NICHOLAS FINANCIAL INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED September 30, 2022


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

FOR THE TRANSITION PERIOD FROM TO .

Commission file number: 0-26680

NICHOLAS FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

British Columbia, Canada

59-2506879

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)


2454 McMullen Booth Road, Building C
Clearwater, Florida		33759
(Address of Principal Executive Offices)		(Zip Code)

(727) 726-0763

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

NICK

NASDAQ

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

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

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


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

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

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

As of November 11, 2022, approximately 12.7 million common shares, no par value, of the Registrant were outstanding (of which 5.3 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and 7.3 million shares were entitled to vote).

NICHOLAS FINANCIAL, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page

Part I .	Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2022 and March 31, 2022	1
	Condensed Consolidated Statements of Income for the three and six months ended September 30, 2022 and 2021	2
	Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended September 30, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2022 and 2021	4
	Notes to the Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28

Part II .	Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 6.	Exhibits	30

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)


	September 30, 2022 (Unaudited)			March 31, 2022
Assets
Cash	$	1,503		$	4,775
Finance receivables, net		161,696			168,600
Repossessed assets		1,208			658
Operating lease right-of-use assets		3,282			4,277
Prepaid expenses and other assets		1,146			1,103
Income taxes receivable		961			989
Property and equipment, net		1,468			1,783
Deferred income taxes		3,022			1,385
Total assets	$	174,286		$	183,570
Liabilities and shareholders’ equity
Credit facility, net of debt issuance costs	$	59,349		$	54,813
Note payable		-			3,244
Net long-term debt		59,349			58,057
Operating lease liabilities		3,441			4,410
Accounts payable and accrued expenses		2,458			4,717
Total liabilities		65,248			67,184
Commitments and contingencies (see Note 10)
Shareholders’ equity
Preferred stock, no par: 5,000 shares authorized; none issued		—			—
Common stock, no par: 50,000 shares authorized; 12,658 and 12,673 shares issued, respectively; and 7,309 and 7,546 shares outstanding, respectively		35,172			35,292
Treasury stock: 5,349 and 5,127 common shares, at cost, respectively		(76,684	)		(74,405	)
Retained earnings		150,550			155,499
Total shareholders’ equity		109,038			116,386
Total liabilities and shareholders’ equity	$	174,286		$	183,570

See Notes to the Condensed Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,					Six Months Ended September 30,
	2022			2021		2022			2021
Revenue:
Interest and fee income on finance receivables	$	12,249		$	12,572	$	24,313		$	25,166
Net gain on equity investments		853			—		66			—
Total revenue		13,102			12,572		24,379			25,166
Expenses:
Marketing		325			373		909			950
Administrative		6,910			7,448		15,670			15,143
Provision for credit losses		8,906			1,395		12,550			2,125
Depreciation and amortization		116			96		241			172
Interest expense		975			1,121		1,543			2,309
Total expenses		17,232			10,433		30,913			20,699
(Loss) income before income taxes		(4,130	)		2,139		(6,534	)		4,467
Income tax (benefit) expense		(958	)		536		(1,585	)		1,135
Net (loss) income	$	(3,172	)	$	1,603	$	(4,949	)	$	3,332
Net (loss) income per share:
Basic	$	(0.44	)	$	0.21	$	(0.68	)	$	0.44
Diluted	$	(0.44	)	$	0.21	$	(0.68	)	$	0.44

See Notes to the Condensed Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

(In thousands)


	Three Months Ended September 30, 2022
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at June 30, 2022		7,315		$	35,143		$	(76,543	)	$	153,722		$	112,322
Issuance of restricted stock awards		11			—			—			—			—
Share-based compensation		—			29			—			—			29
Treasury stock		(17	)		—			(141	)		—			(141	)
Net income		—			—			—			(3,172	)		(3,172	)
Balance at September 30, 2022		7,309		$	35,172		$	(76,684	)	$	150,550		$	109,038

	Three Months Ended September 30, 2021
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at June 30, 2021		7,650		$	35,110		$	(73,008	)	$	154,230		$	116,332
Issuance of restricted stock awards		10			—			—			—			—
Share-based compensation		—			41			—			—			41
Treasury stock		(77	)		—			(887	)		—			(887	)
Net income		—			—			—			1,603			1,603
Balance at September 30, 2021		7,583		$	35,151		$	(73,895	)	$	155,833		$	117,089

	Six Months Ended September 30, 2022
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at March 31, 2022		7,546		$	35,292		$	(74,405	)	$	155,499		$	116,386
Issuance of restricted stock awards		11			—			—			—			—
Cancellation of restricted stock awards		(26	)		(175	)		—			—			(175	)
Share-based compensation		—			55			—			—			55
Treasury stock		(222	)		—			(2,279	)		—			(2,279	)
Net income		—			—			—			(4,949	)		(4,949	)
Balance at September 30, 2022		7,309		$	35,172		$	(76,684	)	$	150,550		$	109,038

	Six Months Ended September 30, 2021
	Common Stock												Total
	Shares			Amount			Treasury Stock			Retained Earnings			Shareholders' Equity
Balance at March 31, 2021		7,708		$	35,064		$	(72,343	)	$	152,501		$	115,222
Issuance of restricted stock awards		12			—			—			—			—
Share-based compensation		—			87			—			—			87
Treasury stock		(137	)		—			(1,552	)		—			(1,552	)
Net income		—			—			—			3,332			3,332
Balance at September 30, 2021		7,583		$	35,151		$	(73,895	)	$	155,833		$	117,089

See Notes to the Condensed Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Six Months Ended September 30,
	2022			2021
Cash flows from operating activities
Net (loss) income	$	(4,949	)	$	3,332
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		241			172
Amortization of debt issuance costs		36			215
Non-cash lease expense		25			(98	)
Loss on sale of property and equipment		(66	)		(2	)
Net gain on equity investments		(66	)		—
Provision for credit losses		12,550			2,125
Amortization of dealer discounts		(3,185	)		(3,237	)
Amortization of insurance and fees commissions		(1,397	)		(1,344	)
Accretion of purchase price discount		(88	)		(116	)
Deferred income taxes		(1,637	)		561
Cancellations of restricted stock awards		(175	)		—
Share-based compensation		55			88
Changes in operating assets and liabilities:
Accrued interest receivable		(39	)		(120	)
Prepaid expenses and other assets		(43	)		78
Accounts payable and accrued expenses		(2,259	)		(593	)
Income taxes receivable		27			413
Net cash (used in) provided by operating activities		(970	)		1,474
Cash flows from investing activities
Purchase and origination of finance receivables		(56,178	)		(51,962	)
Principal payments received on finance receivables and proceeds from repossessed assets sales		54,693			59,237
Purchase of equity investments		(7,237	)		—
Proceeds from sale of equity investments		7,303			—
Proceeds from sale of property and equipment		140			—
Purchases of property and equipment		—			(553	)
Net cash (used in) provided by investing activities		(1,279	)		6,722
Cash flows from financing activities
Repayments on credit facility		(13,000	)		(16,770	)
Proceeds from the credit facility		17,500			—
Repayment of PPP Loan		(3,244	)		—
Repurchases of treasury stock		(2,279	)		(1,552	)
Net cash used in financing activities		(1,023	)		(18,322	)
Net decrease in cash and restricted cash		(3,272	)		(10,126	)
Cash and restricted cash at the beginning of period		4,775			32,977
Cash and restricted cash at the end of period	$	1,503		$	22,851
Supplemental disclosures, including noncash activities:
Interest paid		1,375			2,160
Income taxes paid		24			161
Transfer of finance receivables to repossessed assets		4,320			2,948
Leased assets obtained in exchange for new operating lease liabilities		163			1,693

See Notes to the Condensed Consolidated Financial Statements.

Notes to the Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada” or the Company) is a Canadian holding company incorporated under the laws of British Columbia with several wholly-owned United States subsidiaries, including Nicholas Financial, Inc., a Florida corporation (“NFI”). The accompanying condensed consolidated balance sheet as of September 30, 2022, and the accompanying unaudited interim consolidated financial statements of Nicholas Financial – Canada, and its wholly-owned subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, with the instructions to Form 10-Q pursuant to the Securities Exchange Act of 1934, as amended, and with Article 8 of Regulation S-X thereunder. Accordingly, they do not include all of the information and notes to the consolidated financial statements required by U.S. GAAP for complete consolidated financial statements, although the Company believes that the disclosures made are adequate to ensure the information is not misleading. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2023. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022 as filed with the Securities and Exchange Commission on June 24, 2022. The March 31, 2022 consolidated balance sheet included herein has been derived from the March 31, 2022 audited consolidated balance sheet included in the aforementioned Form 10-K.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on finance receivables.

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported net income (loss).

Note 2. Revenue Recognition

Interest income on finance receivables is recognized using the interest method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. The Company reverses the accrual of interest income when the loan is contractually delinquent 61 days or more.

The Company defines a non-performing asset as one that is 61 or more days past due, a Chapter 7 bankruptcy account, or a Chapter 13 bankruptcy account that has not been confirmed by the courts, for which the accrual of interest income is suspended. Upon confirmation of a Chapter 13 bankruptcy account (BK13), the account is immediately charged-off. Upon notification of a Chapter 7 bankruptcy, an account is monitored for collectability. In the event the debtors’ balance is reduced by the bankruptcy court, the Company records a loss equal to the amount of principal balance reduction. The remaining balance is reduced as payments are received. In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

A dealer discount represents the difference between the finance receivable of a Contract, and the amount of money the Company actually pays for the Contract. The discount negotiated by the Company is a function of the lender, the wholesale value of the vehicle and competition in any given market. In making decisions regarding the purchase of a particular Contract the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer, and the value of the automobile in relation to the purchase price and the term of the Contract.

The dealer discount is amortized as an adjustment to yield using the interest method over the life of the loan. The average dealer discount associated with new volume for the three months ended September 30, 2022 and 2021 was 6.4% and 6.7%, respectively, in relation to the total amount financed.

Unearned insurance and fee commissions consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit life insurance,

involuntary unemployment insurance coverage, and forced placed automobile insurance. These commissions are amortized over the life of the contract using the effective interest method.

Note 3. Earnings Per Share

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. Earnings per share is calculated using the two-class method, as such awards are more dilutive under this method than the treasury stock method. Basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. The Company's participating securities are non-vested restricted shares which are not required to share losses, and accordingly, are not allocated losses in periods of net loss. Diluted earnings per share includes the dilutive effect of additional potential common shares from stock compensation awards. Earnings per share have been computed based on the following weighted average number of common shares outstanding:


	Three months ended September 30, (In thousands, except per share amounts)						Six months ended September 30, (In thousands, except per share amounts)
	2022			2021			2022			2021
Numerator
Net (loss) income per consolidated statements of income	$	(3,172	)	$	1,603		$	(4,949	)	$	3,332
Percentage allocated to shareholders *		100	%		100	%		100	%		100	%
Numerator for basic and diluted earnings per share	$	(3,172	)	$	1,596		$	(4,949	)	$	3,319

Denominator
Denominator for basic earnings per share - weighted-average shares outstanding		7,273			7,620			7,385			7,622
Dilutive effect of stock options		—			—			—			—
Denominator for diluted earnings per share		7,273			7,620			7,385			7,622

Per share income from continuing operations
Basic	$	(0.44	)	$	0.21		$	(0.68	)	$	0.44
Diluted		(0.44	)		0.21			(0.68	)		0.44

* Basic weighted-average shares outstanding		7,273			7,620			7,385			7,622
Basic weighted-average shares outstanding and unvested restricted stock units expected to vest		7,273			7,652			7,385			7,651
Percentage allocated to shareholders		100	%		100	%		100	%		100	%

Note 4. Finance Receivables

Finance Receivables Portfolio, net

Finance receivables consist of Contracts and Direct Loans and are detailed as follows:


	(In thousands)
	September 30, 2022			March 31, 2022
Finance receivables	$	175,406		$	178,786
Accrued interest receivable		2,354			2,315
Unearned dealer discounts		(6,535	)		(6,894	)
Unearned insurance commissions and fees		(2,313	)		(2,446	)
Purchase price discount		(125	)		(212	)
Finance receivables, net of unearned		168,787			171,549
Allowance for credit losses		(7,091	)		(2,949	)
Finance receivables, net	$	161,696		$	168,600

Contracts and Direct Loans each comprise a portfolio segment. The following tables present selected information on the entire portfolio of the Company:


	As of September 30,
Contract Portfolio	2022			2021
Average APR		22.8	%		22.9	%
Average discount		7.2	%		7.5	%
Average term (months)		50			50
Number of active contracts		18,059			20,927


	As of September 30,
Direct Loan Portfolio	2022			2021
Average APR		29.7	%		29.0	%
Average term (months)		27			27
Number of active contracts		7,264			5,006

The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The Contracts are predominantly for used vehicles. As of September 30, 2022, the average model year of vehicles collateralizing the portfolio was a 2012 vehicle.

Direct Loans were typically ranging from $500 to $15 thousand and were generally secured by a lien on an automobile, watercraft or other permissible tangible personal property. The majority of Direct Loans was originated with current or former customers under the Company’s automobile financing program. The typical Direct Loan represented a better credit risk than the typical Contract due to the customer’s prior payment history with the Company; however, the underlying collateral was “typically” less valuable. In deciding whether to make a loan, the Company considered the individual’s credit history, job stability, income, and impressions created during a personal interview with a Company loan officer. Additionally, because most of the Direct Loans made by the Company to date have been made to current or former customers, the payment history of the borrower was a significant factor in making the loan decision. As of September 30, 2022, loans made by the Company pursuant to its Direct Loan program constituted approximately 16% of the aggregate principal amount of the Company’s loan portfolio. Changes in the allowance for credit losses for both Contracts and Direct Loans were driven primarily by consideration of the composition of the portfolio, current economic conditions, the estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and adequacy of the allowance for credit losses. If the allowance for credit losses was determined to be inadequate, then an additional charge to the provision would be recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. Additionally, credit loss trends over several reporting periods were utilized in estimating losses and overall portfolio performance. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation was overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Each portfolio segment consists of smaller balance homogeneous loans which are collectively evaluated for impairment.

Allowance for Credit Losses

The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts and Direct Loans for the three months ended September 30, 2022 and 2021 (in thousands):


	Three months ended September 30, 2022									Six months ended September 30, 2022
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	2,460		$	1,226		$	3,686		$	1,960		$	989		$	2,949
Provision for credit losses		7,511			1,395			8,906			10,615			1,935			12,550
Charge-offs		(6,144	)		(645	)		(6,789	)		(10,190	)		(994	)		(11,184	)
Recoveries		1,261			27			1,288			2,703			73			2,776
Balance at September 30, 2022	$	5,088		$	2,003		$	7,091		$	5,088		$	2,003		$	7,091

	Three months ended September 30, 2021									Six months ended September 30, 2021
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of period	$	5,268		$	(18	)	$	5,250		$	6,001		$	153		$	6,154
Provision for credit losses		460			935			1,395			1,190			935			2,125
Charge-offs		(3,128	)		(182	)		(3,310	)		(5,901	)		(373	)		(6,274	)
Recoveries		1,116			11			1,127			2,426			31			2,457
Balance at September 30, 2021	$	3,716		$	746		$	4,462		$	3,716		$	746		$	4,462

The Company uses the trailing twelve-month charge-offs, and applies this calculated percentage to ending finance receivables to calculate estimated probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management’s total estimate of probable credit losses and its assessment of the overall adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believes that the allowance for credit losses reflects the current trends of incurred losses within the portfolio and is better aligned with the portfolio’s performance indicators.

The following table is an assessment of the credit quality by creditworthiness:


	(In thousands)
	September 30, 2022						September 30, 2021
	Contracts		Direct Loans		Total		Contracts		Direct Loans		Total
Performing accounts	$	140,921	$	26,550	$	167,471	$	153,991	$	18,646	$	172,637
Non-performing accounts		6,828		827		7,655		3,949		198		4,147
Total		147,749		27,377		175,126		157,940		18,844		176,784
Chapter 13 bankruptcy accounts		246		34		280		214		15		229
Finance receivables	$	147,995	$	27,411	$	175,406	$	158,154	$	18,859	$	177,013

A performing account is defined as an account that is less than 61 days past due. The Company defines an automobile contract as delinquent when more than 10% of a payment contractually due by a certain date has not been paid immediately by the following due date, which date may have been extended within limits specified in the servicing agreements or as a result of a deferral. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable.

In certain circumstances, the Company will grant obligors one-month payment extensions. The only modification of terms in those circumstances is to advance the obligor’s next due date by one month and extend the maturity date of the receivable. There are no other concessions, such as a reduction in interest rate, or forgiveness of principal or of accrued interest. Accordingly, the Company considers such extensions to be insignificant delays in payments rather than troubled debt restructurings.

A non-performing account is defined as an account that is contractually delinquent for 61 days or more or is a Chapter 13 bankruptcy account for which the accrual interest income has been suspended. The Company’s charge-off policy is to charge off an account in the month the contract becomes 121 days contractually delinquent.

In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and Direct Loans, excluding Chapter 13 bankruptcy accounts:


	Contracts
	(In thousands, except percentages)
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+			Total
September 30, 2022	$	147,749	$	9,769		$	4,492		$	2,303		$	33		$	16,597
				6.61	%		3.04	%		1.56	%		0.02	%		11.23	%

March 31, 2022	$	154,143	$	7,097		$	2,936		$	1,183		$	48		$	11,264
				4.60	%		1.90	%		0.77	%		0.03	%		7.31	%

September 30, 2021	$	157,940	$	7,990		$	2,905		$	1,024		$	19		$	11,938
				5.06	%		1.84	%		0.65	%		0.01	%		7.56	%


	Direct Loans
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+			Total
September 30, 2022	$	27,377	$	1,169		$	517		$	302		$	8		$	1,996
				4.27	%		1.89	%		1.10	%		0.03	%		7.29	%

March 31, 2022	$	24,376	$	607		$	197		$	77		$	—		$	881
				2.49	%		0.81	%		0.32	%		—			3.61	%

September 30, 2021	$	18,844	$	416		$	145		$	53		$	—		$	614
				2.21	%		0.77	%		0.28	%		—			3.26	%

Note 5. Credit Facility

Wells Fargo Line of Credit

On November 5, 2021, NFI and Nicholas Data Services, Inc., a Florida corporation (“NDS” and collectively with NFI, the “Borrowers”), two wholly-owned subsidiaries of Nicholas Financial, Inc. (the “Company”) entered into a senior secured line of credit (the “Line of Credit”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “Credit Agreement”). The prior line of credit (the "Ares Line of Credit") pursuant to a credit agreement among the Company’s subsidiary NF Funding I, LLC, Ares Agent Services, L.P. and the lenders party thereto was paid off in connection with entering into the Line of Credit.

Pursuant to the Credit Agreement, the lenders agreed to extend to the Borrowers a line of credit of up to $175 million. The availability of funds under the Line of Credit is generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the Line of Credit will accrue interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 2.25%. The commitment period for advances under the Line of Credit is three years (the expiration of that time period, the “Maturity Date”).

Pursuant to the Credit Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the Line of Credit. Furthermore, pursuant to a separate collateral pledge agreement, NDS pledged its equity interest in NFI as additional collateral.

The Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets. If an event of default occurs, the lenders could increase borrowing costs, restrict the Borrowers’ ability to obtain additional advances under the Line of Credit, accelerate all amounts outstanding under the Line of Credit, enforce their interest against collateral pledged under the Line of Credit or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

If the lenders terminate the Line of Credit following the occurrence of an event of default under the loan documents, or the Borrowers prepay the loan and terminate the Line of Credit prior to the Maturity Date, then the Borrowers are obligated to pay a termination or prepayment fee in an amount equal to a percentage of $175 million calculated as 2% if the termination or prepayment occurs during year one, 1% if the termination or repayment occurs during year two, and 0.5% if the termination or prepayment occurs thereafter.

As of September 30, 2022, the Company had aggregate outstanding indebtedness under the Line of Credit of $59.5 million, compared to $55.0 million as of March 31, 2022.

Future maturities of debt as of September 30, 2022 were as follows:


(in thousands)
FY2023	$	—
FY2024		—
FY2025		59,500
FY2026		—
	$	59,500

On October 20, 2022, the Company received a letter from the agent of its lenders, notifying the Company that it is instituting the default rate of interest effective as of August 31, 2022 in connection with an event of default that occurred from failure to comply with the EBITDA Ratio covenant, as defined, for the calendar month ending August 31, 2022. The agreement requires an EBITDA

Ratio of not less than 1.50 to 1.0 as of the end of each calendar month. The Company’s EBITDA Ratio declined to 0.33 for the calendar month ending August 31, 2022 and to -0.70 for the calendar month ending September 30, 2022.

In the letter, the lenders expressly reserve all rights and remedies available under agreement. Among those rights and remedies is the ability of the lenders to accelerate all of the Company’s obligations under the loan. The effect of the imposition of the default rate of interest resulted in an additional $130 thousand in interest for the quarter ended September 30, 2022.

The Company is working with the lender to waive the violations and restructure the facility to remove the default status and application of the default rate going forward. The Company is also negotiating a refinancing opportunity with an alternative source.

Note 6. Going Concern Assessment

If the lenders were to accelerate the Company’s obligations under the loan agreement, the Company would be unable to immediately meet the obligations and others without undertaking other financing or a capital raise. The lenders' right to accelerate the debt and the Company's ability to find alternative financing on economically favorable terms or at all, depends in part on factors that are beyond the Company’s control and required consideration in management’s going concern assessment for the interim reporting period. Management evaluated the significance of the lenders' right to accelerate the debt, including the likelihood of acceleration based on current discussions and the management’s understanding of the lenders' intentions to restructure the facility. While the EBITDA Ratio was not met, the Debt to Adjusted Tangible Net Worth Ratio has been maintained at a level of approximately 0.6 to one, which is significantly lower than the maximum of 3 to one permitted by the loan agreement. The Company’s tangible net worth reduces credit risk to lenders and supports management’s belief that the Company will continue having access to the lenders' credit. Importantly, based on current discussions, a restructuring of the agreement is expected to exclude the EBITDA Ratio requirement. The lenders are aware of the previously announced branch closures and reductions of workforce including the related charges. In addition, management has strong indications that another lender would be willing to provide ample financing, based on acceptable economic terms, to settle the obligation in the near term. Management’s assessment, which considers the lenders' understood intentions, is that it is probable the current loan agreement will be successfully restructured. Secondarily, based on current negotiations of terms with another lender, management assessed that the Company could obtain other financing in the near term.

Note 7. Income Taxes

The Company recorded an income tax benefit of approximately $958 thousand for the three months ended September 30, 2022 compared to income tax expense of approximately $536 thousand for the three months ended September 30, 2021. The Company’s effective tax rate decreased to 23.4% for the three months ended September 30, 2022 from 25.1% for the three months ended September 30, 2021. The Company recorded an income tax benefit of approximately $1.6 million for the six months ended September 30, 2022 compared to income tax expense of approximately $1.1 million for the six months ended September 30, 2021. The Company’s effective tax rate decreased to 24.4% for the six months ended September 30, 2022 from 25.4% for the six months ended September 30, 2021. The lower effective tax rate for the three and six months ended September 30, 2021 was attributed to discrete and other non-recurring items.

Note 8. Leases

The Company maintains lease agreements related to its branch network and for its corporate headquarters. The branch lease agreements range from one to five years and generally contain options to extend from one to three years. The corporate headquarters lease agreement was renewed with a lease maturity date of March 2023. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease payments are dependent on a rate or index that may change after the commencement date, other than the passage of time.

The Company’s lease liability was $3.4 million and $4.4 million as of September 30, 2022 and March 31, 2022, respectively. This liability is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate. The lease asset was $3.3 million and $4.3 million as of September 30, 2022 and March 31, 2022, respectively.

On July 18, 2022, the Company announced its plan to close eleven branches, of which six closures occurred prior to September 30, 2022 and resulted in approximately $230 thousand in lease termination expenses.

Future minimum lease payments under non-cancellable operating leases in effect as of September 30, 2022, are as follows:


in thousands
FY2023 (remaining six months)	$	736
FY2024		1,066
FY2025		819
FY2026		467
FY2027		293
Thereafter	$	481
Total future minimum lease payments		3,862
Present value adjustment		(421	)
Operating lease liability	$	3,441

The following table reports information about the Company’s lease cost for the three months ended September 30, 2022 (in thousands):


Lease cost:
Operating lease cost	$	435
Variable lease cost		92
Total lease cost	$	527

The following table reports information about the Company’s lease cost for the three months ended September 30, 2021 (in thousands):


Lease cost:
Operating lease cost	$	430
Variable lease cost		85
Total lease cost	$	515

The following table reports information about the Company’s lease cost for the six months ended September 30, 2022 (in thousands):


Lease cost:
Operating lease cost	$	893
Variable lease cost		187
Total lease cost	$	1,080

The following table reports information about the Company’s lease cost for the six months ended September 30, 2021 (in thousands):


Lease cost:
Operating lease cost	$	820
Variable lease cost		170
Total lease cost	$	990

The following table reports other information about the Company’s leases for the three months ended September 30, 2022 (dollar amounts in thousands):


Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	457
Operating Lease - Operating Cash Flows (Liability Reduction)	$	369
Weighted Average Lease Term - Operating Leases		3.9 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the three months ended September 30, 2021 (dollar amounts in thousands):


Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	391
Operating Lease - Operating Cash Flows (Liability Reduction)	$	343
Weighted Average Lease Term - Operating Leases		4.3 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the six months ended September 30, 2022 (dollar amounts in thousands):


Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	902
Operating Lease - Operating Cash Flows (Liability Reduction)	$	748
Weighted Average Lease Term - Operating Leases		3.9 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the six months ended September 30, 2021 (dollar amounts in thousands):


Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	776
Operating Lease - Operating Cash Flows (Liability Reduction)	$	678
Weighted Average Lease Term - Operating Leases		3.7 years
Weighted Average Discount Rate - Operating Leases		6.5%

Note 9. Fair Value Disclosures

The Company’s financial instruments consist of cash, finance receivables, repossessed assets, the line of credit, and the note payable. Each of these financial instruments are not carried at fair value.

Finance receivables, net, approximates fair value based on the price paid to acquire Contracts. The price paid reflects competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic environment. This market is highly liquid as the Company acquires individual loans on a daily basis from dealers.

The initial terms of the Contracts generally range from 12 to 72 months. Beginning in December 2017, the maximum initial term of a Contract was reduced to 60 months. The initial terms of the Direct Loans generally range from 12 to 60 months. If liquidated outside of the normal course of business, the amount received may not be the carrying value.

Repossessed assets are valued at the lower of the finance receivable balance prior to repossession or the estimated net realizable value of the repossessed asset. The Company estimates the net realizable value using estimated auction wholesale proceeds less costs to sell plus insurance claims outstanding, if any.

Based on these market conditions, the fair value of the Line of credit as of September 30, 2022 was estimated to be equal to the book value. The interest rate for the Credit line is a variable rate based on SOFR pricing options.


	(In thousands)
	Fair Value Measurement Using
Description	Level 1		Level 2		Level 3		Fair Value		Carrying Value
Cash and restricted cash:
September 30, 2022	$	1,503	$	-	$	-	$	1,503	$	1,503
March 31, 2022	$	4,775	$	-	$	-	$	4,775	$	4,775
Finance receivables:
September 30, 2022	$	-	$	-	$	161,696	$	161,696	$	161,696
March 31, 2022	$	-	$	-	$	168,600	$	168,600	$	168,600
Repossessed assets:
September 30, 2022	$	-	$	-	$	1,208	$	1,208	$	1,208
March 31, 2022	$	-	$	-	$	658	$	658	$	658
Credit facility:
September 30, 2022	$	-	$	-	$	59,500	$	59,500	$	59,500
March 31, 2022	$	-	$	-	$	55,000	$	55,000	$	55,000
Note Payable:
September 30, 2022	$	-	$	-	$	-	$	-	$	-
March 31, 2022	$	3,244	$	-	$	-	$	3,244	$	3,244

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis. There were none at September 30, 2022 and March 31, 2022 and there were no nonrecurring fair value measurements during the three and six months ended September 30, 2022 and 2021.

Level 2 assets are financial assets and liabilities that do not have regular market pricing, but whose fair value can be determined based on other data values or market pricing.

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. Management has determined that this level to be most appropriate for the Line of credit.

Note 10. Commitments and Contingencies

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, none of which, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

Note 11. Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standard Board (FASB) issued the Accounting Standard Updates (ASU) 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Companies will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements and is collecting and analyzing data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. At this time, the Company believes the adoption of this ASU will likely have a material effect and is expected to increase the overall allowance for credit losses.

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitating of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions in which the reference London Interbank Offered Rate (LIBOR) or another reference rate is expected to be discontinued as a result of the Reference Rate Reform. This ASU was intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This ASU was effective immediately and is

effective through December 31, 2022. The adoption of this ASU did not have a material effect on the Company's consolidated financial statements.

The Company does not believe there are any other recently issued accounting standards that have not yet been adopted that will have a material impact on the Company’s consolidated financial statements.

Note 12. Stock Plans

In May 2019, the Company’s Board of Directors (“Board”) authorized a new stock repurchase program allowing for the repurchase of up to $8.0 million of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other structures in accordance with applicable federal securities laws. The authorization was effective immediately.

The timing and actual number of repurchases will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

In August 2019, the Company’s Board authorized additional repurchases of up to $1.0 million of the Company’s outstanding shares.

The following table summarizes treasury share transactions under the Company's stock repurchase program:


	Three months ended September 30, (In thousands)
	2022					2021
	Number of Shares		Amount			Number of Shares		Amount
Treasury shares at the beginning of period		5,332	$	(76,143	)		5,005	$	(73,008	)
Treasury shares purchased		17		(541	)		77		(887	)
Treasury shares at the end of period		5,349	$	(76,684	)		5,082	$	(73,895	)

	Six months ended September 30, (In thousands)
	2022					2021
	Number of Shares		Amount			Number of Shares		Amount
Treasury shares at the beginning of period		5,127	$	(74,405	)		4,945	$	(72,343	)
Treasury shares purchased		222		(2,279	)		137		(1,552	)
Treasury shares at the end of period		5,349	$	(76,684	)		5,082	$	(73,895	)

For the three months ended September 30, 2022, the Company repurchased a total of 17,007 shares of common stock at an aggregate cost of $141 thousand and average cost per share of $8.30.

Note 13. Note Payable

On May 27, 2020, the Company obtained a loan in the amount of approximately $3.2 million from a bank in connection with the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company used the proceeds of the PPP Loan for payroll costs and other covered expenses and sought full forgiveness of the PPP Loan. The Company submitted a forgiveness application to Fifth Third Bank, the lender, on December 7, 2020 and submitted supplemental documentation on January 16, 2021. On December 27, 2021 SBA informed the Company that no forgiveness was granted. The Company filed an appeal with SBA on January 5, 2022. On May 6, 2022 the Office of Hearing and Appeals SBA (OHA) rendered a decision to deny the appeal. The Company subsequently repaid the outstanding principal balance of $3.2 million plus accrued and unpaid interest of $65 thousand on May 23, 2022.

Note 14. Restructuring Activities

On July 18, 2022, the Company announced its plan to close eleven branches and consolidation of workforce impacting approximately 44 employees. As of September 30, 2022 the Company completed six branch closures, which resulted in approximately $230 thousand in lease termination expenses and approximately $84 thousand in severance expenses.

Note 15. Subsequent Events

As previously announced on Form 8-K filed on October 27, 2022, the Company received a letter from the agent of its lenders, notifying the Company that it is instituting the default rate of interest effective as of August 31, 2022. For further discussions regarding the default see “Note 5. Credit Facility”.

In the letter, the lenders expressly reserve all rights and remedies available under the credit agreement. Among those rights and remedies is the ability of the lenders to accelerate all of the Company’s obligations under the loan. The effect of the imposition of the default rate of interest is an additional $130 thousand in interest for the quarter ended September 30, 2022 and is estimated to be an additional approximately $118 thousand per month while the default rate remains in place.

The Company also announced on Form 8-K filed on November 3, 2022 a change in its operating strategy and restructuring plan with the goal of reducing operating expenses and freeing up capital. As part of this plan, the Company would shift from a decentralized to a regionalized business model and has entered into a loan servicing agreement with Westlake Portfolio Management, LLC. While the Company intends to continue Contract purchase and origination activities, albeit on a smaller scale, its servicing, collections and recovery operations will be outsourced to Westlake. The Company will cease originations of Direct Loans. The Company expects that this plan will reduce overhead, streamline operations and reduce compliance risk, while maintaining the Company’s underwriting standards. The Company expects significant annual operating cost savings to substantially exceed the upfront costs associated with the restructuring. The Company further anticipates that execution of this plan will free up capital and permit the Company to allocate excess capital to increase shareholder returns, whether by acquiring loan portfolios or businesses or by investing outside of the Company’s traditional business. The Company believes this plan would address the profitability concerns underlying the above-mentioned event of default.

As part of this restructuring plan, the Company announced the closure of 34 of its 36 branches. Consolidation of workforce associated with these closures is expected to impact approximately 173 employees, representing 82% of the Company workforce. For further information refer to the disclosure under "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Restructuring and Change in Operating Strategy."

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on management’s current beliefs and assumptions, as well as information currently available to management. When used in this document, the words “anticipate”, “estimate”, “expect”, “will”, “may”, “plan,” “believe”, “intend” and similar expressions are intended to identify forward-looking statements. Although Nicholas Financial, Inc., including its subsidiaries (collectively, the “Company,” “we,” “us,” or “our”) believes that the expectations reflected or implied in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. As a result, actual results could differ materially from those indicated in these forward-looking statements. Forward-looking statements in this Quarterly Report may include, without limitation: (1) statements about the expected benefits, costs and timing of the Company’s restructuring and change in operating strategy, including its servicing arrangement with Westlake Portfolio Management, LLC (“Westlake”) (including without limitation the servicing and termination fees) and its exit and disposal activities; (2) the continuing impact of COVID-19 on our customers and our business, (3) projections of revenue, income, and other items relating to our financial position and results of operations, (4) statements of our plans, objectives, strategies, goals and intentions, (5) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (6) statements of expected industry and general economic trends. These statements are subject to certain risks, uncertainties and assumptions that may cause results to differ materially from those expressed or implied in forward-looking statements, including without limitation:

•

the risk that the anticipated benefits of the restructuring and change in operating strategy, including the servicing arrangement with Westlake (including without limitation the expected reduction in overhead, streamlining of operations or reduction in compliance risk), do not materialize to the extent expected or at all, or do not materialize within the timeframe targeted by management;

•

the risk that the actual servicing fees paid by the Company under the Westlake servicing agreement, which the Company expects to classify as administrative costs on its financial statements, exceed the amounts estimated;

•

the risk that the actual costs of the exit and disposal activities in connection with the consolidation of workforce and closure of offices exceed the Company’s estimates or that such activities are not completed on a timely basis;

•

the risk that the Company underestimates the staffing and other resources needed to operate effectively after consolidating its workforce and closing offices;

•

uncertainties surrounding the Company’s success in developing and executing on a new business plan;

•

uncertainties surrounding the Company’s ability to use any excess capital to increase shareholder returns, including without limitation, by acquiring loan portfolios or businesses or investing outside of the Company’s traditional business;

•

the risk that the lenders under the Wells Fargo credit facility (“WF Credit Facility”) may declare the Company’s obligations under the agreement immediately due and payable;

•

the ongoing impact on us, our employees, our customers and the overall economy of the COVID-19 pandemic and measures taken in response thereto;

•

the ongoing impact on us, our customers and the overall economy of the supply constraints, especially with respect to energy, caused by the COVID-19 pandemic and the Russian invasion of Ukraine and related economic sanctions;

•

availability of capital (including the ability to access bank financing);

•

recently enacted, proposed or future legislation and the manner in which it is implemented, including tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations;

•

fluctuations in the economy;

•

the degree and nature of competition and its effects on the Company’s financial results;

•

fluctuations in interest rates;

•

effectiveness of our risk management processes and procedures, including the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures;

•

demand for consumer financing in the markets served by the Company;

•

our ability to successfully develop and commercialize new or enhanced products and services;

•

the sufficiency of our allowance for credit losses and the accuracy of the assumptions or estimates used in preparing our financial statements;

•

increases in the default rates experienced on our automobile finance installment contracts (“Contracts”) or direct loans (“Direct Loans”);

•

higher borrowing costs and adverse financial market conditions impacting our funding and liquidity;

•

regulation, supervision, examination and enforcement of our business by governmental authorities, and adverse regulatory changes in the Company’s existing and future markets, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and other legislative and regulatory developments, including regulations relating to privacy, information security and data protection and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business;

•

fraudulent activity, employee misconduct or misconduct by third parties, including representatives or agents of Westlake;

•

media and public characterization of consumer installment loans;

•

failure of third parties to provide various services that are important to our operations;

•

alleged infringement of intellectual property rights of others and our ability to protect our intellectual property;

•

litigation and regulatory actions;

•

our ability to attract, retain and motivate key officers and employees;

•

use of third-party vendors and ongoing third-party business relationships, particularly our relationship with Westlake;

•

cyber-attacks or other security breaches suffered by us or Westlake;

•

disruptions in the operations of our or Westlake’s computer systems and data centers;

•

the impact of changes in accounting rules and regulations, or their interpretation or application, which could materially and adversely affect the Company’s reported consolidated financial statements or necessitate material delays or changes in the issuance of the Company’s audited consolidated financial statements;

•

uncertainties associated with management turnover and the effective succession of senior management;

•

our ability to realize our intentions regarding strategic alternatives, including the failure to achieve anticipated synergies;

the risk factors discussed under “Item 1A – Risk Factors” in our Annual Report on Form 10-K, and our other filings made with the U.S. Securities and Exchange Commission (“SEC”).

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. All forward-looking statements included in this Quarterly Report are based on information available to the Company as the date of filing of this Quarterly Report, and the Company assumes no obligation to update any such forward-looking statement. Prospective investors should also consult the risk factors described from time to time in the Company’s other filings made with the SEC, including its reports on Forms 10-K, 10-Q, 8-K and annual reports to shareholders.

Restructuring and Change in Operating Strategy

Change in Operating Strategy

On November 2, 2022, the Company announced a change in its operating strategy and restructuring plan with the goal of reducing operating expenses and freeing up capital. As part of this plan, the Company is shifting from a decentralized to a regionalized business model, but continues to remain committed to its core product of financing primary transportation to and from work for the subprime borrower through the local independent automobile dealership. The Company intends to scale down Contract originations to focus on certain regional markets and will no longer originate Direct Loans. The Company's servicing, collections and recovery operations will be outsourced. The Company's operating strategy also includes risk-based pricing and a prudent underwriting discipline required for optimal portfolio performance. The Company expects that this plan will reduce overhead, streamline operations and reduce compliance risk, while maintaining the Company’s underwriting standards. The Company further anticipates that execution of this plan will free up capital and permit the Company to allocate excess capital to increase shareholder returns, whether by acquiring loan portfolios or businesses or by investing outside of the Company’s traditional business. The Company’s

principal goals are to increase its profitability and its long-term value.

Westlake Servicing Agreement

As part of the restructuring plan, Nicholas Financial, Inc., a Florida corporation (“NFI”) and indirect wholly-owned subsidiary of the Company, entered into a loan servicing agreement (the “Servicing Agreement”) with Westlake Portfolio Management, LLC (“Westlake”).

Pursuant to the Servicing Agreement, on or around the “Closing Date” (expected to occur prior to early December 2022), Westlake will begin servicing all receivables held by NFI under its Contracts and Direct Loans, except for charged-off and certain other receivables. Those receivables covered by the Servicing Agreement as of the Closing Date are referred to as the “initial receivables.” NFI expects to add additional Contract receivables to the receivables pool covered under the Servicing Agreement from time to time in the future, but will no longer originate Direct Loans. All receivables remain vested in NFI.

More specifically, Westlake has agreed to manage, service, administer and make collections on the receivables, as well as perform certain other duties specified in the agreement, in accordance with servicing practices and standards used by prudent sale finance companies or lending institutions that service motor vehicle secured retail installment contracts of the same type. Westlake will maintain custody of the receivable files and lien certificates, acting as custodian for the Company.

Under the Servicing Agreement, NFI has agreed to pay Westlake a boarding fee with respect to the initial receivables, and boarding fees based on a percentage of any additional receivables to be added to the pool in the future. In addition, NFI is obligated to pay Westlake monthly servicing fees depending on the aggregate principal balance of receivables, the types of services provided by Westlake and the payment status of the various loans. The Company expects to classify such fees as administrative costs on its financial statements. Estimates of such administrative costs applied to the initial receivables are provided below. Any additional receivables will also be subject to such servicing fees and presented as administrative costs on the Company’s financial statements. Collections of amounts made after accounts have been charged off are split between NFI and Westlake. NFI must also reimburse Westlake for certain expenses specified in the Servicing Agreement.

The Servicing Agreement contains representations and warranties by both parties. It allows Westlake to delegate its duties under the agreement to an affiliate or subservicer with NFI’s prior written consent. If certain events specified in the Servicing Agreement occur (“Servicer Termination Events”), NFI is entitled to terminate Westlake’s rights and obligations and appoint a successor servicer under the agreement.

The Servicing Agreement will become effective after NFI has transferred the relevant receivables files to Westlake and expires upon the earliest to occur of (i) the date on which NFI sells, transfers or assigns all outstanding receivables to a third party (including to Westlake), (ii) the date on which the last receivable is repaid or otherwise terminated and (iii) 3 years from the Closing Date. If NFI terminates the Agreement other than for a Servicer Termination Event, it is obligated to pay Westlake a termination fee if the termination occurs prior to the third anniversary of the Closing Date, which fee, if payable, is expected to exceed $1 million.

Exit and Disposal Activities

As part of the restructuring plan and change in operating strategy disclosed above, the Board of Directors of the Company determined on November 2, 2022 to close 34 of its 36 branches. Consolidation of workforce associated with these closures is expected to impact approximately 173 employees, representing 82% of the Company’s workforce as of such date.

The expected total charges to be incurred by the Company are between $11.1 million and $12.4 million, consisting of cash expenditures between $11.0 million and $12.3 million, and approximately $0.1 million of non-cash impairment charges associated with lease obligations.

Of these expected total charges, the Company estimates incurring, in the first year following implementation of the restructuring plan, between $4.3 million and $4.6 million of administrative costs, between $0.2 million and $0.3 million of employee-related costs, including severance expenses, and between $3.3 million and $3.4 million for lease terminations, and, in the second through fifth year following such implementation, between $3.2 million and $4.0 million of administrative costs in the aggregate. These administrative costs relate solely to the initial receivables described in the previous section and do not include any additional receivables.

The closing of branches and consolidation of the workforce is expected to be completed by January 31, 2023. The Company expects that the majority of lease terminations and employee-related charges will be recorded in the third quarter of Fiscal Year 2023.

The above estimates of charges and timelines could change as the Company’s plans evolve and become finalized. The Company expects significant annual operating cost savings to substantially exceed the upfront costs associated with the restructuring.

Regulatory Developments

As previously reported, Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which

became operational on July 21, 2011. Under the Dodd-Frank Act, the CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products, such as the Contracts and the Direct Loans that we offer, including explicit supervisory authority to examine, audit, and investigate companies offering a consumer financial product such as ourselves. Although the Dodd-Frank Act expressly provides that the CFPB has no authority to establish usury limits, efforts to create a federal usury cap, applicable to all consumer credit transactions and substantially below rates at which the Company could continue to operate profitably, are still ongoing. Any federal legislative or regulatory action that severely restricts or prohibits the provision of consumer credit and similar services on terms substantially similar to those we currently provide could if enacted have a material, adverse impact on our business, prospects, results of operations and financial condition. Some consumer advocacy groups have suggested that certain forms of alternative consumer finance products, such as installment loans, should be a regulatory priority and it is possible that at some time in the future the CFPB could propose and adopt rules making such lending or other products that we may offer materially less profitable or impractical. Further, the CFPB may target specific features of loans by rulemaking that could cause us to cease offering certain products. Any such rules could have a material adverse effect on our business, results of operations and financial condition. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to any of our current or future lines of business, which could have a material adverse effect on our operations and financial performance.

On October 5, 2017, the CFPB issued a final rule (the “Rule”) imposing limitations on (i) short-term consumer loans, (ii) longer-term consumer installment loans with balloon payments, and (iii) higher-rate consumer installment loans repayable by a payment authorization. The Rule requires lenders originating short-term loans and longer-term balloon payment loans to evaluate whether each consumer has the ability to repay the loan along with current obligations and expenses (“ability to repay requirements”). The Rule also curtails repeated unsuccessful attempts to debit consumers’ accounts for short-term loans, balloon payment loans, and installment loans that involve a payment authorization and an Annual Percentage Rate over 36% (“payment requirements”). The Rule has significant differences from the CFPB’s proposed rules announced on June 2, 2016, relating to payday, vehicle title, and similar loans.

On February 6, 2019, the CFPB issued two notices of proposed rulemaking regarding potential amendments to the Rule. First, the CFPB is proposing to rescind provisions of the Rule, including the ability to repay requirements. Second, the CFPB is proposing to delay the August 19, 2019 compliance date for part of the Rule, including the ability to repay requirements. These proposed amendments are not yet final and are subject to possible change before any final amendments would be issued and implemented. We cannot predict what the ultimate rulemaking will provide. The Company does not believe that these changes, as currently described by the CFPB, would have a material impact on the Company’s existing lending procedures, because the Company currently underwrites all its loans (including those secured by a vehicle title that would fall within the scope of these proposals) by reviewing the customer’s ability to repay based on the Company’s standards. Any regulatory changes could have effects beyond those currently contemplated that could further materially and adversely impact our business and operations. The Company will have to comply with the final rule’s payment requirements since it allows consumers to set up future recurring payments online for certain covered loans such that it meets the definition of having a “leveraged payment mechanism”. The payment provisions of the final rule are expected to go into effect on August 19, 2019. If the payment provisions of the final rule apply, the Company will have to modify its loan payment procedures to comply with the required notices within the mandated timeframes set forth in the final rule.

The CFPB defines a “larger participant” of automobile financing if it has at least 10,000 aggregate annual originations. The Company does not meet the threshold of at least 10,000 aggregate annual direct loan originations, and therefore would not fall under the CFPB’s supervisory authority. The CFPB issued rules regarding the supervision and examination of non-depository “larger participants” in the automobile finance business. The CFPB’s stated objectives of such examinations are: to assess the quality of a larger participant’s compliance management systems for preventing violations of federal consumer financial laws; to identify acts or practices that materially increase the risk of violations of federal consumer finance laws and associated harm to consumers; and to gather facts that help determine whether the larger participant engages in acts or practices that are likely to violate federal consumer financial laws in connection with its automobile finance business. At such time, if we become or the CFPB defines us as a larger participant, we will be subject to examination by the CFPB for, among other things, ECOA compliance; unfair, deceptive or abusive acts or practices (“UDAAP”) compliance; and the adequacy of our compliance management systems.

We have continued to evaluate our existing compliance management systems. We expect this process to continue as the CFPB promulgates new and evolving rules and interpretations. Given the time and effort needed to establish, implement and maintain adequate compliance management systems and the resources and costs associated with being examined by the CFPB, such an examination could likely have a material adverse effect on our business, financial condition and profitability. Moreover, any such examination by the CFPB could result in the assessment of penalties, including fines, and other remedies which could, in turn, have a material effect on our business, financial condition, and profitability.

Litigation and Legal Matters

See “Item 1. Legal Proceedings” in Part II of this Quarterly Report below.

Critical Accounting Policy

The Company’s critical accounting policy relates to the allowance for credit losses. It is based on management’s opinion of an amount that is adequate to absorb losses incurred in the existing portfolio. Because of the nature of the customers under the Company’s Contracts and Direct Loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative.

The Company uses trailing twelve-month net charge-offs as a percentage of average finance receivables, and applies this calculated percentage to ending finance receivables to calculate estimated future probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management’s total estimate of probable credit losses and its assessment of the overall adequacy of the allowance for credit losses. Management utilizes significant judgment in determining probable incurred losses and in identifying and evaluating qualitative factors. This approach aligns with the Company’s lending policies and underwriting standards.

If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Contracts are purchased from many different dealers and are all purchased on an individual Contract-by-Contract basis. Individual Contract pricing is determined by the automobile dealerships and is generally the lesser of the applicable state maximum interest rate, if any, or the maximum interest rate which the customer will accept. In most markets, competitive forces will drive down Contract rates from the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company generally purchases Contracts on an individual basis.

The Company has detailed underwriting guidelines it utilizes to determine which Contracts to purchase. These guidelines are specific and are designed to provide reasonable assurance that the Contracts purchased have common risk characteristics.

Introduction

The Company finances primary transportation to and from work for the subprime borrower. We do not finance luxury cars, second units or recreational vehicles, which are the first payments customers tend to skip in time of economic insecurity. We finance the main and often only vehicle in the household that is needed to get our customers to and from work. The amounts we finance are much lower than most of our competitors, and therefore the payments are significantly lower, too. The combination of financing a “need” over a “want” and making that loan on comparatively affordable terms incentivizes our customers to prioritize their account with us.

For the three months ended September 30, 2022, the dilutive loss per share was $0.44 as compared to dilutive earnings per share of $0.21 for the three months ended September 30, 2021. Net loss was $3.2 million for the three months ended September 30, 2022 as compared to net income of $1.6 million for the three months ended September 30, 2021. Interest and fee income on finance receivables decreased 2.6% to $12.2 million for the three months ended September 30, 2022 as compared to $12.6 million for the three months ended September 30, 2021. Provision for credit losses increased 538.4% to $8.9 million for the three months ended September 31, 2022 as compared to $1.4 million for the three months ended September 30, 2021.

For the six months ended September 30, 2022, the dilutive loss per share was $0.68 as compared to dilutive earnings per share of $0.44 for the six months ended September 30, 2021. Net loss was $4.9 million for the six months ended September 30, 2022 as compared to net income of $3.3 million for the six months ended September 30, 2021. Interest and fee income on
finance receivables decreased 3.4% to $24.3 million for the six months ended September 30, 2022 as compared to $25.2 million
for the six months ended September 30, 2021. Provision for credit losses increased 490.6% to $12.6 million for the six months
ended September 31, 2022 as compared to $2.1 million for the six months ended September 30, 2021.

Non-GAAP financial measures

From time-to-time the Company uses certain financial measures derived on a basis other than generally accepted accounting principles (“GAAP”), primarily by excluding from a comparable GAAP measure certain items the Company does not consider to be representative of its actual operating performance. Such financial measures qualify as “non-GAAP financial measures” as defined in SEC rules. The Company uses these non-GAAP financial measures in operating its business because management believes they are less susceptible to variances in actual operating performance that can result from the excluded items and other infrequent charges.

The Company may present these financial measures to investors because management believes they are useful to investors in evaluating the primary factors that drive the Company’s core operating performance and provide greater transparency into the Company’s results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating these non-GAAP financial measures are significant components to understanding and assessing the Company’s financial performance. Such non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, the Company’s GAAP financial measures. Further, because these non-GAAP financial measures are not determined in accordance with GAAP and are, thus, susceptible to varying calculations, any non-GAAP financial measures, as presented, may not be comparable to other similarly titled measures of other companies.


	Three months ended September 30, (In thousands)						Six months ended September 30, (In thousands)
	2022			2021			2022			2021
Portfolio Summary
Average finance receivables (1)	$	178,636		$	178,873		$	178,902		$	180,364
Average indebtedness (2)	$	65,824		$	72,044		$	63,340		$	75,611
Interest and fee income on finance receivables	$	12,249		$	12,572		$	24,313		$	25,166
Interest expense		975			1,121			1,543			2,309
Net interest and fee income on finance receivables	$	11,274		$	11,451		$	22,770		$	22,857
Gross portfolio yield (3)		27.43	%		28.11	%		27.18	%		27.91	%
Interest expense as a percentage of average finance receivables		2.18	%		2.51	%		1.72	%		2.56	%
Provision for credit losses as a percentage of average finance receivables		19.94	%		3.12	%		14.03	%		2.36	%
Net portfolio yield (3)		5.31	%		22.48	%		11.43	%		22.99	%
Operating expenses as a percentage of average finance receivables		16.46	%		17.70	%		18.80	%		18.04	%
Pre-tax yield as a percentage of average finance receivables (4)		(11.15	)%		4.78	%		(7.37	)%		4.95	%
Net charge-off percentage (5)		12.38	%		4.88	%		9.43	%		4.23	%
Finance receivables							$	175,406		$	177,013
Allowance percentage (6)								4.04	%		2.52	%
Total reserves percentage (7)								7.84	%		6.50	%

Note: All three-month and six-month of income performance indicators expressed as percentages have been annualized.

(1)

Average finance receivables represent the average of finance receivables throughout the period. (This is considered a non-GAAP financial measure).

(2)

Average indebtedness represents the average outstanding borrowings under the Credit Facility. (This is considered a non-GAAP financial measure).

(3)

Portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables. Net portfolio yield represents (a) interest and fee income on finance receivables minus (b) interest expense minus (c) the provision for credit losses, as a percentage of average finance receivables. (This is considered a non-GAAP financial measure).

(4)

Pre-tax yield represents net portfolio yield minus operating expenses (marketing, salaries, employee benefits, depreciation, and administrative), as a percentage of average finance receivables. (This is considered a non-GAAP financial measure).

(5)

Net charge-off percentage represents net charge-offs (charge-offs less recoveries) divided by average finance receivables outstanding during the period. (This is considered a non-GAAP financial measure).

(6)

Allowance percentage represents the allowance for credit losses divided by finance receivables outstanding as of ending balance sheet date.

(7)

Total reserves percentage represents the allowance for credit losses, purchase price discount, and unearned dealer discounts divided by finance receivables outstanding as of ending balance sheet date.

Analysis of Credit Losses

The Company uses a trailing twelve-month charge-off analysis to calculate the allowance for credit losses and takes into consideration the composition of the portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believes that the allowance for credit losses reflects the current trends of incurred losses within the portfolio and is better aligned with the portfolio’s performance indicators.

identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Non-performing assets are defined as accounts that are contractually delinquent for 61 or more days past due or Chapter 13 bankruptcy accounts. For these accounts, the accrual of interest income is suspended, and any previously accrued interest is reversed. Upon notification of a bankruptcy, an account is monitored for collection with other Chapter 13 accounts. In the event the debtors’ balance is reduced by the bankruptcy court, the Company will record a loss equal to the amount of principal balance reduction. The remaining balance will be reduced as payments are received by the bankruptcy court. In the event an account is dismissed from bankruptcy, the Company will decide based on several factors, whether to begin repossession proceedings or allow the customer to begin making regularly scheduled payments.

Beginning March 31, 2018, the Company allocated a specific reserve for the Chapter 13 bankruptcy accounts using a look back method to calculate the estimated losses. Based on this look back, management calculated a specific reserve of approximately $145 thousand and $118 thousand for these accounts as of September 30, 2022 and September 30, 2021, respectively.

The provision for credit losses increased to $8.9 million for the three months ended on September 30, 2022, from $3.6 million for the three months ended on June 30, 2022, due to a substantial increase in the net charge-off percentage. The net charge-off percentage increased by approximately 91% to 12.4% for the three months ended on September 30, 2022, from 6.5% for the three months ended on June 30, 2022, and from 4.9% for the fiscal year ended September 30, 2021, primarily resulting from increased delinquencies and loan defaults. (See note 5 in the Portfolio Summary table in the “Introduction” above for the definition of net charge-off percentage). Management attributes these increased delinquencies and loan defaults primarily to the fact that the beneficial impact of the government’s prior COVID-19-related assistance to the Company’s customers had subsided at a time when those customers began facing increased inflationary pressures affecting their cost of living, and expects that the net charge-off percentage will remain, for the foreseeable future, at levels higher than those experienced in prior years for the same reasons.

The delinquency percentage for Contracts more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of September 30, 2022 was 11.2%, an increase from 7.6% as of September 30, 2021. The delinquency percentage for Direct Loans more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of September 30, 2022 was 7.3%, an increase from 3.3% as of September 30, 2021. The changes in delinquency percentage for both Contracts and Direct Loans was driven primarily by market and economic pressure and its adverse impact on consumers. The delinquency percentages were exceptionally lower across the industry, current delinquency trends return to the pre-pandemic levels.

In accordance with our policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts and Direct Loans.

Three months ended September 30, 2022 compared to three months ended September 30, 2021

Interest and Fee Income on Finance Receivables

Interest and fee income on finance receivables, which consist predominantly of finance charge income, decreased 2.6% to $12.2 million for the three months ended September 30, 2022, from $12.6 million for the three months ended September 30, 2021. The decrease was primarily due to a 8.6% decrease in finance receivables to $175.4 million for the three months ended September 30, 2022, when compared to $177.0 million for the corresponding period ended September 30, 2021. The decrease in finance receivables was primarily the result of a reduction in volume of Contracts purchased, average discount, and average APR. While the reduction in volume continued a trend established under prior management, the decline in average discount and average APR is primarily the result of Company's operating strategy to stay competitive while maintaining conservative underwriting practices.

The gross portfolio yield decreased to 27.4% for the three months ended September 30, 2022, compared to 28.1% for the three months ended September 30, 2021. The net portfolio yield decreased to 5.3% for the three months ended September 30, 2022, compared to 22.5% for the three months ended September 30, 2021. The substantial erosion in net portfolio yield was primarily caused by the significant increase in the provision for credit losses, as described under “Analysis of Credit Losses”.

As part of the Company’s restructuring and change in operating strategy disclosed above, management expects that operating expenses will decline as the Company transitions its servicing and collections activities to Westlake under the Servicing Agreement, although the effects of this decline will likely not begin materializing until the fourth quarter of fiscal year 2023. The Company estimates that administrative costs with respect to the initial pool of receivables serviced by Westlake will be as disclosed above under “Restructuring and Change in Operating Strategy—Exit and Disposal Activities.”

Operating Expenses

Operating expenses decreased to $7.4 million for the three months ended September 30, 2022 compared to $7.9 million for the three months ended September 30, 2021. The decline in operating expenses was primarily attributed to a reduction in salaries and

employee benefits expenses. Similarly, operating expenses as a percentage of average finance receivables, also decreased to 16.5% for the three months ended September 30, 2022 from 17.7% for the three months ended September 30, 2021.

Provision Expense

The provision for credit losses increased to $8.9 million for the three months ended September 30, 2022 from $1.4 million for the three months ended September 30, 2021, largely due to an increase in the net charge-off percentage to 12.4% for the three months ended September 30, 2022 from 4.9% for the three months ended September 30, 2021.

Interest Expense

Interest expense was $1.0 million for the three months ended September 30, 2022 and $1.1 million for the three months ended September 30, 2021. The following table summarizes the Company’s average cost of borrowed funds:


	Three months ended September 30,						Six months ended September 30,
	2022			2021			2022			2021
Variable interest under the Line of Credit facility		2.14	%		1.00	%		1.41	%		1.00	%
Credit spread under the Line of Credit facility		2.25	%		3.75	%		2.25	%		3.75	%
Average cost of borrowed funds		4.39	%		4.75	%		3.66	%		4.75	%

SOFR rates have increased to 2.50%, which represents the daily SOFR rate as required under our Wells Fargo Line of Credit, as of September 30, 2022 compared to 0.1%, which represents the one-month LIBOR rate as required under our Line of Credit, as of September 30, 2021. For further discussions regarding interest rates see “Note 5. Credit Facility”.

On October 20, 2022, the Company received a letter from the agent of its lenders notifying the Company that it is instituting the default rate of interest of 2.5% imposed effective as of August 31, 2022 in connection with an event of default that occurred by virtue of the Company failure to comply with Section 6.3(a) of the Loan Agreement (EBITDA Ratio) for the calendar month ending August 31, 2022. The effect of the imposition of the default rate of interest was an additional interest expense of approximately $130 thousand for the quarter ended September 30, 2022.

Income Taxes

Six months ended September 30, 2022 compared to six months ended September 30, 2021

Interest Income and Loan Portfolio

Interest and fee income on finance receivables, decreased 3.4% to $24.3 million for the six months ended September 30, 2022 from $25.2 million for the six months ended September 30, 2021. The decrease was partly due to a lower average discount and a 0.8% decrease in average finance receivables to $178.9 million for the six months ended September 30, 2022 when compared to $180.4 million for the corresponding period ended September 30, 2021. The decrease in average finance receivables was primarily due to Company's commitment to maintaining its conservative underwriting practices, that typically allow more aggressive competitors to purchase a contract from a dealer.

The gross portfolio yield decreased to 27.2% for the six months ended September 30, 2022 compared to 27.9% for the six months ended September 30, 2021. The net portfolio yield decreased to 11.4% for the six months ended September 30, 2022 compared to 23.0% for the six months ended September 30, 2021, respectively. The substantial erosion in net portfolio yield was primarily caused by the significant increase in the provision for credit losses, as described under “Analysis of Credit Losses”.

Operating Expenses

Operating expenses increased to approximately $16.8 million for the six months ended September 30, 2022 from approximately $16.3 million for the six months ended September 30, 2021. Operating expenses as a percentage of average finance receivables increased to 18.8% for the six months ended September 30, 2022 from 18.0% for the six months ended September 30, 2021. The

increase in the percentage is attributable to an increase in administrative expense and a decrease in the average finance receivables balances.

The disclosure on future operating expenses under "Three months ended September 30, 2022 compared to three months ended September 30, 2021—Operating Expenses” is incorporated herein by reference.

Provision Expense

The provision for credit losses increased to $12.6 for the six months ended September 30, 2022 from $2.1 million for the six months ended September 30, 2021, largely due to an increase in the net charge-off percentage to 9.4% for the six months ended September 30, 2022 from 4.2% for the six months ended September 30, 2021.

Interest Expense

Interest expense was $1.5 million for the six months ended September 30, 2022 and $2.3 million for the six months ended September 30, 2021.

Income Taxes

The Company recorded an income tax benefit of approximately $1.6 million for the six months ended September 30, 2022 compared to income tax expense of approximately $1.1 million for the six months ended September 30, 2021. The Company’s effective tax rate decreased to 24.4% for the six months ended September 30, 2022 from 25.4% for the six months ended September 30, 2021.

Contract Procurement

As of September 30, 2022, the Company purchased Contracts in the states listed in the table below. The Contracts purchased by the Company are predominantly for used vehicles; for the three-month periods ended September 30, 2022 and 2021, less than 1% were for new vehicles.

The following tables present selected information on Contracts purchased by the Company.


	As of September 30,		Three months ended September 30,				Six months ended September 30,
	2022		2022		2021		2022		2021
State	Number of branches		Net Purchases (In thousands)				Net Purchases (In thousands)
FL		8	$	3,878	$	2,798	$	8,627	$	6,232
OH		6		3,219		2,885		6,202		6,138
GA		5		1,928		2,403		4,687		5,417
KY		2		1,120		1,135		2,621		2,798
MO		2		1,159		1,332		2,549		2,785
NC		3		1,910		1,827		3,750		2,958
IN		2		1,008		1,071		2,118		2,079
SC		2		977		1,242		2,318		2,212
AL		2		1,460		964		2,526		1,783
MI	-			64		513		514		1,303
NV		1		535		656		1,103		1,194
TN		1		619		486		915		964
IL		1		463		307		952		746
PA		1		466		372		1,080		732
TX	-			68		328		594		663
WI	-			80		234		344		520
ID	-			40		203		335		374
UT	-			23		86		94		231
AZ	-			65		38		89		56
KS	-			-		-		18		-
Total		36	$	19,082	$	18,880	$	41,436	$	39,185


	Three months ended September 30, (Purchases in thousands)						Six months ended September 30, (Purchases in thousands)
Contracts	2022			2021			2022			2021
Purchases	$	19,082		$	18,880		$	41,436		$	39,185
Average APR		22.7	%		23.0	%		22.8	%		23.1	%
Average discount		6.4	%		6.7	%		6.5	%		6.9	%
Average term (months)		48			47			48			47
Average amount financed	$	11,964		$	11,061		$	11,758		$	10,745
Number of Contracts		1,595			1,707			3,530			3,654

Direct Loan Origination

The following table presents selected information on Direct Loans originated by the Company.


Direct Loans	Three months ended September 30, (Originations in thousands)						Six months ended September 30, (Originations in thousands)
Originated	2022			2021			2022			2021
Purchases/Originations	$	6,527		$	7,040		$	14,742		$	12,777
Average APR		30.3	%		30.0	%		30.8	%		30.1	%
Average term (months)		25			26			25			26
Average amount financed	$	4,574		$	4,433		$	4,351		$	4,396
Number of loans		1,427			1,588			3,417			2,904

Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:


	Six months ended September 30, (In thousands)
	2022			2021
Cash provided by (used in):
Operating activities	$	(970	)	$	1,474
Investing activities		(1,279	)		6,722
Financing activities		(1,023	)		(18,322	)
Net decrease in cash	$	(3,272	)	$	(10,126	)

The Company’s primary use of working capital for the quarter ended September 30, 2022 was funding the purchase of Contracts, which are financed substantially through cash from principal and interest payments received, and the Company’s line of credit.

On November 5, 2021, NFI and its direct parent, Nicholas Data Services, Inc. (“NDS” and collectively with NFI, the “Borrowers”), entered into a senior secured credit facility (the “WF Credit Facility”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “WF Credit Agreement”). The Ares Credit Facility was paid off in connection with entering into the WF Credit Facility.

Pursuant to the WF Credit Agreement, the lenders have agreed to extend to the Borrowers a line of credit of up to $175 million. The availability of funds under the WF Credit Facility is generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the WF Credit Facility will accrue interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 2.25%. The commitment period for advances under the WF Credit Facility is three years (the expiration of that time period, the “Maturity Date”).

Pursuant to the WF Credit Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the WF Credit Facility. Furthermore, pursuant to a separate collateral pledge agreement, NDS pledged its equity interest in NFI as additional collateral.

The WF Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets. If an event of default

occurs, the lenders could increase borrowing costs, restrict the Borrowers’ ability to obtain additional advances under the WF Credit Facility, accelerate all amounts outstanding under the WF Credit Facility, enforce their interest against collateral pledged under the WF Credit Facility or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

If the lenders terminate the WF Credit Facility following the occurrence of an event of default under the loan documents, or the Borrowers prepay the loan and terminate the WF Credit Facility prior to the Maturity Date, then the Borrowers are obligated to pay a termination or prepayment fee in an amount equal to a percentage of $175 million, calculated as 2% if the termination or prepayment occurs during year one, 1% if the termination or repayment occurs during year two, and 0.5% if the termination or prepayment occurs thereafter.

On October 20, 2022, the Company received a letter from the agent of the lenders under the WF Credit Facility notifying the Company that the agent is instituting the default rate of interest of 2.5% effective as of August 31, 2022 in connection with an event of default that occurred by virtue of the Company’s failure to comply with Section 6.3(a) of the Loan Agreement (EBITDA Ratio) for the calendar month ended August 31, 2022. The effect of the imposition of the default rate of interest was an additional approximately $130 thousand in interest for the quarter ended September 30, 2022. The Company expects that an additional approximately $118 thousand in interest will be incurred per month while the default rate remains in place. For the calendar months ended September 30, 2022 and October 31, 2022, the Company also failed to comply with the EBITDA Ratio under the WF Credit Facility. The Company is working with Wells Fargo to address the default, and is also negotiating a refinancing opportunity with an alternative source. There can be no assurances that the Company will be successful in addressing the default or entering into a successor agreement on favorable terms or at all.

The Company will continue to depend on the availability the WF Credit Facility, together with cash from operations, to finance future operations. The availability of funds under the WF Credit Facility generally depends on availability calculations as defined in the WF Credit Agreement. See also the disclosure in Note 5. Credit Facility in this Form 10-Q, which is incorporated herein by reference.

The Company has begun its restructuring process to substantially decrease operating expenses and is developing a strategy with respect to its long-term use of cash. The related disclosure contained in “Restructuring and Change in Operating Strategy” is incorporated herein by reference.

Off-Balance Sheet Arrangements

The Company does not engage in any off-balance sheet financing arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting.

No change in the Company’s internal control over financial reporting occurred during the Company’s fiscal quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, that, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, especially in the section “PART I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements,” you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022, which could materially affect our business, financial condition or future results. The risks described in the Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchase made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our shares of common stock during the three months ended September 30, 2022.


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
Period	(In thousands, except for average price paid per share)
July 1, 2022 to July 31, 2022		5	$	9.46		5	$	2,866
August 1, 2022 to August 31, 2022		4		9.17		4		2,829
September 1, 2022 to September 30, 2022		8		7.17		8		2,772
Total		17	$	8.60		17

The timing and actual number of sharers will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

In August 2019, the Company’s Board authorized additional repurchase of up to $1.0 million of the Company’s outstanding shares.

ITEM 3. Defaults Upon Senior Securities

ITEM 6. EXHIBITS


Exhibit No.		Description

31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.11		Certification of the Principal Executive Officer Pursuant to 18 U.S.C. § 1350

32.21		Certification of the Principal Financial Officer Pursuant to 18 U.S.C. § 1350

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

1 This certification accompanies the Quarterly Report on Form 10-Q and is not filed as part of it.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

NICHOLAS FINANCIAL, INC.

(Registrant)


Date: November 14, 2022		/s/ Mike Rost
		Mike Rost
		Chief Executive Officer
		(Principal Executive Officer)


Date: November 14, 2022		/s/ Irina Nashtatik
		Irina Nashtatik
		Chief Financial Officer
		(Principal Financial Officer)