.3 % 2.3 % 3.5 % 2.5 % 3.8 %
Customer FICO Score 752 753 749 752 746
Loan Balance $ 41 $ 42 $ 36 $ 40 $ 35
Home Improvement
Loan Term (in months) 111 106 107 107 105
Customer Interest Rate 10.7 % 10.3 % 9.9 % 10.2 % 10.1 %
Customer FICO Score 747 753 755 754 753
Loan Balance $ 16 $ 16 $ 16 $ 16 $ 15
Recent Developments
Coronavirus Outbreak. During the first quarter of 2020, Sunlight experienced
strong continued growth in funded loan volume, which was a continuation of the
rapid growth experienced in fiscal year 2019. The onset of the novel coronavirus
("COVID-19") pandemic beginning in March 2020 led to a 3% decline in the number
of credit approvals and a 15% decline in volume of loans funded during the
second quarter of 2020 compared to the second quarter of 2019. However, the
number of credit approvals and funded loan volumes largely recovered in the
third quarter of 2020 to exceed the levels experienced during the third quarter
of 2019. At September 30, 2021 , Sunlight facilitated a cumulative funded loan
volume since inception of approximately $5.4 billion .
Key Factors Affecting Operating Results
Sunlight's future operating results and cash flows are dependent upon a number of opportunities, challenges, and other factors, including (i) growth in the number of loans funded to the customers of each contractor; (ii) the availability of capital to fund the loan products offered by Sunlight and desired by the markets in which Sunlight participates and on economic terms favorable to Sunlight: (iii) funded loan volume; (iv) competition in the markets in which Sunlight operates; (v) the cost of traditional and other alternative sources of power to consumers and industry trends and general economic conditions; (vi) growth in the number of contractors included in Sunlight's network and (vii) concentration among Sunlight's contractor partners and capital provider partners.
Growth in the Number of Contractors and in the Number of Loans Funded for the Customers of each Contractor
Sunlight's expansive network of residential solar and other home improvement
contractors, supported by a differentiated set of tools and services offered
through Orange® and by Sunlight more generally, constitutes the distribution
channel through which Sunlight builds funded loan volume and earns fee income.
Sunlight believes that continued growth in the number of contractors in
Sunlight's network, and growth in the number of loans funded to the customers of
each such contractor, have been and will continue to be key components of
Sunlight's increased market penetration, growth in funded loan volume and
Sunlight's operating results.
47
--------------------------------------------------------------------------------Availability of Capital to Fund Loans; Funded Loan Volume
Sunlight's business model is heavily dependent on connecting its capital providers, who wish to build a portfolio of residential solar or home improvement loans, to the homeowner customers of the contractors in Sunlight's distribution network, who wish to finance the purchase of residential solar systems or home improvements. Sunlight earns a platform fee on each solar and home improvement funded loan facilitated through Orange®. Sunlight's ability to continue to increase its funding capacity either by adding additional capital providers or by increasing the commitments of its existing capital providers to fund loans on terms desired by the solar and/or home improvement markets and on terms that are economically favorable to Sunlight is a critical factor in Sunlight's ability to increase funded loan volume, which is a critical factor in Sunlight's operating results.
Competition
Competition for Sunlight occurs at two levels: (i) competition to acquire and maintain contractor relationships; and (ii) competition to acquire high quality capital to fund loans, in each case on economic terms favorable to Sunlight.
Competition to Acquire and Maintain Contractor Relationships
Competition to obtain contractor relationships is significant. Contractors
generally do not enter exclusive relationships with residential solar loan
providers and Sunlight's agreements with its network of contractors generally do
not provide for exclusive relationships. Contractors may offer loan products
from Sunlight, as well as from Sunlight's competitors, and generally select
between loan providers based on pricing (original issue discount charged),
consumer credit approval rates, variety of loan products to address shifting
consumer demands and market conditions, ease of loan application and completion
process (platform) and other services to facilitate the contractor's business).
Sunlight believes that the following factors, among others, are key to
Sunlight's success in acquiring and maintaining contractor relationships:
•Superior value proposition for contractors. Sunlight's large array of loan
products and flexibility in offering new and additional products stem from the
depth, diversity and attractively-priced funding of Sunlight's capital
providers. Sunlight loan products allow contractors to capture additional
purchase opportunities from consumers that do not want to or are not able to pay
cash for solar system installation or do not want to lease a system from a third
party and forego the benefits of ownership. Sunlight's attractive loan products
and competitive contractor fees allow contractors to choose products that fit
their business needs and the financing needs of their customers. The broad range
of products offered by Sunlight improves the contractor's chances of meeting its
customers' financing needs and completing a sale.
•Easy-to-use technology-enabled POS financing platform, instant credit
decisioning. Orange® is easy to use and provides instant credit decisions for
homeowners interested in financing the purchase of a residential solar system or
home improvement. Access to prompt credit decisions and the ability to close
financing transactions through an intuitive and easy process through the
execution of loan agreements in one encounter with a potential customer provides
significant additional sale opportunities for contractors. Orange® may be
accessed via the Orange® web address, directly from certain contractor's own
website via a flexible application programming interface, or API, and via
Sunlight's mobile application. Besides instant credit decisioning, Orange®
includes automated loan stipulation, secure document upload, e-sign capacity and
other features that facilitate efficient loan transactions and provide
contractors with the ability to grow their businesses.
•Additional features and services offered by Sunlight further support the growth
of contractor businesses, attract new contractors to Sunlight's network and
build contractor loyalty. Sunlight prioritizes innovation in Orange® and
services that support growth in the businesses of its existing network of
contractors, attract new contractors and build contractor loyalty. Examples of
such innovations include Sunlight's advance program, Sunlight's launch of
Spanish-language loan products and Sunlight Rewards™. Sunlight believes that it
has innovated more quickly than its competitors and offers contractors a greater
array of valuable services that drive their determination to offer their
customers Sunlight-offered loan products over those of Sunlight's competitors
and that Sunlight will continue to be able to innovate quickly to meet the needs
of its contractor network.
48
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Competition to
The solar system and home improvement loan markets are relatively fragmented. Facilitating the aggregation of loan volume from these markets is a highly competitive sector of these broader industries. Sunlight faces competition from a diverse landscape of consumer lenders, including traditional banks, credit unions, and specialized solar system lenders and lease providers. Sunlight's competitors source capital from a mix of alternative sources, including depository capital and/or other alternatives that rely on the capital markets. Sunlight believes that it offers capital providers an attractive value proposition due to its industry-leading consumer credit underwriting, attractive risk-adjusted returns earned by its capital providers relative to other asset classes, the access that Sunlight's Platform provides to a unique and growing asset class that may reduce volatility in the ability to deploy capital, and the ability to access new customers for very little cost. Sunlight has successfully added capital providers and grown commitments from existing capital providers since inception. As its contractor network has grown, Sunlight has consistently diversified its capital provider base to ensure that it has sufficient capital to fund the demand for Sunlight facilitated loans and that it is able to offer an evolving competitive mix of loan products to meet contractor and consumer demand. Capital providers have actively participated in this success and Sunlight has not experienced any capital provider attrition since inception, although one capital provider provided notice to Sunlight that it had exceeded its internal asset concentration levels for solar loans and, accordingly, such capital provider terminated their program agreement with Sunlight duringApril 2021 . This capital provider purchased an immaterial portion (less than 2.2%) of Sunlight's total facilitated solar loans in 2020. Sunlight believes that there are many institutions seeking to deploy capital into solar and home improvement loan assets, but Sunlight intends to continue to be selective about adding capital provider partners. Sunlight values diversification but will specifically focus on partnering with potential capital providers that can enable Sunlight to meet strategic goals, including access to the most attractive pricing and access to capacity for a growing suite of loan products, among others.
Industry Trends and General Economic Conditions; Cost of Power
Sunlight's results of operations in the past have been fairly resilient to economic downturns but in the future may be impacted by the relative strength of the overall economy and its effect on unemployment, consumer spending and consumer demand for solar systems and home improvements. As general economic conditions improve or deteriorate, the amount of disposable income consumers have access to tends to fluctuate, which in turn impacts consumer spending levels and the willingness of consumers to take out loans to finance purchases. Specific economic factors such as interest rate levels, changes in monetary, fiscal and related policies, market volatility, consumer confidence, the impact of the pandemic crisis and, particularly, the unemployment rate also influence consumer spending and borrowing patterns. Sunlight's results of operations are also dependent upon continued growth in the residential solar market and the continued penetration of residential solar across the country. Growth in the solar market is attributable to several factors including, among others, savings available to consumers as compared with the cost of traditional sources of power or other forms of clean or alternative power and the opportunity to participate in the world-wide effort of reducing carbons in the atmosphere, or "going green." The cost to homeowners to install solar is impacted by many factors, including the cost of materials, the cost of labor, to the extent financed, prevailing interest rates and the availability of federal, state and local incentives. Specifically, future results of operations may be impacted by the potential discontinuation or material reduction or other change in the federal solar tax credit (the "ITC"). The ITC currently allows a qualifying homeowner to deduct 26% of the cost of installing residential solar systems from theirU.S. federal income taxes, thereby returning a material portion of the purchase price of the residential solar system to homeowners.Congress has extended the ITC expiration date multiple times including, most recently, inDecember 2020 . Under the terms of the current extension, the ITC will remain at 26% through the end of 2022, reduce to 22% for 2023, and further reduce to 0.0% after the end of 2023 for residential solar systems, unless it is extended before that time. Although the ITC has been extended several times, there is no guarantee that it will be extended beyond 2023. Though the residential solar market has grown steadily over the last several years, Sunlight cannot guarantee that such growth will continue. In addition, although the home improvement business is not currently a material part of Sunlight's business, Sunlight believes that it is well-positioned to grow that business significantly over time. The home improvement industry is, however, subject to many of the same industry trends and challenges associated with a changing economy as the solar industry and Sunlight cannot guarantee that it will be successful in growing that business as planned. 49 --------------------------------------------------------------------------------
Concentration
Sunlight's expansive network of residential solar system and other home improvement contractors, supported by a differentiated set of tools and services offered through Orange®, constitutes the distribution channel through which the Sunlight-facilitated loans made available by Sunlight's channel of capital providers are sold to the consumer customers of those loan products. Such an expansive network enables Sunlight to build increased funded loan volume and earn increased platform fees. Sunlight partners with some of the largest contractors in theU.S. , which in the aggregate sell a material portion of Sunlight's funded loan volume through Sunlight's network of capital providers. However, Sunlight's contractor network is considerably diversified. In the period fromSeptember 30, 2019 toSeptember 30, 2020 , the top ten contractors in Sunlight's network were responsible for selling 43.6% of Sunlight's funded loan volume, and in the period fromSeptember 30, 2020 toSeptember 30, 2021 that percentage increased to 45.2%. In both of these periods, only one contractor sold loans aggregating more than 10% of Sunlight's revenue. That contractor was responsible for selling more than 15.8% and 14.5% of Sunlight's funded loan volume in the period fromSeptember 30, 2019 toSeptember 30, 2020 and in the period fromSeptember 30, 2020 toSeptember 30, 2021 , respectively. While the percentage of Sunlight's funded loan volume sold by any contractor in Sunlight's network varies from period to period, there is one contractor,Marc Jones Construction, L.L.C. d/b/a Sunpro Solar ("Sunpro"), that sold 12.1%, 17.1%, and 15.2% of Sunlight's funded loan volume during the Successor Period, the Predecessor Quarterly Period, and the Predecessor Year-to-Date Period, respectively, and 15.8% and 16.4% during the three and nine months endedSeptember 30, 2020 , respectively. Sunlight believes that its contractor network is sufficiently diversified to continue to grow with the solar markets and increase share given market dynamics, but intends to continue adding contractors to the network in order to further diversify. Sunlight has multiple capital providers in both its direct and indirect funding channels, all of which have increased their commitments since partnering with Sunlight. Sunlight's largest capital provider in the period fromSeptember 30, 2020 toSeptember 30, 2021 has materially increased its commitment since the relationship began in 2015. Though Sunlight believes that the relationship with this capital provider is healthy and will continue without disruption, the significant portion of funded loan volume attributable to this capital provider results in concentration risk. Sunlight cannot guarantee that this capital provider will continue to fund loans facilitated by Sunlight in the same volume or at all beyond its current contractual commitment which expires in 2022. This capital provider funded 47.0% and 33.7% of Sunlight's funded loans during the period fromSeptember 30, 2019 toSeptember 30, 2020 and during the period fromSeptember 30, 2020 toSeptember 30, 2021 , respectively. If this capital provider elects to terminate its relationship with Sunlight, then the capital provider is contractually required to provide Sunlight 12 months' advance notice of termination. If Sunlight were to receive such an advance notice of termination, then Sunlight would use this period to develop alternate funding plans by utilizing existing relationships and exploring possible new capital provider relationships. While Sunlight believes that it would be able to identify and implement alternative arrangements during this period, Sunlight cannot guarantee that it would be able to do so at all or on equivalent or favorable terms. Sunlight believes that a failure to arrange alternative loan funding on equivalent terms would have less of an impact on Sunlight's funded loan volume, as capital for the solar loan industry has historically been readily available. Rather, Sunlight believes that such failure would be more likely to have a greater negative impact on the amount of platform fees that Sunlight earns, and therefore could impact revenue.
Basis of Presentation
Sunlight conducts business through one operating segment, and Sunlight operates
in one geographic region,
Components of Results of Operations
Revenues
Revenue. Sunlight earns revenue in two primary streams: platform fees earned on
each loan facilitated via Orange® and fees earned for loan portfolio management
and administration services.
Platform fees. Platform fee revenue, for each loan facilitated via Orange®, is
generally the difference between the contractor fee that Sunlight charges to the
contractors in its network for access to Orange® and the ability to offer
financing options to their customers and the capital provider discount charged
to Sunlight (cost of capital to Sunlight) for such loan. The platform fee
percentage is equal to the dollar amount of such fee divided by the principal
balance at origination of such loan. For solar system loans, platform fees are
generally earned by Sunlight in the direct channel when the direct channel
capital provider funds a particular loan and in the indirect channel generally
when an indirect channel capital provider purchases a particular loan from
Sunlight's bank partner. The contract between Sunlight and its bank partner for
home improvement loans is considered a derivative for GAAP purposes, whereas the
contract between Sunlight and its bank partner for solar loans is not. For home
improvement loans, Sunlight records a "realized gain on
50
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contract derivative (net)" in lieu of a platform fee generally when the loans
are purchased by Sunlight's indirect capital provider from Sunlight's bank
partner, and Sunlight is paid. As such, Sunlight excludes from its revenue any
platform fee associated with a home improvement loan under Sunlight's related
home improvement agreement. Sunlight estimates the fair value of the derivative
components of the bank partnership arrangement based on the present value of the
net cash flows that Sunlight expects to collect under the agreement. Under this
home improvement bank partnership arrangement, with respect to a given home
improvement loan, Sunlight will expect to collect (x) the amount paid by
Sunlight's indirect capital provider to purchase the loan from Sunlight's bank
partner (the outstanding principal balance of the loan less the amount of the
capital provider discount applied to that loan plus any accrued and unpaid
interest) minus (y) the total of amounts funded to the relevant contractor in
respect of the related home improvement project (total cost of the project to
the consumer customer of the relevant contractor less the applicable contractor
fee) and any amounts that Sunlight owes to its bank partner in the form of
minimum guaranteed returns to the bank partner on the origination of such loan.
The aggregate estimated fair value of this agreement is marked to market by
Sunlight on a monthly basis. When a loan sale occurs, the estimated fair value
associated with the loans included in the sold portfolio is reversed and
Sunlight recognizes the related realized net cash as a realized gain as noted
above.
Loan portfolio management and administration revenue. Sunlight also earns
revenue from fees charged by Sunlight for providing loan portfolio management
and administration services for certain of its capital providers. These services
include the reporting of loan performance information, administration of
servicing performed by third parties, and addressing customer concerns or
complaints through Sunlight's call center on behalf of the relevant capital
provider.
Costs and Expenses
Cost of revenues. Sunlight's cost of revenues includes the aggregate costs that Sunlight incurs to satisfy its obligations in facilitating the origination of a loan. The cost of revenues includes variable consideration that Sunlight pays for its platform fees which do not otherwise meet the criteria necessary for netting against gross revenues, including items such as credit bureau fees, the cost to check homeowners' title in connection with the homeowner credit underwriting, the cost of certain sales incentives, and certain information technology costs directly associated with loan origination activities, among others. Compensation and benefits. Compensation and benefits expenses represent costs related to our employees, such as salaries, bonuses, benefits and equity-based compensation expenses. Also included are any recruiting costs incurred by Sunlight in attracting talent and professional and consulting fees related to certain services that Sunlight outsources to third parties. Selling, general, and administrative. Selling, general and administrative expenses include legal, audit and other professional services fees, travel and entertainment expenses, and insurance premiums as incurred. Sunlight recognizes expenses associated with co-marketing agreements when earned by the counterparty.
Property and technology. Property and technology expenses comprise rent, information technology services to support the Orange® infrastructure and operation, as well as other Sunlight technology requirements, and noncapitalizable costs to internally develop software as incurred.
Depreciation and amortization. Depreciation and amortization expense relate
primarily to the amortization of definite-lived intangible assets acquired in
the Business Combination that include contractor and capital provider
relationships, developed technology, and trademarks/ tradenames. Other
amortization includes internally developed software to support Orange® or
otherwise developed by or on behalf of Sunlight after the Business Combination
and leasehold improvements. Depreciation expense includes the depreciation of
computer hardware as well as furniture, fixtures, and equipment.
Provision for losses. Provision for losses expenses relate primarily to certain
receivables that are held-for-investment by Sunlight that are not performing or
Sunlight estimates will not perform based upon historical experience. The term
relates to Sunlight's advances program, its prefunding program, and to certain
solar and home improvement loans and loan participations that Sunlight purchased
from Sunlight's capital providers pursuant to the terms of its contract with
those capital providers.
Management fees to affiliate. These expenses relate to fees paid pursuant to
management agreements entered into between Sunlight and certain of Sunlight's
affiliates. These management agreements terminated upon closing of the Business
Combination.
51
--------------------------------------------------------------------------------Other Income (Expense), Net
Interest income. Sunlight recognizes income on certain receivables that are held-for-investment by Sunlight, including certain solar or home improvement loans, or participations in such loans, held on the Sunlight balance sheet, in each case to the extent such receivables are performing. Sunlight accrues interest income based on the unpaid principal balance and contractual terms of such receivables, and recognizes income related to the discounts associated with such receivables as a yield adjustment using the interest method, or on a straight-line basis when it approximates the interest method, over the loan term. Interest expense. Interest expenses represent interest payable by Sunlight on its borrowings under its Loan and Security Agreement (as defined below). Interest expense also includes the amortization of associated deferred financing costs prior to the Business Combination.
Change in fair value of warrant liabilities. The change in fair value of warrant liabilities relates to certain warrants issued by Sunlight to certain third parties to purchase Sunlight's Class A Shares. Such warrants are marked to market periodically and any change in value is reflected in this line item.
Change in fair value of, and realized gains on, contract derivative, net. The arrangement with Sunlight's bank partner to originate home improvement loans is considered a derivative under GAAP. As such, Sunlight's revenues exclude the platform fees that Sunlight earns from the sale of home improvement loans from the bank partner's balance sheet. Instead, Sunlight records a derivative that is marked to market on a monthly basis, with realized gains recognized on the derivative on the sale of the loan from the bank partner to an indirect channel capital provider and accounting for the impact of any changes to the applicable interest rates on the amounts payable to the bank partner in connection with any such sale.
Other realized losses, net. Other realized losses primarily relate to losses Sunlight incurred in connection with certain indirect channel loans.
Other income (expense). Other income or expense primarily relate to the changes in a liability for certain guarantees of performance provided by Sunlight to Sunlight's bank partner relating to the loans held on the balance sheet of Sunlight's bank partner and certain other guarantees of performance made by Sunlight to certain of its capital providers with respect to specified solar loans.
Business Combination expenses. The expenses Sunlight incurs that are not considered operating expenses. For the Combined Quarterly Period and Combined Year-to-Date Period, these costs primarily represent legal and other professional costs Sunlight incurred in connection with the Business Combination.
Income tax benefit (expense). The income taxes Sunlight incurs on the income, or
loss, not allocable to noncontrolling interests in
Noncontrolling interests in income (loss) of consolidated subsidiaries. The net
income (loss) of Sunlight's consolidated subsidiaries allocable to third parties
and to which Sunlight is not entitled.
52
--------------------------------------------------------------------------------Results of Operations
This section includes a summary of our results of operations, followed by detailed comparisons of our results for the Successor Period, the Predecessor Quarterly Period, the Predecessor Year-to-Date Period, and the three and nine months endedSeptember 30, 2020 (in thousands, except percentages): Successor Predecessor Predecessor For the Period For the Three For the Nine July 10, 2021 to For the Period Months Ended
For the Period Months Ended
September 30, July 1, 2021 to September 30, January 1, 2021 September 30,
2021 July 9, 2021 2020 Increase (Decrease)(a) to July 9, 2021 2020 Increase (Decrease)(b)
Revenue $ 26,520 $ 2,074 $ 17,247 $ 11,347 65.8 % $ 53,064 $ 40,519 $ 39,065 96.4 %
Costs and Expenses
Cost of revenues
(exclusive of items
shown separately below) 4,841 365 3,468 1,738 50.1 10,556 8,715 6,682 76.7
Compensation and
benefits 32,782 1,042 6,748 27,076 401.2 17,162 19,471 30,473 156.5
Selling, general, and
administrative 3,330 330 904 2,756 304.9 3,450 2,726 4,054 148.7
Property and technology 1,502 162 1,105 559 50.6 2,790 3,153 1,139 36.1
Depreciation and
amortization 20,541 78 812 19,807 2,439.3 1,688 2,430 19,799 814.8
Provision for losses 254 - 310 (56) (18.1) 1,172 788 638 81.0
Management fees to
affiliate - 4 100 (96) (96.0) 204 300 (96) (32.0)
63,250 1,981 13,447 51,784 385.1 37,022 37,583 62,689 166.8
Operating income (loss) (36,730) 93 3,800 (40,437) n.m. 16,042 2,936 (23,624) n.m.
Other Income (Expense),
Net
Interest income 77 9 94 (8) (8.5) 262 370 (31) (8.4)
Interest expense (291) (32) (264) (59) 22.3 (604) (592) (303) 51.2
Change in fair value of
warrant liabilities 10,116 (1,439) (95) 8,772 n.m. (5,504) (66) 4,678 n.m.
Change in fair value of
contract derivatives,
net 489 125 391 223 57.0 (662) 846 (1,019) n.m.
Realized gains on
contract derivatives,
net 1,377 6 170 1,213 713.5 2,992 291 4,078 1,401.4
Other income (expense) (60) (5) (24) (41) 170.8 616 (414) 970 n.m.
Business combination
expenses (1,093) (529) - (1,622) n.m. (7,011) - (8,104) n.m.
10,615 (1,865) 272 8,478 3,116.9 (9,911) 435 269 61.8
Net Income (Loss) Before
Income Taxes (26,115) (1,772) 4,072 (31,959) n.m. 6,131 3,371 (23,355) n.m.
Income tax benefit
(expense) 5,684 - - 5,684 n.m. - - 5,684 n.m.
Net Income (Loss) (20,431) (1,772) 4,072 (26,275) n.m. 6,131 3,371 (17,671) n.m.
Noncontrolling interests
in loss of consolidated
subsidiaries 9,108 - - 9,108 n.m. - - 9,108 n.m.
Net Income (Loss)
Attributable to Class A
Shareholders $ (11,323) $ (1,772) $ 4,072 $ (17,167) n.m. $ 6,131 $ 3,371 $ (8,563) n.m.
a.Change represents the Combined Quarterly Period compared to the three months
ended September 30, 2020 .
b.Change represents the Combined Year-to-Date Period compared to the nine months
ended September 30, 2020 .
53
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The Combined Quarterly Period Compared to the Three Months Ended
Revenue
The following table provides the components of Sunlight's revenue for the
Successor Period, the Predecessor Quarterly Period, and the three months ended
Successor Predecessor Increase (Decrease)(a)
For the
Period July For the For the Three
10, 2021 to Period July Months Ended
September 30, 1, 2021 to September 30,
2021 July 9, 2021 2020 $ %
Direct Channel Platform Fees,
net $ 21,670 $ 1,972 $ 17,703 $ 5,939 33.5 %
Indirect Channel Platform
Fees, net 2,489 11 (1,160) 3,660 n.m.
Other revenues 2,361 91 704 1,748 248.3
$ 26,520 $ 2,074 $ 17,247 $ 11,347 65.8
a.Change represents the Combined Quarterly Period compared to the three months
ended
Revenue increased by$11.3 million or 65.8% for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 due to an increase of 70.5% in platform fee loans, and an increase of 0.1% in the average platform fee percentage earned on loans funded by direct channel capital providers or purchased by indirect channel capital providers. Sunlight's revenue excludes amounts earned through its facilitation of home improvement loan originations, which Sunlight presents as realized gains on contract derivatives. Funded loans increased from$360.4 million in the three months endedSeptember 30, 2020 to$639.5 million in the three months endedSeptember 30, 2021 , an increase of 77.4%. Sunlight believes that an increase in funded loans year-over-year is attributable primarily to both growth in the residential solar market and an increase in the number of contractors in Sunlight's contractor network. The total number of contractors in Sunlight's network increased from approximately 963 atSeptember 30, 2020 to over 1,484 atSeptember 30, 2021 . The number of solar contractors in the network increased from 609 atSeptember 30, 2020 to 776 atSeptember 30, 2021 , an increase of 27.4%. The number of home improvement contractors in the network increased from 354 atSeptember 30, 2020 to 708 atSeptember 30, 2021 . The average platform fee percentage earned on loans funded by direct channel capital providers or purchased by indirect channel capital providers increased 0.1% from the three months endedSeptember 30, 2021 to the three months endedSeptember 30, 2020 . The platform fee percentage earned by Sunlight is dependent on several factors, including (i) the contractor fees charged by Sunlight to contractors (which is impacted by competitive pressure that varies from period to period, by loan product based on consumer preferences, and by the mix of contractors in a particular period as certain contractors may generally have higher or lower contractor fees than others), (ii) the capital provider discounts charged to Sunlight by Sunlight's capital providers (which fluctuate, among other things, based on market conditions impacting cost of capital, opportunities in other asset classes, and the mix of capital providers funding or purchasing loans in a particular period as certain capital providers may generally have higher or lower capital provider discounts than others), (iii) the mix of Sunlight loan products funded in a particular period (as certain products in that period, for reasons relating to competitive pressure for certain loan products or otherwise, may generally carry a higher or lower capital provider discount or contractor fee, than others) and (iv) other factors. Sunlight earns revenues from platform fees, which are determined by the margin between capital provider discounts charged to Sunlight and contractor fees charged by Sunlight to the contractors that sell the Sunlight facilitated loan products. Both components in the calculation of platform fees are influenced by a variety of factors, including but not limited to those described above. For example, capital providers wishing to obtain greater volume may reduce capital provider discounts charged across all products to make funding with this capital provider an attractive option to Sunlight. As well, competitive pressures or volume discounts negotiated with given contractors may reduce the contractor fees that Sunlight charges to such contractors on certain loan products or across loan products. Sunlight believes that the difference in platform fee percentage fromSeptember 30, 2020 toSeptember 30, 2021 is primarily attributable to competition in the market with regard to contractor fees, the mix of Sunlight loan products funded in the two periods (based on the recent trend towards contractor preference to offer certain longer term, lower interest rate loan products facing significant competitive pressure from other participants offering loan financing in the market and driving attractive contractor fee pricing in those periods) and an increase in capital provider discounts charged to Sunlight by capital providers in Sunlight's indirect channel during the second quarter of 2020. Sunlight's indirect channel capital providers are generally more reactive than direct channel capital providers to market uncertainty and interest rate market 54 -------------------------------------------------------------------------------- volatility as presented at the onset of the COVID-19 pandemic. Unlike Sunlight's direct channel capital providers, Sunlight's indirect channel capital providers are generally not depository institutions and therefore their own cost of capital is subject to market uncertainty. Consequently, the capital provider discounts charged to Sunlight by such indirect channel capital providers are also likely to be more reactive. Deposits, which are generally used by Sunlight's direct channel capital providers to fund loans, are generally more stable, less reactive to market variance and the least expensive cost of capital. The following table presents averages weighted by original loan balance of capital provider discounts, contractor fees and platform fees. Successor Predecessor Predecessor For the Period July For the Period July For the Three Months 10, 2021 to 1, 2021 to July 9, Combined Ended September 30, Change in September 30, 2021 2021 Quarterly Period 2020 Average(a) Solar Total - Capital Provider Discount 17.0 % 17.2 % 17.0 % 12.1 % 4.9 % Solar Total - Contractor Fee 21.5 21.6 21.5 16.5 5.0 Solar Total - Platform Fee 4.5 4.4 4.5 4.4 0.1 Solar Direct Channel - Capital Provider Discount 16.8 17.2 16.8 11.7 5.1 Solar Direct Channel - Contractor Fee 21.9 21.6 21.8 17.1 4.7 Solar Direct Channel - Platform Fee 5.1 4.4 5.0 5.4 (0.4) Solar Indirect Channel - Capital Provider Discount 18.1 - 18.1 15.2 2.9 Solar Indirect Channel - Contractor Fee 20.3 - 20.3 12.6 7.7 Solar Indirect Channel - Platform Fee 2.2 - 2.2 (2.6) 4.8
a.Change represents the Combined Quarterly Period compared to the three months
ended
Costs and Expenses Cost of revenues increased by 50.1% for the three months endedSeptember 30, 2021 , less than the 65.8% increase in revenues, when compared to the three months endedSeptember 30, 2020 . The$1.7 million increase in cost of revenues resulted from$0.9 million of increased costs of consumer credit underwriting arising from increased credit approval volumes,$0.1 million from rewards earned by salespeople under Sunlight Rewards™,$0.6 million from costs incurred in connection with the increase of funded loan volumes and Sunlight's role in facilitating those loans, and$0.1 million of cost increases from broker fees paid to financial institutions for arranging certain loan origination or purchase arrangements with capital providers. The broker fees are calculated as a percentage of the funded loan volume originating from an applicable loan origination or purchase arrangement with a capital provider. Sunlight's obligation to pay these broker fees generally terminates between three and five years after the date that the initial loan is originated or purchased pursuant to an arrangement facilitated by the broker. Compensation and benefits expense increased by$27.1 million , or 401.2% for the three months endedSeptember 30, 2021 when compared to the three months endedSeptember 30, 2020 , primarily due to an increase of$24.8 million from recognition of compensation expense in connection with equity-based awards during the Successor Period, while remaining costs were associated with an increase in full-time employees from 165 atSeptember 30, 2020 to 220 atSeptember 30, 2021 and The increase in full-time employees is consistent with the growth in Sunlight's business year-over-year and Sunlight expects to continue hiring as its business grows in order to continue to expand its contractor network, develop its home improvement business and meet the demands of its contractors and capital providers. Selling, general, and administrative expense increased by$2.8 million , or 304.9% for the three months endedSeptember 30, 2021 when compared to the three months endedSeptember 30, 2020 primarily due to increased professional fees including legal, audit and tax services. Property and technology expense increased by$0.6 million , or 50.6% for the three months endedSeptember 30, 2021 when compared to the three months endedSeptember 30, 2020 primarily due to an increase in licensing fees charged by certain of Sunlight's third-party service providers that support the infrastructure and operation of Orange® associated with the growth in Sunlight's network of contractors. 55 -------------------------------------------------------------------------------- Depreciation and amortization expense increased by$19.8 million , or 2,439.3% for the three months endedSeptember 30, 2021 when compared to the three months endedSeptember 30, 2020 primarily due to the amortization of intangible assets acquired in the Business Combination during the Successor Period. Provision for loss expense decreased by$0.1 million , or (18.1)% for the three months endedSeptember 30, 2021 when compared to the three months endedSeptember 30, 2020 . Such increase was due primarily to a decreased level of loan write offs. The ratio of provision for loss expense over aggregate funded bank partner loan volume in the three months endedSeptember 30, 2020 was 0.4% as compared to 0.8% over the three months endedSeptember 30, 2021 as a result of the write offs. Operating margin decreased materially from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 due to the factors described above, primarily related to non-cash charges in connection with the Business Combination. Generally, operating margin benefits from the fixed nature of a material level of Sunlight expense and revenue generally growing materially faster than operating expenses when excluding the amortization effects of identified intangible assets and equity-based compensation expense.
Other Income (Expense), Net
Total other income increased$8.5 million for the three months endedSeptember 30, 2021 when compared to the three months endedSeptember 30, 2020 , primarily resulting from (a)$8.8 million decrease in the fair value of warrants issued by Sunlight and redeemable in its equity, treated as liabilities and (b) a$1.2 million increase in income Sunlight realized from the arrangement with Sunlight's bank partner to originate home improvement loans treated as a derivative underU.S. GAAP. This in increased income was partially offset by a$1.6 million increase in costs incurred in connection with the Business Combination.
Income Tax Benefit
Sunlight's Predecessor is a limited liability company not subject to income
taxes. During the Successor Period, the
Noncontrolling Interests in Consolidated Subsidiaries
Sunlight's Predecessor did not consolidate any entities in which third parties owned a noncontrolling interest. During the Successor Period, income (loss) of consolidated subsidiaries allocated to noncontrolling interests represents$26.1 million ofSunlight Financial LLC consolidated net loss during the Successor Period and weighted-average noncontrolling interests of 34.9%.
The Combined Year-to-Date Period Compared to the Nine Months Ended
Revenue
The following table provides the components of Sunlight's revenue for the
Successor Period, the Predecessor Year-to-Date Period, and the nine months ended
Successor Predecessor Increase (Decrease)(a)
For the
Period July For the Nine
10, 2021 to For the Period Months Ended
September 30, January 1, 2021 September 30,
2021 to July 9, 2021 2020 $ %
Direct Channel Platform Fees,
net $ 21,670 $ 45,703 $ 36,607 $ 30,766 84.0 %
Indirect Channel Platform
Fees, net 2,489 5,054 2,018 5,525 273.8
Other revenues 2,361 2,307 1,894 2,774 146.5
$ 26,520 $ 53,064 $ 40,519 $ 39,065 96.4
a.Change represents the Combined Year-to-Date Period compared to the nine months
ended
Revenue increased by$39.1 million or 96.4% for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 due to an increase of 126.9% in platform fee loans, partially offset by an overall 0.3% decrease in the average platform fee percentage earned on loans funded by direct channel capital providers or purchased 56 --------------------------------------------------------------------------------
by indirect channel capital providers. Sunlight's revenue excludes amounts earned through its facilitation of home improvement loan originations, which Sunlight presents as realized gains on contract derivatives.
Funded loans increased from$832.3 million for the nine months endedSeptember 30, 2020 to$1.9 billion for the nine months endedSeptember 30, 2021 , an increase of 126.7%. Sunlight believes that the increase in funded loans year-over-year is attributable primarily to both growth in the residential solar market and an increase in the number of contractors in Sunlight's contractor network. The average platform fee percentage earned on loans funded by direct channel capital providers or purchased by indirect channel capital providers decreased 0.3% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 for the same reasons described in Sunlight's quarter-on-quarter results of operations. The following table presents averages weighted by original loan balance of capital provider discounts, contractor fees and platform fees. Successor Predecessor Predecessor For the Period July For the Period For the Nine Months 10, 2021 to January 1, 2021 to Combined Ended September 30, Change in September 30, 2021 July 9, 2021 Year-to-Date Period 2020 Average(a) Solar Total - Capital Provider Discount 17.0 % 16.7 % 16.8 % 11.5 % 5.3 % Solar Total - Contractor Fee 21.5 20.8 21.1 16.1 5.0 Solar Total - Platform Fee 4.5 4.1 4.3 4.6 (0.3) Solar Direct Channel - Capital Provider Discount 16.8 16.6 16.6 10.4 6.2 Solar Direct Channel - Contractor Fee 21.9 20.9 21.2 16.1 5.1 Solar Direct Channel - Platform Fee 5.1 4.3 4.6 5.7 (1.1) Solar Indirect Channel - Capital Provider Discount 18.1 17.2 17.5 15.4 2.1 Solar Indirect Channel - Contractor Fee 20.3 20.2 20.2 16.3 3.9 Solar Indirect Channel - Platform Fee 2.2 3.0 2.7 0.9 1.8
a.Change represents the Combined Year-to-Date Period compared to the nine months
ended
Costs and Expenses Cost of revenues increased by 76.7% for the nine months endedSeptember 30, 2021 , which is less than the 96.4% increase in revenues, when compared to the nine months endedSeptember 30, 2020 . The$6.7 million increase in cost of revenues resulted from$2.0 million of increased costs of consumer credit underwriting arising from increased credit approval volumes,$1.4 million from rewards earned by salespeople under Sunlight Rewards™,$2.3 million from costs incurred in connection with the increase of funded loan volume in 2020 and Sunlight's role in facilitating those loans, and increased costs of$1.0 million from broker fees paid to financial institutions for arranging certain loan origination or purchase arrangements with capital providers. The broker fees are calculated as a percentage of the funded loan volume originating from an applicable loan origination or purchase arrangement with a capital provider. Sunlight's obligation to pay these broker fees generally terminates between three and five years after the date that the initial loan is originated or purchased pursuant to an arrangement facilitated by the broker. Compensation and benefits expense increased by$30.5 million , or 156.5% for the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 , primarily due to an increase of$24.8 million from recognition of compensation expense in connection with equity-based awards during the Successor Period and an increase in full-time employees from 165 atSeptember 30, 2020 to 220 atSeptember 30, 2021 . The increase in full-time employees is consistent with the growth in Sunlight's business and Sunlight expects to continue hiring as its business grows in order to continue to expand its contractor network, develop its home improvement business and meet the demands of its contractors and capital providers. Selling, general, and administrative expense increased by$4.1 million , or 148.7% for the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 primarily due to increased professional fees including legal, audit and tax services. 57 -------------------------------------------------------------------------------- Property and technology expense increased by$1.1 million , or 36.1% for the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 primarily due to an increase in licensing fees charged by certain of Sunlight's third-party service providers that support the infrastructure and operation of Orange® associated with the growth in Sunlight's network of contractors. Depreciation and amortization expense decreased by$19.8 million , or 814.8% for the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 primarily due to the amortization of intangible assets acquired in the Business Combination during the Successor Period and the amortization of investments made in Orange® to support ongoing innovation and to automate certain other corporate processes. Provision for loss expense increased by$0.6 million , or 81.0% for the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 . Such increase was due primarily to an increased level of funded loan volume with Sunlight's bank partner. The ratio of provision for loss expense over aggregate funded bank partner loan volume in the nine months endedSeptember 30, 2020 was 0.7% as compared to 0.3% over the three months endedSeptember 30, 2021 , indicating an decrease in loss experience as compared to funded bank partner loan volume. Operating margin decreased materially from the nine months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 due to the factors described above, primarily related to non-cash charges in connection with the Business Combination. Generally, operating margin benefits from the fixed nature of a material level of Sunlight expense and revenue generally growing materially faster than operating expenses when excluding the amortization effects of identified intangible assets and equity-based compensation expense.
Other Income (Expense), Net
Total other expenses increased$0.3 million for the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 , primarily resulting from (a)$8.1 million increase in costs incurred in connection with the Business Combination, (b)$4.7 million increase in the fair value of warrants issued by Sunlight and redeemable in its equity, treated as liabilities, and (c) $1.0 million reversal of the change in fair value of the arrangement with Sunlight's bank partner to originate home improvement loans treated as a derivative underU.S. GAAP. caused by an offsetting$4.1 million realized gain from the sale of those loans.
Income Tax Benefit
Sunlight's Predecessor is a limited liability company not subject to income
taxes. During the Successor Period, the
Noncontrolling Interests in Consolidated Subsidiaries
Sunlight's Predecessor did not consolidate any entities in which third parties owned a noncontrolling interest. During the Successor Period, income (loss) of consolidated subsidiaries allocated to noncontrolling interests represents$26.1 million ofSunlight Financial LLC consolidated net loss during the Successor Period and weighted-average noncontrolling interests of 34.9%.
Liquidity and Capital Resources
As ofSeptember 30, 2021 , Sunlight had$72.8 million of unrestricted cash on hand and had drawn$20.6 million available to it under its$30.0 million credit facility. At the closing of the Business Combination, Sunlight had an additional$49.5 million cash on hand from the proceeds of the Business Combination, which we intend to use as working capital to finance operations and other potential needs in the business. OnApril 26, 2021 , Sunlight entered into a Loan and Security Agreement (the "Loan and Security Agreement") withSilicon Valley Bank ("SVB"). The Loan and Security Agreement, which replaces Sunlight's prior$15.0 million credit facility, has a borrowing capacity of up to$30.0 million and matures onApril 26, 2023 . To secure the payment and performance of Sunlight's obligations under the Loan and Security Agreement, Sunlight granted a continuing security interest in certain collateral, which generally includes all Sunlight assets, whether currently owned or thereafter acquired, and all proceeds and products there To secure the payment and performance of Sunlight's obligations under the Loan and Security Agreement, Sunlight granted a continuing security interest in certain collateral, which generally includes all Sunlight assets, whether currently owned or thereafter acquired, and all proceeds and products thereof. Borrowings under the Loan and Security Agreement accrue interest at a rate equal to the greater of (i) 5.0% and (ii) the prime rate plus 1.75% per annum. The Loan and Security Agreement contains certain financial covenants, including maintenance of (i) Liquidity 58 -------------------------------------------------------------------------------- (as defined therein) at all times in an amount equal to or greater than the greater of (a) 35% of all outstanding principal amounts of any advances and (b)$10.0 million ; (ii) at all times Available Takeout Commitment Amount (as defined therein) in an amount equal to or greater than$200.0 million ; and (iii) EBITDA (as defined in the Loan and Security Agreement) of at least$5.0 million for the six month period ending on the last day of each month. The Loan and Security Agreement contains customary events of default. SVB could elect to accelerate the maturity of the loans and/or terminate the commitments under the Loan and Security Agreement upon the occurrence and during the continuation of an event of default, and Sunlight could be required to repay all amounts outstanding under the Loan and Security Agreement. In connection with the transition of accounts to SVB, Sunlight experienced a technical default that was waived internally by SVB via email. Sunlight expects to receive a formal waiver similarly addressing the technical default. Otherwise, no defaults or events of default have occurred as of the date of this filing. Sunlight's cash requirements relate primarily to funding Sunlight advances and prefunding programs, to invest in continued innovations in Orange® and to pay Sunlight's operating expenses, repayment of borrowings (and interest thereon), management fees, outstanding commitments and guarantees (including Sunlight's purchase of loans pursuant to the terms of certain of its capital provider agreements and loan participations), other operating expenses, and tax distributions. Sunlight may be required to purchase loans from its bank partner after an agreed period of time if Sunlight has not arranged the sale of such loans. To date, Sunlight has not been required to purchase loans from its bank partner due to an inability to sell such loans to an indirect channel capital provider. Additionally, Sunlight assumes the risk of compliance errors and the risk of borrower or contractor fraud in the origination of the loans, and as such, Sunlight is obligated to purchase the applicable loan from its bank partner should these events occur. Sunlight has also entered into a program agreement with its bank partner to fund its home improvement loans that contains similar provisions related to risks accepted by Sunlight. Historically, Sunlight has met its cash requirements from cash flow generated by operations, collection of advances under its contractor advance funding program and in prefunding payments under its prefunding program, and draws on Sunlight's credit facility. Sunlight believes that it will continue to generate cash flow from its operations which, together with funds available under its new credit facility and cash on hand, will be sufficient to meet its current and future liquidity needs.
Relationships with Contractors and Capital Providers
Relationships with Contractors
Sunlight's expansive network of residential solar system installers and other home improvement contractors, supported by a differentiated set of tools and services offered through Orange®, constitutes the distribution channel through which Sunlight builds funded loan volume and earns platform fees. The ability to finance residential solar systems on terms that typically translate to immediate saving for homeowners on their utility bills and significant amounts in lifetime savings has materially contributed to the strong growth in the number of residential solar systems installed inthe United States over the last five years. Sunlight attracts and builds strong relationships with residential solar system contractors of all sizes in key solar markets by prioritizing innovations in Orange® and providing services that assist the contractors in growing their own businesses. Sunlight's team of business development and relationship management professionals provides hands-on support to these contractors. Sunlight believes that innovations such as prequalification capabilities, easy and secure document upload features, reliable next day funding and Sunlight's capital advance program (as described more fully below), amongst other innovations, both attract new contractors to Sunlight's network and build loyalty and deepen Sunlight's existing contractor relationships. In addition, Sunlight's diverse set of capital providers enables Sunlight to offer its network of contractors a wide array of loan products that vary as to structure, interest rate and tenor, and thereby permits Sunlight's network of contractors to offer competitively-priced products that best serve their markets, and all at competitive pricing. These benefits to Sunlight's existing network of contractors translate to deeper penetration of the contractors' sales, which is an important contributor to the growth of Sunlight's market share and revenue. There can be no assurance that Sunlight will be able to maintain its current contractor relationships. Sunlight may lose existing contractors that represent a significant portion of Sunlight's business, and there is no guarantee that Sunlight would be able to engage replacement contractors on terms similar to its existing contractors. Sunlight started its business in 2014 and developed key anchor partnerships with a residential solar contractor in 2016. Beginning in 2017 and through 2018, Sunlight focused on building and diversifying its contractor relationships and continues that process today. In 2020, as compared with 2019, Sunlight grew its solar contractor base by more than 60%. However, dependence on any one contractor or small group of contractors creates concentration risk, particularly in the event that any such contractor elects to terminate its relationship with Sunlight or experiences business disruption or a business failure or bankruptcy. For example, duringMay 2021 , Sunlight was advised by a significant contractor that it will discontinue use of the Sunlight's platform to source solar loans effective immediately. This contractor accounted for 59 -------------------------------------------------------------------------------- approximately 6.7% and 10.6% of Sunlight's total funded loan volumes during the year endedDecember 31, 2020 and for the nine months endedSeptember 30, 2021 , respectively. Sunlight believes that its strong relationships with the existing contractors in Sunlight's network, the continued growth in the number of contractor relationships, and the various competitive loan products and sales tools in Orange® that Sunlight can offer those contractors have been and will continue to be key components of Sunlight's increased market penetration, growth in funded loan volume and revenue.
Relationships with Capital Providers
Sunlight's business model is dependent on its ability to connect its capital
providers, who wish to build a portfolio of residential solar system loans, to
the homeowner customers of the contractors in Sunlight's distribution network,
who wish to finance the purchase of a residential solar system. Sunlight earns a
platform fee on each solar and home improvement loan facilitated through
Orange®. The platform fee is generally equal to the difference, or the margin,
between (i) the contractor fee that Sunlight charges to contractors for access
to Orange® and for making the various Sunlight-offered loan products available
to such contractors and (ii) the capital provider discount charged by the
relevant capital provider either funding or purchasing the loan in the direct
and indirect channels, respectively (as described below). Sunlight's business is
therefore heavily dependent upon the availability of capital on attractive
economic terms. Sunlight believes that it offers capital providers an attractive
value proposition due to its industry-leading consumer credit underwriting, the
attractive risk-adjusted returns that Sunlight's capital providers earn relative
to other asset classes, the access that Sunlight's Platform provides to a unique
and growing asset class that may reduce volatility in the ability to deploy
capital, and the ability to access new customers for very little cost.
Sunlight engages with its capital providers not just as funding sources but as
funding partners. As with Sunlight's network of contractors, Sunlight works
closely with its capital providers to understand and address their business
needs as related to the residential solar loan industry. Matters related to loan
product, credit strategy, contractor commercial underwriting and consumer
protection practices are considered and designed in tandem with the goal of
creating a robust and growing channel for funded loan volume. Additionally,
through Orange®, Sunlight's capital providers operating within Sunlight's direct
channel can track and manage the pipeline of solar loan volume allocated to that
capital provider. Sunlight's relationships with its diverse and growing network
of capital providers provides significant flexibility to source competitively
priced capital. Since the acquisition of Sunlight's initial flow capital funding
source in 2016, the number of capital providers funding Sunlight-facilitated
solar loans has increased materially and, more importantly, all of Sunlight's
direct channel capital providers have significantly increased their commitments
to fund solar loan volume.
Sunlight categorizes its capital providers as being either in Sunlight's direct
or indirect channel. Sunlight maintains both channels to provide diversification
of funding sources, access to funding for different types of loan products and
for other strategic purposes. The ability of Sunlight to allocate loans to
various capital providers, as well as the availability of the two different
funding channels, creates flexibility and allows Sunlight to respond nimbly to
shifting market conditions.
Direct channel capital providers fund Sunlight-facilitated solar or home
improvement loans one-by-one directly onto their balance sheet via Orange®.
Sunlight's direct channel capital providers are depository institutions with the
power and authority to originate loans such as banks and credit unions.
Generally, direct channel capital providers choose to service the loans they
originate.
In the indirect channel, Sunlight's solar loan allocation engine directs the
solar loans to be funded on the balance sheet of Sunlight's intermediary bank
partner. These loans are aggregated, pooled and sold to indirect channel capital
providers that cannot, or do not wish to, directly originate solar loans. The
indirect channel capital provider relationship allows Sunlight to access a
broader range of capital, which may include, among others, credit funds,
insurance companies and pension funds. Indirect channel capital providers
present a unique opportunity for Sunlight to access high quality and significant
sources of funding that are diverse from traditional depository sources.
60
--------------------------------------------------------------------------------Cash Flow and Liquidity Analysis
Sunlight assesses liquidity primarily in terms of its ability to generate cash to fund operating and financing activities. Sunlight has generated increasing amounts of cash from operating activities, and management believes that Sunlight is in a strong financial and liquidity position. Sunlight's cash from operating activities are generally derived from platform fees which are fully earned at the funding of a loan by direct channel capital providers and the purchase of a loan from our bank partner's balance sheet by an indirect channel capital provider. Refer to "Critical Accounting Policies and Estimates" and Item 1A. "Risk Factors" for a full description of the related estimates, assumptions, and judgments.
The Combined Year-to-Date Period Compared to the Nine Months Ended
The following provides a summary of cash flow data for the nine months ended
Successor Predecessor
For the Nine
For the Period For the Period Months Ended
July 10, 2021 to January 1, 2021 to September 30,
September 30, 2021 July 9, 2021 2020
Net cash provided by (used in) operating
activities $ (47,921) $ 14,356 $ (12,347)
Net cash used in investing activities (305,344) (1,404) (3,690)
Net cash provided by (used in) financing
activities 211,791 (2,025) 827
Cash Flow from Operating Activities
For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$33.6 million . Operating cash inflows for the nine months endedSeptember 30, 2021 primarily consisted of proceeds from Sunlight's direct channel capital providers to fund, and indirect channel capital provider to purchase, without duplication, loans of$1.6 billion , of which Sunlight paid$1.5 billion to contractors; repayment of advances and prefunds of$1.2 billion (conversely, Sunlight advanced or prefunded$1.4 billion ); and net interest expense paid of$0.8 million . Operating cash outflows primarily consisted of compensation and benefits of$49.4 million , information technology expenses of$3.9 million , and management fees paid to affiliates of$0.2 million . For the nine months endedSeptember 30, 2020 , net cash used in operating activities was$12.3 million . Operating cash inflows for the nine months endedSeptember 30, 2020 primarily consisted of proceeds from Sunlight's direct channel capital providers to fund, and indirect channel capital providers to purchase without duplication, loans of$0.7 billion , of which Sunlight paid$0.7 billion to contractors; repayment of advances and prefunds of$0.6 billion (conversely, Sunlight advanced or prefunded$0.6 billion ); and net interest expense paid of$0.6 million . Operating cash outflows primarily consisted of compensation and benefits of$15.9 million , information technology expenses of$2.8 million , and management fees paid to affiliates of$0.3 million .
Cash Flow from Investing Activities
For the nine months endedSeptember 30, 2021 , net cash used in investing activities was$306.7 million , of which$304.6 million represents cash paid for the acquisition ofSunlight Financial LLC and the remaining activities involved recurring business activities consisting of cash paid to acquire loans and loan participations of$1.4 million , net of$1.2 million in cash received as return of capital thereon, and$1.9 million paid to internally develop software and acquire property and equipment. For the nine months endedSeptember 30, 2020 , net cash used in investing activities was$3.7 million , consisting of cash paid to acquire loans and loan participations of$2.1 million , net of$1.0 million in cash received as return of capital thereon, and$2.5 million paid to internally develop software and acquire property and equipment.
Cash Flow from Financing Activities
For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$209.8 million , which included a$250.0 million equity raise, net of$19.6 million of related costs and tax payments made on equity issued in connection with the Business Combination. The remaining uses of cash consisted of ongoing operations consisting of repayments of borrowings under Sunlight's prior credit facilities of$14.8 million , net of borrowings of$20.7 million , distributions of$7.5 million , and$0.5 million payment of debt issuance costs. For the nine months endedSeptember 30 , 61 -------------------------------------------------------------------------------- 2020, net cash provided by financing activities was$0.8 million , consisting of borrowings of$8.7 million , net of repayments of borrowings under Sunlight's prior credit facilities of$5.9 million , and distributions of$2.0 million .
Long-Term Debt
OnApril 26, 2021 , Sunlight entered into a Loan and Security Agreement with SVB. The Loan and Security Agreement, which replaces Sunlight's prior$15.0 million credit facility, has a borrowing capacity of up to$30.0 million and matures onApril 26, 2023 . Borrowings under the Loan and Security Agreement accrue interest at a rate equal to the greater of (i) 5.0% and (ii) the prime rate plus 1.75% per annum. The Loan and Security Agreement contains certain financial covenants, including (i) liquidity in an amount equal to or greater than (a) 35% of all outstanding principal amounts of any advances and (b)$10.0 million ; (ii) Available Takeout Commitment Amount (as defined therein) in an amount equal to or greater than$200.0 million ; and (iii) EBITDA (as defined in the Loan and Security Agreement) of at least$5.0 million for the six month period ending on the last day of each month. The Loan and Security Agreement contains customary events of default. SVB could elect to accelerate the maturity of the loans and/or terminate the commitments under the Loan and Security Agreement upon the occurrence and during the continuation of an event of default, and Sunlight could be required to repay all amounts outstanding under the Loan and Security Agreement. In connection with the transition of accounts to SVB, Sunlight experienced a technical default that was waived internally by SVB via email. Sunlight expects to receive a formal waiver similarly addressing the technical default. Otherwise, no defaults or events of default have occurred as of the date of this filing.
Other Changes in Financial Position
Nine Months Ended
In addition to the changes in Sunlight's financial position fromDecember 31, 2020 toSeptember 30, 2021 described in "- Results of Operations" and "- Cash Flow and Liquidity Analysis," the following activities also occurred: •Restricted cash. The cash Sunlight holds subject to contractual restrictions increased by$0.7 million resulting from a$0.8 million increase in cash temporarily held by Sunlight in connection with Sunlight's administration of loan participations on behalf of a third party.
Other Factors Affecting Liquidity and Capital Resources
Unitholders' Distribution
Predecessor
Pursuant to the Fourth Amended and Restated Limited Liability Company Agreement of Sunlight, dated as ofMay 25, 2018 , as amended or otherwise modified (the "Prior Sunlight LLC Agreement"), holders of Class A-1 Units, Class A-2 Units or Class A-3 Units (collectively, the "Class A Units") were generally entitled to receive, with respect to each such Class A Unit, a preferred return on a quarterly basis. Sunlight's board of directors could have elected to pay this return in cash or by issuing additional Class A Units to each such holder. If the board of directors elected to pay this return in cash, Sunlight would have paid such in an amount equal to$12.50 ,$15.22 , and$24.06 per unit per annum to the Class A-1, Class A-2, and Class A-3 Units. If the board of directors elected to pay this return in additional units, the company would have issued a number of units equal to 14.5% of each such holders outstanding units, on an annualized basis. Sunlight's board of directors elected to pay this return in the form of additional Class A Units for all periods through the date of the Business Combination. In addition, the Prior Sunlight LLC Agreement also provided that members of Sunlight were entitled to be paid certain tax distributions on a pro rata basis in accordance with their relative tax obligation from available cash and subject to certain customary limitations on distributions.
Successor
Sunlight replaced the Prior Sunlight LLC Agreement with theSunlight A&R LLC Agreement which was entered into concurrently with the Closing. Under the Sunlight A&R LLC Agreement,SL Financial Holdings Inc. , as the sole managing member of Sunlight, has the right to determine when distributions will be made to the holders of Sunlight Units and the amount of any such distributions, except that Sunlight is required to make distributions to the extent and in an amount such that the Sunlight Unitholders, includingSunlight Financial Holdings Inc. ("Sunlight Financial Holdings "), receive certain tax-related distributions and to make distributions in the event of dissolution. If a distribution is paid to the Sunlight Unitholders, such distribution will be made to the holders of Sunlight Units on a pro rata basis in accordance with their respective percentage ownership of Sunlight Units. Funds used by Sunlight to satisfy its tax distribution obligations will not be available for reinvestment in its business, except to the extentSunlight Financial Holdings uses any excess cash it receives to reinvest in Sunlight for additional Sunlight Units. 62 -------------------------------------------------------------------------------- The holders of Sunlight ClassX Units and Sunlight Class EX Units, includingSL Financial Holdings Inc. , will generally incurU.S. federal, state and local income taxes on their share of any net taxable income of Sunlight. Net income and losses of Sunlight generally will be allocated to the holders of Sunlight ClassX Units and Sunlight Class EX Units on a pro rata basis in accordance with their respective percentage ownership of Sunlight ClassX Units and Sunlight Class EX Units, subject to requirements underU.S. federal income tax law that certain items of income, gain, loss or deduction be allocated disproportionately in certain circumstances. To the extent that Sunlight has legally available cash (including borrowings available under the new credit facility or other debt arrangements) and subject to the terms of any current or future debt instruments, the Sunlight A&R LLC Agreement requires Sunlight to make pro rata cash distributions to all holders of Sunlight Units, includingSunlight Financial Holdings , (1) first, in an amount sufficient to allowSunlight Financial Holdings and its wholly owned subsidiaries to satisfy their actual tax liabilities and obligations under the Tax Receivable Agreement except to the extent (i) based on the written advice of legal counsel, the distribution may reasonably constitute a fraudulent conveyance, or (ii) the terms of any financing necessary to make such tax distribution could reasonably, in the good faith judgment ofSL Financial Holdings Inc. , cause Sunlight to become insolvent within the twelve (12) month period following the date of such distribution, and (2) thereafter to the extent necessary, in an amount generally intended to allow Sunlight Unitholders, includingSunlight Financial Holdings , to satisfy their respective income tax liabilities with respect to their allocable share of income of Sunlight, based on certain assumptions and conventions (including an assumed income tax rate) and after taking into account other distributions (including prior tax distributions) made by Sunlight.
Tax Receivable Agreement (Successor)
On the Closing Date,Sunlight Financial Holdings entered into the Tax Receivable Agreement with the TRA Holders and the Agent (as defined therein). The Tax Receivable Agreement generally provides for the payment bySunlight Financial Holdings to the Agent, for disbursement to the TRA Holders on a pro rata basis, of 85% of the net cash savings, if any, inU.S. federal, state and local income tax and franchise tax thatSunlight Financial Holdings actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) certain increases in tax basis that occur as a result ofSunlight Financial Holdings' acquisition (or deemed acquisition forU.S. federal income tax purposes) of all or a portion of a TRA Holder's Sunlight Class EX Units upon the exercise of the redemption or call rights set forth in theSunlight A&R LLC Agreement (as defined herein) and (ii) imputed interest deemed to be paid bySunlight Financial Holdings as a result of, and additional tax basis arising from, any paymentsSunlight Financial Holdings makes under the Tax Receivable Agreement.Sunlight Financial Holdings will retain the benefit of the remainder of the actual net cash savings, if any. IfSunlight Financial Holdings elects to terminate the Tax Receivable Agreement early or if it is terminated early due toSunlight Financial Holdings' failure to honor a material obligation thereunder or due to a Change of Control (as defined in the Tax Receivable Agreement),Sunlight Financial Holdings will be required to make a payment equal to the deemed present value of the anticipated future payments to be made by it under the Tax Receivable Agreement (based upon certain assumptions and deemed events set forth in the Tax Receivable Agreement), which amount may substantially exceed the actual cash tax savings realized bySunlight Financial Holdings . In the case of an early termination upon a Change of Control, such early termination payment may, atSunlight Financial Holdings' election, be paid ratably over the two-year period following the Change of Control. Operating Lease Obligations Sunlight's operating lease obligations consist of its lease of real property from third parties under noncancellable operating leases, including the lease of its current office spaces. Sunlight leases office space at two locations: (i)101 N. Tryon Street , Suite 1000,Charlotte, North Carolina 28246 (the "North Carolina Office Space") and (ii)234 West 39th Street , 7th Floor,New York, New York 10018 (the "New York Office Space"). The operating lease rent expense for theNorth Carolina Office Space was$0.3 million ,$0.0 million and$0.6 million for the Successor Period, the Predecessor Quarterly Period, and Predecessor Year-to-Date Period, respectively, and$0.2 million and$0.5 million for the three and nine months endedSeptember 30, 2020 , respectively. The lease for theNorth Carolina Office Space will expire inJune 2030 . The operating lease rent expense for theNew York Office Space was$0.1 million ,$0.0 million , and$0.3 million the Successor Period, the Predecessor Quarterly Period, and Predecessor Year-to-Date Period, respectively, and$0.1 million and$0.3 million for the three and nine months endedSeptember 30, 2020 , respectively. 63 --------------------------------------------------------------------------------
Available Liquidity and Capital Resources
As ofSeptember 30, 2021 , Sunlight's cash and cash equivalents and restricted cash was$75.0 million . The restricted cash held by Sunlight primarily relates to a cash reserve that Sunlight's bank partner requires to secure Sunlight's short-term guarantee obligations of certain loans temporarily held by Sunlight's bank partner. The contractual cash reserve is the difference between (a) the average original issue discount percentage of loans originated and held by Sunlight's bank partner and (b) a contractual minimum original issue discount percentage, multiplied by the balance of the loans on the bank partner's balance sheet at a given time. Sunlight guarantees the loans between the time the bank partner originates such loans and the time Sunlight arranges the sale of such loans to a Sunlight indirect channel capital provider. Sunlight's liquidity and its ability to fund its capital requirements is dependent on its future financial performance, which is subject to general economic, financial and other factors that are beyond its control and many of which are described under Item 1A. "Risk Factors." If those factors significantly change or other unexpected factors adversely affect Sunlight, Sunlight's business may not generate sufficient cash flow from operations or it may not be able to obtain future financings to meet its liquidity needs.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure used by Sunlight's management to evaluate operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, Sunlight believes this measure provides useful information to investors and others in understanding and evaluating Sunlight's operating results in the same manner as Sunlight's management and board of directors. In addition, Adjusted EBITDA provides a useful measure for period-to-period comparisons of Sunlight's business, as it removes the effect of certain non-cash items, variable charges, non-recurring items, unrealized gains or losses or other similar non-cash items that are included in net income or expenses associated with the early stages of the business that are expected to ultimately terminate, pursuant to the terms of certain existing contractual arrangements or expected to continue at levels materially below the historical level, or that otherwise do not contribute directly to management's evaluation of its operating results. Adjusted EBITDA is defined as net income excluding interest expense incurred in connection with Sunlight's debt obligations, income taxes, amortization and depreciation expense, stock-based compensation expense, non-cash changes in certain financial instruments, fees paid to brokers related to the funding of loans by certain of Sunlight's capital providers that will terminate pursuant to existing contractual arrangements, certain transaction bonuses and other expenses resulting from the Business Combination, and other items that management has determined are not reflective of Sunlight's operating performance.
Free Cash Flow
Free Cash Flow is a non-GAAP financial measure that Sunlight uses to indicate
cash flow generated by Sunlight's operations. Sunlight believes that Free Cash
Flow is a supplemental financial measure useful as an indicator of Sunlight's
ability to generate cash. Sunlight's calculation of Free Cash Flow, however, may
not necessarily be comparable to similar measures presented by other companies.
Specifically, Sunlight defines Free Cash Flow as cash from operating activities
adjusted for changes in working capital (including changes in advances and
funding commitments), capital expenditures, certain restricted cash items,
business combination costs, and other items that management has determined are
not reflective of cash generation in Sunlight's business.
64
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The following table presents a reconciliation of net income to Adjusted EBITDA
and free cash flow as well as cash from operating activities to free cash flow
for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Successor Predecessor
For the Period For the Three For the Nine
July 10, 2021 to For the Period Months Ended For the Period Months Ended
September 30, July 1, 2021 to September 30, January 1, 2021 September 30,
2021 July 9, 2021 2020 to July 9, 2021 2020
Net Income (Loss) $ (20,431) $ (1,772) $ 4,072 $ 6,131 $ 3,371
Adjustments for adjusted EBITDA
Depreciation and amortization 20,541 78 812 1,688 2,430
Interest expense 291 32 264 604 592
Income taxes (5,684) - - - -
Non-cash change in financial
instruments (10,568) 1,316 (272) 5,547 (366)
Equity-based compensation 24,821 - 15 18 112 Fees paid to brokers 1,033 93 869 2,261 2,127 Expenses from the Business Combination 1,093 529 - 7,011 - Adjusted EBITDA 11,096 276 5,760 23,260 8,266 Adjustments for net cash provided by (used in) operating activities Interest expense (291) (32) (264) (604) (592) Income taxes 5,684 - - - - Fees paid to brokers (1,033) (93) (869) (2,261) (2,127) Expenses from the Business Combination (1,093) (529) - (7,011) - Provision for losses 254 - 310 1,172 788 Changes in operating capital and other (62,538) (2,372) (14,662) (200)
(18,682)
Net Cash Provided by (Used in) Operating Activities (47,921) (2,750) (9,725) 14,356
(12,347)
Adjustments for free cash flow Capital expenditures (560) (229) (1,668) (1,066)
(2,533)
Changes in advances, net of funding commitments 29,188 4,214 9,534 32,809
11,448
Changes in restricted cash 1,585 17 217 (125)
(682)
Payments of Business Combination costs 968 67 - 7,011 - Other changes in working capital 20,638 (391) 386 (40,793) 537 Free Cash Flow$ 3,898 $ 928$ (1,256) $ 12,192 $ (3,577)
Critical Accounting Policies and Estimates
The preparation of Sunlight's financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments 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 and assumptions about future events that affect the amounts reported in Sunlight's financial statements and accompanying notes. These estimates significantly impact revenues, determinations of fair value and the recognition of interest income on financing receivables and loss allowances thereon.
In accordance with Sunlight's policies, Sunlight regularly evaluates its estimates, assumptions and judgments, and bases its estimates, assumptions and judgments on its historical experience and on factors Sunlight believes reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If Sunlight's assumptions or conditions change, the actual results Sunlight reports may significantly differ from these estimates.
Sunlight believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as ofSeptember 30, 2021 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and on Sunlight's business, makes any estimates and assumptions as ofSeptember 30, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. See Note 2 - "Summary of Significant Accounting Policies" in the notes accompanying Sunlight's financial statements included elsewhere herein for a summary of Sunlight's significant accounting policies, and discussion of recent accounting pronouncements. Sunlight believes that the following discussion addresses Sunlight's most critical accounting policies, 65 -------------------------------------------------------------------------------- which are those that are most important to the portrayal of Sunlight's financial condition and results of operations and require management's most difficult, subjective and complex judgments.
Platform Fees
Sunlight is a business-to-business-to-consumer, technology-enabled POS financing platform that provides residential solar and home improvement contractors the ability to offer seamless POS financing to their customers when purchasing residential solar systems or other home improvements. The resulting loans are funded by Sunlight's network of capital providers who, by partnering with Sunlight, gain access to a difficult-to-reach loan market, best-in-class consumer credit underwriting and attractive risk adjusted returns. These loans are facilitated by Sunlight's proprietary technology platform, Orange®, through which Sunlight offers instant credit decisions to homeowners nationwide at the POS on behalf of Sunlight's various capital providers. Sunlight recognizes platform fees as revenues 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 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. For outstanding volume commitments that require the contractor to deliver future loan volume, Sunlight reduces platform fee revenues it recognizes based on its estimates of the contractor's delivery of future loan volume, which require significant judgment and are based, in part, upon the contractor's historical volume delivery and Sunlight's estimates of the contractor's ability and likelihood to deliver future volume. Sunlight's contract pursuant to which its bank partner originates home improvement loans is considered a derivative under GAAP. As such, Sunlight's revenues exclude the platform fees that Sunlight earns in connection with this contract. Instead, Sunlight estimates the fair value of the contract derivative based upon the present value of net cash flows Sunlight expects to collect under the contract, which predominately consist of the difference of the proceeds Sunlight expects to collect from an indirect channel capital provider at purchase of the loans by such capital provider (the principal balance of loans purchased less the relevant capital provider discount plus unpaid accrued interest on the loans to the date of purchase) and any amounts Sunlight owes to its bank partner in connection with such loans. Upon sale, Sunlight reverses the unrealized estimated fair value of the contract derivative for the loans sold and recognizes the net cash Sunlight receives from the sale within "Realized Gains on Contract Derivative, Net" in Sunlight's consolidated statement of operations. Sunlight is obligated to repurchase non-performing loans originated by its bank partner from the date of origination to the date the loans are purchased from Sunlight's bank partner by a Sunlight indirect channel capital provider. Sunlight does not record loans originated by its bank partner on its consolidated balance sheets (as Sunlight is not the originator of the loans), but Sunlight does record a liability for the losses Sunlight reasonably expects to incur in connection with Sunlight's guarantee of its bank partner. Sunlight's measurement of this liability is subject to significant judgement using historical loss experiences to estimate the likelihood that the guaranteed loans will default prior to sale and the severity of the loss Sunlight expects to incur. AtSeptember 30, 2021 andDecember 31, 2020 , the unpaid principal balance of loans, net of applicable discounts, for guaranteed loans held by Sunlight's bank partner and delinquent more than 90 days was$0.2 million and$0.5 million , respectively. Financing Receivables Sunlight records financing receivables for (a) advances that Sunlight remits to contractors to facilitate the installation of residential solar systems and (b) loans purchased by Sunlight pursuant to the terms of its contracts with its various capital providers and certain five percent (5%) loan participations purchased by Sunlight. Sunlight uses significant judgement in its recognition of interest income and impairment of financing receivables.
Interest Income
Loans (including Sunlight's participation interests in such loans) with respect
to which Sunlight expects to collect the unpaid principal balance and interest
payments as they become due are considered performing loans. Sunlight accrues
interest income on performing loans based on the unpaid principal balance and
contractual terms of the loan. Interest income also includes discounts
associated with the loans purchased as a yield adjustment using the interest
method, or on a straight-line basis when it approximates the interest method,
over the loan term. Sunlight expenses loan origination costs for loans acquired
by Sunlight (including its participation interests in loans) 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.
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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 (i)
when either principal or interest payments are 90 days or more past due based on
contractual terms or (ii) when an individual analysis of a borrower's
creditworthiness indicates a loan should be placed on non-accrual status. When a
loan owned by Sunlight 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 loan or the restructured loan, as the case may
be.
Advances made to contractors under Sunlight's contractor advances program or prefunding program are created at par and do not bear, and therefore do not accrue, interest income.
Allowance for Losses
The allowance for financing receivable losses represents Sunlight's best estimate of probable credit losses arising from financing receivables. Sunlight's allowance for financing receivable losses is evaluated at least quarterly, and based upon management's assessment of several factors including 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. Although management uses the best information available, the evaluation of these indicators of impairment requires significant judgment by Sunlight's management to determine whether failure to collect contractual amounts is probable as well as in estimating the resulting loss allowance. Future adjustments to the allowance for financing receivable losses may be necessary due to economic, operating, regulatory and other conditions beyond Sunlight's control. Sunlight believes that its allowance for financing receivable losses is adequate to cover probable loan losses. However, actual losses, if any, could materially differ from management's estimates.
Provision for Income Taxes
Sunlight 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 accompanying 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.
Sunlight 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. Sunlight recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Judgment is required in assessing the future tax consequences of events that have been recognized in Sunlight's consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact Sunlight's consolidated financial statements.
Derivative Asset
Sunlight's contract under which Sunlight arranges loans for the purchase and
installation of home improvements other than residential solar energy systems
contain features determined to be embedded derivatives from its host. Embedded
derivatives are separated from the host contract and carried at fair value when
the embedded derivative possesses economic characteristics that are not clearly
and closely related to the economic characteristics of the host contract and a
separate, standalone instrument with the same terms would qualify as a
derivative instrument. The derivative is measured both initially and in
subsequent periods at fair value, with changes in fair value recognized on the
statement of operations.
Sunlight uses a discounted cash flow model to value its derivative asset using
various key assumptions, such as estimation of the timing and probability of
expected future cash flows and selection of a discount rate applied to future
cash flows using Sunlight's implied credit risk.
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--------------------------------------------------------------------------------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 under ASC 450-20 Loss Contingencies using the estimated incremental cost of each point based upon the points earned, the point redemption value, and an estimated probability of point 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. If all points earned under the Sunlight Rewards™ Program were redeemed atSeptember 30, 2021 andDecember 31, 2020 , Sunlight would pay$2.7 million and$1.3 million , respectively, of which Sunlight recorded liabilities of$1.7 million and$0.8 million .
Business Combination
Sunlight evaluates its acquisition of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the test is met, the transaction is accounted for as an asset acquisition. If the test is not met, further determination is required as to whether or not Sunlight acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the test to determine whether an acquisition is a business combination or an acquisition of assets. Sunlight uses the acquisition method in accounting for acquired businesses. Under the acquisition method, Sunlight's financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Determining estimated fair value requires a significant amount of judgment and estimates. If Sunlight's assumptions change or errors are determined in its calculations, the fair value could materially change resulting in a change in our goodwill or identifiable net assets acquired, including identified intangible assets.
Emerging Growth Company
As an "emerging growth company," as defined in Section 2(a) of the Securities
Act of 1933, as amended (the "Securities Act"), as modified by the Jumpstart Our
Business Startups Act of 2012 ("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. Accordingly, the information contained herein may be different than
the information you receive from other public companies.
Sunlight also intends to take advantage of some of the reduced regulatory and
reporting requirements of emerging growth companies pursuant to the JOBS Act so
long as Sunlight qualifies as an emerging growth company, including, but not
limited to, not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation and exemptions from the
requirements of holding non-binding advisory votes on executive compensation and
golden parachute payments.
Recent Accounting Pronouncements Issued, But Not Yet Adopted
See Note 2 - "Summary of Significant Accounting Policies" in the notes accompanying Sunlight's consolidated financial statements.
Related Party Transactions
Prior to the closing of the Business Combination, Sunlight entered into management agreements with certain affiliates. For the three months endedSeptember 30, 2021 and 2020, Sunlight paid an aggregate of$0.1 million and$0.1 million , respectively, and$0.2 million and$0.2 million for the nine months endedSeptember 30, 2021 and 2020 in management 68
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fees under the agreements. The agreements were terminated in connection with the closing of the Business Combination. For additional information, see Note 9 of the accompanying consolidated financial statements of Sunlight.
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