sunl-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to________________

Commission File Number:

001-39739

Sunlight Financial Holdings Inc.

(Exact name of registrant as specified in its charter)

Delaware

85-2599566

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

101 North Tryon Street, Suite 1000, Charlotte, NC

28246

(Address of principal executive offices)

(Zip Code)

(888) 315-0822

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol(s):

Name of each exchange on which registered:

Class A Common Stock, par value $0.0001 per share

SUNL

New York Stock Exchange

Warrants, each whole warrant is exercisable for one share of Class A Common Stock at an exercise price of $11.50 per share

SUNL.WS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒

Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 2, 2023, 85,882,302 shares of Class A Common stock, $0.0001 par value, and 44,973,227 shares of Class C common stock, par value $0.0001 per share, were outstanding.

SUNLIGHT FINANCIAL HOLDINGS INC.

FORM 10-Q

INDEX


			PAGE
Part I. Financial Information
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets			1
Unaudited Condensed Consolidated Statements of Operations			2
Unaudited Condensed C onsolidated Statements of Changes in Equity			3
Unaudited Condensed C onsolidated Statements of Cash Flows			5
Notes to Unaudited Condensed Consolidated Financial Statements			7
Note 1 - Organization and Business			7
Note 2 - Summary of Significant Accounting Policies			8
Note 3 - Financing Receivables			21
Note 4 - Derivatives			26
Note 5 - Debt Obligations			27
Note 6 - Equity and Earnings per Share			29
Note 7 - Fair Value Measurement			37
Note 8 - Taxes			39
Note 9 - Transactions with Affiliates and Affiliated Entities			39
Note 10 - Commitments and Contingencies			41
Note 11 - Subsequent Events			44

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			45
Item 3. Quantitative and Qualitative Disclosures About Market Risk			85
Item 4. Controls and Procedures			85

Part II. Other Information
Item 1. Legal Proceedings			87
Item 1A. Risk Factors			88
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			90
Item 3. Defaults Upon Senior Securities			90
Item 4. Mine Safety Disclosures			90
Item 5. Other Information			90
Item 6. Exhibits			92
Signatures			93

PART I

ITEM 1. FINANCIAL STATEMENTS

SUNLIGHT FINANCIAL HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)


	June 30, 2023		December 31, 2022

	(Unaudited)
Assets
Cash and cash equivalents	$	80,147	$	47,515
Restricted cash	6,227		4,272
Advances (net of allowance for credit losses of $1,775 and $6,736)	6,322		45,393
Financing receivables from affiliate (net of allowance for credit losses of $100 and $94)	2,931		3,262
Financing receivables (net of allowance for credit losses of $7 and $8)	232		270

Intangible assets, net	304,584		319,920
Property and equipment, net	1,277		1,489

Due from affiliates	—		2,870

Other assets	33,059		27,204

Total assets	$	434,779	$	452,195

Liabilities and Stockholders' Equity

Liabilities
Accounts payable and accrued expenses	$	14,469	$	12,573
Funding commitments	38,181		20,400
Debt	—		20,613
Affiliate debt	52,267		—


Deferred tax liabilities	837		688
Due to affiliates	27,698		8,102
Warrants, at fair value	458		4,297
Affiliate warrants, at fair value	3,033		—
Affiliate contract derivative, at fair value	12,902		—
Affiliate guarantee obligations	15,772		3,847
Other liabilities	10,182		13,348

Total liabilities	175,799		83,868

Commitments and Contingencies (Note 10)







Stockholders' Equity

Preferred stock; $0.0001 par value; 35,000,000 shares authorized; none issued and outstanding as of June 30, 2023 and December 31, 2022	—		—
Class A common stock; $0.0001 par value; 420,000,000 shares authorized; 85,589,436 and 83,619,915 issued; and 85,562,304 and 82,307,760 outstanding as of June 30, 2023 and December 31, 2022, respectively	9		8

Class C common stock; $0.0001 par value; 65,000,000 shares authorized; 44,973,227 and 47,287,370 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	751,765		761,698
Accumulated deficit	(578,942)		(501,635)
Total capital	172,832		260,071
Treasury stock, at cost; 27,132 and 1,312,155 Class A shares as of June 30, 2023 and December 31, 2022, respectively	(21)		(15,307)

Total stockholders' equity	172,811		244,764
Noncontrolling interests in consolidated subsidiaries	86,169		123,563
Total equity	258,980		368,327
Total liabilities and stockholders' equity	$	434,779	$	452,195

See notes to unaudited condensed consolidated financial statements.

SUNLIGHT FINANCIAL HOLDINGS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)



	For the Three Months Ended June 30,				For the Six Months Ended June 30,

	2023		2022			2023		2022
Revenues
Revenues from non-affiliates	$	(29,738)	$	29,324		$	(9,693)	$	56,928
Revenues from affiliates	111		266			531		893
	(29,627)		29,590			(9,162)		57,821
Costs and Expenses
Cost of revenues (exclusive of items shown separately below)	4,786		5,077			8,945		9,809
Affiliate expenses	—		711			14,204		1,253
Compensation and benefits	15,327		14,138			29,473		27,263
Selling, general, and administrative	9,147		4,531			21,585		10,958

Property and technology	1,753		1,984			3,745		3,912
Depreciation and amortization	8,670		9,694			17,191		32,141
Provision for losses	7,652		3,900			9,811		4,638
Provision for losses, affiliate	(38)		142			(28)		42


	47,297		40,177			104,926		90,016
Operating loss	(76,924)		(10,587)			(114,088)		(32,195)
Other Income (Expense), Net
Interest income	433		5			650		38
Interest income, affiliate	9,947		82			15,702		133
Interest expense	(24)		(296)			(403)		(556)
Interest expense, affiliate	(2,540)		—			(2,540)		—
Change in fair value of warrant liabilities	473		13,610			3,839		8,726
Change in fair value of affiliate warrant liabilities	1,669		—			1,669		—
Change in fair value of contract derivatives, net	(129)		106			(285)		300
Change in fair value of affiliate contract derivatives, net	(670)		214			(670)		(207)
Realized gains on contract derivatives, net	76		79			199		157
Realized gains (losses) on affiliate contract derivatives, net	(12,319)		1,976			(12,319)		3,807
Other realized losses, net	(139)		(176)			(267)		(373)

Other income (expense)	554		(783)			82		(617)
Change in affiliate guarantee obligation	(3,551)		(221)			(9,505)		(211)

	(6,220)		14,596			(3,848)		11,197
Net Income (Loss) Before Income Taxes	(83,144)		4,009			(117,936)		(20,998)
Income tax benefit (expense)	—		1,650			(17)		4,051
Net Income (Loss)	(83,144)		5,659			(117,953)		(16,947)
Noncontrolling interests in (income) loss of consolidated subsidiaries	28,487		(1,543)			40,349		7,089
Net Income (Loss) Attributable to Class A Shareholders	$	(54,657)	$	4,116		$	(77,604)	$	(9,858)

Earnings Per Class A Share
Net income (loss) per Class A share
Basic	$	(0.57)	$	0.05		$	(0.86)	$	(0.11)
Diluted	$	(0.59)	$	0.05		$	(0.87)	$	(0.11)
Weighted average number of Class A shares outstanding
Basic	95,751,483		84,635,413			90,367,223		84,717,117
Diluted	140,724,710		84,668,201			135,340,450		131,433,095

See notes to unaudited condensed consolidated financial statements.

SUNLIGHT FINANCIAL HOLDINGS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(dollars in thousands)



	Shares		Preferred Stock	Common Stock						Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Class A	Class C		Class A		Class B		Class C
March 31, 2023	85,417,812	44,973,227	—	$	9	$	—	$	—	$	747,064	$	(524,285)	$	(17)	$	222,771	$	113,869	$	336,640
Equity-based compensation	171,624	—	—	—		—		—		1,540		—		—		1,540		994		2,534
Shares withheld related to net share settlement of equity awards	—	—	—	—		—		—		—		—		(4)		(4)		—		(4)

Issuance of warrants to affiliate	—	—	—	—		—		—		1,939		—		—		1,939		1,015		2,954

Dilution	—	—	—	—		—		—		1,222		—		—		1,222		(1,222)		—


Net loss	—	—	—	—		—		—		—		(54,657)		—		(54,657)		(28,487)		(83,144)
June 30, 2023	85,589,436	44,973,227	—	$	9	$	—	$	—	$	751,765	$	(578,942)	$	(21)	$	172,811	$	86,169	$	258,980

December 31, 2022	83,619,915	47,287,370	—	$	8	$	—	$	—	$	761,698	$	(501,635)	$	(15,307)	$	244,764	$	123,563	$	368,327
Equity-based compensation	972,122	—	—	—		—		—		3,064		—		—		3,064		2,133		5,197
Shares withheld related to net share settlement of equity awards	—	—	—	—		—		—		—		—		(5)		(5)		—		(5)

Issuance of warrants to affiliate	—	—	—	—		—		—		1,939		—		—		1,939		1,015		2,954
Class EX unit & Class C share exchange	997,399	(2,314,143)	—	1		—		—		(8,670)		—		15,291		6,622		(6,622)		—
Dilution	—	—	—	—		—		—		(6,266)		—		—		(6,266)		6,266		—

Cumulative ASC 326 adoption effect	—	—	—	—		—		—		—		297		—		297		163		460
Net loss	—	—	—	—		—		—		—		(77,604)		—		(77,604)		(40,349)		(117,953)
June 30, 2023	85,589,436	44,973,227	—	$	9	$	—	$	—	$	751,765	$	(578,942)	$	(21)	$	172,811	$	86,169	$	258,980

See notes to unaudited condensed consolidated financial statements.

SUNLIGHT FINANCIAL HOLDINGS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(dollars in thousands)


	Successor
	Shares		Preferred Stock	Common Stock						Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Class A	Class C		Class A		Class B		Class C
March 31, 2022	86,373,596	47,595,455	—	$	9	$	—	$	—	$	765,755	$	(199,758)	$	(15,590)	$	550,416	$	307,667	$	858,083
Equity-based compensation	—	—	—	—		—		—		2,647		—		—		2,647		663		3,310
Shares withheld related to net share settlement of equity awards	—	—	—	—		—		—		—		—		(48)		(48)		—		(48)
Equity repurchase	(445,232)	—	—	—		—		—		(2,004)		—		—		(2,004)		—		(2,004)
Dilution	—	—	—	—		—		—		(1,114)		—		—		(1,114)		1,114		—
Distribution	—	—	—	—		—		—		—		—		—		—		(1,332)		(1,332)


Net income	—	—	—	—		—		—		—		4,116		—		4,116		1,543		5,659

June 30, 2022	85,928,364	47,595,455	—	$	9	$	—	$	—	$	765,284	$	(195,642)	$	(15,638)	$	554,013	$	309,655	$	863,668

December 31, 2021	86,373,596	47,595,455	—	$	9	$	—	$	—	$	764,366	$	(186,022)	$	(15,535)	$	562,818	$	316,145	$	878,963
Equity-based compensation	—	—	—	—		—		—		4,430		—		—		4,430		1,755		6,185
Shares withheld related to net share settlement of equity awards	—	—	—	—		—		—		—		—		(103)		(103)		—		(103)
Equity repurchase	(445,232)	—	—	—		—		—		(2,004)		—		—		(2,004)		—		(2,004)
Dilution	—	—	—	—		—		—		(1,508)		—		—		(1,508)		1,508		—
Distribution	—	—	—	—		—		—		—		—		—		—		(2,705)		(2,705)

Cumulative ASC 842 adoption effect	—	—	—	—		—		—		—		238		—		238		41		279
Net loss	—	—	—	—		—		—		—		(9,858)		—		(9,858)		(7,089)		(16,947)

June 30, 2022	85,928,364	47,595,455	—	$	9	$	—	$	—	$	765,284	$	(195,642)	$	(15,638)	$	554,013	$	309,655	$	863,668

SUNLIGHT FINANCIAL HOLDINGS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)




	For the Six Months Ended June 30,
	2023		2022
Cash Flows From Operating Activities
Net loss	$	(117,953)	$	(16,947)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	17,191		32,141

Provision for losses	9,811		4,638
Provision for losses, affiliate	(28)		42
Change in fair value of warrant liabilities	(3,839)		(8,726)
Change in fair value of affiliate warrant liabilities	(1,669)		—
Change in fair value of contract derivatives, net	285		(300)
Change in fair value of affiliate contract derivatives, net	670		207

Other expense (income)	(82)		828
Change in affiliate guarantee obligation	9,505		—
Share-based payment arrangements	6,270		8,652
Deferred income tax benefit	—		(4,051)
Increase (decrease) in operating capital:
Decrease (increase) in advances	39,656		(25,206)


Decrease (increase) in other assets	5,535		2,915
Increase (decrease) in accounts payable and accrued expenses	5,493		(2,088)
Increase (decrease) in funding commitments	17,781		(6,182)
Increase (decrease) in due to affiliates	68,021		(1,977)
Decrease in other liabilities	(496)		(1,946)
Net cash provided by (used in) operating activities	56,151		(18,000)

Cash Flows From Investing Activities
Return of investments in affiliate loan pool participations	353		579
Return of investments in loan principal repayments	40		7

Payments to acquire loans	(10,007)		(1,355)
Payments to acquire loans from affiliate	—		(83)
Payments to acquire property and equipment	(1,584)		(1,265)


Net cash used in investing activities	(11,198)		(2,117)

Cash Flows From Financing Activities

Proceeds from borrowings under affiliate debt	17,000		—
Repayments of borrowings under line of credit	(20,612)		—









Payments for share-based payment tax withholding	(16)		(103)



Payments for repurchase of common stock	—		(2,004)
Payment of capital distributions	—		(1,182)
Payment of debt issuance costs	(6,738)		—
Net cash used in financing activities	(10,366)		(3,289)

Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash	34,587		(23,406)

Cash, Cash Equivalents, and Restricted Cash, Beginning of Period	51,787		93,900

Cash, Cash Equivalents, and Restricted Cash, End of Period	$	86,374	$	70,494

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	384	$	559
Cash paid during the period for income taxes, net	—		3,360




	For the Six Months Ended June 30,
	2023		2022
Noncash Investing and Financing Activities
Distributions declared, but not paid	$	—	$	1,330


Affiliate debt borrowings, paid in-kind	59,987		—
Affiliate deferred financing costs, paid in-kind	2,658		—

Capital expenditures incurred but not yet paid	502		400
Warrant issuance	7,656		—
Reclassification of warrants as equity	682		—

Deferred financing costs not paid	2,658		—

See notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in tables in thousands, except share, per share, unit, and per unit data)

Note 1. Organization and Business

Sunlight Financial Holdings Inc. (the “Company” or, together with its consolidated subsidiaries, “Sunlight”) is a technology-enabled point-of-sale finance company. Sunlight Financial LLC, its accounting predecessor and wholly-owned subsidiary, was organized as a Delaware limited liability company on January 23, 2014.

Business — Sunlight operates a technology-enabled financial services platform within the United States of America, using a nationwide network of contractors at the point-of-sale, to offer homeowners secured and unsecured loans (“Loans”), originated by third-party lenders, for the purchase and installation of residential solar energy systems and other home improvements.

Sunlight arranges for the origination of Loans by third-party lenders in two distinct ways:

Indirect Channel Loans — Sunlight arranges for Loans (“Indirect Channel Loans”) to be originated by Cross River Bank, Sunlight’s issuing bank partner (“Bank Partner” or “CRB”) through program agreements with its Bank Partner that govern the terms and conditions with respect to originating and servicing the Indirect Channel Loans, and Sunlight pays its Bank Partner a fee based on the principal balance of Loans originated by Sunlight’s Bank Partner. Sunlight’s Bank Partner funds these Loans by remitting funds to Sunlight, and Sunlight is thereafter responsible for making the appropriate payments to the relevant contractor. Sunlight later arranges for the sale of certain Indirect Channel Loans, or participations therein, to third parties (“Indirect Channel Loan Purchasers”). While Sunlight’s Bank Partner is the owner of the Indirect Channel Loans until the loans are sold to Indirect Channel Loan Purchasers, Sunlight retains economic exposure to the Loans until they are sold. Sunlight profits when the price that Indirect Channel Loan Purchasers pay for the Indirect Channel Loans exceeds the Bank Partner’s cost basis in the loans. Sunlight incurs a loss when the price that Indirect Channel Loan Purchasers pay for the Indirect Channel Loans is less than the Bank Partner’s cost basis in the loans.

Direct Channel Loans — Sunlight arranges for remaining Loans (“Direct Channel Loans”) to be originated and retained by third parties (“Direct Channel Partners”). The Direct Channel Partners originate the Direct Channel Loans directly, using their own credit criteria. These Direct Channel Partners pay for Direct Channel Loans by remitting funds to Sunlight, and Sunlight is thereafter responsible for making the appropriate payments to the relevant contractor. Sunlight earns income from the difference between the cash amount paid by a Direct Channel Partner to Sunlight for a given Direct Channel Loan and the dollar amount due to the contractor for such Direct Channel Loan. Sunlight does not participate in the ongoing economics of the Direct Channel Loans and, generally, does not retain any obligations with respect thereto except for certain ongoing fee-based administrative services and loan servicing performed by Sunlight.

Liquidity and Going Concern — Sunlight continues to evaluate 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 twelve months after the date that the consolidated financial statements are issued. Since the second half of 2022, most of Sunlight’s Funded Loans have been Indirect Channel Loans held by the Bank Partner on its balance sheet until directed by Sunlight to sell these Loans to Indirect Channel Loan Purchasers. This has significantly increased Sunlight’s economic exposure and impacted Sunlight’s ability to generate cash when it is not able to sell these Loans (a) at or above previously forecasted pricing, (b) at or above Sunlight’s cost basis in these Loans, or (c) within previously forecasted timeframes.

The Bank Partner Agreements (Note 9) capped the total amount of Indirect Channel Loans held by the Bank Partner at $550.0 million as of June 30, 2023. In addition, the secured term loan (“Secured Term Loan”) described in Note 5 also requires Sunlight to comply with additional covenants including holding a minimum balance of $20.0 million of unrestricted cash in accounts with its Bank Partner. The Indirect Channel Loans held by the Bank Partner during the first half of 2023 included a significant amount of funded but unsold loans which were credit approved prior to certain pricing actions that Sunlight took in the third and fourth quarters of 2022 (the “Backbook Loans”).

In the first half of 2023, Sunlight sold most of the Backbook Loans at a loss. In an effort to address rapidly rising interest rates and other market conditions that negatively impacted Sunlight’s ability to sell Indirect Channel Loans at a profit, Sunlight took pricing actions in the third and fourth quarters of 2022 and also in the first half of 2023 with the expectation that it would be able to sell these Indirect Channel Loans to Indirect Channel Loan Purchasers at a profit to provide cash and cash equivalents that would be reasonably sufficient to fund Sunlight’s operating expenses, capital expenditure requirements, and debt service payments through at least twelve months. However, starting in the second quarter of 2023, market conditions relating to the pricing and terms of the sales of Indirect Channel Loans to Indirect Channel Loan

Purchasers have unexpectedly deteriorated, and Sunlight has not been able to and does not expect to be able to sell Indirect Channel Loans to Indirect Channel Loan Purchasers in previously expected volumes, on previously expected terms and conditions, or within previously expected timeframes.

Sunlight believes that the aggregate impact of these ongoing factors (negative current market conditions resulting in lower loan volumes, sales of Indirect Channel Loans at losses, Sunlight’s potential inability to sell enough loans under current market conditions to enable Sunlight to comply with the total loan cap under the Bank Partner Agreements, and Sunlight’s current expectations regarding the longevity of unfavorable market conditions) will result in greater uses of cash, a materially lower cash balance, and less available liquidity than previously anticipated and will have a material impact on Sunlight’s liquidity, cash, and ability to attract new capital if not resolved in a timely manner, which raises substantial doubt about Sunlight’s ability to continue as a going concern.

While Sunlight has received a waiver from its Bank Partner regarding its non-compliance with the minimum cash held at Bank Partner covenant and certain nonfinancial covenants under the Secured Term Loan, there is no assurance that Sunlight’s Bank Partner will further amend the Secured Term Loan or Bank Partner Agreements to increase borrowings available to Sunlight to accommodate the decline in platform fees or to address Sunlight’s inability to sell loans in the current market environment, and there is no assurance that Sunlight’s Bank Partner will provide future waivers. At the same time that Sunlight continues to engage in discussions with Sunlight’s Bank Partner, under the supervision and oversight of Sunlight’s Board of Directors, Sunlight (with the assistance of a financial advisory firm) continues to explore all available strategic alternatives and other available options for Sunlight, and Sunlight’s Board is considering all available options, including selling the Company or a restructuring of the Company through a privately negotiated transaction or a court process.

The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the consolidated financial statements have been prepared on a basis that assumes Sunlight will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation — The accompanying consolidated financial statements and related notes, prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), include the accounts of Sunlight and its consolidated subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation of Sunlight’s financial position, results of operations, and cash flows have been included and are of a normal and recurring nature. All intercompany balances and transactions have been eliminated.

Certain information and footnote disclosures normally included in financial statements prepared under GAAP may be condensed or omitted for interim financial reporting, and the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year.

These financial statements should be read in conjunction with Sunlight’s audited financial statements for the year ended December 31, 2022 and footnotes thereto included in Sunlight's annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 4, 2023. Capitalized terms used herein, and not otherwise defined, are defined in Sunlight's consolidated financial statements for the year ended December 31, 2022.

Certain prior period amounts have been reclassified to conform to the current period's presentation. In particular, transactions with Sunlight’s Bank Partner, which Sunlight considers an affiliate upon closing of Bank Partner Agreements on April 25, 2023 (Note 9), were reclassified during periods Sunlight did not consider its Bank Partner an affiliate for comparative purposes.

Emerging Growth Company — The Company is 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”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Consolidation — Sunlight consolidates those entities over which it controls significant operating, financial, and investing decisions of the entity as well as those entities deemed to be variable interest entities (“VIEs”) in which the Company is determined to be the primary beneficiary.

The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary beneficiary in entities in which Sunlight has a variable interest. These analyses involve estimates, based on the assumptions of management, as well as judgments regarding significance and the design of entities.

VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Sunlight monitors investments in VIEs and analyzes the potential need to consolidate the related entities pursuant to the VIE consolidation requirements. These analyses require considerable judgment in determining whether an entity is a VIE and determining the primary beneficiary of a VIE since they involve subjective determinations of significance with respect to both power and economics. The result could be the consolidation of an entity that otherwise would not have been consolidated or the deconsolidation of an entity that otherwise would have been consolidated.

A wholly-owned subsidiary of Sunlight Financial Holdings Inc. is the managing member of Sunlight Financial LLC, in which existing unitholders hold a 34.4% and 35.9% noncontrolling interest, net of unvested Class EX Units (Note 6), at June 30, 2023 and December 31, 2022, respectively.

Through its indirect managing member interest, Sunlight Financial Holdings Inc. directs substantially all of the day-to-day activities of Sunlight Financial LLC. The third-party investors in Sunlight Financial LLC do not possess substantive participating rights or the power to direct the day-to-day activities that most directly affect the operations of Sunlight Financial LLC. However, these third-party investors hold both voting, noneconomic Class C shares in Sunlight Financial Holdings Inc. on a one-for-one basis along with nonvoting, economic Class EX Units issued by Sunlight Financial LLC. No single third-party investor, or group of third-party investors, possesses the substantive ability to remove the managing member of Sunlight Financial LLC. Sunlight considers Sunlight Financial LLC a VIE for consolidation purposes and its managing member holds the controlling interest and is the primary beneficiary. Therefore, Sunlight consolidates Sunlight Financial LLC and reflects Class EX unitholder interests in Sunlight Financial LLC held by third parties as noncontrolling interests.

Sunlight conducts substantially all operations through Sunlight Financial LLC and its consolidated subsidiary.

Segments — Sunlight operates through one operating and reportable segment, which reflects how the chief operating decision maker allocates resources and assesses performance. Sunlight arranges for the origination of Loans by third-party lenders using a predominately single expense pool.

Risks and Uncertainties — In the normal course of business, Sunlight primarily encounters credit risk, which is the risk of default on Sunlight’s investments that results from a borrower’s or counterparty’s inability or unwillingness to make

contractually required payments, and interest rate risk, which impacts the value of Indirect Channel Loans for which Sunlight facilitates sales.

Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes subjective estimates of: pending loan originations and sales, which significantly impacts revenues; determinations of fair value, including goodwill, derivatives, and servicing rights; estimates regarding loan performance, which impacts impairments and allowances for loan losses; project installations, which impacts guarantee obligations; and the useful lives of intangible assets. Actual results may differ from those estimates.

Fair Value — GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation.


Level						Measurement
1						Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
2						Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.
3						Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Sunlight follows this hierarchy for its financial instruments, with classifications based on the lowest level of input that is significant to the fair value measurement. The following summarizes Sunlight’s financial instruments hierarchy at June 30, 2023:

Level

Financial Instrument

Measurement

Cash and cash equivalents and restricted cash

Estimates of fair value are measured using observable, quoted market prices, or Level 1 inputs.

Public Warrants

Estimates of fair value are measured using observable, quoted market prices of Sunlight’s warrants.

Servicing liabilities

Estimates of fair value are measured based upon observable market data.

Loans and loan participations, held-for-investment

Estimated fair value is generally determined by discounting the expected future cash flows using inputs such as discount rates.

Affiliate and non-affiliate contract derivatives

Estimated fair value based upon discounted expected future cash flows arising from the contract.

Private Placement Warrants and warrants issued to affiliate

Estimated fair value based upon quarterly valuation estimates of warrant instruments, based upon quoted prices of Sunlight’s Class A shares and warrants thereon as well as fair value inputs provided by an independent valuation firm.

Valuation Process — On a quarterly basis, with assistance from an independent valuation firm, management estimates the fair value of Sunlight’s Level 3 financial instruments. Sunlight’s determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are management’s best estimates after consideration of a variety of internal and external factors. When an independent valuation firm expresses an opinion on the fair value of a financial instrument in the form of a range, management selects a value within the range provided by the independent valuation firm to assess the reasonableness of management’s estimated fair value for that financial instrument. At June 30, 2023, Sunlight’s valuation process for Level 3 measurements, as described below, was conducted internally or by an independent valuation firm and reviewed by management.

Valuation of Loans and Loan Participations — Management generally considers Sunlight's loans and loan participations Level 3 assets in the fair value hierarchy as such assets are illiquid investments that are specific to the loan product, for which there is limited market activity. On a quarterly basis, management engages an independent valuation firm to estimate the fair value of each loan or loan participation categorized as a Level 3 asset.

Valuation of Contract Derivative — Management considers Sunlight's contracts under which Sunlight (a) arranged Indirect Channel Loans for the purchase and installation of home improvements other than residential solar energy systems until December 2022 and the fees Sunlight pays to its Bank Partner to arrange Indirect Channel Loans for the purchase and installation of both residential solar energy systems and home improvements other than residential solar energy systems starting April 2023 (“Contract Derivative 1”) and (b) earns income from the prepayment of certain of those Loans sold to an Indirect Channel Loan Purchaser (“Contract Derivative 2”), both considered derivatives under GAAP, as Level 3 financial instruments in the fair value hierarchy as such instruments represent bilateral, nontraded agreements for which there is limited market activity. On a quarterly basis, management engages an independent valuation firm to estimate the fair value of the contracts.

Valuation of Servicing Liabilities — Sunlight assumes an obligation to service certain loans when originated. Sunlight evaluates compensation it receives to service these loans, if any, against the servicing costs a willing market participant would require to service loans with similar characteristics to service such loans. At June 30, 2023 and December 31, 2022, Sunlight determined that the compensation it receives for certain servicing agreements are less than the estimated market cost to service and recognized a liability reported within Other Liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheet. Servicing liabilities are considered Level 2 financial instruments, as the primary components of the fair value are obtained from observable inputs based on market data, reasonably adjusted for assumptions that would be used by market participants to service loans on the balance sheet of Sunlight’s Bank Partner, for which market data is not available.

Valuation of Warrants — Management considers the Private Placement Warrants and certain contingently issuable warrants issuable to Sunlight’s Bank Partner (Note 6) redeemable for Sunlight’s equity as Level 3 liabilities in the fair value hierarchy as liquid markets do not exist for such liabilities. On a quarterly basis, management engages an independent valuation firm to estimate the fair value of Sunlight’s warrants, which includes models that include estimates of volatility, the value of Sunlight’s stock, contractual terms, discount rates, dividend rates, expiration dates, and risk-free rates.

Other Valuation Matters — For Level 3 financial assets acquired and financial liabilities assumed during the calendar month immediately preceding a quarter end that were conducted in an orderly transaction with an unrelated party, management generally believes that the transaction price provides the most observable indication of fair value given the illiquid nature of these financial instruments, unless management is aware of any circumstances that may cause a material change in the fair value through the remainder of the reporting period. For instance, significant changes in a counterparty’s intent or ability to make payments on a financial asset may cause material changes in the fair value of that financial asset.

See Note 7 for additional information regarding the valuation of Sunlight's financial assets and liabilities.

Sales of Financial Assets and Financing Agreements — Sunlight will, from time to time, facilitate the sale of Indirect Channel Loans. In each case, the transferred loans are legally isolated from Sunlight and control of the transferred loans passes to the transferee, who may pledge or exchange the transferred asset without constraint of Sunlight. Sunlight neither recognizes any financial assets nor incurs any liabilities as a result of the sale, but does recognize revenue based upon the difference between proceeds received from the transferee and the proceeds paid to the transferor.

Leases — Sunlight recognizes right-of-use assets and lease liabilities at the commencement date of the lease based on the present value of remaining fixed and determinable lease payments over the lease term. Sunlight calculates the present value of future payments by using an estimated incremental borrowing rate, which approximates the rate at which Sunlight would borrow on a secured basis and over a similar term, and recognizes lease expense for operating leases on a straight-line basis over the lease term. Right-of-use assets represent Sunlight’s right to control the use of an identified asset for the lease term and lease liabilities represent Sunlight’s obligation to make lease payments arising from the lease. Sunlight uses the incremental borrowing rate on the commencement date in determining the present value of the lease payments.

Balance Sheet Measurement

Cash and Cash Equivalents and Restricted Cash — Cash and cash equivalents consist of bank checking accounts and money market accounts. Sunlight considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Sunlight maintains cash in restricted accounts pursuant to various lending agreements and considers other cash amounts restricted under certain agreements with other counterparties. Substantially all amounts on deposit with major financial institutions exceed insured limits. Cash and cash equivalents and restricted cash are carried at cost, which approximates fair value. Sunlight reported cash and cash equivalents and restricted cash in the following line items of its Unaudited Condensed Consolidated Balance Sheets, which totals the aggregate amount presented in Sunlight’s Unaudited Condensed Consolidated Statements of Cash Flows:



	June 30, 2023		December 31, 2022
Cash and cash equivalents	$	80,147	$	47,515
Restricted cash and cash equivalents	6,227		4,272
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statement of Cash Flows(a)	$	86,374	$	51,787

a.As of June 30, 2023 and December 31, 2022, Sunlight held $28.1 million and $3.5 million, respectively, on deposit with Sunlight’s Bank Partner.

Financing Receivables — Sunlight records financing receivables for (a) advances that Sunlight remits to contractors to facilitate the installation of residential solar systems and the construction or installation of other home improvement projects, (b) loans held by Sunlight, and (c) loan participations Sunlight purchased from its Bank Partner.

Advances — In certain circumstances, Sunlight will provide a contractually agreed upon percentage of cash to a contractor related to a Loan that has not yet been funded by either a Direct Channel Partner or its Bank Partner as well as amounts funded to contractors in anticipation of loan funding. Such advances are generally repaid upon the earlier of (a) a specified number of days from the date of the advance outlined within the respective contractor contract or (b) the substantial installation of the residential solar system or the construction or installation of other home improvement projects. In either case, Sunlight will net such amounts advanced from payments otherwise due to the related contractor. Sunlight carries advances at the amount advanced, net of allowances for losses and charge-offs. In the first quarter of 2023, Sunlight suspended its advance program, aside from advance made to its equipment suppliers, and has significantly reduced outstanding advances.

Loans and Loan Participations — Sunlight recognizes Indirect Channel Loans purchased from Sunlight’s Bank Partner as well as its 5.0% participation interests in Indirect Channel Loans issued by Sunlight’s Bank Partner as financing receivables held-for-investment based on management's intent, and Sunlight's ability, to hold those investments through the foreseeable future or contractual maturity. Financing receivables that are held‑for‑investment are carried at their aggregate outstanding face amount, net of applicable (a) unamortized acquisition premiums and discounts, (b) allowance for losses and (c) charge-offs or write-downs of impaired receivables. If management determines a loan or loan participation is impaired, management writes down the loan or loan participation through a charge to the provision for losses. See “Impairment” for additional discussion regarding management’s determination for loan losses. Sunlight applies the interest method to amortize acquisition premiums and discounts or on a straight-line basis when it approximates the interest method. Sunlight has not acquired any material loans with deteriorated credit quality that were not charged off upon purchase.

Impairment — Sunlight holds financing receivables carried at amortized cost for which management evaluates credit quality indicators at least quarterly to establish allowance for credit losses for advances, loans, and loan participations that represent management's estimate of expected credit losses over the remaining expected life of those financial assets after considering contractual terms, expected prepayments, and cancellation features. The income statement effect of all changes in the allowance for credit losses is recognized in the provision for credit losses. Determining the appropriateness of the allowance for credit losses is complex and requires significant judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of credit exposures, considering the macroeconomic conditions, forecasts, and other factors then prevailing, may result in significant changes in the allowance for credit losses in future periods.

To the extent Sunlight’s credit exposures share risk characteristics with other similar exposures, such credit exposure is collectively assessed for impairment, which includes Sunlight’s loan and loan participations and certain advances. If an exposure does not share risk characteristics with other exposures, Sunlight generally estimates expected credit losses on an individual basis, considering expected repayment