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 Annual Report on Form 10-K. 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. 40 --------------------------------------------------------------------------------
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 Annual Report on Form
10-K. These risks include, among others:
•As of December 31, 2022 we were out of compliance with certain financial
covenants in our existing credit facility and Bank Partner Agreements. While we
have consummated the Transactions under the Commitment & Transaction Support
Agreement with the Bank Partner to address our compliance issues under the Bank
Partner Agreement and replace the existing credit facility, the Amended Bank
Partner Agreements and our new credit facility with the Bank Partner, impose
operating and financial restrictions on us. Our ability to manage our business
in accordance with the terms of these new agreements is a key factor in
achieving profitability.
•We have incurred a net loss and negative cash flows from operating activities
in 2022. While we have consummated the Transactions contemplated by the
Commitment & Transaction Support Agreement, these trends have continued into
2023 and will continue in the near term until we are able to fully benefit from
the consummation of the Transactions.
•While we consummated the Transactions under the Commitment & Transaction
Support Agreement with the Bank Partner, we must continue to work through the
Backbook Loans and rapidly rising interest rate environment to stabilize our
business and return to profitability. In our continuing efforts to do so, we may
consider seeking strategic alternatives in order to sustain our business, and we
cannot predict the impact that such strategic alternative might have on
Sunlight's operations or the prices of Sunlight's securities.
•Our limited liquidity is materially and adversely affecting our business
operations. While we have consummated the Transactions contemplated by the
Commitment & Transaction Support Agreement we will continue to implement cost
saving measures and the Board is continuing to review additional actions to
maximize value for shareholders.
•While the Amended Bank Partner Agreements and Secured Term Loan with the Bank
Partner address our short term liquidity concerns, we must carefully manage our
liquidity to comply with the new agreements and achieve long-term stability.
•Non-compliance on the part of third parties with whom we conduct business
disrupts our business and adversely affects our financial conditions and
operating results.
•We do not currently have an interest rate risk hedging program or seek to hedge
interest rate risks associated with our Bank Partner Agreements, and therefore
are not protected against significant increases in interest rates.
•Worsening economic conditions from rising interest rates, a rising rate of
inflation, or other potential causes of economic distress could raise Sunlight's
cost of capital and/or reduce or eliminate the willingness of Sunlight's direct
or indirect capital providers to continue funding loan volume at historical
levels, thereby materially and adversely impacting Sunlight's business, cash
flows, financial condition and results of operations.
•The ongoing COVID-19 pandemic and other health epidemics and outbreaks,
including the rise of variants of COVID-19, could adversely affect Sunlight's
business, results of operations and financial condition.
•While Sunlight has obtained amended terms under the Amended Bank Partner
Agreements , if Sunlight is unable to facilitate the sale of loans held on its
Bank Partner's balance sheet to comply with the total loan cap and the Bank
Partner is unwilling to further expand its loan capacity, Sunlight may be
required to purchase all or a portion of these loans and/or may be unable to
fund future Indirect Channel Loans.
•To the extent that Sunlight seeks to grow or strengthen its business and
competitive position through future acquisitions, or other strategic
investments, transactions or alliances, Sunlight may not be able to do so
effectively.
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•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.
•The reduction, modification or elimination of government incentives could cause
our revenue to decline and harm our financial results.
•Existing regulations and policies and changes to these regulations and policies
may present technical, regulatory, and economic barriers to the purchase and use
of solar power products, which may significantly reduce demand for our loan
products and services.
•The industries that Sunlight operates in are highly competitive and are likely
to become more competitive. Additionally, if new entrants join these markets who
have ready access to cheaper capital, competing successfully would become more
difficult for Sunlight. Sunlight's inability to compete successfully or maintain
or improve Sunlight's market share and margins could adversely affect its
business.
•Disruptions in the operation of Sunlight's computer systems and those of its
critical third-party service providers and capital providers could have an
adverse effect on Sunlight's business.
•Sunlight's growth is dependent on its contractor network and in turn the
quality of the products and services they provide to their customers, and
Sunlight's failure to retain or replace existing contractors, to grow its
contractor network or the number of Sunlight loans offered through its existing
network, or increases in loan delinquencies due to any deficiencies in
Sunlight's contractor underwriting practices, could adversely impact Sunlight's
business.
•The current electrician shortage adversely impacts our business, financial
condition, and results of operations.
•Sunlight's capital advance program exposes it to potential losses in the event
that a contractor fails to fully perform under its agreements with Sunlight or
becomes insolvent prior to completion of the underlying installation or
construction, which losses could have an adverse impact on Sunlight's business,
results of operations and financial condition.
•If contractors fail to fulfill their obligations to consumers or fail to comply
with applicable law, Sunlight may incur remediation costs.
•Sunlight's revenue is impacted, to a significant extent, by the general
economy, including supply chain disruptions, and the financial performance of
its capital providers and contractors.
•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.
•Sunlight has never paid cash dividends on its capital stock, and does not
anticipate paying dividends in the foreseeable future.
•Sunlight cannot guarantee that it will repurchase its common stock pursuant to
Sunlight's share repurchase program or that Sunlight's share repurchase program
will enhance long-term shareholder value. Share repurchases could also increase
the volatility of the price of Sunlight's common stock and could diminish
Sunlight's cash reserves.
•If assumptions or estimates Sunlight uses in preparing its financial statements
are incorrect or are required to change, Sunlight's reported results of
operations, liquidity and financial condition may be adversely affected.
Recent Developments and Outlook
Commitment & Transaction Support Agreement. As previously reported, onApril 2, 2023 Sunlight Financial LLC ("Sunlight"), a wholly owned subsidiary ofSunlight Financial Holdings Inc. (the "Company"), the Company andCross River Bank ("CRB"), entered into a Commitment and Transaction Support Agreement (the "Commitment & Transaction Support Agreement") pursuant to which the parties agreed to undertake the transactions contemplated under the Commitment & Transaction Support Agreement pursuant to definitive documents that remained subject to negotiation and completion ("Definitive Documents"). EffectiveApril 25, 2023 (the "Closing Date"), the parties and certain of their affiliates agreed to and executed the Definitive Documents and closed the transactions contemplated by the Commitment & Transaction Support Agreement as described below.
Amended CRB Agreements. The Amended CRB Agreements provide, among other things:
•a requirement that the Company establish a pricing and capital markets
committee responsible for setting dealer discounts, interest rates, capital
markets activity, policies relating to hedging, and other terms related to the
Company's loan products and executing any sales of loans held by CRB pursuant to
the Amended CRB Agreements and to provide CRB with observer rights and a right
to attend all meetings held by the committee, subject to exclusions where CRB is
the loan purchaser;
•modifications to the procedures for submitting credit approvals;
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•a modification to the cap on the total loans held by CRB at any time as
provided below, measured on the last day of the calendar month, with a grace
period election for loan sales executed during the seven (7) business days
following the last day of a calendar month. The Company will be entitled to six
(6) grace period elections in any twelve-month period:
Month(s) Ending Bank Cap
April 30, 2023 and May 31, 2023 Waived
June 30, 2023 and July 31, 2023 $550 million
August 31, 2023 , September 30 , $500 million
2023, and October 31, 2023
November 30, 2023 and each month $400 million (plus the Additional Capacity, if any).
thereafter Additional Capacity is the lesser of (i) the Cash Collateral
Amount divided by 5% and (ii) $100 million .
•modifications to the Loan Purchase Trigger Date (as defined in the Amended
Solar Loan Sale Agreement) related to each loan held on CRB's balance sheet;
•a revised tiered fee structure and provision for certain fees accrued through
June 30, 2023 to be payable in additional Tranche 1 Loans (as defined below);
•the Company will use best efforts to amend the Master Services Agreement dated
January 13, 2020 , between CRB, the Company, and Turnstile Capital Management,
LLC (the "Servicer") on or before July 1, 2023 to cause the Servicer to remit
various cash payments associated with loans into an account held by CRB;
•effective on the Closing Date and continuing until full repayment to CRB of all
outstanding obligations, the Company will provide CRB with a pari passu first
lien security interest in all assets of the Company as defined in the Secured
Term Loan; and
•waiver by CRB of any defaults known by CRB to be existing under the CRB
Agreements.
•Secured Term Loan with CRB. On the Closing Date, Sunlight, as borrower, entered
into a Loan and Security Agreement with CRB, and with SL Financial Holdings
Inc. , ("SL Financial") as guarantor (the "Secured Term Loan").The Secured Term
Loan consists of loan commitments for two tranches of loans providing for
Tranche 1 Loans and Tranche 2 Loans (each as defined below). The Secured Term
Loan, and all other obligations of Sunlight to CRB are secured by a first lien
perfected security interest in all Sunlight's and SL Financial's assets. The
Secured Term Loan matures on October 25, 2025 ( the "Maturity Date"). The
Secured Term Loan provides loan commitments under two sub- facilities. The $38.8
million Tranche 1 facility (the "Tranche 1 Loans") will be used to repay all
outstanding borrowings under the SVB Facility, pay fees and accrued interest due
under the Loan Program Agreements and for general corporate purposes. The $49.8
million Tranche 2 facility (the "Tranche 2 Loans" and, collectively with the
"Tranche 1 Loans" the "Facility Loans") will be used for deferred loan sale
proceeds and to pay fees and capitalized interest.
No scheduled principal payments are due until the first anniversary of the
Closing Date. Commencing with the first full month after the first anniversary
of the Closing Date, Sunlight is required to make equal monthly principal
payments in an amount equal to 4% of the aggregate amount of the Facility Loans
funded or deemed funded through the first anniversary of the CRB Closing Date.
On the Maturity Date, all remaining unpaid amounts of principal and interest
must be repaid in full.
An upfront fee equal to $2,658,000 , payable upon the closing date of the Secured
Term Loan will be paid in kind and added to the outstanding amount the Facility
Loans. An unused fee equal to 14% per annum of the difference between (a) the
Maximum Covered Loan Sale Amount (as defined in the Secured Term Loan) minus any
commitment reductions with respect to Tranche 2 Term Loans since the Closing
Date and (b) the aggregate principal amount of Tranche 2 Term Loans then
outstanding will be payable monthly in kind and added to the outstanding amount
of Tranche 2 Loans.
The aggregate principal outstanding amount of loans under the Secured Term Loan
(including capitalized or accrued and unpaid interest and any fees, the upfront
fee and the unused fee) shall not exceed $100 million . The Secured Term Loan is
subject to mandatory prepayment under certain conditions, which prepayments may
be allocated to Tranche 1 or Tranche 2 loans at the option of the Company and
Sunlight. Additionally, the Company and Sunlight will be required to prepay the
Secured Term Loan in full upon a liquidation, winding up, change of control,
merger, sale of all or substantially all of the assets of Sunlight, or a
transaction that results in the Company becoming privately held. Sunlight may,
at its option, prepay the Secured Term Loans and/or permanently reduce and
terminate unused loan commitments, in each case, in part or full at any time
prior to the maturity date with no penalties; which prepayments and/or
commitment reductions may be allocated to Tranche 1 Loans and/or Tranche 2 loans
at the option of Sunlight.
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The Secured Term Loan contains customary restrictive covenants for facilities of
its type, which include, among other things, limitations on use of proceeds,
dispositions, changes in business, management or business locations, change of
control, mergers or acquisitions, indebtedness, liens, restricted payments,
dividends or any other payments to equity, investments, transactions with
affiliates, and capital expenditures, subject to certain customary baskets and
exceptions. The Secured Term Loan also includes a financial covenant requiring
minimum liquidity (unrestricted an unencumbered cash and cash equivalents held
by Sunlight) in deposit accounts or securities accounts in an amount equal to or
greater than $20 million , measured as of the end of each calendar month and
requires that Sunlight maintain unrestricted cash in an aggregate amount of not
less than (a) during the two-week period after the Closing Date, $20 million ,
and (b) thereafter, the greater of (x) $20 million and (y) 75% of Sunlight's
cash, in accounts with CRB or its affiliates.
The Secured Term Loan also contains customary events of default that would
permit the lenders to accelerate the loans, including, among other things, the
failure to make timely payments when due under the Secured Term Loan or other
material indebtedness as described in the Secured Term Loan, the failure to
satisfy covenants contained in the Secured Term Loan, specified events of
bankruptcy and insolvency, a material event of default under the Amended Loan
Program Documents or any other agreement with CRB.
CRB Warrant. On the Closing Date the Company entered into a Warrant Purchase
Agreement (the "Purchase Agreement") with CRB Group, Inc. ("Purchaser"),
pursuant to which the Company issued to Purchaser a stock purchase warrant (the
"Warrant") exercisable for up to 25,944,541 shares ("Warrant Shares") subject to
certain adjustments, of Class A common stock, par value $0.0001 per share, of
the Company (the "Common Stock") at a per share price of $0.01 , subject to
certain adjustments and vesting as described below. On the Closing Date, the
Warrant vested and became exercisable with respect to 12,907,080 Warrant Shares.
The remaining portion of the Warrant with respect to 13,037,461 Warrant Shares,
subject to certain adjustments, will vest and become exercisable on April 27,
2024 ; provided, however, if the payment in full of the Secured Term is paid in
full prior to such date or a Change of Control (as defined in the Secured Term
Loan) occurs prior to such date, such number of Warrant Shares equal to the
product of the following equation shall immediately vest and become exercisable
and the remainder of the unvested Warrant Shares shall be forfeited and not be
exercisable: (i) (A) the number of days that elapsed between the date hereof and
the Acceleration Date (inclusive of the Acceleration Date) divided by (B) 366,
multiplied by (ii) 13,037,461.
Liquidity and Ability to Operate as a Going Concern. While we have consummated
the Transactions under the Commitment & Transaction Support Agreement, without
the benefit of the Transactions contemplated thereby, based on recurring losses
from operations and negative cash flows from operations for the year ended
December 31, 2022 , as well as cash and liquidity projections, there would have
been substantial doubt about our ability to continue as a going concern for the
next twelve months. Our consolidated financial statements have been prepared
assuming we will continue as a going concern and do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets, or the amounts and classification of liabilities that may result if
we do not continue as a going concern. You should not rely on our consolidated
balance sheet as an indication of the amount of proceeds that would be available
to satisfy claims of creditors, and potentially be available for distribution to
shareholders, in the event of liquidation.
Revolving Credit Facility with SVB Debt Refinancing and Breach of Financial
Covenants Waiver. The Loan and Security Agreement with SVB required Sunlight to
maintain minimum liquidity, EBITDA and available takeout commitment levels on a
quarterly basis. As a result of the platform fee losses in the fourth quarter of
2022, Sunlight did not meet the EBITDA requirement as of December 31, 2022 .
Additionally, without the benefit of Transactions, breaches of other significant
agreements, including the Bank Partner Agreements, could have triggered a cross
default under the Loan and Security Agreement with SVB. In connection with the
execution of the Secured Term Loan Sunlight repaid $3.6 million outstanding
under the Loan and Security Agreement and terminated the agreement and all
agreements related thereto. While the Amended Bank Partner Agreements and the
Secured Term Loan address our compliance issues under the agreements outstanding
at December 31, 2022 , they impose financial and other restrictive covenants upon
us. These financial and other restrictive covenants place certain limitations on
our operations and impose financial compliance requirements on us. Our ability
to manage our business in accordance with the terms of these new agreements is a
key factor in achieving profitability.
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Sales of Certain Funded Indirect Channel Loans with Bank Partner . The Bank
Partner originates the Indirect Channel Loans on its balance sheet through
Sunlight's proprietary technology platform, Orange®, that the Bank Partner holds
on its balance sheet until directed by the Company in the ordinary course of its
business to sell them to investors, including credit funds, insurance companies
and pension funds. While the Bank Partner is the owner of the loans, Sunlight
retains economic exposure to them until they are sold. The Bank Partner
currently holds, pursuant to the Bank Partner Agreements, the Backbook Loans.
Sunlight sold a material portion of the Backbook Loans in December 2022 , to
comply with the Bank Partner Agreements and other similar agreements with
capital providers, resulting in negative platform fees of $22.3 million in the
fourth quarter of 2022. As of March 31, 2023 , the aggregate principal amount of
loans held by the Bank Partner pursuant to the Bank Partner Agreements was
$764.0 million . The Company expects to sell the remaining Backbook Loans in 2023
that, even in light of the Amended Bank Partner Agreements, could result in
additional losses and negative platform fees between $45.0 million and $55.0
million on the loans held by the Bank Partner at March 31, 2023 .
Strategic Alternative Investment Partner(s). While we have consummated the
Transactions under the Commitment & Transaction Support Agreement and entered
into Amended Bank Partner Agreements and the Secured Term Loan with the Bank
Partner, we must continue to work the Backbook Loans and rapidly rising interest
rate environment to stabilize our business and return to profitability. In our
continuing efforts to do so, we may consider seeking strategic alternatives in
order to sustain our business. Sunlight cannot predict the impact that such
strategic alternative might have on Sunlight's operations or the prices of
Sunlight's securities.
December Amendments to Bank Partner Agreements with the Bank Partner. In
December 2022 , Sunlight and its Bank Partner amended the Indirect Channel Loan
Program for Solar and Home Improvement that govern the terms and conditions with
respect to originating and servicing the Indirect Channel Loans. Sunlight shall
continue to arrange for the sale of certain Indirect Channel Loans, or
participations, to therein, to third parties ("Indirect Channel Loan
Purchasers"). This contractual arrangement incorporates interest rate and credit
risks related to the risk of default on Indirect Channel Loans held by its Bank
Partner that results from a borrower's inability or unwillingness to make
contractually required payments. In connection with entering into the Bank
Partner Amendment, the Bank Partner also agreed to an omnibus waiver of certain
potential breaches and defaults under the Existing Bank Partner Agreements by
Sunlight through April 2023 , including any required compliance with any
applicable loan cap under the Bank Partner Agreements (the "Bank Partner
Waiver").
Impact of Rapid and Significant Increase in Interest Rates. During 2022,
interest rates have increased rapidly and significantly. The macro-economic
impact of these significant interest rate increases had a material impact on
Sunlight's business, profitability and cash-flow in the near term. First, these
rapid interest rate increases have resulted in a significant shift in reliance
from Sunlight's Direct Channels to its Indirect Channel, which is less
profitable and creates additional risk of rising rates between the time that the
underlying Indirect Channel loan is processed at a lower interest rate to a
later time when Sunlight is able to monetize Indirect Channel Loans after
interest rates have increased. As a result, Sunlight incurred losses relating to
its current portfolio of Indirect Channel Loans because of this interest rate
gap. Losses associated with the sale of these loans are recorded by the Company
as negative platform fees. In response to rapidly rising interest rates,
Sunlight implemented several increases in dealer fees charged to contractors
during the second half of 2022 and during the first quarter of 2023, as well as
eliminated certain products that are difficult to finance in the current
interest rate environment. Sunlight facilitated platform fee loans reflecting
the dealer fee increases starting in the fourth quarter of 2022 and continued
during 2023.
Partnership Unit Exchange. In January 2023 , holders of 2,314,143 Class EX units
of Sunlight Financial LLC exchanged their Class EX units, along with a
corresponding number of Class C shares of the Company, for 2,305,426 Class A
shares of the Company at $1.29 per Class A share. The Company issued 997,399
Class A shares, net of applicable tax withholding, and delivered 1,308,027 Class
A shares held in treasury in connection with this exchange.
45
--------------------------------------------------------------------------------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.
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 year endedDecember 31, 2022 and the period ofJuly 10, 2021 throughDecember 31, 2021 (the Successor Period") includes the results of operations for the Successor. The period fromJanuary 1, 2021 throughDecember 31, 2021 (the "Combined Annual Period") includes the results of operations for the Successor during the Successor Period and the results of operation for the Predecessor during the periodJanuary 1, 2021 throughJuly 9, 2021 (the "Predecessor Year-to-Date Period"). Sunlight believes that the discussion of Sunlight's combined operational results, while on different bases of accounting related to the application of purchase accounting, is appropriate as Sunlight highlights operational changes as well as purchase accounting related items.
The Year Ended
•Sunlight facilitated the origination of$2.9 billion of loans for the year endedDecember 31, 2022 , representing an increase of 14.7% from$2.5 billion of loans during the Combined Annual Period. •Revenue was$98.5 million for the year endedDecember 31, 2022 , representing a decrease of 14.1% from$114.7 million for the Combined Annual Period. •Net loss was$511.9 million for the year endedDecember 31, 2022 , which includes a goodwill impairment charge of$445.8 million and a$32.4 million write-off of advances made to a contractor, compared with$241.0 million for the Combined Annual Period. •Adjusted Net Loss was$22.2 million for the year endedDecember 31, 2022 , compared with Adjusted Net Loss of$40.5 million for the Combined Annual Period. •Adjusted EBITDA was$(35.7) million for the year endedDecember 31, 2022 , compared with$52.9 million for the Combined Annual Period.
As discussed more fully in "-Results of Operations," Sunlight's Net Income (Loss), Adjusted Net Income (Loss), and Adjusted EBITDA for the Combined Year-to-Date Period includes the effects from the Business Combination and is presented on a basis different than those measures for the Predecessor Year-to-Date Period.
Adjusted EBITDA
Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to Net Income, the most directly comparable GAAP measure, is included in "-Non-GAAP Financial Measures." The following charts depict Adjusted EBITDA and other key performance measures for the year endedDecember 31, 2022 and the Combined Annual Period (USD in thousands): [[Image Removed: 2211]][[Image Removed: 2212]][[Image Removed: 2213]][[Image Removed: 2214]][[Image Removed: 2215]] a.Includes the results of operations for the Combined Annual Period. Refer to "-Key Performance Measures" and "-Results of Operations" for amounts related to those periods. 46 --------------------------------------------------------------------------------
Key Performance Measures
Sunlight reviews several key performance measures, discussed below, to evaluate its business and results, measure performance, identify trends, formulate plans, and make strategic decisions. Sunlight believes that the presentation of such metrics is useful to its investors and counterparties because they are used to measure and model the performance of companies such as Sunlight using similar metrics. The following table sets forth key performance measures for the year endedDecember 31, 2022 and the Combined Annual Period (USD in thousands, except percentages): Successor(a) Predecessor For the Period For the Period For the Year Ended July 10, 2021 to January 1, 2021 to Combined Annual December 31, 2022 December 31, 2021 July 9, 2021 Period Percentage Change(b) Funded Loans(c)$ 2,896,238 $ 1,214,754 $ 1,309,504 $ 2,524,258 14.7 % Direct Channel Funded Loans 1,912,801 923,848 1,048,232 1,972,080 (3.0) Indirect Channel Funded Loans 983,437 290,906 261,272 552,178 78.1 Platform Fee Loans(d) 2,505,067 1,228,022 1,318,644 2,546,666 (1.6) Direct Channel Platform Fee Loans 1,912,801 923,848 1,048,232 1,972,080 (3.0) Indirect Channel Platform Fee Loans 592,266 304,174 270,412 574,586 3.1 Revenue 98,506 61,674 53,064 114,738 (14.1) Net Income (Loss) (511,936) (247,084) 6,131 (240,953) 112.5 Adjusted Net Income (Loss) (22,182) 21,789 18,689 40,478 n.m. Adjusted EBITDA (35,691) 29,644 23,260 52,904 n.m. a.Funded Loans, Platform Fee Loans, and Revenues were not materially impacted by the Business Combination for the year endedDecember 31, 2022 and the Combined Annual Period. 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.Change represents the year endedDecember 31, 2022 compared to the Combined Annual Period. c.Sunlight facilitated home improvement loans of$441.5 million ,$130.1 million , and$81.2 million that were funded during the year endedDecember 31, 2022 and the periods fromJuly 10, 2021 throughDecember 31, 2021 andJanuary 1, 2021 throughJuly 9, 2021 , respectively. d.Sunlight facilitated home improvement platform fee loans of$379.0 million ,$94.9 million , and$102.0 million that were funded during the year endedDecember 31, 2022 and the periods fromJuly 10, 2021 throughDecember 31, 2021 , andJanuary 1, 2021 throughJuly 9, 2021 , respectively. Funded Loans. Sunlight refers to the aggregate principal balance of the loans facilitated through Orange®, and funded by Sunlight's capital provider, 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 intermediaryBank 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 intermediaryBank 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. 47 -------------------------------------------------------------------------------- The contracts under which Sunlight (a) arranges loans for the purchase and installation of home improvements other than residential solar energy systems untilDecember 2022 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 or losses on the derivatives within "Realized Gains (Losses) on Contract Derivatives, Net."
Net Income (Loss). Net income (loss) 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. Loan Characteristics The following table sets forth the average characteristics of loans Sunlight facilitated for the year endedDecember 31, 2022 and the Combined Annual Period and Combined Year-to-Date Period (USD in thousands, except percentages): Successor Predecessor For the For the Period Period July January 1, For the Year 10, 2021 to 2021 to Ended December December July 9, Combined Annual Average Loan Characteristics 31, 2022 31, 2021 2021 Period Solar Loan Term (in months) 258 234 231 232 Customer Interest Rate 2.0 % 2.3 % 2.5 % 2.4 % Customer FICO Score 753 752 752 752 Loan Balance$ 46 $ 41 $ 40 $ 41 Home Improvement Loan Term (in months) 115 111 107 109 Customer Interest Rate 10.7 % 10.7 % 10.2 % 10.5 % Customer FICO Score 758 747 754 750 Loan Balance$ 18 $ 16 $ 16 $ 16 Home Improvement Maxx®(a) Loan Term (in months) 107 107 n.a. 107 Customer Interest Rate 18.4 % 17.9 % n.a. 17.9 % Customer FICO Score 631 634 n.a. 634 Loan Balance$ 10 $ 10 n.a.$ 10
a.Home Improvement Maxx® loans represented less than 10.0% of loans facilitated
by Sunlight during the year ended
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.
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--------------------------------------------------------------------------------Number of Contractors and 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.
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 maintain or 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
in acquiring and maintaining contractor relationships:
•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 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 the businesses of its existing network of contractors,
attract new contractors and build contractor loyalty. Examples of such
innovations include Sunlight's advance program, Sunlight's launch of
Spanish-language loan products and Sunlight Rewards™. Sunlight believes that it
has innovated more quickly than its competitors and offers contractors a greater
array of valuable services that drive their determination to offer their
customers Sunlight-offered loan products over those of Sunlight's competitors
and that Sunlight will continue to be able to innovate quickly to meet the needs
of its contractor network.
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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 has partnered with capital providers to fund the demand for Sunlight facilitated loans and ensure that it is able to offer an evolving and competitive mix of loan products to meet contractor and consumer demand. As capital providers experience decreased liquidity as a result of rising funding costs, they have and may in the future reduce or pause the loan volume they fund from Sunlight, and with respect to Sunlight's Indirect Channel, if Sunlight is unable to facilitate the sale of loans held on itsBank Partner's balance sheet, Sunlight may be required to purchase all or a portion of these loans and/or may be unable to fund future Indirect Channel loans. InApril 2021 , Sunlight's Bank Provider provided notice to Sunlight that it had exceeded its internal asset concentration levels for solar loans and terminated their program agreement with Sunlight, and, starting inJuly 2022 , all but one direct capital provider has paused the loan volume they fund by Sunlight and one direct capital provider cancelled their program agreement.
Industry Trends and General Economic Conditions; Cost of Power
Sunlight's results of operations will in the future continue to be impacted by the relative strength or weakness of the overall economy and its effect on unemployment, interest rates, consumer spending, and consumer demand for solar systems and home improvements. As general economic conditions change, direct channel capital provider capacity may be negatively impacted, and consumer spending levels and the willingness of consumers to take out loans to finance purchases may impact the Company's volume flow. 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.
Though the residential solar market has grown steadily over the last several years, Sunlight cannot guarantee that such growth will continue.
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--------------------------------------------------------------------------------Concentration
Sunlight's 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. In the period fromDecember 31, 2020 toDecember 31, 2021 , the top ten contractors in Sunlight's network were responsible for selling 45.4% of Sunlight's funded loan volume, and in the period fromDecember 31, 2021 toDecember 31, 2022 that percentage decreased to 41.0%. 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 13.3% and 14.1% of Sunlight's funded loan volume in the period fromDecember 31, 2020 toDecember 31, 2021 and in the period fromDecember 31, 2021 toDecember 31, 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 14.1% of Sunlight's funded loan volume during the year endedDecember 31, 2022 , and sold 11.3% and 15.2% of Sunlight's funded loan volume during the periods fromJuly 10, 2021 throughDecember 31, 2021 , andJanuary 1, 2021 throughJuly 9, 2021 , respectively. InSeptember 2022 , one of Sunlight's largest contractors became insolvent, primarily driven by solar installation challenges that led to the contractor's liquidity issues, and as a result, the Company determined it would be unable to collect all advanced amounts owed and took a non-cash charge of$32.4 million on such advances. Sunlight currently has one capital provider in its direct funding channel. The rapid interest rate increases that occurred during this year have resulted in limited capacity by direct capital providers and a significant shift in reliance from Sunlight's Direct Channels to its Indirect Channel, which is less profitable and creates additional risk of rising rates between the time that the underlying Indirect Channel Loan is processed at a lower interest rate to a later time when Sunlight is able to monetize Indirect Channel loans after interest rates have increased. As a result, Sunlight incurred losses relating to its current portfolio of Indirect Channel Loans. Sunlight's largest capital provider in the period fromDecember 31, 2021 toDecember 31, 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 29.4% and 9.9% of Sunlight's funded loans during the period fromDecember 31, 2020 toDecember 31, 2021 and during the period fromDecember 31, 2021 toDecember 31, 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 or pause volume based on yield requirements. Sunlight sold$149.0 million of loans funded through the Indirect Channel for a loss of$22.0 million inDecember 2022 . As ofDecember 31, 2022 , the remaining unpaid principal amount of loans held byBank Partner is$403.4 million , of which$385.3 million in funded loans is expected be sold on behalf ofBank Partner . If Sunlight is unable to facilitate the sale of loans held on such capital provider's balance sheet, and such capital provider is unwilling to expand its loan capacity, Sunlight may be required to purchase all or a portion of these loans and/or may be unable to fund future Indirect Channel Loans. While the rapid rise in interest rates may impact the Company's indirect channel margins, Sunlight has enacted significant price increases and eliminated certain products to offset such impacts. 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, although Sunlight cannot guarantee that it would be able to replace a capital provider 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.
51
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Platform fees. Platform fee revenue for each loan facilitated via Orange® is
generally the difference between the contractor fee that Sunlight charges to the
contractors in its network for access to Orange® and the ability to offer
financing options to their customers and the capital provider discount charged
to Sunlight (cost of capital to Sunlight) for such loan. The platform fee
percentage is equal to the dollar amount of such fee divided by the principal
balance at origination of such loan. 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 .
Prior to December 2022 , the contract between Sunlight and its intermediary Bank
Partner for home improvement loans was considered a derivative for GAAP
purposes, whereas the contract between Sunlight and its intermediary Bank
Partner for solar loans was not. For indirect channel home improvement loans,
prior to December 2022 , Sunlight recorded a "realized gain (loss) on contract
derivative (net)" in lieu of a platform fee generally when the loans were
purchased by Sunlight's indirect capital provider from Sunlight's Bank Partner ,
and Sunlight was paid. As such, Sunlight excluded from its revenue any platform
fee associated with an indirect channel home improvement loan under Sunlight's
related home improvement agreement. Upon amendment of the contract in December
2022 , that contract was no longer considered a derivative for GAAP purposes.
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, amounts Sunlight pays to its
Bank Partner to facilitate the sale of Indirect Channel Loans, 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.
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.
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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. In addition to loans
and loan participations, Sunlight recognizes interest income on a specified
proportion of the contractual interest and original issue discount on Indirect
Channel Loans held by Sunlight's Bank Partner . 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 (losses) on, contract derivatives,
net. The arrangements with Sunlight's intermediary Bank Partner to originate
indirect channel home improvement loans (until December 2022 ) and with an
indirect loan purchaser to purchase such loans were considered derivatives under
GAAP. As such, Sunlight's revenues excluded 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
quarterly basis, with realized gains or losses 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'sBank Partner relating to the loans held on the balance sheet of Sunlight'sBank 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.
53
--------------------------------------------------------------------------------Results of Operations
This section includes a summary of our results of operations, followed by
detailed comparisons of our results for the year ended
Successor Predecessor
For the Year For the Period For the Period
Ended December July 10, 2021 to January 1, 2021 Combined
31, 2022 December 31, 2021 to July 9, 2021 Annual Period Increase (Decrease)(a)
Revenue $ 98,506 $ 61,674 $ 53,064 $ 114,738 $ (16,232) (14.1) %
Costs and Expenses
Cost of revenues (exclusive of items
shown separately below) 27,095 9,873 10,556 20,429 6,666 32.6
Compensation and benefits 51,746 44,996 17,162 62,158 (10,412) (16.8)
Selling, general, and administrative 24,871 7,419 3,450 10,869 14,002 128.8
Property and technology 7,447 3,088 2,790 5,878 1,569 26.7
Depreciation and amortization 49,394 43,389 1,688 45,077 4,317 9.6
Provision for losses 51,293 1,217 1,172 2,389 48,904 2,047.0
Goodwill impairment 445,756 224,701 - 224,701 221,055 98.4
Management fees to affiliate - - 204 204 (204) (100.0)
657,602 334,683 37,022 371,705 285,897 76.9
Operating income (loss) (559,096) (273,009) 16,042 (256,967) (302,129) 117.6
Other Income (Expense), Net
Interest income 3,485 149 262 411 3,074 747.9
Interest expense (1,404) (554) (604) (1,158) (246) 21.2
Change in fair value of warrant
liabilities 14,710 22,583 (5,504) 17,079 (2,369) (13.9)
Change in fair value of contract
derivatives, net (962) 638 (662) (24) (938) 3,908.3
Realized gains on contract
derivatives, net 2,601 2,866 2,992 5,858 (3,257) (55.6)
Other realized losses, net (703) - - - (703) n.m.
Other income (expense) (7,488) (181) 616 435 (7,923) n.m.
Business combination expenses - (3,080) (7,011) (10,091) 10,091 (100.0)
10,239 22,421 (9,911) 12,510 (2,271) (18.2)
Net Income (Loss) Before Income Taxes (548,857) (250,588) 6,131 (244,457) (304,400) 124.5
Income tax benefit (expense) 36,921 3,504 - 3,504 33,417 953.7
Net Income (Loss) (511,936) (247,084) 6,131 (240,953) (270,983) 112.5
Noncontrolling interests in loss of
consolidated subsidiaries 196,085 87,528 - 87,528 108,557 124.0
Net Income (Loss) Attributable to
Class A Shareholders $ (315,851) $ (159,556) $ 6,131 (153,425) $ (162,426) 105.9
a.Change represents the year ended
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The Year Ended
Revenue
The following table provides the components of Sunlight's revenue for the years endedDecember 31, 2022 and the Combined Annual Period (USD in thousands, except percentages): Successor Predecessor Increase (Decrease)(a) For the Period July For the Year 10, 2021 to For the Period Ended December December 31, January 1, 2021 Combined 31, 2022 2021 to July 9, 2021 Annual Period $ % Direct Channel Platform Fees, net$ 106,766 $ 49,937 $ 45,703 $ 95,640 $ 11,126 11.6 % Indirect Channel Platform Fees, net (16,608) 6,846 5,054 11,900 (28,508) n.m. Other revenues 8,348 4,891 2,307 7,198 1,150 16.0 Total$ 98,506 $ 61,674 $ 53,064 $ 114,738 $ (16,232) (14.1)
a.Change represents the year ended
Revenue decreased by$16.2 million or 14.1% for the year endedDecember 31, 2022 as compared to the Combined Annual Period primarily due to the rapid interest rate increases and a significant increase in reliance on Sunlight's Indirect Channel impacted by Backbook Loans subject to additional risk of rising interest rates between the time that the underlying Indirect Channel Loan is credit approved and when Sunlight is able to monetize Indirect Channel Loans through third party loan sales. For the year endedDecember 31, 2022 , the impact of losses associated with the sale of these loans resulted in a decline of$28.5 million in indirect channel platform fees, partially offset by changes in the direct channel platform fees of$11.1 million , attributable to the recent dealer fee increases implemented during the year. Funded loans increased by$372.0 million or 14.7% for the year endedDecember 31, 2022 , as compared to the Combined Annual Period due to the growth in the residential solar market and the increase in the number of contractors in Sunlight's contractor network. The total number of contractors in Sunlight's network increased from 1,509 atDecember 31, 2021 to 1,997 atDecember 31, 2022 . The number of solar contractors in the network increased from 762 atDecember 31, 2021 to 850 atDecember 31, 2022 , an increase of 11.5%. The number of home improvement contractors in the network increased from 747 atDecember 31, 2021 to 1,147 atDecember 31, 2022 , an increase of 53.5%. The average platform fee percentage earned on loans funded by direct channel capital providers or purchased by the indirect channel capital provider decreased 0.8% from the Combined Annual Period to the year endedDecember 31, 2022 . 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 and contractor 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 may 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 certain contractors may reduce the contractor fees that Sunlight charges to such contractors on certain loan products or across loan products. The macro-economic impact of the significant interest rate increases had a material impact on Sunlight's business, profitability and cash-flow in the near term. These rapid interest rate increases have resulted in a significant shift in reliance from Sunlight's Direct Channels to its Indirect Channel, which is less profitable and creates additional risk of changing rates between the time that the underlying Indirect Channel Loan is processed at a lower interest rate to a later time when Sunlight is able to monetize Indirect Channel Loans after interest rates have increased. As a result, total platform fees decreased as a result of an increase in total average capital provider discount of 0.4%, reduced capacity from Direct Channel capital providers drove lower platform fee margins, and the 0.4% decrease in total average dealer fees charged to contractors, which reflects the elimination of certain products that are difficult to finance in the current interest rate environment as well as capital provider discount increases in the Indirect Channel. 55 --------------------------------------------------------------------------------
The following table presents averages weighted by original loan balance of capital provider discounts, contractor fees and platform fees.
Successor Predecessor
For the Period For the Period
For the Year Ended July 10, 2021 to January 1, 2021 Combined Annual
December 31, 2022 December 31, 2021 to July 9, 2021 Period Change in
Average(a)
Solar Total - Capital Provider
Discount 17.1 % 16.8 % 16.7 % 16.7 % 0.4 %
Solar Total - Contractor Fee 21.1 21.8 20.8 21.5 (0.4)
Solar Total - Platform Fee 4.0 5.0 4.1 4.8 (0.8)
Solar Direct Channel - Capital
Provider Discount 16.0 16.5 16.6 16.5 (0.5)
Solar Direct Channel -
Contractor Fee 21.6 21.9 20.9 21.6 -
Solar Direct Channel - Platform
Fee 5.6 5.4 4.3 5.1 0.5
Solar Indirect Channel - Capital
Provider Discount 23.5 17.9 17.2 17.6 5.9
Solar Indirect Channel -
Contractor Fee 18.4 21.5 20.2 20.8 (2.4)
Solar Indirect Channel -
Platform Fee (5.1) 3.6 3.0 3.2 (8.3)
a.Change represents the year ended
Costs and Expenses Cost of revenues increased by$6.7 million or 32.6% for the year endedDecember 31, 2022 when compared to the Combined Annual Period. The$6.7 million increase in cost of revenues primarily resulted from a$3.5 million increase in costs incurred in connection with funded loan volume,$3.2 million in increased costs of consumer credit underwriting arising from credit approval volumes, and a$1.2 million increase in rewards earned by salespeople under the Sunlight Rewards™ program, partially offset by$1.2 million in 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 decreased by$10.4 million , or 16.8% for the year endedDecember 31, 2022 when compared to the Combined Annual Period. Of the$10.4 million decrease,$24.0 million of compensation expense recognized in the Combined Annual Period resulted from the immediate vesting of equity-based compensation awards granted to employees of Sunlight's Predecessor that satisfied vesting conditions upon completion of the Business Combination, offset by increases of$12.3 million from restricted stock units granted on or after the Business Combination to Sunlight employees and$1.3 million of costs associated with the increase in full-time employees from 214 atDecember 31, 2021 to 232 atDecember 31, 2022 . Selling, general, and administrative expense increased by$14.0 million , or 128.8% for the year endedDecember 31, 2022 when compared to the Combined Annual Period. Sunlight incurred$7.9 million of incremental expense related to Sunlight's operations as a public company, including increases of$5.9 million for audit and accounting related expenses and$2.0 million in insurance premiums. In addition, Sunlight incurred an additional$1.7 million in transaction and due diligence related costs,$0.9 million in advertising costs,$0.6 million in investor relations costs,$0.7 million in tax and compliance,$0.5 million in travel and entertainment and$1.7 million in other miscellaneous expenses. Property and technology expense increased by$1.6 million , or 26.7% for the year endedDecember 31, 2022 when compared to the Combined Annual Period, primarily due to increases of$0.9 million in rent and$0.7 million in additional 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$4.3 million , or 9.6% for the year endedDecember 31, 2022 when compared to the Combined Annual Period, primarily from$16.2 million in incremental amortization of intangible assets acquired in the Business Combination and an increase of$0.1 million in developed technology, partially offset by the elimination of amortization of intangible assets acquired in the Business Combination for capital provider relationships of$12.0 million during the Combined Annual Period. 56 -------------------------------------------------------------------------------- Provision for losses increased by$48.9 million for the year endedDecember 31, 2022 when compared to the Combined Annual Period, of which$38.9 million represents impairment charges arising from the insolvency of certain advance program contractors, including$32.4 million from the insolvency of one of Sunlight's largest advance program contractors inSeptember 2022 . As a result, Sunlight determined it would be unable to collect$32.4 million Sunlight advanced to the contractor atSeptember 30, 2022 , representing the total net amounts advanced to the contractor at that time. Sunlight has re-underwritten all other contractors in the advance program and has taken actions to further reduce its exposure to counterparty risk, including reducing advance limits, reducing the advance rate per job, increasing pricing for contractors in this program and eliminating advance eligibility for certain contractors. We also continue to proactively monitor contractors in this program for changes in their risk profile. Excluding the impairment charges arising from the insolvency of certain advance program contractors, the ratio of provision for loss over aggregate fundedBank Partner loan volume in the Combined Annual Period was 0.4% as compared to 0.6% during the year endedDecember 31, 2022 .
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. Sunlight recorded goodwill impairment charges totaling$445.8 million during the year endedDecember 31, 2022 . primarily due to challenges in the macro-economic environment, such as rapidly rising interest rates impacting Sunlight's financial performance and the market performance of companies similar to Sunlight. Operating margin significantly decreased from the Combined Annual Period to the year endedDecember 31, 2022 , primarily related to non-cash charges in connection with the Business Combination, provision for losses and goodwill impairment as well as reduced platform fee revenues from the sale of Backbook Loans. 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 equity-based compensation expense, provision for losses, the amortization effects of identified intangible assets and goodwill impairment.
Other Income (Expense), Net
Total other income (expense) for the year endedDecember 31, 2022 was consistent with the Combined Annual Period, primarily resulting from (a) a$3.1 million increase in interest income as a result of the Indirect Channel Loan Program Agreement Amendments effectiveDecember 1, 2022 , (b)$2.4 million decrease in fair value of public and private warrants, originally issued by Spartan and assumed by Sunlight upon closing of the Business Combination (c)$10.1 million decrease in costs incurred in connection with the Business Combination, and (d)$3.3 million of realized losses and$0.9 million of unrealized losses from the arrangement with Sunlight'sBank Partner to originate solar and home improvement loans, treated as a derivative under GAAP. InDecember 2022 ,Sunlight and Bank Partner amended the arrangement, which removed the indexed contractual rate and the arrangement was no longer considered a derivative under GAAP.
Income Tax Benefit
Sunlight's Predecessor was a limited liability company not subject to income taxes. During the Successor period fromJuly 10, 2021 throughDecember 31, 2021 , the$3.5 income tax benefit reflected an effective tax rate of 1.4%. During the year endedDecember 31, 2022 , the$36.9 million income tax benefit reflects an effective tax rate of 6.7%, primarily driven by the$445.8 million goodwill impairment.
Noncontrolling Interests in Consolidated Subsidiaries
Sunlight's Predecessor did not consolidate any entities in which third parties owned a noncontrolling interest. During the Successor Period fromJuly 10, 2021 throughDecember 31, 2021 , income (loss) of consolidated subsidiaries allocated to noncontrolling interests represents$250.6 million ofSunlight Financial LLC consolidated net loss and weighted-average noncontrolling interests of 35.0%. During the year endedDecember 31, 2022 , loss of consolidated subsidiaries allocated to noncontrolling interests represents$547.4 million ofSunlight Financial LLC's consolidated net loss allocated to such noncontrolling interests at a weighted-average ownership of 35.4%. The weighted-average ownership of the noncontrolling interests increased as a result of vested Class EX units.
Liquidity and Capital Resources
See "Recent Developments and Outlook" at the beginning of this Item.
57
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As of December 31, 2022 , Sunlight held $47.5 million of unrestricted cash on
hand, which includes $20.4 million of funding commitments and $5.9 million of
other cash held for the benefit of third parties, and had drawn $20.6 million
available to it under its $30.0 million credit facility, which matures in April
2023 .
Going Concern
As of December 31, 2022 and through the date of these consolidated financial
statements are issued, Sunlight evaluated whether there are certain conditions
and events, considered in the aggregate, that raise substantial doubt about its
ability to continue as a going concern within one year after the date that the
audited consolidated financial statements are issued.
SVB is the sole lender under Sunlight's revolving credit facility that is due to
mature on April 26, 2023 (outstanding amount as of March 10, 2023 was $14.2
million ). Prior to the SVB receivership, Sunlight was in negotiations with SVB
to extend the maturity date and to address current Sunlight defaults under the
revolving credit facility. Prior to the issuance of Sunlight's financial
statements as of and for the year ended December 31, 2022 , these negotiations
and the ability of Sunlight to amend and extend (or to replace) this revolving
credit facility were uncertain, which could have had a material impact on
Sunlight's liquidity, cash and ability to attract new capital if not resolved on
a timely basis.
Additionally, Sunlight's Bank Partner holds Indirect Channel Loans on its
balance sheet until directed by Sunlight in the ordinary course of its business
to sell them to investors, including credit funds, insurance companies, and
pension funds. While Sunlight's Bank Partner is the owner of the loans, Sunlight
retains economic exposure to them until they are sold. Sunlight profits when the
price that investors pay for the Indirect Channel Loans exceeds the Bank
Partner's cost basis in the loans and incurs a loss when the price that
investors pay for the Indirect Channel Loans is less than the Bank Partner's
cost basis in the loans. The Bank Partner Agreements capped the total amount of
Indirect Channel Loans held by the Bank Partner at $450.0 million . Furthermore,
the Indirect Channel Loans held by Sunlight's Bank Partner included the Backbook
Loans. Despite the completion of the previously disclosed loan sale in December
2022 , Sunlight was not in compliance with certain provisions of the Bank Partner
Agreements, including the total loan cap. Sunlight expected that additional
sales of Backbook Loans would result in a loss for certain of the Backbook
Loans. Sunlight continued to pursue strategic alternatives as previously
announced, which resulted in entry in to the Commitment & Transaction Support
Agreement with the Bank Partner on April 2, 2023 . Effective April 25, 2023 , we
consummated the Transactions contemplated under the Commitment & Transaction
Support Agreement and Sunlight entered into, among other things, the Amended
Bank Partner Agreements and the Secured Term Loan.
Based on pricing actions that Sunlight took in the third and fourth quarters of
2022 and entry into the Amended Bank Partner Agreements and the Secured Term
Loan as of the issuance date of the audited consolidated financial statements
for the year ended December 31, 2022 , Sunlight has concluded that its cash and
cash equivalents will be reasonably sufficient to fund its operating expenses,
capital expenditure requirements, and debt service payments through at least
twelve months from the date that these consolidated financial statements were
issued.
Share Repurchase Program
On May 16, 2022 , Sunlight's Board of Directors authorized a share repurchase
program pursuant to which Sunlight may repurchase up to $50.0 million of
Sunlight's Class A common stock over an eighteen-month period from the date of
authorization. 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 all SEC rules and other legal requirements.
The number of shares to be purchased and the timing of the purchases are based
on a variety of factors, including, but not limited to, the level of cash
balances, debt covenant restrictions, general business conditions, the market
price of Sunlight's stock, self-imposed trading blackout periods, and the
availability of alternative investment opportunities. There is no minimum number
of shares required to be repurchased under the share repurchase program, and the
share repurchase program may be suspended or discontinued at any time. Sunlight
repurchased and cancelled 3,036,259 Class A common stock at an average price per
share of $3.44 for a total of $10.5 million during the year ended December 31,
2022 . In September 2022 , Sunlight suspended share repurchases under the program
to preserve liquidity in the current environment but may resume repurchases in
the future.
58
--------------------------------------------------------------------------------Loan and Security Agreement
OnApril 26, 2021 , Sunlight entered into a Loan and Security Agreement, as amended (the "Loan and Security Agreement") with 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 under the revolving credit line 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 quarter (the "EBITDA Covenant"). 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. As a result of the platform fee losses in the fourth quarter of 2022, Sunlight did not meet the EBITDA requirement as ofDecember 31, 2022 . Due to this covenant breach, SVB is contractually entitled to request immediate repayment of the outstanding debt obligation. Sunlight has borrowed approximately$20.6 million under the Loan and Security Agreement. In addition, the unprecedented speed and magnitude of interest rate increases since the second quarter of fiscal year 2022 have reduced Sunlight's Direct Channel capital provider capacity, increased reliance on the Indirect Channel and affected Sunlight's ability to profitably monetize Indirect Channel Loans originated at lower interest rates. As a result, Sunlight has experienced and is expected to continue to experience losses in the near term, until the significant pricing increases implemented over the past several months take effect, which is expected to negatively impact Sunlight's future financial covenant compliance. Prior to the SVB receivership, Sunlight was in negotiations with SVB to extend the maturity date and to address current Sunlight defaults under the revolving credit facility. Sunlight continued to pursue strategic alternatives as previously announced, which resulted in entry into the Commitment & Transaction Support Agreement with the Bank Partner onApril 2, 2023 . EffectiveApril 25, 2023 , we consummated the Transactions contemplated under the Commitment and Transaction Support Agreement and Sunlight entered into, among other things, the Secured Term Loan with the Bank Partner, a portion of which was used to repay the outstanding balance of the existing credit facility with SVB and terminate that credit facility.
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 itsBank 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 itsBank 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, as well as borrower defaults in certain cases, and as such, Sunlight is obligated to purchase the applicable loan from itsBank Partner and certain Indirect Channel Loan Purchasers should these events occur. Sunlight has also entered into a program agreement with itsBank Partner to fund its home improvement loans that contains similar provisions related to risks accepted by Sunlight. While solar contractors are generally responsible to return loan proceeds they receive for solar loans where contractors do not complete solar installations within a certain period of time, Sunlight may be required to repurchase such solar loans from Indirect Channel Loan Purchasers, or refund platform fees toDirect Channel Partners , in cases where solar contractors are unable or unwilling to do so. 59 -------------------------------------------------------------------------------- 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. However, a number of factors, including but not limited to, rapidly rising interest rates and other impacts of the current economic environment, reduced Direct Channel volume capacity, and lower margins due to a greater reliance on the Indirect Channel and the sale of loans originated prior to Sunlight's recent pricing increases, reduced our cash generated by operations. As ofDecember 31, 2022 , we have approximately$20.6 million of consolidated long-term debt maturing in 2023, excluding interest obligations. EffectiveApril 25, 2023 , we consummated the Transactions under the Commitment & Transaction Support Agreement and entered into, among other things, the Amended Bank Partner Agreements and the Secured Term Loan, which we believe provides us with funds reasonably sufficient to fund our operating expenses, capital expenditure requirements, and debt service payments through at least twelve months. Refer to "-Going Concern" for additional information regarding Sunlight's liquidity and operation during the next 12 months from the date of this Annual Report on Form 10-K. Relationships with Contractors and Capital Providers
Relationships with Contractors
Sunlight's 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. 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. In 2022, as compared with 2021, Sunlight grew its solar contractor base by more than 11.5%. 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 1.2% of Sunlight's total funded loan volumes during the year endedDecember 31, 2021 andDecember 31, 2022 , respectively. InSeptember 2022 , one of Sunlight's then-current largest contractors became insolvent, primarily driven by solar installation challenges that led to the contractor's liquidity issues; this contractor accounted for approximately 9.1% and 3.9% of Sunlight's total funded loan volumes during the year endedDecember 31, 2021 and for the year endedDecember 31, 2022 , respectively.
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 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 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. 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 intermediaryBank 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, 60 --------------------------------------------------------------------------------
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. 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 ourBank Partner's balance sheet by an indirect channel capital provider. Refer to "Critical Accounting Policies and Estimates" in this Annual Report on Form 10-K and Item 1A. "Risk Factors" in this Annual Report on Form 10-K, which amends and restates the risk factors set forth in 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 Year Ended
The following provides a summary of cash flow data for the years ended
Successor Predecessor
For the Year For the Period For the Period
Ended December July 10, 2021 to January 1, 2021 Combined Annual
31, 2022 December 31, 2021 to July 9, 2021 Period
Net cash provided by (used in)
operating activities $ (25,639) $ (18,565) $ 14,356 $ (4,209)
Net cash used in investing
activities (4,686) (308,012) (1,404) (309,416)
Net cash provided by (used in)
financing activities (11,788) 203,958 (2,025) 201,933
Cash Flow from Operating Activities
For the year endedDecember 31, 2022 , net cash used in operating activities was$25.6 million . Operating cash inflows for the year endedDecember 31, 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$2.4 billion , of which Sunlight paid$2.4 billion to contractors; repayment of advances and prefunds of$2.3 billion (conversely, Sunlight advanced or prefunded$2.5 billion ). Operating cash outflows primarily consisted of compensation and benefits of$32.5 million ;$5.0 million of income taxes; rebate, referral, and rewards paid of$7.7 million ; and$1.4 million of net interest on borrowings. For the Combined Annual Period, net cash used in operating activities was$4.2 million . Operating cash inflows for the Combined Annual Period primarily consisted of proceeds from Sunlight's direct channel capital providers to fund, and indirect channel capital providers to purchase without duplication, loans of$2.1 billion , of which Sunlight paid$2.0 billion to contractors; repayment of advances and prefunds of$1.7 billion (conversely, Sunlight advanced or prefunded$1.8 billion ); and net interest expense paid of$1.0 million . Operating cash outflows primarily consisted of compensation and benefits of$58.3 million , information technology expenses of$3.9 million , and management fees paid to affiliates of$0.2 million .
Cash Flow from Investing Activities
For the year endedDecember 31, 2022 , net cash used in investing activities was$4.7 million , of which$2.3 million was paid to internally develop software and acquire property and equipment and$3.3 million was paid to acquire loans; Sunlight received$0.9 million as return of capital on loans and loan participations. For the Combined Annual Period, net cash used in investing activities was$309.4 million , of which$304.6 million represents cash paid for the acquisition ofSunlight Financial LLC and the remaining activities involved recurring business activities consisting of cash paid to acquire loans and loan participation of$1.9 million , net of$1.5 million in cash received as a return of capital thereon, and$4.5 million was paid to internally develop software and acquire property and equipment. 61 --------------------------------------------------------------------------------
Cash Flow from Financing Activities
For the year endedDecember 31, 2022 , net cash used in financing activities was$11.8 million that represents$10.5 million of share repurchases, distributions of$1.2 million , and$0.2 million of tax payments made on share-based payments in connection with the Business Combination. For the Combined Annual Period, net cash provided by financing activities was$201.9 million , which included a$250.0 million equity raise, net of$19.6 million of related costs and tax payments made on equity issued in connection with the Business Combination.
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 quarter. 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. As a result of the platform fee losses in the fourth quarter of 2022, Sunlight did not meet the EBITDA requirement as ofDecember 31, 2022 . Due to this covenant breach, SVB is contractually entitled to request for immediate repayment of the outstanding debt obligation. Sunlight has borrowed approximately$20.6 million under the Loan and Security Agreement, which matures inApril 2023 . In addition, the unprecedented speed and magnitude of interest rate increases since the second quarter of fiscal year 2022 have reduced Sunlight's Direct Channel capital provider capacity and increased reliance on the Indirect Channel. This has affected Sunlight's ability to profitably monetize Indirect Channel Loans originated earlier in 2022. As a result, Sunlight has experienced and is expected to continue to experience losses in the near term, until the significant pricing increases implemented over the past several months take effect, which is expected to negatively impact Sunlight's future financial covenant compliance. Prior to the SVB receivership, Sunlight was in negotiations with SVB to extend the maturity date and to address current Sunlight defaults under the revolving credit facility. Sunlight continued to pursue strategic alternatives as previously announced, which resulted in entry into the Commitment & Transaction Support Agreement with the Bank Partner onApril 2, 2023 . EffectiveApril 25, 2023 , we consummated the Transactions contemplated under the Commitment & Transaction Support Agreement and Sunlight entered into, among other things, the Secured Term Loan with the Bank Partner, a portion of which was used to repay the outstanding balance of the existing credit facility with SVB and terminate that credit facility.
Other Changes in Financial Position
Year Ended
In addition to the changes in Sunlight's financial position fromDecember 31, 2021 toDecember 31, 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
increased by
•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. InOctober 2022 , holders of 308,085 Class EX units ofSunlight Financial LLC exchanged their Class EX units, along with a corresponding number of Class C shares of the Company, for 308,085 Class A shares of the Company at$1.25 per Class A share. As a result, Sunlight recorded a Deferred Tax Asset of$0.2 million and a TRA liability of$0.1 million . Changes in the outstanding ClassX Units and Class EX Units issued bySunlight Financial LLC resulted in a reallocation of$2.2 million ofSunlight Financial LLC's net assets from ClassX Units held by Sunlight to the noncontrolling interests that hold Class EX Units. 62 -------------------------------------------------------------------------------- •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. 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 any 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 . 63 --------------------------------------------------------------------------------
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 expense for theNorth Carolina Office Space was$1.7 million for the year endedDecember 31, 2022 and$0.8 million for the Combined Annual Period, respectively. The lease for theNorth Carolina Office Space will expire inJune 2029 . The operating lease expense for theNew York Office Space was$0.5 million for the year endedDecember 31, 2022 and$0.5 million for the Combined Annual Period, respectively. The lease for theNew York Office Space is scheduled to expire inOctober 2023 .
Available Liquidity and Capital Resources
As ofDecember 31, 2022 , Sunlight's cash and cash equivalents and restricted cash was$51.8 million , which includes$20.4 million of funding commitments and$5.9 million of other cash held for the benefit of third parties. The restricted cash held by Sunlight primarily relates to a cash held by Sunlight on behalf of a third party for whom Sunlight provides loan administration services. Sunlight's liquidity and its ability to fund its future capital requirements is dependent on a number of factors described below as well as 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 this Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 . 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. In addition, the unprecedented speed and magnitude of interest rate increases since the second quarter of fiscal year 2022 has reduced Sunlight's Direct Channel capital provider capacity, increased Sunlight's reliance on the Indirect Channel and affected Sunlight's ability to profitably monetize Indirect Channel Loans originated at lower interest rates. As a result, Sunlight has experienced and is expected to continue to experience losses and reduced cash generated from operations in the near term, until the significant pricing increases implemented over the past several months take effect, which is expected to negatively impact Sunlight's future financial covenant compliance. Prior to the SVB receivership, Sunlight was in negotiations with SVB to extend the maturity date and to address current Sunlight defaults under the revolving credit facility. Sunlight continued to pursue strategic alternatives as previously announced, which resulted in entry into the Commitment & Transaction Support Agreement with the Bank Partner onApril 2, 2023 . EffectiveApril 25, 2023 , we consummated the Transactions contemplated under the Commitment & Transaction Support Agreement and Sunlight, among other things, entered into the Amended Bank Partner Agreements and the Secured Term Loan with the Bank Partner, a portion of which was used to repay the outstanding balance of the existing credit facility with SVB and terminate that credit facility. We believe that the funds provided by those transactions are reasonably sufficient to fund our operating expenses, capital expenditure requirements, and debt service payments through at least twelve months. 64 --------------------------------------------------------------------------------
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 year ended
Successor Predecessor
For the Year For the Period For the Period
Ended December July 10, 2021 to January 1, 2021 Combined Annual
31, 2022 December 31, 2021 to July 9, 2021 Period
Net Income (Loss) $ (511,936) $ (247,084) $ 6,131 $ (240,953)
Adjustments for adjusted net income (loss)
Amortization of Business Combination
intangibles 47,988 43,152 - 43,152
Non-cash change in financial instruments (6,260) (23,039) 5,547 (17,492)
Goodwill impairment 445,756 224,701 - 224,701
Accelerated postcombination compensation
expense - 20,979 - 20,979
Expenses from the Strategic Alternatives
Process 1,723 - - -
Expenses from the Business Combination and
Other 547 3,080 7,011 10,091
Adjusted Net Income (Loss) (22,182) 21,789 18,689 40,478
Adjustments for adjusted EBITDA
Depreciation and amortization 1,406 237 1,688 1,925
Interest expense 1,404 554 604 1,158
Income tax benefit (36,921) (3,504) - (3,504)
Equity-based compensation 17,851 8,667 18 8,685
Fees paid to brokers 2,751 1,901 2,261 4,162
Adjusted EBITDA (35,691) 29,644 23,260 52,904
Adjustments for net cash provided by (used in)
operating activities
Interest expense (1,404) (554) (604) (1,158)
Income tax benefit 36,921 3,504 - 3,504
Fees paid to brokers (2,751) (1,901) (2,261) (4,162)
Expenses from the Strategic Alternatives
Process (1,723) - - -
Expenses from the Business Combination and
Other (547) (3,080) (7,011) (10,091)
Provision for losses 51,293 1,217 1,172 2,389
Changes in advances, net of funding
commitments (29,015) (22,956) (6,013) (28,969)
Changes in operating capital and other (42,722) (24,439) 5,813 (18,626)
Net Cash Provided by (Used in) Operating
Activities (25,639) (18,565) 14,356 (4,209)
Adjustments for free cash flow
Capital expenditures (3,249) (1,873) (1,295) (3,168)
Changes in advances, net of funding
commitments 29,015 22,956 6,013 28,969
Changes in restricted cash 2,254 1,826 (108) 1,718
Payments of Strategic Alternatives costs 866 - - -
Payments of Business Combination costs - 1,770 6,549 8,319
Other changes in operating working capital (5,463) 13,310 (590) 12,720
Free Cash Flow $ (2,216) $ 19,424 $ 24,925 $ 44,349
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The following table presents a calculation of Adjusted Net Income (Loss) per diluted Class A Share (USD in thousands, except per share amounts):
Successor
For the Year For the Period July
Ended December 10, 2021 to
31, 2022 December 31, 2021
Adjusted Net Income (Loss) $ (22,182) $ 21,789
Adjusted Net Income (Loss) per Class A Share, Diluted $ (0.14) $ 0.13
Weighted-average Class A Shares
Class A Shares 83,704,018 86,373,596
Class EX Units 46,837,245 47,595,455
Restricted Stock Units 2,416,070 2,085,501
Warrants 27,777,780 27,777,780
160,735,113 163,832,332
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 ofDecember 31, 2022 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, including the current economic conditions and increasing interest rates, and on Sunlight's business, makes any estimates and assumptions as ofDecember 31, 2022 inherently less certain than they would be absent the current and potential impacts from those conditions. 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 67 -------------------------------------------------------------------------------- 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. UntilDecember 2022 , Sunlight's contracts with its intermediaryBank Partner to originate home improvement loans and with an indirect loan purchaser to purchase such loans were considered derivatives under GAAP. As such, Sunlight's revenues excluded the platform fees that Sunlight earned in connection with these contracts. Instead, Sunlight estimated the fair value of the contract derivatives based upon the present value of net cash flows Sunlight expected to collect under the contracts, which predominately consisted of the difference of the proceeds Sunlight expected 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 owed to itsBank Partner in connection with such loans. Upon sale, Sunlight reversed the unrealized estimated fair value of the contract derivative for the loans sold and recognized the net cash Sunlight received from the sale within "Realized Gains (Losses) on Contract Derivatives, Net" in Sunlight's consolidated statement of operations. InDecember 2022 ,Sunlight and Bank Partner amended the agreement, which removed the indexed contractual rate and the agreement was no longer considered a derivative under GAAP. Sunlight is obligated to repurchase non-performing loans originated by itsBank Partner from the date of origination to the date the loans are purchased from Sunlight'sBank Partner by a Sunlight indirect channel capital provider. Sunlight does not record loans originated by itsBank 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 itsBank 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. AtDecember 31, 2022 andDecember 31, 2021 , the unpaid principal balance of loans, net of applicable discounts, for guaranteed loans held by Sunlight'sBank Partner and delinquent more than 90 days was$1.3 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.
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--------------------------------------------------------------------------------Allowance for Losses
The allowance for financing receivable losses represents Sunlight's best estimate of probable credit losses arising from financing receivables. Sunlight's allowance for financing receivable losses is evaluated at least quarterly, and based upon management's assessment of several factors including historical losses, changes in the nature and volume of financing receivables, overall portfolio quality, and existing economic conditions that may affect the customer's ability to pay. Although management uses the best information available, the evaluation of these indicators of impairment requires significant judgment by Sunlight's management to determine whether failure to collect contractual amounts is probable as well as in estimating the resulting loss allowance. Future adjustments to the allowance for financing receivable losses may be necessary due to economic, operating, regulatory and other conditions beyond Sunlight's control. Sunlight believes that its allowance for financing receivable losses is adequate to cover probable loan losses. However, actual losses, if any, could materially differ from management's estimates.
Provision for Income Taxes
Sunlight accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates that are expected to be in effect when the differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the accompanying Consolidated Statements of Operations in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized.
Sunlight accounts for uncertain tax positions by reporting a liability for unrecognizable tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Sunlight recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Judgment is required in assessing the future tax consequences of events that have been recognized in Sunlight's consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact Sunlight's consolidated financial statements.
Contract Derivatives
Sunlight's contracts under which Sunlight arranges Indirect Channel Loans, 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 servicing liabilities using various key assumptions, such as estimation of the timing and probability of expected future sales and selection of a discount rate applied to future cash flows using Sunlight's implied credit risk.
Servicing Liabilities
Sunlight has an obligation to service Indirect Channel Loans for the period from origination by Sunlight'sBank Partner until the Indirect Channel Loans are sold to an institutional investor, financial institution or other funding source. Upon amendments to the agreements between Sunlight and itsBank Partner inDecember 2022 , Sunlight is no longer entitled to reimburse itself for all servicing expense prior to the sale of Indirect Channel Loans. Therefore, management determined that, in accordance with ASC 860, Transfers and Servicing, the compensation Sunlight receives to service these Bank Partner Loans is less than adequate and as a result, as ofDecember 31, 2022 , management recognized a servicing liability as part of the other liabilities on the accompanying Consolidated Balance Sheets. Sunlight uses a discounted cash flow model to value its derivative assets and liabilities using various key assumptions, such as the cost of servicing, an estimation of the timing and probability of expected future cash flows, a weighted average remaining life, and a selection of a discount rate applied to future cash flows using peer market data. 69 --------------------------------------------------------------------------------
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 atDecember 31, 2022 andDecember 31, 2021 , Sunlight would pay$3.1 million and$3.0 million , respectively, of which Sunlight recorded liabilities of$1.8 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. 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.
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--------------------------------------------------------------------------------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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