Sunlight Financial Holdings Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurement

Fair Value Measurement

3 Months Ended

Mar. 31, 2023

The carrying values and fair values of Sunlight’s assets or liabilities recorded at fair value on a recurring or non-recurring basis, as well as other financial instruments for which fair value is disclosed, at March 31, 2023 and December 31, 2022 were as follows:


	Principal Balance or Notional Amount		Carrying Value		Fair Value
					Level 1		Level 2		Level 3		Total
March 31, 2023
Assets:
Financing Receivables:
Loan participations, held-for-investment	$	3,437	$	3,028	$	—	$	—	$	2,960	$	2,960
Loans, held-for-investment	270		241		—		—		220		220
Cash and cash equivalents	75,518		75,518		75,518		—		—		75,518
Restricted cash	4,350		4,350		4,350		—		—		4,350
Contract derivatives	25,202		293		—		—		293		293

Liabilities:
Debt	7,694		7,694		—		—		7,694		7,694
Warrants	312,225		931		—		—		931		931

Guarantee obligation	n.a.		15,128		—		—		15,128		15,128
Servicing liability	n.a.		1,010		—		1,010		—		1,010

December 31, 2022
Assets:
Financing Receivables:
Loan participations, held-for-investment	3,635		3,254		—		—		3,110		3,110
Loans, held-for-investment	309		278		—		—		260		260
Cash and cash equivalents	47,515		47,515		47,515		—		—		47,515
Restricted cash	4,272		4,272		4,272		—		—		4,272
Contract derivatives	38,805		449		—		—		449		449

Liabilities:
Debt	20,613		20,613		—		—		20,613		20,613
Warrants	312,225		4,297		—		—		4,297		4,297
Guarantee obligation	n.a.		8,024		—		—		8,024		8,024
Servicing liability	n.a.		512		—		512		—		512

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value.

Sunlight’s assets and liabilities measured at fair value on a recurring basis using Level 3 inputs changed as follows:


	Assets		Liabilities
	Contract Derivatives		Warrants
December 31, 2022	$	449	$	4,297
Transfers(a)









Transfers to Level 3	—		—
Transfers from Level 3	—		—
Gains (losses) included in net income(b)
Included in change in fair value of warrant liabilities	—		(3,366)
Included in change in fair value of contract derivatives, net	(156)		—
Included in realized gains on contract derivatives, net	123		—
Payments, net	(123)		—
March 31, 2023	$	293	$	931

December 31, 2021	$	1,411	$	19,007
Transfers(a)
Transfers to Level 3	—		—
Transfers from Level 3	—		—
Gains (losses) included in net income(b)
Included in change in fair value of warrant liabilities	—		4,884
Included in change in fair value of contract derivatives, net	(227)		—
Included in realized gains on contract derivatives, net	1,909		—
Payments, net	(1,909)		—









March 31, 2022	$	1,184	$	23,891

a.Transfers are assumed to occur at the beginning of the respective period.

b.Increases in the fair value of liabilities represent losses included in net income.

Contract Derivative Valuation — Fair value estimates of Sunlight's contract derivatives are based on an internal pricing model that uses a discounted cash flow valuation technique, incorporates significant unobservable inputs, and includes assumptions that are inherently subjective and imprecise. Significant inputs used in the valuation of Sunlight’s contract derivatives include:


Contract Derivative						Significant Inputs

2						Inputs include expected prepayment rate of applicable Indirect Channel Loans sold to the Indirect Channel Loan Purchaser. Significant increases (decreases) in the expected prepayment rate in isolation would result in a significantly higher (lower) fair value measurement.

The following significant assumptions were used to value Sunlight’s contract derivative:



	March 31, 2023		December 31, 2022



Contract Derivative 2
Expected prepayment rate	75.0	%	75.0	%

Compensation Unit and Warrant Valuation — Sunlight uses the observed market price of its publicly-traded Class A Shares and the warrants thereon to measure the value of RSU awards on the grant date and the value of Public Warrants, respectively. For Private Placement Warrants, Sunlight uses an independent third-party valuation firm to value those warrants using a Monte Carlo option pricing model, which includes the following estimates of underlying asset value, volatility, dividend rates, expiration dates, and risk-free rates:



Assumption	March 31, 2023

Class A common share value per share(a)	$	0.31
Implied volatility(a)	113.2		%
Dividend yield(b)	—		%
Time to expiry (in years)(a)	3.3
Risk free rate(a)	3.8		%

a.Significant increases in these assumptions in isolation would result in a higher fair value measurement.

b.Significant increases in these assumptions in isolation would result in a lower fair value measurement.

Goodwill — In connection with Sunlight’s goodwill assessment (Note 2), the Company valued its single reporting unit using an equal-weighted valuation methodology, which incorporated (a) an income approach using a discounted cash flow analysis (b) a market approach using publicly-traded companies similar to Sunlight and (c) a market capitalization approach.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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