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," "we," "our" and "us") consolidated results of operations and financial condition. The discussion should be read in conjunction with Sunlight's consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading "Risk Factors." Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "Sunlight" is intended to mean the business and operations ofSunlight Financial Holdings Inc. and its consolidated subsidiaries. 43 --------------------------------------------------------------------------------
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
SUMMARY
This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, which statements involve
substantial risks and uncertainties. Such forward-looking statements relate to,
among other things, the operating performance of our investments, the stability
of our earnings, our financing needs, and the size and attractiveness of market
opportunities. Forward-looking statements are generally identifiable by the use
of forward-looking terminology such as "may," "will," "should," "potential,"
"expect," "endeavor," "seek," "anticipate," "outlook," "intend," "estimate,"
"overestimate," "underestimate," "believe," "could," "project," "predict,"
"continue" or other similar words or expressions. Forward-looking statements are
based on certain assumptions; discuss future expectations; describe future plans
and strategies; contain projections of results of operations, cash flows, or
financial condition; or state other forward-looking information. Our ability to
predict results or the actual outcome of future plans or strategies is
inherently limited. Although we believe that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, our actual
results and performance could differ materially from those set forth in the
forward-looking statements. These forward-looking statements involve risks,
uncertainties, and other factors that may cause our actual results in future
periods to differ materially from forecasted results.
Our ability to implement our business strategy is subject to numerous risks, as
more fully described under Item 1A. "Risk Factors" in this Quarterly Report on
Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31,
2021 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 .
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, including supply chain disruptions, the financial performance of its
capital providers and contractors, and the willingness of Sunlight's capital
providers to fund loans on terms desired by relevant markets and economically
favorable to Sunlight.
•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 our Class A common stock to drop significantly,
even if our business is doing well.
•We cannot guarantee that we will repurchase our common stock pursuant to our
share repurchase program or that our share repurchase program will enhance
long-term shareholder value. Share repurchases could also increase the
volatility of the price of our common stock and could diminish our cash
reserves.
•Our results of operations could be adversely affected by economic and political
conditions globally and the effects of these conditions on our clients'
businesses and levels of business activity.
44
--------------------------------------------------------------------------------Business Overview
Sunlight Financial Holdings Inc. ("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® ("Orange®" or 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 throughJune 30, 2022 , Sunlight has facilitated over$7.4 billion of loans through the 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 190,250 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 ofJune 30, 2022 , residential solar systems and energy-efficient home improvement products, facilitated through Sunlight financings sinceMay 2016 , have prevented the emission of an estimated 33.1 million metric tons of carbon dioxide into 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 endingDecember 31, 2021 . 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 70% of residential solar loan sales were financed with solar loans in 2021. 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 ofJune 30, 2022 , the average FICO score of all solar borrowers financed through Sunlight's Platform is 748. 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. 45 -------------------------------------------------------------------------------- OnJuly 9, 2021 (the "Closing Date"), Sunlight consummated the transactions contemplated by that certain Business Combination Agreement (the "Business Combination Agreement"), dated as ofJanuary 23, 2021 , by and amongSpartan Acquisition Corp. II ("Spartan"),Sunlight Financial LLC and the Spartan Subsidiaries, FTV Blocker andTiger Blocker (each as defined in the Business Combination Agreement). On the Closing Date, Spartan changed its name to "Sunlight Financial Holdings Inc. " andSunlight Financial LLC became the operating subsidiary ofSunlight 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 forSunlight 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 forSunlight Financial Holdings Inc. and its consolidated subsidiaries, includingSunlight Financial LLC (the "Successor"). The three and six months endedJune 30, 2022 includes the results of operations for the Successor and the results of operation for the Predecessor during the three and six months endedJune 30, 2021 .
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 Three Months Ended
•Sunlight facilitated the origination of$716.4 million of loans during the three months endedJune 30, 2022 , representing an increase of 7.5% from$666.2 million of loans during the three months endedJune 30, 2021 . •Revenue was$29.6 million for the three months endedJune 30, 2022 , representing an increase of 12.9% from$26.2 million for the three months endedJune 30, 2021 . •Net income (loss) was$5.7 million for the three months endedJune 30, 2022 , representing an increase from$5.2 million in income for the three months endedJune 30, 2021 . •Adjusted Net Income (Loss) was$2.3 million for the three months endedJune 30, 2022 , representing a decrease from$9.3 million for the three months endedJune 30, 2021 . •Adjusted EBITDA was$6.8 million for the three months endedJune 30, 2022 , representing a decrease of 41.0% from$11.5 million for the three months endedJune 30, 2021 .
The Six Months Ended
•Sunlight facilitated the origination of$1,309.2 million of loans during the six months endedJune 30, 2022 , representing an increase of 5.0% from$1,247.2 million of loans during the six months endedJune 30, 2021 . •Revenue was$57.8 million for the six months endedJune 30, 2022 , representing an increase of 13.4% from$51.0 million for the six months endedJune 30, 2021 . •Net income (loss) was$(16.9) million for the six months endedJune 30, 2022 , representing a decrease from$7.9 million for the six months endedJune 30, 2021 . •Adjusted Net Income (Loss) was$7.1 million for the six months endedJune 30, 2022 , representing a decrease from$18.6 million for the six months endedJune 30, 2021 . •Adjusted EBITDA was$14.6 million for the six months endedJune 30, 2022 , representing a decrease of 36.5% from$23.0 million for the six months endedJune 30, 2021 . 46 -------------------------------------------------------------------------------- As discussed more fully in "-Results of Operations," Sunlight's net income (loss), Adjusted Net Income (Loss), and Adjusted EBITDA for the three and six months endedJune 30, 2022 includes the effects from the Business Combination and is presented on a basis different than those measures for the Predecessor's three and six months endedJune 30, 2021 .
Adjusted EBITDA
Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, is included in "-Non-GAAP Financial Measures." The following charts depict Adjusted EBITDA and other key performance measures for the three and six months endedJune 30, 2022 and 2021 (USD in thousands): [[Image Removed: sunl-20220630_g2.jpg]][[Image Removed: sunl-20220630_g3.jpg]][[Image Removed: sunl-20220630_g4.jpg]][[Image Removed: sunl-20220630_g5.jpg]][[Image Removed: sunl-20220630_g6.jpg]] [[Image Removed: sunl-20220630_g7.jpg]][[Image Removed: sunl-20220630_g8.jpg]][[Image Removed: sunl-20220630_g9.jpg]][[Image Removed: sunl-20220630_g10.jpg]][[Image Removed: sunl-20220630_g11.jpg]] a.Includes the results of operations for the Predecessor for the three and six months endedJune 30, 2021 and the Successor for the three and six months endedJune 30, 2022 . Refer to "-Key Performance Measures" and "-Results of Operations" for amounts related to those periods.
Highlights
In the second quarter of 2022, Sunlight continued to experience strong growth including: •The number of borrowers increased to 20,676, up 11.3% from 18,572 borrowers in the prior-year period. •Contractor relationships grew 26.0% relative to the prior-year period, with 165 new solar and home improvement contractors joining the Platform in the second quarter of 2022 for a total of 1,754 active contractors. •Average loan balance of$35,872 , with a record-high average solar loan balance of$44,704 . •As ofJune 30, 2022 , Sunlight had a cumulative funded loan total of$7.4 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.
47
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The following table sets forth key performance measures for the three and six
months ended June 30, 2022 and June 30, 2021 (USD in thousands, except
percentages):
Successor(a) Predecessor Successor(a) Predecessor
For the Three For the Six
For the Three Months Months Ended June For the Six Months Months Ended
Ended June 30, 30, Ended June 30, June 30,
2022 2021 Percentage Change 2022 2021 Percentage Change
Funded Loans(b) $ 716,351 $ 666,177 7.5 % $ 1,309,183 $ 1,247,236 5.0 %
Direct Channel Funded
Loans 473,144 506,993 (6.7) 901,349 1,003,539 (10.2)
Indirect Channel Funded
Loans 243,207 159,184 52.8 407,834 243,697 67.4
Platform Fee Loans(c) 631,457 651,311 (3.0) 1,223,998 1,273,951 (3.9)
Direct Channel Platform
Fee Loans 473,144 506,993 (6.7) 901,349 1,003,539 (10.2)
Indirect Channel Platform
Fee Loans 158,313 144,318 9.7 322,649 270,412 19.3
Revenue 29,590 26,203 12.9 57,821 50,990 13.4
Net Income (Loss) 5,659 5,243 7.9 (16,947) 7,903 n.m.
Adjusted Net Income
(Loss) 2,259 9,311 (75.7) 7,136 18,617 (61.7)
Adjusted EBITDA 6,786 11,495 (41.0) 14,595 22,986 (36.5)
a.Funded Loans, Platform Fee Loans, and Revenues were not materially impacted by
the Business Combination for the six months ended June 30, 2022 . Refer to
"-Results of Operations" for a discussion of the effects of the Business
Combination on Net Income (Loss), Adjusted Net Income (Loss), and Adjusted
EBITDA.
b.Sunlight facilitated home improvement loans of $112.3 million , $44.5 million ,
$188.7 million , and $75.5 million that were funded during the three and six
months ended June 30, 2022 and 2021, respectively.
c.Sunlight facilitated home improvement platform fee loans of $99.3 million ,
$29.4 million , $186.4 million , and $102.0 million during the three and six
months ended June 30, 2022 and 2021, respectively.
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 intermediary bank
partner originates solar and home improvement loans, as directed by Sunlight's
allocation engine, on its balance sheet. These loans are aggregated, pooled, and
sold to indirect channel capital providers that cannot, or do not wish to,
directly originate solar or home improvement 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.
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, servicing 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 intermediary bank partner. Fees earned by Sunlight for loan portfolio management, servicing 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. The contracts under which Sunlight (a) arranges loans for the purchase and installation of home improvements other than residential solar energy systems and (b) earns income from the prepayment of certain of those Loans sold to an Indirect Channel Loan Purchaser are considered derivatives under GAAP. As such, Sunlight's revenues exclude the platform fees that Sunlight earns in connection with these contracts. Instead, Sunlight records realized gains on the derivatives within "Realized Gains on Contract Derivative, Net."
Net Income. Net income is a financial measure used to measure Sunlight's performance from period-to-period on a consistent basis.
Non-GAAP Financial Measures. Adjusted Net Income and Adjusted EBITDA are
non-GAAP financial measures 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 Net Income, Adjusted EBITDA, and reconciliations
to net income.
48
--------------------------------------------------------------------------------Loan Characteristics
The following table sets forth the average characteristics of loans Sunlight facilitated for the three and six months endedJune 30, 2022 and 2021 (USD in thousands, except percentages): Successor Predecessor Successor Predecessor For the Three For the Three For the Six For the Six Months Ended Months Ended June Months Ended Months Ended June 30, 30, June 30, June 30, Average Loan Characteristics 2022 2021 2022 2021 Solar Loan Term (in months) 254 237 249 236 Customer Interest Rate 2.0 % 2.5 % 2.0 % 2.4 % Customer FICO Score 754 750 755 750 Loan Balance$ 45 $ 40 $ 44 $ 40 Solar Maxx®(a) Loan Term (in months) 283 n.a. 284 n.a. Customer Interest Rate 6.1 % n.a. 6.2 % n.a. Customer FICO Score 633 n.a. 633 n.a. Loan Balance$ 40 n.a.$ 40 n.a. Home Improvement Loan Term (in months) 114 116 114 116 Customer Interest Rate 11.0 % 9.8 % 11.0 % 9.7 % Customer FICO Score 758 755 758 756 Loan Balance$ 17 $ 16 $ 17 $ 16 Home Improvement Maxx®(b) Loan Term (in months) 106 n.a. 106 n.a. Customer Interest Rate 18.5 % n.a. 18.6 % n.a. Customer FICO Score 630 n.a. 628 n.a. Loan Balance$ 10 n.a.$ 10 n.a. a.Solar Maxx® loans represented less than 1.0% of loans facilitated by Sunlight during the six months endedJune 30, 2022 . b.Home Improvement Maxx® loans represented less than 10.0% of loans facilitated by Sunlight during the six months endedJune 30, 2022 .
Recent Developments
OnMay 16, 2022 , Sunlight's Board of Directors authorized a share repurchase program pursuant to which Sunlight may repurchase up to$50.0 million of Sunlight's Class A common stock over an eighteen-month period from the date of authorization. Sunlight repurchased 1,026,836 Class A Shares for a total of$3.6 million afterJune 30, 2022 .
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 (a) growth in the
number of loans funded to the customers of each contractor; (b) 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; (c) funded loan volume; (d) competition in the markets in which
Sunlight operates; (e) the cost of traditional and other alternative sources of
power to consumers and industry trends and general economic conditions; (f)
growth in the number of contractors included in Sunlight's network; and (g)
concentration among Sunlight's contractor partners and capital provider
partners.
49
--------------------------------------------------------------------------------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 through deepening relationships with, as well as first-look exclusivity arrangements and volume commitments from, those contractors, 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.
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 other home improvements. Sunlight earns a platform fee on each solar and home improvement 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 an important factor in Sunlight's ability to increase funded loan volume, which is in turn a critical factor in Sunlight's operating results.
Competition
Competition for Sunlight occurs at two levels: (a) competition to acquire and maintain contractor relationships; and (b) 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 and maintain contractor relationships is significant.
Although Sunlight has negotiated first-look exclusivity arrangements with, and
volume commitments from, certain contractors, the contractors in the residential
solar market generally do not enter into 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 (i.e. the dealer
fee or original issue discount charged to the contractor), 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's 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
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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.
Competition to
The residential 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, specialized residential 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 and 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 terminated their program agreement with Sunlight inApril 2021 , and, as capital providers experience decreased liquidity as a result of rising funding costs, they may reduce or temporarily pause the loan volume they fund from Sunlight. However, Sunlight believes that there are many institutions seeking to deploy capital into solar and home improvement loan assets, and will 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 to which consumers have access 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, inflationary pressure, market volatility, consumer confidence, the impact of the COVID-19 pandemic, the Russian invasion ofUkraine , 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, which is subject to inflationary pressure, the cost of labor, the availability of federal, state and local incentives, and, to the extent financed, prevailing interest rates. Specifically, future results of operations may be impacted by the potential discontinuation or material reduction or other change in the federal solar investment tax credit (the "ITC"). InAugust 2022 , the ITC was extended under the terms of the "Inflation Reduction Act of 2022", which provides that until 2033 a qualifying homeowner will be allowed to deduct 30% 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. Under the terms of the current extension, the ITC will remain at 30% through the end of 2032, reduce to 26% for 2033, reduce to 22% for 2034, and further reduce to 0.0% after the end of 2034 for residential solar systems, unless it is extended before that time. Although the ITC has been extended several times, there is no guarantee that the ITC will be extended beyond 2034. 51 -------------------------------------------------------------------------------- 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.
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 capital providers are sold to the consumer customers of such contractors. Sunlight partners with some of the largest contractors inthe United States , which in the aggregate generate 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 fromJune 30, 2020 toJune 30, 2021 , the top ten contractors in Sunlight's network were responsible for selling 43.9% of Sunlight's funded loan volume, and in the period fromJune 30, 2021 toJune 30, 2022 that percentage increased to 45.0%. 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 14.9% and 14.0% of Sunlight's funded loan volume in the period fromJune 30, 2020 toJune 30, 2021 and in the period fromJune 30, 2021 toJune 30, 2022 , 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, ADT Sunpro f/k/aMarc Jones Construction, L.L.C. , that sold 16.4% and 15.1% of Sunlight's funded loan volume during the six months endedJune 30, 2022 and 2021, respectively. Sunlight believes that its contractor network is sufficiently diversified to continue to grow with the residential solar market, and increase share given market dynamics, but intends to continue adding contractors to the network in order to further diversify and broaden the opportunity to grow the business. Sunlight has multiple capital providers in both its direct and indirect funding channels, all of which have increased their commitments since partnering with Sunlight, and added an additional capital provider in the quarter endedJune 30, 2022 . Sunlight's largest capital provider in the period fromJune 30, 2021 toJune 30, 2022 has materially increased its commitment since the relationship began in 2015, however, volume flow from this capital provider and others is subject to fluctuating yield requirements that may be impacted by changes in funding costs. The significant portion of funded loan volume attributable to this capital provider results in concentration risk. This capital provider funded 39.0% and 20.7% of Sunlight's funded loans during the period fromJune 30, 2020 toJune 30, 2021 and during the period fromJune 30, 2021 toJune 30, 2022 , respectively. 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. This capital provider may reduce the volume commitment in whole or in part upon no less than 90 days' prior written notice and/or may reduce volume based on yield requirements. Additionally, Sunlight had a pipeline of loans that were allocated to a new capital provider, to be sold following their merger with a bank. However, the delay and ultimate cancellation of that merger caused Sunlight to shift the sale of approximately$85 million of funded loans from the quarter endedJune 30, 2022 into the second half of the year and increases our near-term reliance on the Indirect Channel. Sunlight added new capital providers in 2021 and 2022 to reduce its capital provider concentration risk and will continue to do so selectively. Further, Sunlight is in continuous discussions with multiple capital providers on an ongoing basis and, if Sunlight were to receive an advance notice of termination from the capital provider, Sunlight would seek to develop alternate funding sources to replace this capital provider, although Sunlight cannot guarantee that it would be able to do so at all or on equivalent or favorable terms. This, and any reduction in loan volume due to fluctuating yield requirements could negatively impact Sunlight's funded loan volume and 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,
servicing 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
52
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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. 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 when an indirect channel capital
provider purchases a particular loan from Sunlight's intermediary bank partner.
The contract between Sunlight and its intermediary bank partner for home
improvement loans is considered a derivative for GAAP purposes, whereas the
contract between Sunlight and its intermediary bank partner for solar loans is
not. For indirect channel home improvement loans, Sunlight records a "realized
gain on 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 an indirect channel 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 (a)
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 (b) 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, servicing and administration revenue. Sunlight also
earns revenue from fees charged by Sunlight for providing loan portfolio
management, servicing, 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 expenses 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.
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Goodwill Impairment. To the extent Sunlight determines the carrying value of its
goodwill resulting from the Business Combination exceeds its implied fair value,
Sunlight recognizes an impairment loss for that difference on the date of such
determination.
Provision for losses. Provision for losses 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.
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 solar loans, held on Sunlight's 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 common stock. 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 derivatives, net. The
arrangements with Sunlight's intermediary bank partner to originate indirect
channel home improvement loans and with an indirect loan purchaser to purchase
such loans are considered derivatives 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
derivatives that are marked to market on a monthly basis, with realized gains
recognized on the derivatives 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. 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 taxable
income, or income tax benefit in periods of taxable 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.
Results of Operations
This section includes a summary of our results of operations, followed by
detailed comparisons of our results for the three and six months ended
54
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Successor Predecessor Successor Predecessor
For the
Three Months For the Three For the Six
Ended June Months Ended June Months Ended For the Six Months
30, 30, Increase (Decrease) June 30 , Ended June 30 , Increase (Decrease)
2022 2021 $ % 2022 2021 $ %
Revenue $ 29,590 $ 26,203 $ 3,387 12.9 % $ 57,821 $ 50,990 $ 6,831 13.4 %
Costs and Expenses
Cost of revenues (exclusive
of items shown separately
below) 5,773 5,337 436 8.2 11,002 10,191 811 8.0
Compensation and benefits 14,138 8,108 6,030 74.4 27,263 16,120 11,143 69.1
Selling, general, and
administrative 4,546 1,204 3,342 277.6 11,018 3,120 7,898 253.1
Property and technology 1,984 1,420 564 39.7 3,912 2,628 1,284 48.9
Depreciation and
amortization 9,694 801 8,893 1,110.2 32,141 1,610 30,531 1,896.3
Provision for losses 4,042 436 3,606 827.1 4,680 1,172 3,508 299.3
Management fees to
affiliate - 100 (100) (100.0) - 200 (200) (100.0)
40,177 17,406 22,771 130.8 90,016 35,041 54,975 156.9
Operating income (loss) (10,587) 8,797 (19,384) n.m. (32,195) 15,949 (48,144) n.m.
Other Income (Expense), Net
Interest income 87 112 (25) (22.3) 171 253 (82) (32.4)
Interest expense (296) (317) 21 (6.6) (556) (572) 16 (2.8)
Change in fair value of
warrant liabilities 13,610 (1,451) 15,061 n.m. 8,726 (4,065) 12,791 n.m.
Change in fair value of
contract derivatives, net 320 69 251 363.8 93 (787) 880 n.m.
Realized gains on contract
derivatives, net 2,055 719 1,336 185.8 3,964 2,986 978 32.8
Other realized losses, net (176) - (176) n.m. (373) - (373) n.m.
Other income (expense) (1,004) 209 (1,213) n.m. (828) 621 (1,449) n.m.
Business combination
expenses - (2,895) 2,895 (100.0) - (6,482) 6,482 (100.0)
14,596 (3,554) 18,150 n.m. 11,197 (8,046) 19,243 n.m.
Net Income (Loss) Before
Income Taxes 4,009 5,243 (1,234) (23.5) (20,998) 7,903 (28,901) n.m.
Income tax benefit
(expense) 1,650 - 1,650 n.m. 4,051 - 4,051 n.m.
Net Income (Loss) 5,659 5,243 416 7.9 (16,947) 7,903 (24,850) n.m.
Noncontrolling interests in
(income) loss of
consolidated subsidiaries (1,543) - (1,543) n.m. 7,089 - 7,089 n.m.
Net Income (Loss)
Attributable to Class A
Shareholders $ 4,116 $ 5,243 $ (1,127) (21.5) $ (9,858) $ 7,903 $ (17,761) n.m.
The Three Months Ended
Revenue
The following table provides the components of Sunlight's revenue for three
months ended
Successor Predecessor Increase (Decrease)
For the
Three Months
Ended June For the Three Months
30, 2022 Ended June 30, 2021 $ %
Direct Channel Platform Fees, net $ 25,206 $ 21,885 $ 3,321 15.2 %
Indirect Channel Platform Fees, net 2,667 3,227 (560) (17.4)
Other revenues 1,717 1,091 626 57.4
Total $ 29,590 $ 26,203 $ 3,387 12.9
55-------------------------------------------------------------------------------- Revenue increased by$3.4 million or 12.9% for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 due to an increase of 1.0% in the average platform fee percentage earned on loans funded by direct channel capital providers or purchased by indirect channel capital providers, partially offset by a decrease of 3.0% in platform fee loans. 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$666.2 million in the three months endedJune 30, 2021 to$716.4 million in the three months endedJune 30, 2022 , an increase of 7.5%. 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 1,392 atJune 30, 2021 to 1,756 atJune 30, 2022 . The number of solar contractors in the network increased from 746 atJune 30, 2021 to 796 atJune 30, 2022 , an increase of 6.7%. The number of home improvement contractors in the network increased from 646 atJune 30, 2021 to 960 atJune 30, 2022 , an increase of 48.6%. The average platform fee percentage earned on loans funded by direct channel capital providers or purchased by indirect channel capital providers increased 1.0% from the three months endedJune 30, 2022 to the three months endedJune 30, 2021 . 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 based on, among other things, 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 fromJune 30, 2021 toJune 30, 2022 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. Sunlight's indirect channel capital providers are generally more reactive than direct channel capital providers to market uncertainty and interest rate market 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. 56 --------------------------------------------------------------------------------
Successor Predecessor
For the Three
Months Ended June For the Three Months
30, Ended June 30, Change in
2022 2021 Average
Solar Total - Capital Provider Discount 16.5 % 16.7 % (0.2) %
Solar Total - Contractor Fee 21.5 20.7 0.8
Solar Total - Platform Fee 5.0 4.0 1.0
Solar Direct Channel - Capital Provider Discount 15.2 16.6 (1.4)
Solar Direct Channel - Contractor Fee 20.6 20.9 (0.3)
Solar Direct Channel - Platform Fee 5.4 4.3 1.1
Solar Indirect Channel - Capital Provider Discount 23.4 17.2 6.2
Solar Indirect Channel - Contractor Fee 26.7 20.2 6.5
Solar Indirect Channel - Platform Fee 3.3 3.0 0.3
Costs and Expenses
Cost of revenues increased by 8.2% for the three months ended June 30, 2022 ,
less than the 12.9% increase in revenues, when compared to the three months
ended June 30, 2021 . The $0.4 million increase in cost of revenues resulted from
$0.3 million of increased costs of consumer credit underwriting arising from
increased credit approval volumes and $0.4 million from rewards earned by
salespeople under Sunlight Rewards™, partially offset by $0.1 million from costs
incurred in connection with the decrease of funded loan volumes and Sunlight's
role in facilitating those loans and $0.3 million of cost decreases 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 $6.0 million , or 74.4% for the
three months ended June 30, 2022 when compared to the three months ended
June 30, 2021 . Of the $6.0 million increase, $4.8 million of compensation
expense recognized in the three months ended June 30, 2022 resulted from the
Business Combination from the vesting of equity-based compensation awards
granted to employees of Sunlight's Predecessor that did not immediately vest
upon completion of the Business Combination (provisionally-vested replacement
awards were granted upon completion of the Business Combination that vest in
future periods) and $2.0 million from restricted stock units granted on or after
the Business Combination to Sunlight employees. The remaining costs were
associated with an increase in full-time employees from 220 at June 30, 2021 to
237 at June 30, 2022 . 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 $3.3 million , or
277.6% for the three months ended June 30, 2022 when compared to the three
months ended June 30, 2021 . Of the $3.3 million increase, Sunlight incurred $2.3
million of incremental expense related to Sunlight's operations as a public
company, including $1.1 million of increased audit and accounting costs and an
additional $1.0 million of insurance costs. In addition, Sunlight incurred an
additional $0.1 million of legal and compliance costs.
Property and technology expense increased by $0.6 million , or 39.7% for the
three months ended June 30, 2022 when compared to the three months ended
June 30, 2021 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 increased by $8.9 million , or 1,110.2% for
the three months ended June 30, 2022 when compared to the three months ended
June 30, 2021 primarily due to the amortization of intangible assets acquired in
the Business Combination during the three months ended June 30, 2022 .
Provision for loss expense increased by
57
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established during the second quarter of 2022 against a financing receivable
from one of its contractors. Excluding this financing receivable, the ratio of
provision for loss expense over aggregate funded bank partner loan volume in the
three months ended June 30, 2021 was 0.3% as compared to 0.6% over the three
months ended June 30, 2022 as a result of the write offs.
Operating margin decreased materially from the three months ended June 30, 2021
to the three months ended June 30, 2022 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$18.2 million for the three months endedJune 30, 2022 when compared to the three months endedJune 30, 2021 , primarily resulting from (a)$15.1 million decrease in the fair value of warrants issued by Sunlight and redeemable in its equity, treated as liabilities, (b) a$1.3 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, and (c) a$2.9 million decrease in costs incurred in connection with the Business Combination, partially offset by a$1.2 million increase in guarantee obligations. Income Tax Benefit
Sunlight's Predecessor is a limited liability company not subject to income
taxes. During the three months ended
Noncontrolling Interests in Consolidated Subsidiaries
Sunlight's Predecessor did not consolidate any entities in which third parties owned a noncontrolling interest. During the three months endedJune 30, 2022 , income (loss) of consolidated subsidiaries allocated to noncontrolling interests represents$4.4 million ofSunlight Financial LLC consolidated net loss during the three months endedJune 30, 2022 and weighted-average noncontrolling interests of 35.2%.
The Six Months Ended
Revenue
The following table provides the components of Sunlight's revenue for six months
ended
Successor Predecessor
For the Six
Months Ended For the Six Months
June 30, Ended June 30, Increase (Decrease)
2022 2021 $ %
Direct Channel Platform Fees, net $ 47,904 $ 43,731 $ 4,173 9.5 %
Indirect Channel Platform Fees, net 6,123 5,043 1,080 21.4
Other revenues 3,794 2,216 1,578 71.2
Total $ 57,821 $ 50,990 $ 6,831 13.4
Revenue increased by $6.8 million or 13.4% for the six months ended June 30,
2022 as compared to the six months ended June 30, 2021 due to an overall 0.8%
increase in the average platform fee percentage earned on loans funded by direct
channel capital providers or purchased by indirect channel capital providers,
partially offset by a decrease of 3.9% in platform fee loans, excluding indirect
channel home improvement platform fee loans treated as derivatives for
accounting purposes. Sunlight's revenue excludes amounts earned through its
facilitation of indirect channel home improvement loan originations, which
Sunlight presents as realized gains on contract derivatives.
Funded loans increased from $1,247.2 million for the six months ended June 30,
2021 to $1,309.2 million for the six months ended June 30, 2022 , an increase of
5.0%. Sunlight believes that the increase in funded loans year-over-year is
attributable primarily to growth in the residential solar market, deepening
relationships with existing contractors, and an increase in the number of
contractors in Sunlight's contractor network.
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The average platform fee percentage earned on loans funded by direct channel
capital providers or purchased by indirect channel capital providers increased
0.8% from the six months ended June 30, 2021 to the six months ended June 30,
2022 . Sunlight believes that the difference in platform fee percentage from
June 30, 2021 to June 30, 2022 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. Sunlight's indirect channel capital providers
are generally more reactive than direct channel capital providers to market
uncertainty and interest rate market 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
For the Six Months For the Six Months
Ended June 30, Ended June 30, Change in
2022 2021 Average
Solar Total - Capital Provider Discount 16.4 % 16.6 % (0.2) %
Solar Total - Contractor Fee 21.4 20.8 0.6
Solar Total - Platform Fee 5.0 4.2 0.8
Solar Direct Channel - Capital Provider Discount 15.2 16.5 (1.3)
Solar Direct Channel - Contractor Fee 20.5 20.9 (0.4)
Solar Direct Channel - Platform Fee 5.3 4.4 0.9
Solar Indirect Channel - Capital Provider Discount 22.9 17.2 5.7
Solar Indirect Channel - Contractor Fee 26.5 20.2 6.3
Solar Indirect Channel - Platform Fee 3.6 3.0 0.6
Costs and Expenses
Cost of revenues increased by 8.0% for the six months ended June 30, 2022 , which
is less than the 13.4% increase in revenues when compared to the six months
ended June 30, 2021 . The $0.8 million increase in cost of revenues resulted from
$0.7 million of increased costs of consumer credit underwriting arising from
increased credit approval volumes and $0.7 million from incremental rewards
earned by salespeople under Sunlight Rewards™, partially offset by decreased
costs of $0.4 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 $11.1 million , or 69.1% for the
six months ended June 30, 2022 when compared to the six months ended June 30,
2021 . Of the $11.1 million increase, $8.6 million of compensation expense
recognized in the six months ended June 30, 2022 resulted from the Business
Combination, including $5.5 million from the vesting of equity-based
compensation awards granted to employees of Sunlight's Predecessor that did not
immediately vest upon completion of the Business Combination
(provisionally-vested replacement awards were granted upon completion of the
Business Combination that vest in future periods) and $3.1 million from
restricted stock units granted on or after the Business Combination to Sunlight
employees. The remaining $2.4 million of increased compensation expense resulted
from an increase in employees from 220 at June 30, 2021 to 237 at June 30, 2022 .
The increase in 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.
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Selling, general, and administrative expense increased by $7.9 million , or
253.1% for the six months ended June 30, 2022 when compared to the six months
ended June 30, 2021 . Of the $7.9 million increase, Sunlight incurred $2.3
million of incremental expense related to Sunlight's operations as a public
company, including $1.1 million of increased audit and accounting costs and an
additional $1.0 million of insurance costs. In addition, Sunlight incurred an
additional $0.1 million of legal and compliance costs as well as $0.2 million of
additional bad debt and other costs during the six months ended June 30, 2022
when compared to the six months ended June 30, 2021 .
Property and technology expense increased by $1.3 million , or 48.9% for the six
months ended June 30, 2022 when compared to the six months ended June 30, 2021 ,
primarily due to increases in rent and 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 increased by $30.5 million , or 1,896.3%
for the six months ended June 30, 2022 when compared to the six months ended
June 30, 2021 , primarily due to the amortization of intangible assets acquired
in the Business Combination during the six months ended June 30, 2022 amounting
to $31.9 million , partially offset by lower amortization of investments made in
Orange® to support ongoing innovation and to automate certain other corporate
processes.
Provision for losses increased by $3.5 million , or 299.3% for the six months
ended June 30, 2022 when compared to the six months ended June 30, 2021 . Such
increase was due primarily to an allowance Sunlight established during the
second quarter of 2022 against a financing receivable from one of its
contractors. Excluding this financing receivable, the ratio of provision for
loss expense over aggregate funded bank partner loan volume in the six months
ended June 30, 2021 was 0.5% as compared to 0.5% during the six months ended
June 30, 2022 .
Operating margin decreased materially from the six months ended June 30, 2021 to
the six months ended June 30, 2022 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 (expense) increased$19.2 million for the six months endedJune 30, 2022 when compared to the six months endedJune 30, 2021 , primarily resulting from a$6.5 million decrease in costs incurred in connection with the Business Combination and a$8.7 million decrease in the fair value of public and private warrants, originally issued by Spartan and assumed by Sunlight upon closing of the Business Combination, during the six months endedJune 30, 2022 as compared to a$4.1 million increase in the fair value of warrants issued by Sunlight's Predecessor during the six months endedJune 30, 2021 .
Income Tax Benefit
Sunlight's Predecessor was a limited liability company not subject to income taxes. During the six months endedJune 30, 2022 , the$4.1 million income tax benefit reflects an effective tax rate of 19.3%.
Noncontrolling Interests in Consolidated Subsidiaries
Sunlight's Predecessor did not consolidate any entities in which third parties owned a noncontrolling interest. During the six months endedJune 30, 2022 , income (loss) of consolidated subsidiaries allocated to noncontrolling interests represents$20.3 million ofSunlight Financial LLC's consolidated net loss allocated to such noncontrolling interests at a weighted-average ownership of 35.1%.
Liquidity and Capital Resources
As of
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--------------------------------------------------------------------------------Share Repurchase Program
OnMay 16, 2022 , Sunlight's Board of Directors authorized a share repurchase program pursuant to which Sunlight may repurchase up to$50.0 million of Sunlight's Class A common stock over an eighteen-month period from the date of authorization. Sunlight intends to fund the share repurchases through a combination of cash on hand and future cash flow from operations. Under the share repurchase program, Sunlight may purchase common stock in open market transactions, block, or privately-negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act or by any combination of such methods, in each case subject to compliance with allSEC rules and other legal requirements. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, debt covenant restrictions, general business conditions, the market price of Sunlight's stock, self-imposed trading blackout periods, and the availability of alternative investment opportunities. There is no minimum number of shares required to be repurchased under the share repurchase program, and the share repurchase program may be suspended or discontinued at any time.
Loan and Security Agreement
OnApril 26, 2021 , Sunlight entered into a Loan and Security Agreement, as amended (the "Loan and Security Agreement") withSilicon Valley Bank ("SVB"). The Loan and Security Agreement, which replaced 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 of Sunlight's 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 (a) 5.0% and (b) the prime rate plus 1.75% per annum. The Loan and Security Agreement contains certain financial covenants, including maintenance of (a) Liquidity (as defined therein) at all times in an amount equal to or greater than the greater of (i) 35% of all outstanding principal amounts of any advances and (ii)$10.0 million ; (b) at all times Available Takeout Commitment Amount (as defined therein) in an amount equal to or greater than$200.0 million ; and (c) EBITDA (as defined therein) 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 can 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 can 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 by SVB. Otherwise, no defaults or events of default have occurred as of the date of this filing.
Material Cash Requirements
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),
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, income taxes, and tax distributions
to noncontrolling interests. 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 liquidity needs during
the next 12 months from the date of this Quarterly Report on Form 10-Q and
beyond.
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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. 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 a key anchor partnership with a large 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%. In 2021, as compared with 2020, Sunlight grew its solar contractor base by more than 32.3%. 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 would discontinue use of the Sunlight platform to finance its consumer customers effective immediately. This contractor accounted for approximately 9.5% and 2.1% of Sunlight's total funded loan volumes during the year endedDecember 31, 2021 and for the six months endedJune 30, 2022 , 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® 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 (a) 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 (b) 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 our 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.
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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 allocation engine directs that certain solar
and home improvement loans 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.
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 historically 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" in this Quarterly Report on Form 10-Q and Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a full description of the related estimates, assumptions, and judgments.
The Six Months Ended
The following provides a summary of cash flow data for the six months ended
Successor Predecessor
For the Six
Months Ended For the Six Months
June 30, Ended June 30,
2022 2021
Net cash provided by (used in) operating activities $ (18,000) $ 17,106
Net cash used in investing activities (2,117) (1,404)
Net cash used in financing activities (3,289) (2,025)
63--------------------------------------------------------------------------------
Cash Flow from Operating Activities
For the six months endedJune 30, 2022 , net cash used in operating activities was$18.0 million . Operating cash inflows for the six months endedJune 30, 2022 primarily consisted of proceeds from Sunlight's direct channel capital providers to fund, and indirect channel capital provider to purchase, without duplication, loans of$1.1 billion , of which Sunlight paid$1.1 billion to contractors; repayment of advances and prefunds of$1.0 billion (conversely, Sunlight advanced or prefunded$1.1 billion ). Operating cash outflows primarily consisted of compensation and benefits of$19.4 million ;$3.4 million of income taxes, and$0.7 million of other taxes, paid; professional service fees of$6.9 million ; rebate, referral, and rewards paid of$3.1 million ; and$0.6 million of net interest on borrowings. For the six months endedJune 30, 2021 , net cash provided by operating activities was$17.1 million . Operating cash inflows for the six months endedJune 30, 2021 primarily consisted of proceeds from Sunlight's direct channel capital providers to fund, and indirect channel capital providers to purchase without duplication, loans of$1.0 billion , of which Sunlight paid$1.0 billion to contractors; repayment of advances and prefunds of$0.8 billion (conversely, Sunlight advanced or prefunded$0.9 billion ); and net interest expense paid of$0.5 million . Operating cash outflows primarily consisted of compensation and benefits of$17.3 million , information technology expenses of$2.1 million , and management fees paid to affiliates of$0.2 million .
Cash Flow from Investing Activities
For the six months endedJune 30, 2022 , net cash used in investing activities was$2.1 million , of which$1.3 million was paid to internally develop software and acquire property and equipment and$1.4 million was paid to acquire loans; Sunlight received$0.6 million as return of capital on loans and loan participations. For the six months endedJune 30, 2021 , net cash used in investing activities was$1.4 million , of which$1.1 million was paid to internally develop software and acquire property and equipment and$1.2 million was paid to acquire loans and loan participations, net of$0.8 million in cash received as return of capital thereon.
Cash Flow from Financing Activities
For the six months endedJune 30, 2022 , net cash used in financing activities was$3.3 million that represents$2.0 million of share repurchases, distributions of$1.2 million , and$0.1 million of tax payments made on share-based payments in connection with the Business Combination. For the six months endedJune 30, 2021 , net cash used in financing activities was$2.0 million , consisting of$20.7 million in borrowings under Sunlight's credit facility, net of$14.8 million in repayments and$0.5 million payment of debt issuance costs, as well as distributions of$7.5 million .
Long-Term Debt
OnApril 26, 2021 , Sunlight entered into the 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 (a) 5.0% and (b) the prime rate plus 1.75% per annum. The Loan and Security Agreement contains certain financial covenants, including (a) liquidity in an amount equal to or greater than (i) 35% of all outstanding principal amounts of any advances and (ii)$10.0 million ; (b) Available Takeout Commitment Amount (as defined therein) in an amount equal to or greater than$200.0 million ; and (c) EBITDA (as defined therein) 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 by SVB. Otherwise, no defaults or events of default have occurred as of the date of this filing. 64 --------------------------------------------------------------------------------
Other Changes in Financial Position
Six Months Ended
In addition to the changes in Sunlight's financial position fromDecember 31, 2021 toJune 30, 2022 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 decreased by$0.4 million resulting from a$0.4 million decrease in cash temporarily held by Sunlight in connection with Sunlight's administration of loan participations on behalf of a third party. •Cumulative ASC 842 adoption effects. Sunlight recorded a right-of-use asset of$7.6 million and a lease liability of$7.6 million onJanuary 1, 2022 as well as removal of$0.2 million in deferred rent. •Noncontrolling interests in consolidated subsidiaries. Changes in the outstanding ClassX Units and Class EX Units issued bySunlight Financial LLC resulted in a reallocation of$1.5 million ofSunlight Financial LLC's net assets from ClassX Units held by Sunlight to the noncontrolling interests that hold Class EX Units. •Tax distribution.Sunlight Financial LLC declared distributions to its unitholders representing estimated tax payments in accordance withSunlight Financial LLC's organizational agreements. Sunlight accrued$2.7 million , or$0.06 per Class EX Unit, to its noncontrolling interests. Ratable estimated tax payments fromSunlight Financial LLC to members consolidated by Sunlight are eliminated in consolidation.
Other Factors Affecting Liquidity and Capital Resources
Unitholders' Distribution
Predecessor
Pursuant to the Fourth Amended and Restated Limited Liability Company Agreement ofSunlight Financial LLC , 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 Financial LLC'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 Financial LLC 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,Sunlight Financial LLC would have issued a number of units equal to 14.5% of each such holders outstanding units, on an annualized basis.Sunlight Financial LLC'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 ofSunlight Financial LLC 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 Financial LLC replaced the Prior Sunlight LLC Agreement with the Fifth Amended and Restated Limited Liability Company Agreement of Sunlight (the "Sunlight A&R LLC Agreement"), which was entered into concurrently with the closing of the Business Combination. Under the Sunlight A&R LLC Agreement,SL Financial Holdings Inc. , as the sole managing member ofSunlight Financial LLC , has the right to determine when distributions will be made to the holders of Sunlight Units (as defined therein) and the amount of any such distributions, except thatSunlight Financial LLC is required to make distributions to the extent and in an amount such that the Sunlight Unitholders, includingSunlight Financial Holdings Inc. , receive certain tax-related distributions and to make distributions in the event of dissolution. If a distribution is paid to the members ofSunlight Financial LLC , 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 Inc. uses any excess cash it receives to reinvest inSunlight Financial LLC for additional Sunlight Units. 65 -------------------------------------------------------------------------------- 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 ofSunlight Financial LLC . Net income and losses ofSunlight Financial LLC 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 requiresSunlight Financial LLC to make pro rata cash distributions to all holders of Sunlight Units, includingSunlight Financial Holdings Inc. , (a) first, in an amount sufficient to allowSunlight Financial Holdings Inc. 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. , causeSunlight Financial LLC to become insolvent within the twelve (12) month period following the date of such distribution, and (b) thereafter to the extent necessary, in an amount generally intended to allow Sunlight Unitholders, includingSunlight Financial Holdings Inc. , to satisfy their respective income tax liabilities with respect to their allocable share of income ofSunlight Financial LLC , based on certain assumptions and conventions (including an assumed income tax rate) and after taking into account other distributions (including prior tax distributions) made bySunlight Financial LLC .
Tax Receivable Agreement ("TRA") (Successor)
On the Closing Date, Sunlight entered into the TRA with the TRA Holders and the Agent (as defined therein). The TRA generally provides for the payment by Sunlight 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 that Sunlight actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing Date as a result of (a) certain increases in tax basis that occur as a result of Sunlight's acquisition (or deemed acquisition forU.S. federal income tax purposes) of all or a portion of a TRA Holders' Sunlight Class EX Units upon the exercise of the redemption or call rights set forth in the Sunlight A&R LLC Agreement and (b) imputed interest deemed to be paid by Sunlight as a result of, and additional tax basis arising from, any payments Sunlight makes under the Tax Receivable Agreement. Sunlight will retain the benefit of the remainder of the actual net cash savings, if any. If Sunlight elects to terminate the TRA early or if it is terminated early due to Sunlight's failure to honor a material obligation thereunder or due to a Change of Control (as defined in the TRA), Sunlight 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 TRA (based upon certain assumptions and deemed events set forth in the TRA), which amount may substantially exceed the actual cash tax savings realized by Sunlight. In the case of an early termination upon a Change of Control, such early termination payment may, at Sunlight 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: (a)101 N. Tryon Street , Suite 1000,Charlotte, North Carolina 28246 (the "North Carolina Office Space") and (b)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$0.8 million and$0.3 million for the six months endedJune 30, 2022 and 2021, respectively. The lease for theNorth Carolina Office Space will expire inJune 2029 . The operating lease rent expense for theNew York Office Space was$0.2 million and$0.2 million for the six months endedJune 30, 2022 and 2021, respectively. The lease for theNew York Office Space is scheduled to expire inOctober 2023 . 66 --------------------------------------------------------------------------------
Available Liquidity and Capital Resources
As ofJune 30, 2022 , Sunlight's cash and cash equivalents and restricted cash was$70.5 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" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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. 67 --------------------------------------------------------------------------------
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.
Adjusted Net Income
Adjusted Net Income is a non-GAAP financial measure used by Sunlight's
management to evaluate operating performance. 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 Net Income
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. Adjusted Net Income is defined as net income
excluding non-cash changes in certain financial instruments, 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.
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The following table presents a reconciliation of net income to Adjusted Net
Income, Adjusted EBITDA and Free Cash Flow as well as cash from operating
activities to Free Cash Flow for the three and six months ended June 30, 2022
and 2021 (USD in thousands):
Successor Predecessor Successor Predecessor
For the Three For the Three For the Six
Months Ended June Months Ended June Months Ended For the Six Months
30, 30, June 30, Ended June 30,
2022 2021 2022 2021
Net Income (Loss) $ 5,659 $ 5,243 $ (16,947) $ 7,903
Adjustments for adjusted net income
(loss)
Amortization of Business Combination
intangibles 9,385 - 31,584 -
Non-cash change in financial instruments (12,926) 1,173 (7,991)
4,232
Expenses from the Business Combination and Other 141 2,895 490 6,482 Adjusted Net Income (Loss) 2,259 9,311 7,136 18,617 Adjustments for adjusted EBITDA Depreciation and amortization 309 801 557 1,610 Interest expense 296 317 556 572 Income tax expense (benefit) (1,650) - (4,051) - Equity-based compensation 4,792 7 8,652 18 Fees paid to brokers 780 1,059 1,745 2,169 Adjusted EBITDA 6,786 11,495 14,595 22,986 Adjustments for net cash provided by (used in) operating activities Interest expense (296) (317) (556) (572) Fees paid to brokers (780) (1,059) (1,745) (2,169) Expenses from the Business Combination and Other (141) (2,895) (490) (6,482) Provision for losses 4,042 436 4,680 1,172 Changes in advances, net of funding commitments (5,769) (2,654) (31,388)
(1,799)
Changes in operating capital and other (712) 1,600 (3,096)
3,970
Net Cash Provided by (Used in) Operating Activities 3,130 6,606 (18,000)
17,106
Adjustments for free cash flow Capital expenditures (820) (357) (1,665)
(1,066)
Changes in advances, net of funding commitments 5,769 2,654 31,388 1,799 Changes in restricted cash (774) 915 (438) (125) Payments of Business Combination costs - 2,012 -
6,482
Other changes in working capital 1,609 (566) 4,082 (199) Free Cash Flow $ 8,914 $ 11,264$ 15,367 $ 23,997
The following table presents a calculation of Adjusted Net Income per diluted Class A Share (USD in thousands, except per share amounts):
Successor
For the Three For the Six
Months Ended June Months Ended June
30, 30,
2022 2022
Adjusted Net Income (Loss) $ 2,259 $ 7,136
Adjusted Net Income (Loss) per Class A Share, Diluted $ 0.01 $ 0.04
Weighted-average Class A Shares
Class A Shares 84,635,413 84,717,117
Class EX Units 46,802,203 46,715,978
Restricted Stock Units 1,887,969 2,001,987
Warrants 27,777,780 27,777,780
161,103,365 161,212,862
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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 ofJune 30, 2022 ; 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 ofJune 30, 2022 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, 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 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 contracts with its intermediary bank partner to originate home
improvement loans and with an indirect loan purchaser to purchase such loans are
considered derivatives under GAAP. As such, Sunlight's revenues exclude the
platform fees that Sunlight earns in connection with these contracts. Instead,
Sunlight estimates the fair value of the contract derivatives based upon the
present value of net cash flows Sunlight expects to collect under the contracts,
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 Derivatives, Net" in Sunlight's consolidated statement of
operations.
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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. At June 30, 2022 and December 31, 2021 , 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 $0.1 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 (5.0%) 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. 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 (a) when either principal or interest payments are 90 days or more past due based on contractual terms or (b) 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.
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--------------------------------------------------------------------------------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 Assets
Sunlight's contracts 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 derivatives are 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 assets 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.
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 underFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 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 atJune 30, 2022 andDecember 31, 2021 , Sunlight would pay$3.7 million and$3.0 million , respectively, of which Sunlight recorded liabilities of$2.4 million and$1.8 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.
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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 (the "JOBS Act"), Sunlight is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies." Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Unless otherwise stated, Sunlight elects 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
See Note 9 "-Transactions with Affiliates and Affiliated Entities" in the notes accompanying Sunlight's consolidated financial statements.
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