Organization and Business |
6 Months Ended |
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Jun. 30, 2023 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Organization and Business | 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.
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