Fair Value Measurement

3 Months Ended

Mar. 31, 2022

The carrying values and fair values of Sunlight’s assets and liabilities recorded at fair value on a recurring or non-recurring basis, as well as other financial instruments for which fair value is disclosed, at March 31, 2022 and December 31, 2021 were as follows:


	Principal Balance or Notional Amount		Carrying Value		Fair Value
					Level 1		Level 2		Level 3		Total
March 31, 2022 (Successor)
Assets:
Financing Receivables:
Loan participations, held-for-investment	$	4,280	$	3,869	$	—	$	—	$	3,770	$	3,770
Loans, held-for-investment	288		257		—		—		240		240
Cash and cash equivalents	69,574		69,574		69,574		—		—		69,574
Restricted cash	2,355		2,355		2,355		—		—		2,355
Contract derivatives	71,356		1,184		—		—		1,184		1,184

Liabilities:
Debt	20,613		20,613		—		—		20,613		20,613
Warrants	312,225		23,891		—		—		23,891		23,891
Guarantee obligation	n.a.		408		—		—		408		408

December 31, 2021 (Successor)
Assets:
Financing Receivables:
Loan participations, held-for-investment	4,584		4,051		—		—		4,260		4,260
Loans, held-for-investment	291		262		—		—		250		250
Cash and cash equivalents	91,882		91,882		91,882		—		—		91,882
Restricted cash	2,018		2,018		2,018		—		—		2,018
Contract derivatives	76,770		1,411		—		—		1,411		1,411

Liabilities:
Debt	20,613		20,613		—		—		20,613		20,613
Warrants	312,225		19,007		—		—		19,007		19,007
Guarantee obligation	n.a.		418		—		—		418		418

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

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


	Assets		Liabilities
	Contract Derivatives		Warrants
December 31, 2021 (Successor)	$	1,411	$	19,007









Transfers(a)
Transfers to Level 3	—		—
Transfers from Level 3	—		—
Gains (losses) included in net income(b)
Included in change in fair value of warrant liabilities	—		4,884
Included in change in fair value of contract derivatives, net	(227)		—
Included in realized gains on contract derivatives, net	1,909		—
Payments, net	(1,909)		—
March 31, 2022 (Successor)	$	1,184	$	23,891

December 31, 2020 (Predecessor)	$	1,435	$	5,643
Transfers(a)
Transfers to Level 3	—		—
Transfers from Level 3	—		—
Gains (losses) included in net income(b)
Included in change in fair value of warrant liabilities	—		2,614
Included in change in fair value of contract derivatives, net	(856)		—
Included in realized gains on contract derivatives, net	2,267		—
Payments, net	(2,267)		—
March 31, 2021 (Predecessor)	$	579	$	8,257

a.Transfers are assumed to occur at the beginning of the respective period, except transfers that occurred at the Closing Date of the Business Combination.

b.Changes in the fair value of liabilities shown as losses included in net income.

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


Contract Derivative						Significant Inputs
1						Inputs include expected cash flows from the financing and sale of applicable Indirect Channel Loans and discount rates that market participants would expect for the Indirect Channel Loans. Significant increases (decreases) in the discount rates in isolation would result in a significantly lower (higher) fair value measurement.
2						Inputs include expected prepayment rate of applicable Indirect Channel Loans sold to the Indirect Channel Loan Purchaser. Significant increases (decreases) in the expected prepayment rate in isolation would result in a significantly higher (lower) fair value measurement.

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


	Successor
	March 31, 2022		December 31, 2021
Contract Derivative 1
Discount rate	10.4	%	10.0	%
Weighted average life (in years)	0.2		0.2
Contract Derivative 2
Expected prepayment rate	75.0	%	75.0	%

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


	Successor
Assumption	March 31, 2022

Class A common share value per share(a)	$	5.04
Implied volatility(a)	53.9		%
Dividend yield(b)	—		%
Time to expiry (in years)(a)	4.3
Risk free rate(a)	2.5		%

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

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

Predecessor

To determine the grant-date value of each Class C Unit and LTIP Unit granted prior to the Business Combination, an independent third-party valuation firm (a) used an income valuation approach to determine the fair value of Sunlight’s equity on a quarterly basis and (b) allocated that fair value to each class of interest in Sunlight’s equity and warrants thereon on a per unit basis using an option pricing method. Sunlight determined the grant-date fair value of an award using the value at the quarter-end closest to the grant date of the award. Significant increases (decreases) in the cost of equity, volatility, tax rate, and equity term in isolation would result in a significantly lower (higher) fair value measurement.

To determine the fair value of warrants prior to the Business Combination, Sunlight applied a hybrid probability-weighted expected return valuation method, which incorporated two scenarios: (a) a scenario using a market valuation approach that assumed Sunlight completed the Business Combination and (b) a remain private scenario that used the aforementioned income valuation approach.

- Definition

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

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