SUNLIGHT FINANCIAL HOLDINGS INC. MANAGEMENT REPORT OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of Sunlight 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 of
Sunlight Financial Holdings Inc. and its consolidated subsidiaries.

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CAUTION 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,"
"intend," "expect," "endeavor," "seek," "anticipate," "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:
•Sunlight has incurred net losses in the past, and Sunlight may be unable to
sustain profitability in the future.
•The ongoing COVID-19 pandemic and other health epidemics and outbreaks could
adversely affect Sunlight's business, results of operations and financial
condition.
•If Sunlight fails to manage its operations and growth effectively, Sunlight may
be unable to execute its business plan, maintain high levels of customer
services and support or adequately address competitive challenges.
•Sunlight may in the future expand to new industry verticals outside of the U.S.
solar system and home improvement industries, and failure to comply with
applicable regulations, accurately predict demand or growth, or build a process
valued in those new industries could have an adverse effect on Sunlight's
business.
•To the extent that Sunlight seeks to grow through future acquisitions, or other
strategic investments or alliances, Sunlight may not be able to do so
effectively.
•A material reduction in the retail price of electricity charged by electric
utilities, other retail electricity providers, or other energy sources as
compared to potential savings for purchasing and using a solar system or an
increase in pricing for purchasing and using a solar system above the cost of
other energy sources could result in a lower demand for solar systems, which
could have an adverse impact on Sunlight's business, results of operations and
financial condition.
•Sunlight's inability to compete successfully or maintain or improve Sunlight's
market share and margins could adversely affect its business.
•Disruptions in the operation of Sunlight's computer systems and those of its
critical third-party service providers and capital providers could have an
adverse effect on Sunlight's business.
•Existing regulations and policies and changes to these regulations and policies
may present technical, regulatory, and economic barriers to the purchase and use
of solar energy systems, which may significantly reduce demand for our loan
products.
•Sunlight's growth is dependent on its contractor network and in turn the
quality of the service and products they provide to their customers, and
Sunlight's failure to retain or replace existing contractors, to grow its
contractor network or the number of Sunlight loans offered through its existing
network, or increases in loan delinquencies due to any deficiencies in
Sunlight's contractor underwriting practices, could adversely impact Sunlight's
business.
•Sunlight's revenue is impacted, to a significant extent, by the general
economy, including supply chain disruptions, and the financial performance of
its capital providers and contractors.
•Sunlight has never paid cash dividends on its capital stock, and does not
anticipate paying dividends in the foreseeable future.
•If assumptions or estimates Sunlight uses in preparing its financial statements
are incorrect or are required to change, Sunlight's reported results of
operations, liquidity, and financial condition may be adversely affected.
•A significant portion of Sunlight's total outstanding shares are restricted
from immediate resale but may be sold into the market in the near future. This
could cause the market price of our Class A Common Stock to drop significantly,
even if its business is doing well.

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Executive Overview


Sunlight's revenue is primarily attributable to platform fees earned by Sunlight
for facilitating the origination of solar and home improvement loans by its
capital providers. Sunlight believes that revenue, and resulting Adjusted
EBITDA, will increase over time as the solar and home improvement markets grow
organically, as Sunlight adds solar and home improvement contractors to its
network, and as Sunlight continues to expand its relationship with its existing
contractor partners.

Sunlight has prepared the discussion of its results of operations for the fiscal
year ended December 31, 2021 by combining the Predecessor and Successor results
of operations and cash flows during the year ended December 31, 2021 and
comparing the combined data to the results of operations and cash flows for the
year ended December 31, 2020. 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 combined annual period from the predecessor fiscal year ended December 31, 2020


•Sunlight facilitated the origination of $2.5 billion of loans during the
Combined Annual Period, representing an increase of 71.9% from $1.5 billion of
loans during the year ended December 31, 2020.
•Revenue was $114.7 million for the Combined Annual Period, representing an
increase of 64.9% from $69.6 million for the year ended December 31, 2020.
•Net income (loss) was $(241.0) million for the Combined Annual Period,
representing a decrease from $10.6 million for the year ended December 31, 2020.
•Adjusted Net Income (Loss) was $40.5 million for the Combined Annual Period,
representing an increase from $16.2 million for the year ended December 31,
2020.
•Adjusted EBITDA was $52.9 million for the Combined Annual Period, representing
an increase of 120.8% from $24.0 million for the year ended December 31, 2020.

As discussed more fully in "-Results of Operations," Sunlight's net income
(loss), Adjusted Net Income (Loss), and Adjusted EBITDA for the Combined Annual
Period includes the effects from the Business Combination and presented on a
basis different than those measures for the Predecessor's Year Ended
December 31, 2020.

Adjusted EBITDA

Information regarding the use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, is included in “Non-GAAP Financial Measures to GAAP”. The following graphs illustrate Adjusted EBITDA and other key performance measures for the combined annual period and the year ended December 31, 2020 (in thousands):

[[Image Removed: sunl-20211231_g2.jpg]][[Image Removed: sunl-20211231_g3.jpg]][[Image Removed: sunl-20211231_g4.jpg]][[Image Removed: sunl-20211231_g5.jpg]][[Image Removed: sunl-20211231_g6.jpg]]


a.Includes the results of operations for the Predecessor during the period of
January 1, 2021 through July 9, 2021 and for the Successor during the period of
July 10, 2021 through December 31, 2021. Refer to "-Key Performance Measures"
and "-Results of Operations" for amounts related to that period.

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Strong points


In the fourth quarter of 2021, Sunlight continued to experience strong growth
including:
•The number of borrowers increased to 18,225, up 1.9% from 17,882 borrowers in
the prior-year period.
•Contractor relationships grew 40.2% relative to the prior-year period, with 25
new solar and home improvement contractors joining the Sunlight Platform in the
fourth quarter of 2021.
•Battery attachment rate grew to 17.8%, compared with 16.6% in the prior-year
period.
•Average loan balance decreased 2.5% year-over-year to 34,774, with a
record-high average solar loan balance of $41,983 in the fourth quarter of 2021.
•As of December 31, 2021, Sunlight had a cumulative funded loan total of $6.1
billion.

Key Performance Measures

Sunlight reviews several key performance measures, discussed below, to evaluate
its business and results, measure performance, identify trends, formulate plans
and make strategic decisions. Sunlight believes that the presentation of such
metrics is useful to its investors and counterparties because they are used to
measure and model the performance of companies such as Sunlight using similar
metrics.

The following table presents the main performance measures for the successive period, the previous annual period, the combined annual period and the year ended. December 31, 2020 (in thousands, except percentages):

                                          Successor                               Predecessor                                 Predecessor
                                        For the Period                                               For the Period                                  For the Year
                                       July 10, 2021 to                                            January 1, 2021 to       Combined Annual         Ended December            Percentage
                                      December 31, 2021                                               July 9, 2021             Period(a)               31, 2020               Change(b)

Funded Loans                          $     1,214,754                                              $     1,309,504          $   2,524,258          $    1,468,647                   71.9  %
Direct Channel Funded Loans                   923,848                                                    1,048,232              1,972,080               1,205,392                   63.6
Indirect Channel Funded Loans                 290,906                                                      261,272                552,178                 263,255                  109.8
Platform Fee Loans                          1,228,022                                                    1,318,644              2,546,666               1,432,661                   77.8
Direct Channel Platform Fee
Loans                                         923,848                                                    1,048,232              1,972,080               1,205,392                   63.6
Indirect Channel Platform Fee
Loans                                         304,174                                                      270,412                574,586                 227,269                  152.8
Revenue                                        61,674                                                       53,064                114,738                  69,564                   64.9
Net Income (Loss)                            (247,084)                                                       6,131               (240,953)                 10,624                      n.m.
Adjusted Net Income (Loss)                     21,789                                                       18,689                 40,478                  16,211                  149.7
Adjusted EBITDA                                29,644                                                       23,260                 52,904                  23,958                  120.8


a.The Combined Annual Period represents the combined results of the Successor
Period and the Predecessor Annual Period. Funded Loans, Platform Fee Loans, and
Revenues were not materially impacted by the Business Combination for the year
ended December 31, 2021. 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 Combined Annual Period compared to the year ended
December 31, 2020.

Funded Loans. Sunlight refers to the aggregate principal balance of the loans
facilitated through Orange®, and funded by Sunlight's capital providers, during
a given period, as "funded loans." Direct channel capital providers fund
Sunlight-facilitated solar or home improvement loans one-by-one directly onto
their balance sheet via Orange®. Sunlight's direct channel capital providers are
depository institutions with the power and authority to originate loans such as
banks and credit unions. In the indirect channel, Sunlight's intermediary bank
partner originates solar and home improvement loans, as directed by Sunlight's
allocation engine, onto 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. The home improvement line of business represents an immaterial portion of
the funded loans.

Platform fee loans. Indicates loans facilitated by Sunlight on which it earns platform fees during a given period (as further described under “Revenue” below).

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Revenue. Sunlight earns revenue in two primary streams: platform fees earned on
funded loans, as described above, and fees for loan portfolio management and
administration services. For loans originated through Sunlight's direct channel,
Sunlight earns platform fees when the direct channel capital provider funds a
particular loan and, for loans originated through Sunlight's indirect channel,
Sunlight earns platform fees when the indirect channel capital provider
purchases a particular loan from Sunlight's intermediary bank partner. Fees
earned by Sunlight for loan portfolio management and administration services are
paid to Sunlight by the capital providers for which such services are performed
on a monthly basis or such other period as the parties agree.

The contracts under which Sunlight (a) arranges loans for the purchase and
installation of home improvements other than residential solar energy systems
and (b) earns income from the prepayment of certain of those Loans sold to an
Indirect Channel Loan Purchaser are considered derivatives under GAAP. As such,
Sunlight's revenues exclude the platform fees that Sunlight earns in connection
with these contracts. Instead, Sunlight records realized gains on the
derivatives within "Realized Gains on Contract Derivative, Net."

Net revenue. Net income is a financial measure used to measure Sunlight’s performance from period to period on a consistent basis.


Non-GAAP Financial Measures. Adjusted Net Income and Adjusted EBITDA are
non-GAAP financial measures used by Sunlight's management to evaluate operating
performance, generate future operating plans, and make strategic decisions,
including those relating to operating expenses and the allocation of internal
resources. Please see "-Non-GAAP Financial Measures" for a further description
of the calculation of Adjusted Net Income, Adjusted EBITDA, and reconciliations
to net income.

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Characteristics of the loan


The following table sets forth the average characteristics of loans Sunlight
facilitated for the Successor Period, the Predecessor Annual Period, and the
year ended December 31, 2020 (USD in thousands):

                                                         Successor                                 Predecessor                                         Predecessor
                                                       For the Period                             For the Period                                      For the Year
                                                      July 10, 2021 to                          January 1, 2021 to         Combined Annual           Ended December
Average Loan Characteristic                          December 31, 2021                             July 9, 2021                 Period                  31, 2020

Solar
Loan Term (in months)                                       234                                         231                        232                      224
Customer Interest Rate                                      2.3       %                                 2.5      %                 2.4      %               3.8     %
Customer FICO Score                                         752                                         752                        752                      746
Loan Balance                                         $       41                                 $        40              $          41              $        35
Solar Maxx®(a)
Loan Term (in months)                                       292                                               n.a.                 292                           n.a.
Customer Interest Rate                                      6.9       %                                       n.a.                 6.9      %                    n.a.
Customer FICO Score                                         641                                               n.a.                 641                           n.a.
Loan Balance                                         $       46                                               n.a.       $          46                           n.a.
Home Improvement
Loan Term (in months)                                       111                                         107                        109                      105
Customer Interest Rate                                     10.7       %                                10.2      %                10.5      %              10.1     %
Customer FICO Score                                         747                                         754                        750                      753
Loan Balance                                         $       16                                 $        16              $          16              $        15
Home Improvement Maxx®(b)
Loan Term (in months)                                       107                                               n.a.                 107                           n.a.
Customer Interest Rate                                     17.9       %                                       n.a.                17.9      %                    n.a.
Customer FICO Score                                         634                                               n.a.                 634                           n.a.
Loan Balance                                         $       10                                               n.a.       $          10                           n.a.


a.Solar Maxx® loans represented less than 1.0% of loans facilitated by Sunlight
during the year ended December 31, 2021.
b.Home Improvement Maxx® loans represented less than 1.0% of loans facilitated
by Sunlight during the year ended December 31, 2021.

RECENT DEVELOPMENTS


Coronavirus Outbreak. During the first quarter of 2020, Sunlight experienced
strong continued growth in funded loan volume, which was a continuation of the
rapid growth experienced in the fiscal year ended December 31, 2019. The onset
of the novel coronavirus ("COVID-19") pandemic beginning in March 2020 led to a
3% decline in the number of credit approvals and a 15% decline in volume of
loans funded during the second quarter of 2020 compared to the second quarter of
2019. However, the number of credit approvals and funded loan volumes largely
recovered in the third quarter of 2020 to exceed the levels experienced during
the third quarter of 2019. At December 31, 2021, Sunlight facilitated cumulative
funded loan volume since inception of approximately $6.1 billion.

Main factors affecting operating results


Sunlight's future operating results and cash flows are dependent upon a number
of opportunities, challenges, and other factors, including (i) growth in the
number of loans funded to the customers of each contractor; (ii) 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; (iii) funded loan volume; (iv) competition in the markets
in which Sunlight operates; (v) the cost of traditional and other alternative
sources of power to consumers and industry trends and general economic
conditions; (vi) growth in the number of contractors included in Sunlight's
network; and (vii) concentration among Sunlight's contractor partners and
capital provider partners.

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Growth in the number of contractors and the number of loans financed for each contractor’s clients


Sunlight's expansive network of residential solar and other home improvement
contractors, supported by a differentiated set of tools and services offered
through Orange® and by Sunlight more generally, constitutes the distribution
channel through which Sunlight builds funded loan volume and earns fee income.
Sunlight believes that continued growth in the number of contractors in
Sunlight's network and growth in the number of loans funded to the customers of
each such contractor through deepening relationships with, as well as first-look
exclusivity arrangements and volume commitments from, those contractors, have
been and will continue to be key components of Sunlight's increased market
penetration, growth in funded loan volume, and Sunlight's operating results.

Availability of capital to fund loans; Volume of loans financed


Sunlight's business model is heavily dependent on connecting its capital
providers, who wish to build a portfolio of residential solar or home
improvement loans, to the homeowner customers of the contractors in Sunlight's
distribution network, who wish to finance the purchase of residential solar
systems or other home improvements. Sunlight earns a platform fee on each solar
and home improvement loan facilitated through Orange®. Sunlight's ability to
continue to increase its funding capacity either by adding additional capital
providers or by increasing the commitments of its existing capital providers to
fund loans on terms desired by the solar and/or home improvement markets and on
terms that are economically favorable to Sunlight is an important factor in
Sunlight's ability to increase funded loan volume, which is in turn a critical
factor in Sunlight's operating results.

Competetion


Competition for Sunlight occurs at two levels: (i) competition to acquire and
maintain contractor relationships; and (ii) competition to acquire high quality
capital to fund loans, in each case on economic terms favorable to Sunlight.

Competition to acquire and maintain relationships with contractors


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, contractors generally do not enter
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 (ie. the dealer fee or original issue discount charged to the
contractor), consumer credit approval rates, variety of loan products to address
shifting consumer demands and market conditions, ease of loan application and
completion process (platform) and other services to facilitate the contractor's
business.

Sunlight believes that the following factors, among others, are key to
Sunlight's success in acquiring and maintaining contractor relationships:
•Superior value proposition for contractors. Sunlight's large array of loan
products and flexibility in offering new and additional products stem from the
depth, diversity and attractively-priced funding of Sunlight's capital
providers. Sunlight's loan products allow contractors to capture additional
purchase opportunities from consumers that do not want to or are not able to pay
cash for solar system installation or do not want to lease a system from a third
party and forego the benefits of ownership. Sunlight's attractive loan products
and competitive contractor fees allow contractors to choose products that fit
their business needs and the financing needs of their customers. The broad range
of products offered by Sunlight improves the contractor's chances of meeting its
customers' financing needs and completing a sale.
•Easy-to-use technology-enabled POS financing platform, instant credit
decisioning. Orange® is easy to use and provides instant credit decisions for
homeowners interested in financing the purchase of a residential solar system or
home improvement. Access to prompt credit decisions and the ability to close
financing transactions through an intuitive and easy process through the
execution of loan agreements in one encounter with a potential customer provides
significant additional sale opportunities for contractors. Orange® may be
accessed via the Orange® web address, directly from certain contractor's own
website via a flexible application programming interface, or API, and via
Sunlight's mobile application. Besides instant credit decisioning, Orange®
includes automated loan stipulation, secure document upload, e-sign capacity and
other features that facilitate efficient loan transactions and provide
contractors with the ability to grow their businesses.
•Additional features and services offered by Sunlight further support the growth
of contractor businesses, attract new contractors to Sunlight's network and
build contractor loyalty. Sunlight prioritizes innovation in Orange® and
services that support growth in the businesses of its existing network of
contractors, attract new contractors and build contractor loyalty. Examples of
such innovations include Sunlight's advance program, Sunlight's launch of
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Spanish-language loan products and Sunlight Rewards™. Sunlight believes that it
has innovated more quickly than its competitors and offers contractors a greater
array of valuable services that drive their determination to offer their
customers Sunlight-offered loan products over those of Sunlight's competitors
and that Sunlight will continue to be able to innovate quickly to meet the needs
of its contractor network.

Competition at Acquire capital to fund loans


The residential solar system and home improvement loan markets are relatively
fragmented. Facilitating the aggregation of loan volume from these markets is a
highly competitive sector of these broader industries. Sunlight faces
competition from a diverse landscape of consumer lenders, including traditional
banks, credit unions, specialized residential solar system lenders, and lease
providers. Sunlight's competitors source capital from a mix of alternative
sources, including depository capital and/or other alternatives that rely on the
capital markets.

Sunlight believes that it offers capital providers an attractive value
proposition due to its industry-leading consumer credit underwriting, attractive
risk-adjusted returns earned by its capital providers relative to other asset
classes, the access that Sunlight's Platform provides to a unique and growing
asset class that may reduce volatility in the ability to deploy capital, and the
ability to access new customers for very little cost. Sunlight has successfully
added capital providers and grown commitments from existing capital providers
since inception. As its contractor network has grown, Sunlight has consistently
diversified its capital provider base to ensure that it has sufficient capital
to fund the demand for Sunlight facilitated loans and that it is able to offer
an evolving and competitive mix of loan products to meet contractor and consumer
demand. Capital providers have actively participated in this success and
Sunlight has not experienced any capital provider attrition since inception,
although one capital provider provided notice to Sunlight that it had exceeded
its internal asset concentration levels for solar loans and, accordingly, such
capital provider terminated their program agreement with Sunlight in April 2021.
This capital provider purchased an immaterial portion (less than 2.2%) of
Sunlight's total facilitated solar loans in 2020. Sunlight believes that there
are many institutions seeking to deploy capital into solar and home improvement
loan assets, but Sunlight intends to continue to be selective about adding
capital provider partners. Sunlight values diversification but will specifically
focus on partnering with potential capital providers that can enable Sunlight to
meet strategic goals, including access to the most attractive pricing and access
to capacity for a growing suite of loan products, among others.

Industry trends and general economic conditions; Energy cost


Sunlight's results of operations in the past have been fairly resilient to
economic downturns but in the future may be impacted by the relative strength of
the overall economy and its effect on unemployment, consumer spending. and
consumer demand for solar systems and home improvements. As general economic
conditions improve or deteriorate, the amount of disposable income consumers
have access to tends to fluctuate, which in turn impacts consumer spending
levels and the willingness of consumers to take out loans to finance purchases.
Specific economic factors such as interest rate levels, changes in monetary,
fiscal and related policies, market volatility, consumer confidence, the impact
of the COVID-19 pandemic 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, 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 tax
credit (the "ITC"). The ITC currently allows a qualifying homeowner to deduct
26% of the cost of installing residential solar systems from their U.S. federal
income taxes, thereby returning a material portion of the purchase price of the
residential solar system to homeowners. Congress has extended the ITC expiration
date multiple times including, most recently, in December 2020. Under the terms
of the current extension, the ITC will remain at 26% through the end of 2022,
reduce to 22% for 2023, and further reduce to 0.0% after the end of 2023 for
residential solar systems, unless it is extended before that time. Although the
ITC has been extended several times, there is no guarantee that it will be
extended beyond 2023.

Though the residential solar market has grown steadily over the last several
years, Sunlight cannot guarantee that such growth will continue. In addition,
although the home improvement business is not currently a material part of
Sunlight's business, Sunlight believes that it is well-positioned to grow that
business significantly over time. The home improvement
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industry is, however, subject to many of the same industry trends and challenges
associated with a changing economy as the solar industry and Sunlight cannot
guarantee that it will be successful in growing that business as planned.

Concentration


Sunlight's expansive network of residential solar system and other home
improvement contractors, supported by a differentiated set of tools and services
offered through Orange®, constitutes the distribution channel through which the
Sunlight-facilitated loans made available by Sunlight's capital providers are
sold to the consumer customers of such contractors. Sunlight partners with some
of the largest contractors in the United States, which in the aggregate generate
a material portion of Sunlight's funded loan volume through Sunlight's network
of capital providers. However, Sunlight's contractor network is considerably
diversified. In the period from December 31, 2019 to December 31, 2020, the top
ten contractors in Sunlight's network were responsible for selling 42.0% of
Sunlight's funded loan volume, and in the period from December 31, 2020 to
December 31, 2021 that percentage increased to 45.4%. 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 15.4% and 13.3% of
Sunlight's funded loan volume in the period from December 31, 2019 to
December 31, 2020 and in the period from December 31, 2020 to December 31, 2021,
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, Marc Jones Construction, L.L.C. d/b/a Sunpro Solar ("Sunpro"), that
sold 11.3% and 15.2% of Sunlight's funded loan volume during the Successor
Period and the Predecessor Annual Period, respectively, and 15.4% during the
year ended December 31, 2020. Sunlight believes that its contractor network is
sufficiently diversified to continue to grow with the residential solar market,
and increase share given market dynamics, but intends to continue adding
contractors to the network in order to further diversify and broaden the
opportunity to grow the business.

Sunlight has multiple capital providers in both its direct and indirect funding
channels, all of which have increased their commitments since partnering with
Sunlight. Sunlight's largest capital provider in the period from December 31,
2020 to December 31, 2021 has materially increased its commitment since the
relationship began in 2015. Though Sunlight believes that the relationship with
this capital provider is healthy and will continue without disruption, the
significant portion of funded loan volume attributable to this capital provider
results in concentration risk. This capital provider funded 45.3% and 29.4% of
Sunlight's funded loans during the period from December 31, 2019 to December 31,
2020 and during the period from December 31, 2020 to December 31, 2021,
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.
Sunlight added new capital providers in 2021 to reduce its capital provider
concentration risk and will continue to do so selectively. Further, Sunlight is
in continuous discussions with multiple capital providers on an ongoing basis
and, if Sunlight were to receive an advance notice of termination from the
capital provider, Sunlight will use the advance notification to develop
alternate funding sources to replace this capital provider. While Sunlight
believes that it would be able to identify and implement alternative
arrangements during this period, Sunlight cannot guarantee that it would be able
to do so at all or on equivalent or favorable terms. Sunlight believes that a
failure to arrange alternative loan funding on equivalent terms would have
little impact on Sunlight's funded loan volume, as capital for the solar loan
industry has historically been readily available. Rather, Sunlight believes that
such failure would be more likely to have a greater negative impact on the
amount of platform fees that Sunlight earns, and therefore could impact revenue.

presentation basis

Sunlight operates through an operating segment, and Sunlight operates in a geographic region, United States. See Notes 1 and 2 to Sunlight’s accompanying consolidated financial statements for more information.

Components of operating results

Revenue


Revenue. Sunlight earns revenue in two primary streams: platform fees earned on
each loan facilitated via Orange® and fees earned for loan portfolio management
and administration services.

Platform fees. Platform fee revenue for each loan facilitated via Orange® is
generally the difference between the contractor fee that Sunlight charges to the
contractors in its network for access to Orange® and the ability to offer
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
                                       43
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particular loan from Sunlight's intermediary bank partner. The contract between
Sunlight and its intermediary bank partner for home improvement loans is
considered a derivative for GAAP purposes, whereas the contract between Sunlight
and its intermediary bank partner for solar loans is not. For indirect channel
home improvement loans, Sunlight records a "realized gain on contract derivative
(net)" in lieu of a platform fee generally when the loans are purchased by
Sunlight's indirect capital provider from Sunlight's bank partner, and Sunlight
is paid. As such, Sunlight excludes from its revenue any platform fee associated
with an indirect channel home improvement loan under Sunlight's related home
improvement agreement. Sunlight estimates the fair value of the derivative
components of the bank partnership arrangement based on the present value of the
net cash flows that Sunlight expects to collect under the agreement. Under this
home improvement bank partnership arrangement, with respect to a given home
improvement loan, Sunlight will expect to collect (x) the amount paid by
Sunlight's indirect capital provider to purchase the loan from Sunlight's bank
partner (the outstanding principal balance of the loan less the amount of the
capital provider discount applied to that loan plus any accrued and unpaid
interest) minus (y) the total of amounts funded to the relevant contractor in
respect of the related home improvement project (total cost of the project to
the consumer customer of the relevant contractor less the applicable contractor
fee) and any amounts that Sunlight owes to its bank partner in the form of
minimum guaranteed returns to the bank partner on the origination of such loan.
The aggregate estimated fair value of this agreement is marked to market by
Sunlight on a monthly basis. When a loan sale occurs, the estimated fair value
associated with the loans included in the sold portfolio is reversed and
Sunlight recognizes the related realized net cash as a realized gain as noted
above.

Loan portfolio management and administration revenue. Sunlight also earns
revenue from fees charged by Sunlight for providing loan portfolio management,
servicing, and administration services for certain of its capital providers.
These services include the reporting of loan performance information,
administration of servicing performed by third parties, and addressing customer
concerns or complaints through Sunlight's call center on behalf of the relevant
capital provider.

Costs and Expenses

Cost of revenues. Sunlight's cost of revenues includes the aggregate costs that
Sunlight incurs to satisfy its obligations in facilitating the origination of a
loan. The cost of revenues includes variable consideration that Sunlight pays
for its platform fees which do not otherwise meet the criteria necessary for
netting against gross revenues, including items such as credit bureau fees, the
cost to check homeowners' title in connection with the homeowner credit
underwriting, the cost of certain sales incentives, and certain information
technology costs directly associated with loan origination activities, among
others.

Compensation and benefits. Compensation and benefits expenses represent costs
related to our employees, such as salaries, bonuses, benefits and equity-based
compensation expenses. Also included are any recruiting costs incurred by
Sunlight in attracting talent and professional and consulting fees related to
certain services that Sunlight outsources to third parties.

Selling, general, and administrative. Selling, general and administrative
expenses include legal, audit and other professional services fees, travel and
entertainment expenses, and insurance premiums as incurred. Sunlight recognizes
expenses associated with co-marketing agreements when earned by the
counterparty.

Property and technology. Real estate and technology expenses include rent, IT services to support the infrastructure and operation of Orange®, as well as other Sunlight technology needs, and non-capitalizable costs to develop software in-house when incurred. 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.

Provision for losses. Provision for losses expenses 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
                                       44
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equity interests that Sunlight has purchased from Sunlight’s capital providers pursuant to the terms of its contract with such 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 the Sunlight balance sheet, in
each case to the extent such receivables are performing. Sunlight accrues
interest income based on the unpaid principal balance and contractual terms of
such receivables, and recognizes income related to the discounts associated with
such receivables as a yield adjustment using the interest method, or on a
straight-line basis when it approximates the interest method, over the loan
term.

Interest expense. Interest expenses represent interest payable by Sunlight on
its borrowings under its Loan and Security Agreement (as defined below).
Interest expense also includes the amortization of associated deferred financing
costs prior to the Business Combination.

Change in fair value of warrant liabilities. The change in fair value of warrant
liabilities relates to certain warrants issued by Sunlight to certain third
parties to purchase Sunlight's Class A Common Stock. Such warrants are marked to
market periodically and any change in value is reflected in this line item.

Change in fair value of, and realized gains on, contract derivative, net. The
arrangement with Sunlight's intermediary bank partner to originate indirect
channel home improvement loans is considered a derivative under GAAP. As such,
Sunlight's revenues exclude the platform fees that Sunlight earns from the sale
of home improvement loans from the bank partner's balance sheet. Instead,
Sunlight records a derivative that is marked to market on a monthly basis, with
realized gains recognized on the derivative 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 incurred by Sunlight on certain indirect channel loans.


Other income (expense). Other income or expense primarily relate to the changes
in a liability for certain guarantees of performance provided by Sunlight to
Sunlight's bank partner relating to the loans held on the balance sheet of
Sunlight's bank partner and certain other guarantees of performance made by
Sunlight to certain of its capital providers with respect to specified solar
loans.

Business combination expenses. Expenses incurred by Sunlight that are not considered operating expenses. For the Combined Annual Period, these costs primarily represent legal and other professional fees incurred by Sunlight in connection with the Business Combination.

Income tax benefit (expense). Income taxes Sunlight bears on taxable income, or tax benefit in times of taxable loss, not attributable to non-controlling interests in Sunlight Financial LLC.


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.

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Operating results

This section includes a summary of our operating results, followed by detailed comparisons of our results for the combined annual period and the year ended. December 31, 2020 (in thousands, except percentages):

                                             Successor                                    Predecessor                              Predecessor
                                                                                         For the Period
                                          For the Period                                   January 1,
                                         July 10, 2021 to                                 2021 to July       Combined          For the Year Ended
                                         December 31, 2021                                  9, 2021        Annual Period        December 31, 2020               Increase (Decrease)(a)

Revenue                                  $       61,674                                                    $   53,064          $        114,738          $    69,564             $   45,174              64.9  %
Costs and Expenses
Cost of revenues (exclusive of
items shown separately below)                     9,873                                                        10,556                    20,429               13,711                  6,718              49.0
Compensation and benefits                        44,996                                                        17,162                    62,158               26,174                 35,984             137.5
Selling, general, and
administrative                                    7,419                                                         3,450                    10,869                3,806                  7,063             185.6
Property and technology                           3,088                                                         2,790                     5,878                4,304                  1,574              36.6
Depreciation and amortization                    43,389                                                         1,688                    45,077                3,231                 41,846           1,295.1
Provision for losses                              1,217                                                         1,172                     2,389                1,350                  1,039              77.0
Goodwill impairment                             224,701                                                             -                   224,701                    -                224,701                 n.m.
Management fees to affiliate                          -                                                           204                       204                  400                   (196)            (49.0)
                                                334,683                                                        37,022                   371,705               52,976                318,729             601.6
Operating income (loss)                        (273,009)                                                       16,042                  (256,967)              16,588               (273,555)                n.m.
Other Income (Expense), Net
Interest income                                     149                                                           262                       411                  520                   (109)            (21.0)
Interest expense                                   (554)                                                         (604)                   (1,158)                (829)                  (329)             39.7
Change in fair value of warrant
liabilities                                      22,583                                                        (5,504)                   17,079               (5,510)                22,589                 n.m.
Change in fair value of contract
derivatives, net                                    638                                                          (662)                      (24)               1,435                 (1,459)                n.m.
Realized gains on contract
derivatives, net                                  2,866                                                         2,992                     5,858                  103                  5,755           5,587.4
Other realized losses, net                            -                                                             -                         -                 (171)                   171            (100.0)
Other income (expense)                             (181)                                                          616                       435                 (634)                 1,069                 n.m.
Business combination expenses                    (3,080)                                                       (7,011)                  (10,091)                (878)                (9,213)          1,049.3
                                                 22,421                                                        (9,911)                   12,510               (5,964)                18,474                 n.m.
Net Income (Loss) Before Income
Taxes                                          (250,588)                                                        6,131                  (244,457)              10,624               (255,081)                n.m.
Income tax benefit (expense)                      3,504                                                             -                     3,504                    -                  3,504                 n.m.
Net Income (Loss)                              (247,084)                                                        6,131                  (240,953)              10,624               (251,577)                n.m.
Noncontrolling interests in loss
of consolidated subsidiaries                     87,528                                                             -                    87,528                    -                 87,528                 n.m.
Net Income (Loss) Attributable to
Class A Shareholders                     $     (159,556)                                                   $    6,131          $       (153,425)         $    10,624             $ (164,049)                n.m.

a.The change represents the combined annual period compared to the year ended
December 31, 2020.

The combined annual period compared to the financial year ended December 31, 2020
(Predecessor)

Income

The following table shows the revenue components of Sunlight for the successive period, the previous annual period, the combined annual period and the fiscal year ended December 31, 2020 (in thousands, except percentages):

                                        Successor                 Predecessor                                  Predecessor                 Increase (Decrease)(a)
                                         For the
                                       Period July
                                       10, 2021 to              For the Period
                                       December 31,             January 1, 2021          Combined          For the Year Ended
                                           2021                 to July 9, 2021       Annual Period         December 31, 2020                $                   %

Direct Channel Platform Fees,
net                                    $  49,937                $     45,703          $    95,640          $         64,120          $       31,520             49.2  %
Indirect Channel Platform Fees,
net                                        6,846                       5,054               11,900                     2,733                   9,167            335.4
Other revenues                             4,891                       2,307                7,198                     2,711                   4,487            165.5
Total                                  $  61,674                $     53,064          $   114,738          $         69,564          $       45,174             64.9

a.The change represents the combined annual period compared to the year ended
December 31, 2020.

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Revenue increased by $45.2 million or 64.9% for the year ended December 31, 2021
as compared to the year ended December 31, 2020 due to an increase of 77.8% in
platform fee loans, as well as an overall 0.1% increase in the average platform
fee percentage earned on loans funded by direct channel capital providers or
purchased by indirect channel capital providers. Sunlight's revenue excludes
amounts earned through its facilitation of indirect channel home improvement
loan originations, which Sunlight presents as realized gains on contract
derivatives.

Funded loans went from $1.5 billion for the year ended December 31, 2020 for
$2.5 billion for the year ended December 31, 2021, an increase of 71.9%. Sunlight believes the year-over-year increase in funded loans is primarily due to growth in the residential solar market, deepening relationships with existing contractors, and an increase in the number of contractors in the network of Sunlight contractors.


The average platform fee percentage earned on loans funded by direct channel
capital providers or purchased by indirect channel capital providers increased
0.1% from the year ended December 31, 2020 to the year ended December 31, 2021.
The platform fee percentage earned by Sunlight is dependent on several factors,
including (i) the contractor fees charged by Sunlight to contractors (which is
impacted by competitive pressure that varies from period to period, by loan
product based on consumer 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.

Sunlight believes that the difference in platform fee percentage from
December 31, 2020 to December 31, 2021 is primarily attributable to competition
in the market with regard to contractor fees, the mix of Sunlight loan products
funded in the two periods (based on the recent trend towards contractor
preference to offer certain longer term, lower interest rate loan products
facing significant competitive pressure from other participants offering loan
financing in the market and driving attractive contractor fee pricing in those
periods) and an increase in capital provider discounts charged to Sunlight by
capital providers in Sunlight's indirect channel during the second quarter of
2020. Sunlight's indirect channel capital providers are generally more reactive
than direct channel capital providers to market uncertainty and interest rate
market volatility as presented at the onset of the COVID-19 pandemic. Unlike
Sunlight's direct channel capital providers, Sunlight's indirect channel capital
providers are generally not depository institutions and therefore their own cost
of capital is subject to market uncertainty. Consequently, the capital provider
discounts charged to Sunlight by such indirect channel capital providers are
also likely to be more reactive. Deposits, which are generally used by
Sunlight's direct channel capital providers to fund loans, are generally more
stable, less reactive to market variance, and the least expensive cost of
capital.

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The following table shows the initial loan balance-weighted averages of capital provider discounts, contractor fees, and platform fees.

                                             Successor                     Predecessor                                      Predecessor
                                          For the Period                 For the Period
                                         July 10, 2021 to              January 1, 2021 to        Combined Annual        For the Year Ended            Change in
                                         December 31, 2021                July 9, 2021                Period             December 31, 2020            Average(a)

Solar Total - Capital Provider
Discount                                           16.8  %                         16.7  %                16.7  %                   13.0  %                   3.7  %
Solar Total - Contractor Fee                       21.8                            20.8                   21.5                      17.7                      3.8
Solar Total - Platform Fee                          5.0                             4.1                    4.8                       4.7                      0.1

Solar Direct Channel - Capital
Provider Discount                                  16.5                            16.6                   16.5                      12.5                

4.0

Solar Direct Channel - Contractor
Fee                                                21.9                            20.9                   21.6                      17.8                

3.8

Solar Direct Channel - Platform
Fee                                                 5.4                             4.3                    5.1                       5.3                

(0.2)


Solar Indirect Channel - Capital
Provider Discount                                  17.9                            17.2                   17.6                      15.4                      2.2
Solar Indirect Channel -
Contractor Fee                                     21.5                            20.2                   20.8                      16.9                      3.9
Solar Indirect Channel - Platform
Fee                                                 3.6                             3.0                    3.2                       1.5                      1.7

a.The change represents the combined annual period compared to the year ended
December 31, 2020.

Costs and expenses


Cost of revenues increased by 49.0% for the year ended December 31, 2021, which
is less than the 64.9% increase in revenues when compared to the year ended
December 31, 2020. The $6.7 million increase in cost of revenues resulted from
$2.2 million of increased costs of consumer credit underwriting arising from
increased credit approval volumes, $1.5 million from rewards earned by
salespeople under Sunlight Rewards™, $2.5 million from costs incurred in
connection with the increase of funded loan volume and Sunlight's role in
facilitating those loans, and increased costs of $0.4 million from broker fees
paid to financial institutions for arranging certain loan origination or
purchase arrangements with capital providers. The broker fees are calculated as
a percentage of the funded loan volume originating from an applicable loan
origination or purchase arrangement with a capital provider. Sunlight's
obligation to pay these broker fees generally terminates between three and five
years after the date that the initial loan is originated or purchased pursuant
to an arrangement facilitated by the broker.

Compensation and benefits expense increased by $36.0 million, or 137.5% for the
year ended December 31, 2021 when compared to the year ended December 31, 2020.
Of the $36.0 million increase, $29.6 million of compensation expense recognized
in the Successor period resulted from Business Combination, including $21.0
million 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, $5.7 million from such awards that did
not immediately vest (provisionally-vested replacement awards were granted upon
completion of the Business Combination and vest in future periods), and $2.9
million from restriction stock units granted on or after the Business
Combination to Sunlight employees. The remaining $6.4 million of increased
compensation expense resulted from an increase in employees from 190 at
December 31, 2020 to 216 at December 31, 2021. The increase in employees is
consistent with the growth in Sunlight's business and Sunlight expects to
continue hiring as its business grows in order to continue to expand its
contractor network, develop its home improvement business and meet the demands
of its contractors and capital providers.

Selling, general, and administrative expense increased by $7.1 million, or
185.6% for the year ended December 31, 2021 when compared to the year ended
December 31, 2020. Of the $7.1 million increase, Sunlight incurred $2.7 million
of expense related to Sunlight's operations as a public company, including $2.0
million of insurance expenses and $0.6 million of incremental professional fees
during the Successor Period. The remaining $4.4 million increased costs for
additional professional and administrative fees associated with Sunlight's
continuing growth.

Property and technology expense increased by $1.6 million, or 36.6% for the year
ended December 31, 2021 when compared to the year ended December 31, 2020,
primarily due to an increase in licensing fees charged by certain of Sunlight's
third-party service providers that support the infrastructure and operation of
Orange® associated with the growth in Sunlight's network of contractors.

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Depreciation and amortization expense increased by $41.8 million, or 1,295.1%
for the year ended December 31, 2021 when compared to the year ended
December 31, 2020, primarily due to the amortization of intangible assets
acquired in the Business Combination during the Successor Period amounting to
$43.1 million and the amortization of investments made in Orange® to support
ongoing innovation and to automate certain other corporate processes.

Sunlight recorded goodwill of $670.0 million upon closing of the Business
Combination, of which Sunlight considered $224.7 million impaired as part of
Sunlight's annual goodwill impairment test during the Successor Period. Market
activities adversely impacting the valuation of public companies similar to
Sunlight indicated that the $670.0 million carrying value of goodwill, after
taking into account price adjustments, exceeded its fair value by the $224.7
million impairment amount.

Provision for loss expense increased by $1.0 million, or 77.0% for the year
ended December 31, 2021 when compared to the year ended December 31, 2020. Such
increase was due primarily to an increased level of funded loan volume with
Sunlight's bank partner. The ratio of provision for loss expense over aggregate
funded bank partner loan volume in the year ended December 31, 2020 was 0.5% as
compared to 0.4% during the year ended December 31, 2021, indicating an decrease
in loss experience as compared to funded bank partner loan volume.

Operating margin decreased materially from the year ended December 31, 2020 to
the year ended December 31, 2021 due to the factors described above, primarily
related to non-cash charges in connection with the Business Combination.
Generally, operating margin benefits from the fixed nature of a material level
of Sunlight expense and revenue generally growing materially faster than
operating expenses when excluding the amortization effects of identified
intangible assets and equity-based compensation expense.

Other income (expenses), net


Total other income (expense) increased $18.5 million for the year ended
December 31, 2021 when compared to the year ended December 31, 2020, primarily
resulting from a $22.6 million decrease in the fair value of public and private
warrants, originally issued by Spartan and assumed by Sunlight upon closing of
the Business Combination, during the Successor Period and a $5.8 million
realized gain from the sale of indirect channel home improvement loans under an
agreement with Sunlight's bank partner, accounted as a derivative under U.S.
GAAP. These increases were partially offset by a $9.2 million increase in costs
incurred in connection with the Business Combination and $1.5 million reversal
of the fair value in connection with the realized gains from the aforementioned
sale of indirect channel home improvement loans.

Tax benefit


Sunlight's Predecessor was a limited liability company not subject to income
taxes. During the Successor Period, the $3.5 million income tax benefit reflects
an effective tax rate of 1.4%.

Non-controlling interests in consolidated subsidiaries


Sunlight's Predecessor did not consolidate any entities in which third parties
owned a noncontrolling interest. During the Successor Period, income (loss) of
consolidated subsidiaries allocated to noncontrolling interests represents
$250.6 million of Sunlight Financial LLC consolidated net loss during the
Successor Period allocated to such noncontrolling interests at a
weighted-average ownership of 35.0%.

Cash and capital resources

From December 31, 2021The sunlight had $91.9 million of unallocated cash and had drawn $20.6 million made available to it as part of its $30.0 million credit facility.


On April 26, 2021, Sunlight entered into a Loan and Security Agreement, as
amended (the "Loan and Security Agreement") with Silicon Valley Bank ("SVB").
The Loan and Security Agreement, which replaced Sunlight's prior $15.0 million
credit facility, has a borrowing capacity of up to $30.0 million and matures on
April 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 (i) 5.0% and (ii) the prime rate plus
1.75% per annum. The Loan and Security Agreement contains certain financial
covenants, including maintenance of (i) Liquidity (as defined therein) at all
times in an amount equal to or greater than the greater of (a) 35% of all
outstanding principal amounts of any advances and (b) $10.0 million; (ii) at all
times Available Takeout Commitment Amount (as defined therein) in an amount
equal to or greater than $200.0
                                       49
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million; and (iii) EBITDA (as defined therein) of at least $5.0 million for the
six-month period ending on the last day of each month. The Loan and Security
Agreement contains customary events of default. SVB can elect to accelerate the
maturity of the loans and/or terminate the commitments under the Loan and
Security Agreement upon the occurrence and during the continuation of an event
of default, and Sunlight can be required to repay all amounts outstanding under
the Loan and Security Agreement. In connection with the transition of accounts
to SVB, Sunlight experienced a technical default that was waived by SVB.
Otherwise, no defaults or events of default have occurred as of the date of this
filing.

Sunlight's cash requirements relate primarily to funding Sunlight advances and
prefunding programs, to invest in continued innovations in Orange® and to pay
Sunlight's operating expenses, repayment of borrowings (and interest thereon),
outstanding commitments and guarantees (including Sunlight's purchase of loans
pursuant to the terms of certain of its capital provider agreements and loan
participations), other operating expenses, income taxes, and tax distributions
to noncontrolling interests. Sunlight may be required to purchase loans from its
bank partner after an agreed period of time if Sunlight has not arranged the
sale of such loans. To date, Sunlight has not been required to purchase loans
from its bank partner due to an inability to sell such loans to an indirect
channel capital provider. Additionally, Sunlight assumes the risk of compliance
errors and the risk of borrower or contractor fraud in the origination of the
loans, and as such, Sunlight is obligated to purchase the applicable loan from
its bank partner should these events occur. Sunlight has also entered into a
program agreement with its bank partner to fund its home improvement loans that
contains similar provisions related to risks accepted by Sunlight.

Historically, Sunlight has met its cash requirements from cash flow generated by
operations, collection of advances under its contractor advance funding program
and in prefunding payments under its prefunding program, and draws on Sunlight's
credit facility. Sunlight believes that it will continue to generate cash flow
from its operations which, together with funds available under its new credit
facility and cash on hand, will be sufficient to meet its current and future
liquidity needs.

Relations with entrepreneurs and capital providers

Relations with contractors


Sunlight's expansive network of residential solar system installers and other
home improvement contractors, supported by a differentiated set of tools and
services offered through Orange®, constitutes the distribution channel through
which Sunlight builds funded loan volume and earns platform fees. The ability to
finance residential solar systems on terms that typically translate to immediate
saving for homeowners on their utility bills and significant amounts in lifetime
savings has materially contributed to the strong growth in the number of
residential solar systems installed in the United States over the last five
years. Sunlight attracts and builds strong relationships with residential solar
system contractors of all sizes in key solar markets by prioritizing innovations
in Orange® and providing services that assist the contractors in growing their
own businesses. Sunlight's team of business development and relationship
management professionals provides hands-on support to these contractors.
Sunlight believes that innovations such as prequalification capabilities, easy
and secure document upload features, reliable next day funding and Sunlight's
capital advance program (as described more fully below), amongst other
innovations, both attract new contractors to Sunlight's network and build
loyalty and deepen Sunlight's existing contractor relationships. In addition,
Sunlight's diverse set of capital providers enables Sunlight to offer its
network of contractors a wide array of loan products that vary as to structure,
interest rate and tenor, and thereby permits Sunlight's network of contractors
to offer competitively-priced products that best serve their markets. These
benefits to Sunlight's existing network of contractors translate to deeper
penetration of the contractors' sales, which is an important contributor to the
growth of Sunlight's market share and revenue. There can be no assurance that
Sunlight will be able to maintain its current contractor relationships. Sunlight
may lose existing contractors that represent a significant portion of Sunlight's
business, and there is no guarantee that Sunlight would be able to engage
replacement contractors on terms similar to its existing contractors.

Sunlight started its business in 2014 and developed a key anchor partnership
with a large residential solar contractor in 2016. Beginning in 2017 and through
2018, Sunlight focused on building and diversifying its contractor relationships
and continues that process today. In 2020, as compared with 2019, Sunlight grew
its solar contractor base by more than 60%. In 2021, as compared with 2020,
Sunlight grew its solar contractor base by more than 32.3%. However, dependence
on any one contractor or small group of contractors creates concentration risk,
particularly in the event that any such contractor elects to terminate its
relationship with Sunlight or experiences business disruption or a business
failure or bankruptcy. For example, during May 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 6.7% and 9.5% of Sunlight's total funded loan volumes during
the year ended December 31, 2020 and for the year ended December 31, 2021,
respectively. Sunlight believes that its strong relationships with the existing
contractors in Sunlight's network, the continued growth in the number of
contractor relationships, and the various
                                       50
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Orange®’s competitive lending products and sales tools have been and will continue to be key drivers of Sunlight’s increased market penetration, funded loan volume growth and revenue.

Relations 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 (i) 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 (ii) the capital provider discount charged by the
relevant capital provider either funding or purchasing the loan in the direct
and indirect channels, respectively (as described below). Sunlight's business is
therefore heavily dependent upon the availability of capital on attractive
economic terms. Sunlight believes that it offers capital providers an attractive
value proposition due to its industry-leading consumer credit underwriting, the
attractive risk-adjusted returns that Sunlight's capital providers earn relative
to other asset classes, the access that our Platform provides to a unique and
growing asset class that may reduce volatility in the ability to deploy capital,
and the ability to access new customers for very little cost.

Sunlight engages with its capital providers not just as funding sources but as
funding partners. As with Sunlight's network of contractors, Sunlight works
closely with its capital providers to understand and address their business
needs as related to the residential solar loan industry. Matters related to loan
product, credit strategy, contractor commercial underwriting and consumer
protection practices are considered and designed in tandem with the goal of
creating a robust and growing channel for funded loan volume. Additionally,
through Orange®, Sunlight's capital providers operating within Sunlight's direct
channel can track and manage the pipeline of solar loan volume allocated to that
capital provider. Sunlight's relationships with its diverse and growing network
of capital providers provides significant flexibility to source competitively
priced capital. Since the acquisition of Sunlight's initial flow capital funding
source in 2016, the number of capital providers funding Sunlight-facilitated
solar loans has increased materially and, more importantly, all of Sunlight's
direct channel capital providers have significantly increased their commitments
to fund solar loan volume.

Sunlight categorizes its capital providers as being either in Sunlight's direct
or indirect channel. Sunlight maintains both channels to provide diversification
of funding sources, access to funding for different types of loan products and
for other strategic purposes. The ability of Sunlight to allocate loans to
various capital providers, as well as the availability of the two different
funding channels, creates flexibility and allows Sunlight to respond nimbly to
shifting market conditions.

Direct channel capital providers fund Sunlight-facilitated solar or home
improvement loans one-by-one directly onto their balance sheet via Orange®.
Sunlight's direct channel capital providers are depository institutions with the
power and authority to originate loans such as banks and credit unions.
Generally, direct channel capital providers choose to service the loans they
originate.

In the indirect channel, Sunlight's allocation engine directs that certain solar
and home improvement loans be funded on the balance sheet of Sunlight's
intermediary bank partner. These loans are aggregated, pooled and sold to
indirect channel capital providers that cannot, or do not wish to, directly
originate solar loans. The indirect channel capital provider relationship allows
Sunlight to access a broader range of capital, which may include, among others,
credit funds, insurance companies and pension funds. Indirect channel capital
providers present a unique opportunity for Sunlight to access high quality and
significant sources of funding that are diverse from traditional depository
sources.

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Cash flow and liquidity analysis


Sunlight assesses liquidity primarily in terms of its ability to generate cash
to fund operating and financing activities. Sunlight has historically generated
increasing amounts of cash from operating activities, and management believes
that Sunlight is in a strong financial and liquidity position. Sunlight's cash
from operating activities are generally derived from platform fees which are
fully earned at the funding of a loan by direct channel capital providers and
the purchase of a loan from our bank partner's balance sheet by an indirect
channel capital provider. Refer to "Critical Accounting Policies and Estimates"
and Item 1A. "Risk Factors" in this Annual Report on Form 10-K for a full
description of the related estimates, assumptions, and judgments.

The combined annual period compared to the financial year ended December 31, 2020
(Predecessor)

The following is a summary of cash flow data for the year ended
December 31, 2021 and 2020 (in thousands):

                                                Successor                   Predecessor                                 Predecessor
                                             For the Period               For the Period
                                            July 10, 2021 to              January 1, 2021         Combined          For the Year Ended
                                            December 31, 2021             to July 9, 2021       Annual Period        December 31, 2020

Net cash provided by (used in)
operating activities                        $      (18,565)               $ 

14,356 ($4,209) $5,025 Net cash used in investing activities

             (308,012)                     (1,404)           (309,416)                   (4,803)
Net cash provided by (used in)
financing activities                               203,958                      (2,025)            201,933                       827


Cash flow from operating activities


For the year ended December 31, 2021, net cash used in operating activities was
$4.2 million. Operating cash inflows for the year ended December 31, 2021
primarily consisted of proceeds from Sunlight's direct channel capital providers
to fund, and indirect channel capital provider to purchase, without duplication,
loans of $2.1 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.

For the year ended December 31, 2020, net cash provided by operating activities
was $5.0 million. Operating cash inflows for the year ended December 31, 2020
primarily consisted of proceeds from Sunlight's direct channel capital providers
to fund, and indirect channel capital providers to purchase without duplication,
loans of $1.3 billion, of which Sunlight paid $1.2 billion to contractors;
repayment of advances and prefunds of $1.1 billion (conversely, Sunlight
advanced or prefunded $1.1 billion); and net interest expense paid of $0.3
million. Operating cash outflows primarily consisted of compensation and
benefits of $21.0 million, information technology expenses of $3.6 million,
professional fees of $1.1 million, and management fees paid to affiliates of
$0.4 million.

Cash flow from investing activities


For the year ended December 31, 2021, net cash used in investing activities was
$309.4 million, of which $304.6 million represents cash paid for the acquisition
of Sunlight Financial LLC as part of the Business Combination and the remaining
activities involved recurring business activities consisting of cash paid to
acquire loans and loan participations of $1.9 million, net of $1.5 million in
cash received as return of capital thereon, and $4.5 million paid to internally
develop software and acquire property and equipment. For the year ended
December 31, 2020, net cash used in investing activities was $4.8 million,
consisting of cash paid to acquire loans and loan participations of $2.8
million, net of $1.3 million in cash received as return of capital thereon, and
$3.3 million paid to internally develop software and acquire property and
equipment.

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Cash flow from financing activities


For the year ended December 31, 2021, net cash provided by financing activities
was $201.9 million, which included a $250.0 million in proceeds from and equity
raise, net of $19.6 million of related costs, and $26.4 million in tax payments
made on share-based payments in connection with the Business Combination. The
remaining uses of cash consisted of ongoing operations consisting of repayments
of borrowings under Sunlight's prior credit facilities of $14.8 million, net of
borrowings of $20.7 million, distributions of $7.5 million, and $0.5 million
payment of debt issuance costs. For the year ended December 31, 2020, net cash
provided by financing activities was $0.8 million, consisting of borrowings of
$8.7 million, net of repayments of borrowings under Sunlight's prior credit
facilities of $5.9 million, and distributions of $2.0 million.

long-term debt


On April 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 on April 26, 2023. Borrowings under the Loan and Security Agreement
accrue interest at a rate equal to the greater of (i) 5.0% and (ii) the prime
rate plus 1.75% per annum. The Loan and Security Agreement contains certain
financial covenants, including (i) liquidity in an amount equal to or greater
than (a) 35% of all outstanding principal amounts of any advances and (b) $10.0
million; (ii) Available Takeout Commitment Amount (as defined therein) in an
amount equal to or greater than $200.0 million; and (iii) EBITDA (as defined
therein) of at least $5.0 million for the six-month period ending on the last
day of each month. The Loan and Security Agreement contains customary events of
default. SVB could elect to accelerate the maturity of the loans and/or
terminate the commitments under the Loan and Security Agreement upon the
occurrence and during the continuation of an event of default, and Sunlight
could be required to repay all amounts outstanding under the Loan and Security
Agreement. In connection with the transition of accounts to SVB, Sunlight
experienced a technical default that was waived by SVB. Otherwise, no defaults
or events of default have occurred as of the date of this filing.

Other changes in financial situation

Year ended December 31, 2021


In addition to the changes in Sunlight's financial position from December 31,
2020 to December 31, 2021 described in "-Results of Operations" and "-Cash Flow
and Liquidity Analysis," the following activities also occurred:

•Restricted cash. The cash Sunlight holds subject to contractual restrictions
decreased by $1.1 million resulting from a $0.6 million decrease in cash
temporarily held by Sunlight in connection with Sunlight's administration of
loan participations on behalf of a third party.

•Goodwill. As result of the Business Combination, Sunlight recorded $670.5
million of goodwill, net of purchase price adjustments, representing the excess
of the purchase price over the estimated fair values of the identifiable net
assets acquired. As of December 31, 2021, as result of Sunlight's annual
goodwill impairment analysis, Sunlight recorded an impairment charge of $224.7
million.

•Intangible Assets. As result of the Business Combination and the related
purchase price allocation, Sunlight identified the intangible assets in related
to contractor relationships, capital provider relationships, trademarks, and
developed technology, recorded at a total fair value of $407.6 million at the
Closing Date of the Business Combination, and carried at a value net of
amortization over their estimated useful lives on a straight-line basis.

•Noncontrolling Interest. As result of the Business Combination and the revised
organizational structure, certain unitholders of Sunlight Financial LLC received
a new class of common units in Sunlight, the Class EX units ("Class EX Units"),
as well as one share of Class C Common Stock of the Company, to replace their
current holding of Class C units in Sunlight Financial LLC. The Class EX Units
represent noncontrolling interests in Sunlight Financial LLC, valued at $427.2
million at the Closing Date.


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Other Factors Affecting Liquidity and Capital Resources

Distribution to Unitholders

Predecessor


Pursuant to the Fourth Amended and Restated Limited Liability Company Agreement
of Sunlight Financial LLC, dated as of May 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 of
Sunlight 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
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 of Sunlight 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 that
Sunlight Financial LLC is required to make distributions to the extent and in an
amount such that the Sunlight Unitholders, including Sunlight 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 of Sunlight
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 extent Sunlight Financial Holdings Inc. uses any excess cash it receives to
reinvest in Sunlight Financial LLC for additional Sunlight Units.

The holders of Sunlight Class X Units and Sunlight Class EX Units, including SL
Financial Holdings Inc., will generally incur U.S. federal, state and local
income taxes on their share of any net taxable income of Sunlight Financial LLC.
Net income and losses of Sunlight Financial LLC generally will be allocated to
the holders of Sunlight Class X Units and Sunlight Class EX Units on a pro rata
basis in accordance with their respective percentage ownership of Sunlight Class
X Units and Sunlight Class EX Units, subject to requirements under U.S. federal
income tax law that certain items of income, gain, loss or deduction be
allocated disproportionately in certain circumstances. To the extent that
Sunlight has legally available cash (including borrowings available under the
new credit facility or other debt arrangements) and subject to the terms of any
current or future debt instruments, the Sunlight A&R LLC Agreement requires
Sunlight Financial LLC to make pro rata cash distributions to all holders of
Sunlight Units, including Sunlight Financial Holdings Inc., (1) first, in an
amount sufficient to allow Sunlight 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 of SL Financial
Holdings Inc., cause Sunlight Financial LLC to become insolvent within the
twelve (12) month period following the date of such distribution, and (2)
thereafter to the extent necessary, in an amount generally intended to allow
Sunlight Unitholders, including Sunlight Financial Holdings Inc., to satisfy
their respective income tax liabilities with respect to their allocable share of
income of Sunlight 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 by Sunlight Financial
LLC.

Tax Receivables Agreement (Successor)


On the Closing Date, Sunlight entered into the Tax Receivable Agreement with the
TRA Holders and the Agent (as defined therein). The Tax Receivable Agreement
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, in
U.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 (i) certain increases in tax basis that
occur as a result of Sunlight's acquisition (or deemed acquisition
                                       54
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for U.S. federal income tax purposes) of all or a portion of a TRA Holder's
Sunlight Class EX Units upon the exercise of the redemption or call rights set
forth in the Sunlight A&R LLC Agreement and (ii) 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 Tax Receivable Agreement 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 Tax Receivable
Agreement), 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 Tax
Receivable Agreement (based upon certain assumptions and deemed events set forth
in the Tax Receivable Agreement), 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: (i)
101 N. Tryon Street, Suite 1000, Charlotte, North Carolina 28246 (the "North
Carolina Office Space") and (ii) 234 West 39th Street, 7th Floor, New York, New
York 10018 (the "New York Office Space"). The operating lease rent expense for
the North Carolina Office Space was $0.4 million and $0.3 million for the
Successor Period and Predecessor Annual Period, respectively, and $0.6 million
for the year ended December 31, 2020. The lease for the North Carolina Office
Space will expire in June 2029. The operating lease rent expense for the New
York Office Space was $0.2 million and $0.2 million for the Successor Period and
Predecessor Annual Period, respectively, and $0.4 million for the year ended
December 31, 2020. The lease for the New York Office Space is scheduled to
expire in October 2022.

Available cash and capital resources


As of December 31, 2021, Sunlight's cash and cash equivalents and restricted
cash was $93.9 million. The restricted cash held by Sunlight primarily relates
to a cash reserve that Sunlight's bank partner requires to secure Sunlight's
short-term guarantee obligations of certain loans temporarily held by Sunlight's
bank partner. The contractual cash reserve is the difference between (a) the
average original issue discount percentage of loans originated and held by
Sunlight's bank partner and (b) a contractual minimum original issue discount
percentage, multiplied by the balance of the loans on the bank partner's balance
sheet at a given time. Sunlight guarantees the loans between the time the bank
partner originates such loans and the time Sunlight arranges the sale of such
loans to a Sunlight indirect channel capital provider.

Sunlight's liquidity and its ability to fund its capital requirements is
dependent on its future financial performance, which is subject to general
economic, financial and other factors that are beyond its control and many of
which are described under Item 1A. "Risk Factors" in this Annual Report on Form
10-K. 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.

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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 Successor Period, Predecessor Annual
Period, the Combined Annual Period, and year ended December 31, 2020 (in
thousands):

                                                       Successor                               Predecessor                                   Predecessor
                                                    For the Period                           For the Period
                                                   July 10, 2021 to                          January 1, 2021       Combined Annual       For the Year Ended
                                                   December 31, 2021                         to July 9, 2021           Period             December 31, 2020

Net Income (Loss)                                  $     (247,084)                           $      6,131          $   (240,953)         $         

10,624

Adjustments for adjusted net income (loss)
Amortization of Business Combination
intangibles                                                43,152                                       -                43,152                         -
Non-cash change in financial instruments                  (23,039)                                  5,547               (17,492)                    4,709
Intangible impairment                                     224,701                                       -               224,701                         -
Accelerated postcombination compensation
expense                                                    20,979                                       -                20,979                         -
Expenses from the Business Combination                      3,080                                   7,011                10,091                       878
Adjusted Net Income (Loss)                                 21,789                                  18,689                40,478                    16,211
Adjustments for adjusted EBITDA
Depreciation and amortization                                 237                                   1,688                 1,925                     3,231
Interest expense                                              554                                     604                 1,158                       829
Income tax expense (benefit)                               (3,504)                                      -                (3,504)                        -

Equity-based compensation                                   8,667                                      18                 8,685                       126
Fees paid to brokers                                        1,901                                   2,261                 4,162                     3,561

Adjusted EBITDA                                            29,644                                  23,260                52,904                    23,958
Adjustments for net cash provided by (used
in) operating activities
Interest expense                                             (554)                                   (604)               (1,158)                     

(829)

Income tax benefit (expense)                                3,504                                       -                 3,504                         -
Fees paid to brokers                                       (1,901)                                 (2,261)               (4,162)                   (3,561)
Expenses from the Business Combination                     (3,080)                                 (7,011)              (10,091)                     (878)
Provision for losses                                        1,217                                   1,172                 2,389                     1,350
Changes in operating capital and other                    (47,395)                                   (200)              (47,595)                  

(15,015)

Net Cash Provided by (Used in) Operating
Activities                                                (18,565)                                 14,356                (4,209)                    

5,025

Adjustments for free cash flow(a)
Capital expenditures                                       (1,873)                                 (1,295)               (3,168)                   

(3,280)

Changes in advances, net of funding
commitments                                                22,956                                   6,013                28,969                    

19,000

Changes in restricted cash                                  1,826                                    (108)                1,718                    

(1,193)


Payments of Business Combination costs                      1,770                                   6,549                 8,319                         -
Other changes in working capital                           13,310                                    (590)               12,720                   (10,552)
Free Cash Flow                                     $       19,424                            $     24,925          $     44,349          $          9,000

a.Sunlight has updated adjustments to net cash provided by operating activities for the period January 1, 2021 by July 9, 2021 to reflect certain excluded items.

The following table provides a calculation of adjusted net earnings per diluted Class A share (in thousands of dollars, except per share amounts):

                                                                                          Successor
                                                                                       For the Period
                                                                                        July 10, 2021
                                                                                       to December 31,
                                                                                            2021

Adjusted Net Income (Loss)                                                             $     21,789

Adjusted Net Income (Loss) per Class A Share, Diluted                                  $       0.13

Weighted-average Class A Shares
Class A Shares                                                                              86,373,596
Class EX Units                                                                              47,595,455
Restricted Stock Units                                                                       2,085,501
Warrants                                                                                    27,777,780
                                                                                           163,832,332



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Significant 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 that Sunlight believes are reasonable under the circumstances. The results involve judgments about the carrying values ​​of assets and liabilities that are not readily apparent from other sources. If Sunlight’s assumptions or conditions change, the actual results of Sunlight’s reports may differ materially from those estimates.


Sunlight believes the estimates and assumptions underlying its consolidated
financial statements are reasonable and supportable based on the information
available as of December 31, 2021; however, uncertainty over the ultimate impact
COVID-19 will have on the global economy generally, and on Sunlight's business,
makes any estimates and assumptions as of December 31, 2021 inherently less
certain than they would be absent the current and potential impacts of COVID-19.

See Note 2 "-Summary of Significant Accounting Policies" in the notes
accompanying Sunlight's financial statements included elsewhere herein for a
summary of Sunlight's significant accounting policies, and discussion of recent
accounting pronouncements. Sunlight believes that the following discussion
addresses Sunlight's most critical accounting policies, which are those that are
most important to the portrayal of Sunlight's financial condition and results of
operations and require management's most difficult, subjective and complex
judgments.

Platform fees


Sunlight is a business-to-business-to-consumer, technology-enabled POS financing
platform that provides residential solar and home improvement contractors the
ability to offer seamless POS financing to their customers when purchasing
residential solar systems or other home improvements. The resulting loans are
funded by Sunlight's network of capital providers who, by partnering with
Sunlight, gain access to a difficult-to-reach loan market, best-in-class
consumer credit underwriting and attractive risk adjusted returns. These loans
are facilitated by Orange®, through which Sunlight offers instant credit
decisions to homeowners nationwide at the POS on behalf of Sunlight's various
capital providers. Sunlight recognizes platform fees as revenues at the time
that direct channel partners or indirect channel loan purchasers obtain control
of the service provided to facilitate their origination or purchase of a loan,
which is no earlier than when Sunlight delivers loan documentation to the
customer. Sunlight wholly satisfies its performance obligation to direct channel
partners, bank partner and indirect channel loan purchasers upon origination or
purchase of a loan. Sunlight considers rebates offered by Sunlight to certain
contractors in exchange for volume commitments as variable components to
transaction prices; such variability resolves upon the contractor's satisfaction
of their volume commitment. For outstanding volume commitments that require the
contractor to deliver future loan volume, Sunlight reduces platform fee revenues
it recognizes based on its estimates of the contractor's delivery of future loan
volume, which require significant judgment and are based, in part, upon the
contractor's historical volume delivery and Sunlight's estimates of the
contractor's ability and likelihood to deliver future volume.

Sunlight's contract pursuant to which its intermediary bank partner originates
home improvement loans is considered a derivative under GAAP. As such,
Sunlight's revenues exclude the platform fees that Sunlight earns in connection
with this contract. Instead, Sunlight estimates the fair value of the contract
derivative based upon the present value of net cash flows Sunlight expects to
collect under the contract, which predominately consist of the difference of the
proceeds Sunlight expects to collect from an indirect channel capital provider
at purchase of the loans by such capital provider (the principal balance of
loans purchased less the relevant capital provider discount plus unpaid accrued
interest on the loans to the date of purchase) and any amounts Sunlight owes to
its bank partner in connection with such loans. Upon sale, Sunlight reverses the
unrealized estimated fair value of the contract derivative for the loans sold
and recognizes the net cash Sunlight receives from the sale within "Realized
Gains on Contract Derivative, Net" in Sunlight's consolidated statement of
operations.

Sunlight is obligated to repurchase non-performing loans originated by its bank
partner from the date of origination to the date the loans are purchased from
Sunlight's bank partner by a Sunlight indirect channel capital provider.
Sunlight does not record loans originated by its bank partner on its
consolidated balance sheets (as Sunlight is not the originator of the
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loans), but Sunlight does record a liability for the losses Sunlight reasonably
expects to incur in connection with Sunlight's guarantee of its bank partner.
Sunlight's measurement of this liability is subject to significant judgement
using historical loss experiences to estimate the likelihood that the guaranteed
loans will default prior to sale and the severity of the loss Sunlight expects
to incur. At December 31, 2021 and December 31, 2020, the unpaid principal
balance of loans, net of applicable discounts, for guaranteed loans held by
Sunlight's bank partner and delinquent more than 90 days was $0.1 million and
$0.6 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%) 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 (i)
when either principal or interest payments are 90 days or more past due based on
contractual terms or (ii) 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 entrepreneurs under Sunlight’s Entrepreneur Advance Program or Pre-Financing Program are created at par and do not carry, and therefore do not accrue, interest income.

Allowance for losses


The allowance for financing receivable losses represents Sunlight's best
estimate of probable credit losses arising from financing receivables.
Sunlight's allowance for financing receivable losses is evaluated at least
quarterly, and based upon management's assessment of several factors including
historical losses, changes in the nature and volume of financing receivables,
overall portfolio quality, and existing economic conditions that may affect the
customer's ability to pay. Although management uses the best information
available, the evaluation of these indicators of impairment requires significant
judgment by Sunlight's management to determine whether failure to collect
contractual amounts is probable as well as in estimating the resulting loss
allowance. Future adjustments to the allowance for financing receivable losses
may be necessary due to economic, operating, regulatory and other conditions
beyond Sunlight's control. Sunlight believes that its allowance for financing
receivable losses is adequate to cover probable loan losses. However, actual
losses, if any, could materially differ from management's estimates.

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.
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Sunlight accounts for uncertain tax positions by reporting a liability for unrecognizable tax benefits resulting from uncertain tax positions taken or to be taken on a tax return. Sunlight recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.


Judgment is required in assessing the future tax consequences of events that
have been recognized in Sunlight's consolidated financial statements or tax
returns. Variations in the actual outcome of these future tax consequences could
materially impact Sunlight's consolidated financial statements.

Derivative asset


Sunlight's contract under which Sunlight arranges loans for the purchase and
installation of home improvements other than residential solar energy systems
contain features determined to be embedded derivatives from its host. Embedded
derivatives are separated from the host contract and carried at fair value when
the embedded derivative possesses economic characteristics that are not clearly
and closely related to the economic characteristics of the host contract and a
separate, standalone instrument with the same terms would qualify as a
derivative instrument. The derivative is measured both initially and in
subsequent periods at fair value, with changes in fair value recognized on the
statement of operations.

Sunlight uses a discounted cash flow model to value its derivative asset using
various key assumptions, such as estimation of the timing and probability of
expected future cash flows and selection of a discount rate applied to future
cash flows using Sunlight's implied credit risk.

Sunlight Rewards™ Program


The Sunlight Rewards™ Program is a proprietary loyalty program that Sunlight
offers to salespeople selling residential solar systems for Sunlight's network
of contractors. Sunlight records a contingent liability under Financial
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 at December 31, 2021 and December 31, 2020,
Sunlight would pay $3.0 million and $1.3 million, respectively, of which
Sunlight recorded liabilities of $1.8 million and $0.8 million.

Trade suit


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.

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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 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 to Sunlight’s Consolidated Financial Statements.

Related party transactions

See Note 9 “-Transactions with Affiliates and Affiliated Entities” in the Notes to Sunlight’s Consolidated Financial Statements.

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