Nicholas Financial, Inc. provides direct consumer loans and purchases installment sales contracts from
automobile dealers for used cars and light trucks. Nicholas Financial operates a network of 50+ locations in
Florida, Alabama, Georgia, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsyl-
vania, South Carolina and Tennessee. The Company’s stock has been publicly traded since 1987. The company
is listed on the NASDAQ-GS Global Select Market under the symbol, NICK. The NASDAQ Global Select Market
(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:17)
“Fiscal year 2019 was also a very important and even transformative year for Nicholas Financial. ... At
the conclusion of the fiscal year, we were able to look back over the previous 12 months with a sense of
accomplishment. We had faced our challenges head-on and were able to execute on solutions that we
believe are positive for our Company now and for years to come.”
- Doug Marohn
From the President...................................................1
Form 10-K Annual Report................................... Insert
NFI Shareholder Information Inside Back Cover
F R O M T H E P R E S I D E N T
The fiscal year ended March 31, 2019 marked our 34th year in business
and our 32nd year as a public company. Although most of those years produced
excellent results and record returns, the last several years have resulted in meager
and even negative earnings. Fiscal year 2019, in fact, resulted in a material net
loss. However fiscal year 2019 was also a very important and even transformative
year for Nicholas Financial. It was a year in which we faced our challenges head on
and addressed the policy and strategy mistakes instituted during fiscal years 2015
through 2017. We secured stability of liquidity, improved our infrastructure and
technological capabilities, added new product lines and ultimately improved the
overall health and stability of our great Company. Shortly after the end of the fiscal
year, we closed on the acquisition of Metrolina Credit Company – the first major
transaction in the history of Nicholas Financial and one that was immediately
accretive to earnings.
When I returned to Nicholas Financial in December of 2017, I took over a company
which was very much on the decline. The many challenges we faced then included
too many strategic and operational policies that ran counter to our current plan for
success. These counter-productive policies created a lack of any real brand identity,
no obvious value proposition to our core clients (the independent preowned car dealer), a toxic legacy portfolio with uncontrolled
losses comprised of lower yields and other deficient underwriting aspects. Other circumstances that were detrimental to success of
Nicholas at the time included an archaic customer servicing platform, a strained relationship with our bank group, operational expens-
es that were two and three times those of our competitors and a shrinking portfolio that just exacerbated all of these other challenges.
From the day I walked back through the doors of Nicholas Financial on December 12, 2017, our strategy has been to systematically ad-
dress each one of these challenges and to build the base necessary to return this unique and excellent Company back to the successful
organization it had been for three decades prior. I am happy and proud to report to you that line by line, item by item, that is exactly
what we accomplished in fiscal year 2019.
Doug Marohn
President & CEO
The letter I wrote to you a year ago laid out the many policies and strategies enacted in previous years that were simply counter to
those in place when we enjoyed 30 years of impressive and often record returns. We showed how most of our existing portfolio was
built on several years of aggressive underwriting with loose controls, deficient pricing and improper structure. We produced a chart
showing how the key performance indicators (KPI’s) from fiscal years 2015 through 2017 deteriorated to unsustainable levels that were
damaging to profitability and detrimental to what simply makes sense.
We also proved early on that our renewed commitment to common sense lending in this space produced improved yield through
increased rate and discount. Additional benefits included lower exposure through reduced amount financed, shortened monthly terms
and improved loan to value, while at the same time maintaining level credit profile aspects of our borrowing customer. Since that
letter a year ago, we have continued to improve on each of those KPI’s. We have increased the average rate to 23.5%, increased the
average discount to approximately 8% and reduced the average amount financed to under $10,000. We have also shortened the average
term to less than 48 months, reduced the LTV to about 100% and have kept the average FICO range in line with (and in some cases bet-
ter than) our historical credit profiles of the last 10 years. The chart below illustrates the material improvement on our underwriting
metrics since December 2017.
Fiscal Year /Quarter
2019
4
3
2
1
2018
4
3
2
1
2017
4
3
2
1
Number of
Contracts Purchased
Principal Amount
Purchased
7,684
2,151
1,625
1,761
2,147
9,767
2,814
2,365
2,239
2,349
14,619
3,677
3,846
3,592
3,504
$77,498,829
$21,233,193
$16,475,956
$17,844,587
$21,945,093
$109,575,099
$29,253,725
$27,378,449
$25,782,056
$27,160,869
$170,941,206
$42,629,274
$45,941,459
$41,540,401
$40,830,072
Average
Financed
$
10,086
9,871
10,139
10,133
10,221
11,219
10,396
11,577
11,515
11,563
11,693
11,593
11,945
11,565
11,609
Average
APR
Average Discount
Percentage
Average
Term
23.5%
23.5%
23.5%
23.5%
23.7%
22.4%
23.3%
21.7%
22.0%
22.3%
22.2%
22.3%
22.0%
22.3%
22.4%
8.2%
8.0%
8.1%
8.4%
8.3%
7.4%
7.9%
6.9%
7.3%
7.6%
7.1%
7.3%
6.9%
7.0%
7.2%
47
46
47
47
48
54
50
54
55
55
57
56
57
57
57
1
F R O M T H E P R E S I D E N T
The premise for these changes was that we would reduce our
This return to the traditional 120-day charge off policy affords us
losses through better underwriting and deal structure. This
many positives despite the negative impact on our fiscal year 2019
theory has proven to be absolutely correct. In each of the quarters
financials. This change brings us more in line with industry stan-
reported since my return, we have experienced vastly improved
dards. It also creates a greater sense of urgency when servicing past
loss timing curves on the pools of business produced. The following
due accounts. The 120-day charge off policy benefits our customers
write-off charts represent the two most seasoned pools and illus-
as well, in that if we do have to repossess a vehicle due to delinquen-
trate the improved portfolio performance.
cy, we are doing it earlier in the account life. Since the customer is
only 2 or 3 payments past due
versus 4 or 5, it makes it much
more feasible for a customer to
redeem the vehicle, if they have
the ability and are willing to do
so. In the event of a repossession
that does not get redeemed, the
collateral is typically in much
better condition than if it were
repossessed later in the delin-
quency cycle.
Another failed policy that
was instituted at Nicholas a
few years ago was extending
the charge-off parameters in
terms of allowable delinquency.
Whereas we had historically
charged-off accounts when they
went over 120 days past due, the
Company changed that in 2016
to charging off after 180 days
past due. This change exacer-
bated the negative performance
of our portfolio. Not only did
that policy impact the timing of repossessions, it also impacted the
way our employees serviced and collected the accounts. Too often,
there was not a focus on collection efforts for accounts “only” 60
or 90 days past due. This created an unmanageable build-up of
late stage delinquency, made up of accounts that could have been
addressed and resolved earlier.
In fiscal year 2019, we made the purposeful and strategic decision
to return to the traditional 120-day charge off policy, which result-
ed in a one-time charge-off of approximately $6.4 million. The deci-
sion also had an impact on our provision expense of approximately
$4.9 million. Had we not made this decision, we would have had
positive net earnings of well over $1 million for the fiscal year.
We are also already seeing an increase in recovery dollars on
charged-off accounts and anticipate that to continue. Finally, it
allows for a much more transparent snapshot of the portfolio.
Continuing on the topic of servicing, Nicholas Financial had used
an internally built software application for our loan servicing
since inception of the Company. The system was extremely secure,
experienced virtually no down time and was a great “work horse”
overall. It was not without limitations, as the aging technology at
its core made integrating third-party vendors more difficult, and the
available workforce familiar with the dated software platform was
becoming increasingly scarce.
2
F R O M T H E P R E S I D E N T
Other reasons for moving to a more contemporary system include
However, the current state of the Company and the recent
limited reporting tools and a perceived lack of user friendliness
performance of our portfolio were such that we were constantly
for the borrowing customer as they accessed their account. After
being issued pricing increases, short term renewals and covenant
vetting many available platforms,
restrictions that made operations and strategic planning more
we made the decision to convert our
and more uncertain. We knew it was time to find a partner who
Loan Management System to GOLD-
not only understood our business but also recognized our long
Point Systems in June of 2018. We
history of success and – more importantly – believed emphat-
completed the conversion from our
ically in our direction and future. On March 29, 2019, we were
internal system to the GOLDPoint
excited to announce our new credit facility with funds managed
system in February of 2019.
by affiliates of Ares Management Corporation that replaced our
warehouse line with the previous bank group.
The conversion to GOLDPoint Systems provides Nicholas Finan-
cial with a significantly improved technological foundation that
provides countless benefits, including materially improved report-
ing capabilities, a streamlined capability to interface with vendor
partners and 3rd party products, enhanced user functionality and
management tools as well as a vastly more robust customer portal.
We jokingly refer to our old system as the “Pong” video game from
the 1980’s and GOLDPoint as being more akin to “Fortnite”.
The new Ares
Management facility
was a big win for
Nicholas across the
board. The $175
million facility
affords us sufficient capital and liquidity to fund our business.
The three-year term gives us the security and stability to allow
One of the biggest challenges beyond simply executing on our
us to focus on the business of the business, instead of the uncer-
business model, was our ability to maintain sufficient capital
and liquidity for the long-term. For many years the Company
tainty of constantly negotiating short term renewals. The terms
and conditions are attractive and provide us with much more
had enjoyed a very positive and stable relationship with its bank
flexibility in dealing with our capital requirements. The freedom
group.
of a long-term facility with what we feel are improved terms and
pricing have us focused directly forward instead of constantly
looking over our shoulder.
Being cognizant of our increasing operational expense percent-
ages, as a result of our shrinking portfolio due to the increased
focus on deal structure and pricing over volume, we made some
hard decisions in the 4th quarter. We exited two states (Vir-
ginia and Texas) entirely for the time being. Unfortunately, the
four offices in these two states have been drags on our P&L for
years and we simply could not continue allocating resources to
these unprofitable operations. We also identified several select
offices for consolidation in multi-branch markets. As of the date
of this letter, we have reduced our branch count in the Raleigh
and Charlotte markets of North Carolina and in Atlanta, Georgia,
while still maintaining one or more branches in each of these
markets.
In addition to the market exits and consolidations, we are excit-
ed to report we are still actively looking to grow our network in
viable new markets. We are currently generating business and
building portfolios in Columbia, South Carolina and Milwaukee,
Wisconsin. We intend to open full-service branches in both mar-
kets in the not too distant future. There are several other mar-
kets under consideration for potential expansion, as well.
3
F R O M T H E P R E S I D E N T
One of our more exciting ventures in fiscal year 2019 has been our
We needed to secure a different credit facility that provided secu-
initiatives to grow our Direct Loan business. What was primarily
rity and stability. We needed to find a way to stem the shrinking
a product we only offered in Florida is now also in place in North
of our portfolio. What we found out is we could not have closed the
Carolina, Georgia and Ohio. These loans are principally offered
new credit facility without having converted to our new servicing
to our existing and former customer base. For the most part the
platform, due to the sophisticated reporting requirements of an ABS
Direct loan accounts have performed extremely well, with de-
facility. Subsequently, the new credit facility allowed us the capital
linquencies and losses as low as half of what we’ve seen in our
and flexibility of use to act quickly when the potential Metrolina
Indirect portfolio. Recently we have initiated the process of getting
Credit Company acquisition surfaced. This was something we could
licensed to offer this product in all the other states in which we
not have accomplished under our previous credit line.
operate. We hope to be able to offer this product in every branch
across our network by the end of the year.
At the conclusion of the fiscal year, we were able to look back over
Now that fiscal year 2019 is behind us, we look forward to fiscal
the previous 12 months with a sense of accomplishment. We had
year 2020 and beyond. Armed with improved infrastructure, more
faced our challenges head-on and were able to execute on solutions
stability of funding, and a shot in the arm from our acquisition of
that we believe are positive for our Company now and for years to
Metrolina, we are charging into 2020 with more momentum than
come. But we were not done there.
On April 30, 2019 – the first month of the new fiscal year 2020 –
we announced with great pride and enthusiasm the acquisition of
Metrolina Credit Company. Metrolina was my home for the four
years prior to rejoining Nicholas. As their President and CEO from
2014 through 2017, I was intimately aware of Metrolina’s operations,
portfolio, personnel, culture and potential. The consolidation of
two companies so similarly aligned made for an exciting transac-
tion that was immediately accretive to Nicholas. The acquisition of
Metrolina not only added over $22 million of performing receivables
I can remember at Nicholas. Our focus now is to not only acquire
good quality loans that are well priced and structured but to also
increase the volume of loans purchased, allowing us to grow the
Company again. Everything we have done in this past year was
executed with the intention of getting us to the place we are now.
There are still many challenges ahead of us both internally and
externally. It will not be an easy row to hoe for the foreseeable
future. However, we are now poised to focus on offense as much as
defense, so we can grow our business, our portfolio and our returns
for our investors.
to our portfolio but it also removed a direct competitor from the
We thank all of you who have invested in Nicholas. We truly
Carolinas. The synergy between the two companies allowed us to
appreciate your support and continued belief in our Company. On
immediately assimilate a talented group of Metrolina employees
behalf of our Board of Directors, our management team and all our
and expanded our Carolina dealer base significantly.
wonderful and dedicated employees, thank you for your confidence,
Interestingly, all our major accomplishments were closely inter-
twined and most likely could not have happened without the com-
bined interaction. We needed to convert to a more technologically
advanced loan management system.
support and trust.
4
Doug Marohn
President & Chief Executive Officer
July, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:3)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
OR
(cid:4)(cid:4) 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
( State or other jurisdiction of
incorporation or organization)
2454 McMullen Booth Road, Building C
Clearwater, FL
(Address of principal executive offices)
33759
(Zip Code)
Registrant’s telephone number, including area code: (727) 726-0763
8736-3354
(I.R.S. Employer
Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common shares, no par value
Securities registered pursuant to Section 12(g) of the Act: None
Trading
Symbol(s)
NICK
Name of each exchange on which registered
NASDAQ Global Select Market
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:3) NO (cid:4)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:3) NO (cid:4)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES (cid:4) NO (cid:3)
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required
to submit such files). YES (cid:4) NO (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
d
(cid:3)
Large accelerated filer
Non-accelerated filer
(cid:3)
Emerging growth company (cid:3)
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. (cid:3)
Accelerated filer
(cid:3)
Smaller reporting company(cid:4)
ff
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:3) NO (cid:4)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the
shares of common stock on The NASDAQ Stock Market on September 30, 2018, was approximately $66.7 million.
The number of shares of Registrant’s Common Stock outstanding as of June 21, 2019 was approximately 12.6 million shares, no par
r
Registrant were outstanding (of which approximately 4.7 million shares were held by the Registrant’s principal operating subsid
to applicable law, not entitled to vote and approximately 7.9 million shares were entitled to vote).
value, of the
iary and pursuant
t
Portions of the Registrant’s definitive Proxy Statement and Information Circular for the 2019 Annual General Meeting of Shareholders are
incorporated by reference in Part III, Items 10 through 14, of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
NICHOLAS FINANCIAL, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes In and Disagreements With Accountants on Accounting and Financial
Item 9.
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Page No.
1
11
21
21
21
21
22
24
26
33
34
59
60
61
62
62
62
62
62
63
Forward-Looking Information
This Annual Report on Form 10-K (this “Report” or “Annual Report”) 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. and its subsidiaries (collectively the “Company”) 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. Such statements are subject to certain risks, uncertainties and assumptions, including but not
limited to the risk factors discussed herein under “Item 1A – Risk Factors.” 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. Among the key factors that may cause actual results to differ materially
from those projected in forward-looking statements include the availability of capital (including the ability to access
availability of capital (including the ability to access
bank financing), recently enacted, proposed or future legislation and the manner in which it is implemented,
bank financing), recently enacted, proposed or future legislation and the manner in which it is implemented,
including the effect of changes in tax law, fluctuations in the economy, the degree and nature of competition and its
effects on the Company’s financial results, fluctuations in interest rates, 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, the Company’s products and services, increases in the default rates experienced on
n
automobile finance installment contracts (“Contracts”), adverse regulatory changes in the Company’s existing and
d
future markets,
business, including its ability to complete acquisitions and integrate the operations of acquired businesses and to
business, including its ability to complete acquisitions and integrate the operations of acquired businesses and to
expand into new markets, and the Company’s ability to recruit and retain qualified employees
. All forward-looking
statements included in this Report are based on information available to the Company as of the date of filing of this
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 US Securities and Exchange Commission (“SEC”), including its reports on Forms 10-Q, 8-K and annual reports
to shareholders.
the Company’s ability to expand its
the Company’s intentions regarding strategic alternatives, the Company’s ability to expand its
Item 1. Business
General
PART I
Nicholas Financial, Inc. (“Nicholas Financial-Canada”) is a Canadian holding company incorporated under the laws
of British Columbia in 1986. The business activities of Nicholas Financial-Canada are currently conducted
exclusively through its wholly-owned indirect subsidiary, Nicholas Financial, Inc., a Florida corporation (“Nicholas
Financial”). Nicholas Financial is a specialized consumer finance company engaged primarily in acquiring and
servicing automobile finance installment contracts (“Contracts”) for purchases of used and new automobiles and
light trucks. To a lesser extent, Nicholas Financial also originates direct consumer loans (“Direct Loans”) and sells
consumer-finance related products. A second Florida subsidiary, Nicholas Data Services, Inc. (“NDS”), serves as the
intermediate holding company for Nicholas Financial. In addition, NF Funding I, LLC (“NF Funding I”), is a newly
formed, wholly-owned, special purpose financing subsidiary of Nicholas Financial.
Nicholas Financial-Canada, Nicholas Financial, NDS, and NF Funding I are hereafter collectively referred to as the
“Company”. Nicholas Financial’s operations accounted for approximately 100% of the Company’s consolidated
revenue for the fiscal year ended March 31, 2019, as NF Funding I accounted for less than 1% of consolidated
revenue for fiscal 2019. Nicholas Financial’s operations accounted for 100% of the Company’s consolidated
revenue for the fiscal year ended March 31, 2018.
All financial information herein is designated in United States dollars. References to “fiscal 2019” are to the fiscal
year ended March 31, 2019 and references to “fiscal 2018” are to the fiscal year ended March 31, 2018.
The Company’s principal executive offices are located at 2454 McMullen Booth Road, Building C, Clearwater,
Florida 33759, and its telephone number is (727) 726-0763.
Available Information
The Company’s filings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q,
definitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports
filed pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, are made available free of charge
through the Investor Center section of the Company’s Internet website at http://www.nicholasfinancial.com as soon
as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. The
Company is not including the information contained on or available through its web site as a part of, or
incorporating such information by reference into, this Report. Copies of any materials the Company files with the
SEC can also be obtained free of charge through the SEC’s website at http://www.sec.gov or at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Operating Strategy
The Company remains committed to its branch-based model and its core product of financing primary transportation
to and from work for the subprime borrower. The Company will strategically employ the use of centralized
servicing departments to supplement the branch operations and improve operational efficiencies, but its focus will
be on its core business model of decentralized operations. The Company’s strategy will also include pricing based
on risk (rate, yield, advance, etc.) and a commitment to the underwriting discipline required for optimal portfolio
performance. The Company’s principal goals are to increase its profitability and its long-term shareholder value.
During fiscal 2019, the Company focused on the following items:
p y
g
g
•
•
•
•
•
recommitted to branch model;
restored accountability to branch managers;
focused on return on assets;
returned to core products;
focused on profitability over volume;
p
y
1
•
•
•
•
focused on independent dealers;
stopped chasing the competition;
focused more on pricing;
focused on growing the Direct Loan portfolio.
g
g
p
The Company also focused on selecting the right markets to have branch locations. As of March 31, 2019, the
Company operated in 15 states — Alabama, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Michigan,
Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, and Wisconsin (with the Wisconsin
operations being conducted out the Charlotte, NC office).
During fiscal 2018, the Company consolidated branch offices located in Dayton, Ohio, Doral, Florida, and Villa
Park, Illinois with other branches in those markets. During fiscal 2019, the Company exited the Maryland market by
closing its branch office located in Baltimore. The Company also consolidated offices in Florida (the Sunrise branch
was consolidated with the Pompano branch) and in North Carolina (the Winston-Salem branch consolidated with the
Greensboro branch). In addition, the Company announced that it was exiting the Texas and Virginia markets.
During the first quarter of fiscal 2020, the Company also consolidated two branches in North Carolina and two
branches in Georgia. The Company will continue to evaluate underperforming markets and underperforming
branches, as needed.
During fiscal 2019, the Company expanded into Milwaukee, Wisconsin, and once receivables reach an acceptable
level, the Company intends to open a physical brick-and-mortar location there. The Company also continues to look
for other expansion opportunities. Although the Company cannot assert how many new markets it will enter (if any)
in the foreseeable future, it does remain focused on growing the branch network where conditions are favorable.
On April 30, 2019 the Company acquired substantially all of the assets of ML Credit Group, LLC (d/b/a Metrolina
the Company acquired substantially all of the assets of ML Credit Group, LLC (d/b/a Metrolina
Credit Company) (“Metrolina”). Metrolina provides automobile financing to consumers by direct loans and through
purchases of retail installment sales contracts originated by automobile dealers in the states of North Carolina and
purchases of retail installment sales contracts originated by automobile dealers in the states of North Carolina and
South Carolina.
This acquisition represents the first bulk purchase of Contracts in over two decades. If other
opportunities arise, the Company may consider possible acquisitions of portfolios of seasoned Contracts from
dealers or lenders in bulk transactions as a means of further penetrating its existing markets or expanding its
presence in targeted geographic locations.
The Company is currently licensed to provide Direct Loans in Florida, North Carolina, Ohio, and has also started
writing deregulated direct loans over $3,000 in Georgia. The Company solicits current and former customers in
these states for the purpose of selling Direct Loans to such customers. In addition, the Company is focused on the
expansion of its Direct Loan capabilities to the other states in which it acquires Contracts. Even with this targeted
expansion, the Company expects its total Direct Loans portfolio to remain between 3% and 10% of its total portfolio
for the foreseeable future.
The Company cannot provide any assurances that it will be able to expand in either its current markets or any
gtargeted new markets.
Automobile Finance Business – Contracts
The Company is engaged in the business of providing financing programs, primarily to purchasers of used cars and
light trucks who meet the Company’s credit standards but who do not meet the credit standards of traditional
lenders, such as banks and credit unions, because of the customer’s credit history, job instability, the age of the
vehicle being financed, or some other factor(s). Unlike traditional lenders, which look primarily to the credit history
of the borrower in making lending decisions and typically finance new automobiles, the Company is willing to
purchase Contracts for purchases made by borrowers who do not have a good credit history and for older model and
high-mileage automobiles. In making decisions regarding the purchase of a particular Contract, the Company
considers the following factors related to the borrower: current income; credit history; history in making installment
payments for automobiles; current and prior job status; and place and length of residence. In addition, the Company
examines its prior experience with Contracts purchased from the dealer from which the Company is purchasing the
Contract, and the value of the automobile in relation to the purchase price and the term of the Contract.
2
As of the date of this Annual Report on Form 10-K, the Company’s automobile finance programs are conducted in
15 states through a total of 50 branch offices located in the states of Florida, Georgia, Ohio, Illinois, Indiana,
Kentucky, Missouri, North Carolina, Alabama, South Carolina, Tennessee, Michigan, Kansas, Pennsylvania, and
Wisconsin. The Company acquires Contracts in Wisconsin using the underwriting staff of the Charlotte, North
Carolina branch location. As of March 31, 2019, the Company had non-exclusive agreements with approximately
4,500 dealers, of which approximately 1,400 were active, for the purchase of individual Contracts that meet the
Company’s financing criteria. The Company considers a dealer agreement to be active if the Company has
purchased a Contract thereunder in the last six months. Each dealer agreement requires the dealer to originate
Contracts in accordance with the Company’s guidelines. Once a Contract is purchased by the Company, the dealer is
no longer involved in the relationship between the Company and the borrower, other than through the existence of
limited representations and warranties of the dealer in favor of the Company.
A customer under a Contract typically makes a down payment, in the form of cash and/or trade-in, ranging from 5%
to 35% of the sale price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees
and, if applicable, premiums for extended service contracts, gap insurance, roadside assistance plans, credit
disability insurance and/or credit life insurance are generally financed over a period of 12 to 60 months. At
approximately the time of origination, the Company purchases a Contract from an automobile dealer at a negotiated
price that is less than the original principal amount being financed by the purchaser of the automobile. The Company
refers to the difference between the negotiated price and the original principal amount being financed as the dealer
discount. The amount of the dealer discount depends upon factors such as the age and value of the automobile and
the creditworthiness of the customer. The Company has recommitted to maintaining pricing discipline and therefore
places less emphasis on competition when pricing the discount. Generally, the Company will pay more (i.e.,
purchase the Contract at a smaller discount from the original principal amount) for Contracts as the credit risk of the
customer improves. To date, the Contracts purchased by the Company have been purchased at discounts that range
from 1% to 15% of the original principal amount of each Contract. As of March 31, 2019, the Company’s loan
portfolio consisted exclusively of Contracts purchased without recourse to the dealer, however each dealer remains
potentially liable to the Company for breaches of certain representations and warranties made by the dealer with
respect to compliance with applicable federal and state laws and valid title to the vehicle. The Company’s policy is
to only purchase a Contract after the dealer has provided the Company with the requisite proof that (a) the Company
has a first priority lien on the financed vehicle (or the Company has, in fact, perfected such first priority lien), (b) the
customer has obtained the required collision insurance naming the Company as loss payee with a deductible of not
more than $1,000 and (c) the Contract has been fully and accurately completed and validly executed. Once the
Company has received and approved all required documents, it pays the dealer for the Contract and commences
servicing the Contract.
3
Contract Procurement
The Company currently purchases Contracts in the states listed in the table below. The Contracts purchased by the
Company are predominantly for used vehicles; for the periods shown below, less than 1% were for new vehicles.
The average model year collateralizing the portfolio as of March 31, 2019 was a 2011 vehicle. The dollar amounts
shown in the table below represent the Company’s finance receivables on Contracts purchased within the respective
fiscal year:
State
Alabama
Florida
Georgia
Illinois
Indiana
Kansas
Kentucky
Maryland
Michigan
Missouri
North Carolina
Ohio
Pennsylvania
South Carolina
Tennessee
Texas
Virginia
Wisconsin
Total
Maximum
allowable
interest
rate (1)
Number of
Branches
Fiscal year ended March 31, (In thousands)
2019
2018
(2)
18-30%(3)
18-30%(3)
(2)
25%
(2)
18-25%(3)
24%
25%
(2)
18-29%(3)
25%
18-21%(3)
(2)
(2)
18-28%(3)
(2)
(2)
2 $
17
6
1
3
1
3
—
2
3
4
6
1
2
2
—
—
—
53 $
1,590 $
21,524
8,988
700
3,995
1,087
3,792
—
3,389
3,207
7,283
11,768
1,772
2,366
2,463
1,787
1,655
133
77,499 $
3,108
29,206
11,192
2,667
7,001
1,788
5,558
1,040
4,709
4,663
8,836
14,599
2,200
4,055
3,374
2,835
2,639
105
109,575
(1)
(2)
(3)
The maximum allowable interest rates are subject to change and vary based on the laws of the individual
states.
None of these states currently imposes a maximum allowable interest rate with respect to the types and sizes
of Contracts the Company purchases. The maximum rate which the Company will typically charge any
customer in each of these states is 30% per annum.
The maximum allowable interest rate in each of these states varies depending upon the model year of the
vehicle being financed. In addition, Georgia does not currently impose a maximum allowable interest rate
with respect to Contracts over $5,000.
The following table presents selected information on Contracts purchased by the Company:
Fiscal year ended March 31,
(Purchases in thousands)
2018
2019
109,575
77,499
$
23.52%
8.22%
47
10,086
7,684
$
22.35%
7.41%
54
11,219
9,767
Contracts
Purchases
Average APR
Average dealer discount
Average term (months)
Average loan
Number of Contracts purchased
$
$
4
Direct Loans
The Company currently originates Direct Loans in Florida, North Carolina, Georgia, and Ohio. Direct Loans are
loans originated directly between the Company and the consumer. These loans are typically for amounts ranging
from $1,000 to $15,000 and are generally secured by a lien on an automobile, watercraft or other permissible
tangible personal property. The average loan made during fiscal 2019 by the Company had an initial principal
balance of approximately $4,000. The Company does not expect the average loan size to increase significantly
within the foreseeable future. Most of the Direct Loans are originated with current or former customers under the
Company’s automobile financing program. The typical Direct Loan represents a better credit risk than our typical
Contract due to the customer’s historical payment history with the Company. The Company does not have a Direct
Loan license in Alabama, Illinois, Indiana, Kansas, Kentucky, Maryland, Michigan, Missouri, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia or Wisconsin, and none is presently required in Georgia provided that the
original principal balance of the loan is greater than $3,000. The Company obtained a Direct Loan license in Ohio
during the fiscal year ended 2019 and expects to pursue licenses in one or more states in the foreseeable future. The
size of the loan and maximum interest rate that may be (and is) charged varies from state to state. The Company
considers the individual’s income, credit history, job stability, and the value of the collateral offered by the borrower
to secure the loan as the primary factors in determining whether an applicant will receive an approval for such loan.
Additionally, because most of the Direct Loans made by the Company to date have been made to borrowers under
Contracts previously purchased by the Company, the payment history of the borrower under the Contract is a
significant factor in making the loan decision. The Company’s Direct Loan program was implemented in April 1995
and accounted for approximately 3% of the Company’s annual consolidated revenues during the year ended
March 31, 2019.
In connection with its Direct Loan program, the Company also makes available credit disability insurance, credit life
insurance, and involuntary unemployment insurance coverage to customers through unaffiliated third-party
insurance carriers. Approximately 65% of the Direct Loans outstanding as of March 31, 2019 elected to purchase
third-party insurance coverage made available by the Company. The cost of this insurance to the customer, which
includes a commission for the Company, is included in the amount financed by the customer.
The following table presents selected information on Direct Loans originated by the Company:
Direct Loans
Originations
Average APR
Average term (months)
Average loan
Number of contracts originated
Fiscal year ended March 31,
(Originations in thousands)
2019
2018
$
$
7,741
$
26.37%
25
4,036
1,918
$
7,642
25.20%
29
3,754
2,036
Underwriting Guidelines
The Company’s typical customer has a credit history that fails to meet the lending standards of most traditional
banks and credit unions. Among the credit problems experienced by the Company’s customers that resulted in a
poor credit history are: prior automobile account repossessions, unpaid revolving credit card obligations, unpaid
medical bill, unpaid student loans, prior bankruptcy, and evictions for nonpayment of rent. The Company believes
that its customer profile is similar to that of its direct competitors.
Prior to its approval of the purchase of a Contract, the Company is provided with a standardized credit application
completed by the consumer which contains information relating to the consumer’s background, employment, and
credit history. The Company also obtains credit reports from Equifax and/or TransUnion, which are independent
credit reporting services. The Company verifies the consumer’s employment history, income, and residence. In most
cases, consumers are interviewed via telephone by a Company application processor (usually the Branch Manager or
Assistant Branch Manager). The Company also considers the customer’s prior payment history with the Company, if
any, as well as the collateral value of the vehicle being financed.
5
The Company has established internal underwriting guidelines to be used by its Branch Managers and internal
underwriters when purchasing Contracts. Any Contract that does not meet these guidelines must be approved by the
District Managers or senior management of the Company. The Company currently has District Managers charged
with managing the specific branches in a defined geographic area. In addition to a variety of administrative duties,
the District Managers are responsible for monitoring their assigned branches’ compliance with the Company’s
underwriting guidelines as well as approving underwriting exceptions.
The Company uses essentially the same criteria in analyzing a Direct Loan as it does in analyzing the purchase of a
Contract. Lending decisions regarding Direct Loans are made based upon a review of the customer’s loan
application, income, credit history, job stability, and the value of the collateral offered by the borrower to secure the
loan. To date, since the majority of the Company’s Direct Loans have been made to individuals whose automobiles
have been financed by the Company, the customer’s payment history under his or her existing or past Contract is a
significant factor in the lending decision.
After reviewing the information included in the Contract or Direct Loan application and taking the other factors into
account, the Company’s loan origination system categorizes the customer using internally developed credit
classifications of “1,” indicating higher creditworthiness, through “4,” indicating lower creditworthiness. Contracts
are financed for individuals who fall within all four acceptable rating categories utilized, “1” through “4”. Usually a
customer who falls within the two highest categories (i.e., “1” or “2”) is purchasing a two to five-year old, lower
mileage used automobile, while a customer in any of the two lowest categories (i.e., “3,” or “4”) usually is
purchasing an older, higher mileage automobile from an independent used automobile dealer.
The Company utilizes internal audit (“IA”) to perform audits of its branches’ compliance with Company
underwriting guidelines. IA audits Company branches on a schedule that is variable depending on the size of the
branch, length of time a branch has been open, current tenure of the Branch Manager, previous branch audit score,
and current and historical branch profitability.
Monitoring and Enforcement of Contracts
The Company requires each customer under a Contract to obtain and maintain collision insurance covering damage
to the vehicle. Failure to maintain such insurance constitutes a default under the Contract, and the Company may, at
its discretion, repossess the vehicle. To reduce potential loss due to insurance lapse, the Company has the
contractual right to obtain collateral protection insurance through a third-party, which covers loss due to physical
damage to a vehicle not covered by any insurance policy of the customer.
The Company’s Management Information Services personnel maintain a number of reports to monitor compliance
by customers with their obligations under Contracts and Direct Loans made by the Company. These reports may be
accessed on a real-time basis or at the end of the day throughout the Company by management personnel, including
Branch Managers and staff, at computer terminals located in the main office and each branch office. These reports
include delinquency reports, customer promise reports, vehicle information reports, purchase reports, dealer analysis
reports, static pool reports, and repossession reports.
A delinquency report is an aging report that provides basic information regarding each customer account and
indicates accounts that are past due. The report includes information such as the account number, address of the
customer, phone numbers of the customer, original term of the Contract, number of remaining payments,
outstanding balance, due dates, date of last payment, number of days past due, scheduled payment amount, amount
of last payment, total past due, and special payment arrangements or agreements.
When an account becomes delinquent, the Company immediately contacts the customer to determine the reason for
the delinquency and to determine if appropriate arrangements for payment can be made. If payment arrangements
acceptable to the Company can be made, the information is entered in its database and is used to generate a customer
promises report, which is utilized by the Company’s collection staff for account follow up.
6
The Company prepares a repossession report that provides information regarding repossessed vehicles and aids the
Company in disposing of repossessed vehicles. In addition to information regarding the customer, this report
provides information regarding the date of repossession, date the vehicle was sold, number of days it was held in
inventory prior to sale, year, make and model of the vehicle, mileage, payoff amount on the Contract, NADA book
value, Black Book value, suggested sale price, location of the vehicle, original dealer and condition of the vehicle, as
well as notes other information that may be helpful to the Company.
If an account is 121 days delinquent and the related vehicle has not yet been repossessed, the account is charged-off
and transferred to the Loss Prevention and Recovery Department. Once a vehicle has been repossessed, the related
loan balance no longer appears on the delinquency report. Instead, the vehicle appears on the Company’s
repossession report and is generally sold at auction. During the fourth quarter of fiscal 2019, the Company changed
its charge-off policy from 181 days past due to 121 days past due. Please see Note 3 to the Consolidated Financial
Statements included in this Annual Report for further discussion.
The Company also prepares a dealer analysis report that provides information regarding each dealer from which it
purchases Contracts. This report allows the Company to analyze the volume of business done with each dealer, the
terms on which it has purchased Contracts from such dealer, as well as the overall portfolio performance of
Contracts purchased from the dealer.
The Company is subject to seasonal variations within the subprime marketplace. While the APR, discount, and term
remain consistent across quarters, write offs and delinquencies tend to be lower while purchases tend to be higher in
the fourth and first quarter of the fiscal year. The second and third quarter of the fiscal year tend to have higher write
offs and delinquencies, and a lower level of purchases.
Marketing and Advertising
The Company’s Contract marketing efforts currently are directed primarily toward automobile dealers. The
Company attempts to meet dealers’ needs by offering highly responsive, cost-competitive, and service-oriented
financing programs. The Company relies on its District and Branch Managers to solicit agreements for the purchase
of Contracts with automobile dealers located within a 60-mile radius of each branch office. The Branch Manager
provides dealers with information regarding the Company and the general terms upon which the Company is willing
to purchase Contracts. The Company is evaluating and assessing other forms of advertising, such as radio or
newspaper advertisements, for the purchase of Contracts.
The Company solicits customers under its Direct Loan program primarily through direct mailings, followed by
telephone calls to individuals who have a good credit history with the Company in connection with Contracts
purchased by the Company.
Computerized Information System
Until February 1, 2019, the Company used an internally developed loan servicing system to assist in responding to
customer inquiries and to monitor the performance of its Contract and Direct Loan portfolio and the performance of
individual customers under Contracts. On February 1, 2019, the Company converted to a third-party loan servicing
system to assist in responding to customer inquiries and to monitor the performance of its Contract and Direct Loan
portfolio and the performance of individual customers under Contracts.
All Company personnel are provided with real-time access to information. The Company has created specialized
programs to automate the tracking of Contracts and Direct Loans from inception. The Company’s computer network
encompasses both its corporate headquarters and its branch office locations. See “Monitoring and Enforcement of
Contracts” above for a summary of the different reports prepared by the Company.
7
Competition
The consumer finance industry is highly fragmented and highly competitive. Due to various factors, including the
existing low interest rate environment, the competitiveness of the industry continues to increase as new competitors
continue to enter the market and certain existing competitors continue to expand their operations. There are
numerous financial service companies that provide consumer credit in the markets served by the Company,
including banks, credit unions, other consumer finance companies, and captive finance companies owned by
automobile manufacturers and retailers. Increased competition for the purchase of Contracts enabled automobile
dealers to shop for the best price, resulting in an erosion in the dealer discounts from the initial principal amounts at
which the Company was willing to purchase Contracts and higher advance rates. Further, increased competition
resulted in the purchase of lower credit quality Contracts. However, with the Company’s change in management
during the end of fiscal 2018 and beginning of fiscal 2019, it has placed less emphasis on competition when pricing
the dealer discount. The Company instead focuses on purchasing Contracts that are priced to reflect the inherent risk
level of the contract, and intends to sacrifice loan volume, if necessary, to maintain that pricing discipline. Primarily
as a result of this shift in focus for the fiscal year ended March 31, 2019, the Company’s average dealer discount on
Contracts purchased increased to 8.2%, compared to 7.4% for the fiscal year ended March 31, 2018. The following
table shows number and principal amount of Contracts purchased, average amount financed, average term, and
average APR and discount for the periods presented:
Fiscal Year /Quarter
Number of
Contracts
Purchased
Principal
Amount
Purchased
Average
Financed
Average
APR
Average
Discount
Percentage
Average
Term
2019
4
3
2
1
2018
4
3
2
1
7,684 $ 77,498,829 $
2,151 21,233,193
1,625 16,475,956
1,761 17,844,587
2,147 21,945,093
9,767 109,575,099
2,814 29,253,725
2,365 27,378,449
2,239 25,782,056
2,349 27,160,869
10,086
9,871
10,139
10,133
10,221
11,219
10,396
11,577
11,515
11,563
23.5%
23.5%
23.5%
23.5%
23.7%
22.4%
23.3%
21.7%
22.0%
33.0%
8.2%
8.0%
8.1%
8.4%
8.3%
7.4%
7.9%
6.9%
7.3%
6.9%
47
46
47
47
48
54
50
54
55
54
The Company’s target market consists of persons who are generally unable to obtain traditional used car financing
because of their credit history or the vehicle’s mileage or age. Historically, the Company was able to expand its
automobile finance business in the non-prime credit market by offering to purchase Contracts on terms that are
competitive with those of other companies. Throughout most of fiscal 2018, the Company attempted to expand its
product mix to include larger loans with lower APRs and reduced discounts. Beginning in January 2018, the
Company rededicated itself to its core product of financing primary transportation to and from work for the
subprime borrower and refocused on pricing integrity on those Contracts acquired. The Company is committed to
the branch-based model and believes that model allows it maintain pricing integrity through solid dealer
relationships and a knowledge of the local market.
The Company’s ability to compete effectively with other companies offering similar financing arrangements
depends in part upon the Company maintaining close business relationships with dealers of used and new vehicles.
No single dealer out of the approximately 4,500 dealers with which the Company currently has active contractual
relationships represents a significant amount of the Company’s business volume for any of the fiscal years ended
March 31, 2019 or 2018.
8
Regulation
The Company’s financing operations are subject to regulation, supervision and licensing under many federal, state
and local statutes, regulations and ordinances. Additionally, the procedures that the Company must follow regarding
the repossession of vehicles securing Contracts are regulated by each of the states in which the Company does
business. To date, the Company’s operations have been conducted exclusively in the states of Alabama, Florida,
Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland, Michigan, Missouri, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Texas, Virginia and Wisconsin (as of March 31, 2019, the Company has exited
Maryland, Texas and Virginia). Accordingly, the laws of such states, as well as applicable federal law, govern the
Company’s operations. The following constitute certain of the existing federal, state and local statutes, regulations
and ordinances with which the Company must comply:
•
•
•
•
•
•
•
State consumer regulatory agency requirements. Pursuant to state regulations, on-site audits can be
conducted for each of the Company’s branches located within Alabama, Florida, Indiana, Kansas,
Michigan, and Missouri to monitor compliance with applicable regulations. These regulations include but,
are not limited to: licensure requirements; requirements for maintenance of proper records; payment of
required fees; maximum interest rates that may be charged on loans to finance used vehicles; and, proper
disclosure to customers regarding financing terms. Pursuant to Florida and North Carolina law, the
Company’s Direct Loan activities in each state are subject to similar periodic on-site audits by the Florida
Financial Services Commission and the North Carolina Office of the Commissioner of Banks, respectively.
If the Company expands its Direct Loan operations to other states, it expects to become subject to similar
on-site audits in such states.
State licensing requirements. The Company files a notification or obtains a license to acquire Contracts
within the following states: Alabama, Florida, Illinois, Indiana, Kansas, Michigan, Missouri, Pennsylvania,
South Carolina, and Wisconsin. In regard to its Direct Loan activities in Florida and North Carolina, the
Company maintains separate Consumer Finance Licenses with the Florida Department of Banking and
Finance and the North Carolina Office of the Commissioner of Banks, respectively. Furthermore, some
states require dealers to maintain a Retail Installment Seller’s License, and where applicable, the Company
only conducts business with dealers who hold such a license.
Fair Debt Collection Practices Act. The Fair Debt Collection Practices Act (“FDCPA”) and applicable
state law counterparts prohibit the Company from contacting customers during certain times and at certain
places, from using certain threatening practices and from making false implications when attempting to
collect a debt.
Truth in Lending Act. The Truth in Lending Act (“TILA”) requires the Company and the dealers it does
business with to make certain disclosures to customers, including the terms of repayment, the total finance
charge and the annual percentage rate charged on each Contract or Direct Loan.
Equal Credit Opportunity Act. The Equal Credit Opportunity Act (“ECOA”) prohibits creditors from
discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to
Regulation B promulgated under the ECOA, creditors are required to make certain disclosures regarding
consumer rights and advise consumers whose credit applications are not approved of the reasons for the
rejection.
Electronic Signatures in Global and National Commerce Act. The Electronic Signatures in Global and
National Commerce Act (“ESIGN”) requires the Company to provide consumers with clear and
conspicuous disclosures before the consumer gives consent to authorize the use of electronic signatures,
electronic contracts, and electronic records.
Fair Credit Reporting Act. The Fair Credit Reporting Act (“FCRA”) requires the Company to provide
certain information to consumers whose credit applications are not approved on the basis of a report
obtained from a consumer reporting agency, as well as, ensure the accuracy and integrity of consumer
information reported to credit reporting agencies.
• Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (“GLBA”) requires the Company to maintain
privacy with respect to certain consumer data in its possession and to periodically communicate with
consumers on privacy matters.
9
•
Servicemembers Civil Relief Act. The Servicemembers Civil Relief Act (“SCRA”) requires the Company to
reduce the interest rate charged on each loan to customers who have subsequently joined, enlisted, been
inducted or called to active military duty and places limitations on collection and repossession activity.
• Military Lending Act. The Military Lending Act (“MLA”) requires the Company to limit the military
annual percentage rate (“MAPR”) that the Company may charge to a maximum of 36 percent, requires
certain disclosures to military consumers, and provides other substantive consumer protections on credit
extended to Servicemembers and their families.
•
•
•
Electronic Funds Transfer Act. The Electronic Funds Transfer Act (“EFTA”) prohibits the Company from
requiring its customers to repay a loan or other credit by electronic funds transfer (“EFT”), except in
limited situations which do not apply to the Company. The Company is also required to provide certain
documentation to its customers when an EFT is initiated and to provide certain notifications to its
customers with regard to preauthorized payments.
Telephone Consumer Protection Act. The Telephone Consumer Protection Act (“TCPA”) governs the
Company’s practice of contacting customers by certain means i.e. auto dealers, pre-recorded or artificial
voice calls on customers’ land lines, fax machines and cell phones, including text messages.
Bankruptcy. Federal bankruptcy and related state laws may interfere with or affect the Company’s ability to
recover collateral or enforce a deficiency judgment.
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). Title X of the
Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which, effective as of
July 21, 2011, has the authority to issue and enforce regulations under the federal “enumerated consumer
laws,” including (subject to certain statutory limitations) FDCPA, TILA, ECOA, FCRA, GLBA and EFTA.
The CFPB has rulemaking and enforcement authority over certain non-depository institutions, including us.
The CFPB is specifically authorized, among other things, to take actions to prevent companies providing
consumer financial products or services and their service providers from engaging in unfair, deceptive or
abusive acts or practices in connection with consumer financial products and services, and to issue rules
requiring enhanced disclosures for consumer financial products or services. Under the Dodd-Frank Act, the
CFPB also may restrict the use of pre-dispute mandatory arbitration clauses in contracts between covered
persons and consumers for a consumer financial product or service. The CFPB also has authority to
interpret, enforce, and issue regulations implementing enumerated consumer laws, including certain laws
that apply to the Company’s business. The CFPB issued rules regarding the supervision and examination of
non-depository “larger participants” in the automobile finance business. At this time, the Company is not
deemed a larger participant.
Failure to comply with these laws or regulations could have a material adverse effect on the Company by, among
other things, limiting the jurisdictions in which the Company may operate, restricting the Company’s ability to
realize the value of the collateral securing the Contracts, and making it more costly or burdensome to do business or
resulting in potential liability. The volume of new or modified laws and regulations and the activity of agencies
enforcing such law have increased in recent years in response to issues arising with respect to consumer lending.
From time to time, legislation and regulations are enacted which increase the cost of doing business, limit or expand
permissible activities or affect the competitive balance among financial services providers. Proposals to change the
laws and regulations governing the operations and taxation of financial institutions and financial services providers
are frequently made in the U.S. Congress, in the state legislatures and by various regulatory agencies. This
legislation may change the Company’s operating environment in substantial and unpredictable ways and may have
a material adverse effect on the Company’s business.
In particular, the Dodd-Frank Act and regulations promulgated thereunder, including the rules regarding supervision
and examination issued by the CFPB, are likely to affect the Company’s cost of doing business, may limit or
expand the Company’s permissible activities, may affect the competitive balance within the Company’s industry
and market areas and could have a material adverse effect on the Company. The Company’s management continues
to assess the Dodd-Frank Act’s probable impact on the Company’s business, financial condition and results of
operations, and to monitor developments involving the entities charged with promulgating regulations thereunder.
However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and on the
Company in particular, is uncertain at this time.
10
In addition to the CFPB, other state and federal agencies have the ability to regulate aspects of the Company’s
business. For example, the Dodd-Frank Act provides a mechanism for state Attorneys General to investigate the
Company. In addition, the Federal Trade Commission has jurisdiction to investigate aspects of the Company’s
business. The Company expects that regulatory investigation by both state and federal agencies will continue and
that the results of these investigations could have a material adverse impact on the Company.
Dealers with which the Company does business must also comply with credit and trade practice statutes and
regulations. Failure of these dealers to comply with such statutes and regulations could result in customers having
rights of rescission and other remedies that could have a material adverse effect on the Company.
The sale of vehicle service contracts and other ancillary products by dealers in connection with Contracts assigned to
the Company from dealers is also subject to state laws and regulations. As the Company is the holder of the
Contracts that may, in part, finance these products, some of these state laws and regulations may apply to the
Company’s servicing and collection of the Contracts. Although these laws and regulations may not significantly
affect the Company’s business, there can be no assurance that insurance or other regulatory authorities in the
jurisdictions in which these products are offered by dealers will not seek to regulate or restrict the operation of the
Company’s business in these jurisdictions. Any regulation or restriction of the Company’s business in these
jurisdictions could materially adversely affect the income received from these products.
The Company’s management believes that the Company maintains all requisite licenses and permits and is in
material compliance with applicable local, state and federal laws and regulations. The Company periodically
reviews its branch office practices in an effort to ensure such compliance. Although compliance with existing laws
and regulations has not had a material adverse effect on the Company’s operations to date, given the increasingly
complex regulatory environment, the increasing costs of complying with such laws and regulations, and the
increasing risk of penalties, fines or other liabilities associated therewith, no assurances can be given that the
Company is in material compliance with all of such laws or regulations or that the costs of such compliance, or the
failure to be in such compliance, will not have a material adverse effect on the Company’s business, financial
condition or results of operations.
Employees
The Company’s management and various support functions are centralized at the Company’s corporate headquarters
in Clearwater, Florida. As of March 31, 2019, the Company employed a total of 279 persons, of which 52 persons
were employed at the Company’s corporate headquarters. None of the Company’s employees are subject to a
collective bargaining agreement, and the Company considers its relations with its employees generally to be good.
Item 1A. Risk Factors
The following factors, as well as other factors not set forth below, may adversely affect the business, operations,
financial condition or results of operations of the Company (sometimes referred to in this section as “we” “us” or
“our”).
We have in the past experienced and may in the future experience high delinquency and loss rates in our portfolios.
This has reduced and may continue to reduce our profitability. In addition, our inability to accurately forecast and
estimate the amount and timing of future collections could have a material adverse effect on our financial position,
liquidity and results of operations.
Our consolidated net loss for the fiscal years ended March 31, 2019 and 2018, was $3.6 million and $1.1 million,
respectively. Our profitability depends, to a material extent, on the performance of contracts that we purchase.
Historically, we have experienced higher delinquency rates than traditional financial institutions because
substantially all of our Contracts and Direct Loans are to non-prime borrowers, who are unable to obtain financing
from traditional sources due primarily to their credit history. Contracts and Direct Loans made to these individuals
generally entail a higher risk of delinquency, default, repossession, and higher losses than loans made to consumers
with better credit.
11
Our underwriting standards and collection procedures may not offer adequate protection against the risk of default,
especially in periods of economic uncertainty and wage stagnation such as have existed over much of the past few
years. In the event of a default, the collateral value of the financed vehicle usually does not cover the outstanding
Contract or Direct Loan balance and costs of recovery.
Our ability to accurately forecast performance and determine an appropriate provision and allowance for credit
losses, is critical to our business and financial results. The allowance for credit losses is established through a
provision for credit losses based on management’s evaluation of the risk inherent in the portfolio, the composition of
the portfolio, specific impaired Contracts and Direct Loans, and current economic conditions. Please see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting
Policy” in Item 7 of this Form 10-K and “Management’s Report on Internal Control over Financial Reporting” in
Item 9A of this Form 10-K, both of which are incorporated herein by reference.
There can be no assurance that our performance forecasts will be accurate. In periods with changing economic
conditions, such as is the case currently, accurately forecasting the performance of Contract and Direct Loans is
more difficult. Our allowance for losses is an estimate, and if actual Contract and Direct Loan losses are materially
greater than our allowance for losses, or more generally, if our forecasts are not accurate, our financial position,
liquidity and results of operations could be materially adversely affected.
Other than limited representations and warranties made by dealers in favor of the Company, Contracts are purchased
from the dealers without recourse, and we are therefore only able to look to the borrowers for repayment.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued the 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. Financial institutions and other organizations 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,
2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. 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, we believe the adoption of
this ASU will have likely have a material adverse effect on our consolidated financial statements.
We operate in an increasingly competitive market.
The non-prime consumer-finance industry is highly competitive, and the competitiveness of the market continues to
increase as new competitors continue to enter the market and certain existing competitors continue to expand their
operations and become more aggressive in offering competitive terms. There are numerous financial service
companies that provide consumer credit in the markets served by us, including banks, credit unions, other consumer
finance companies and captive finance companies owned by automobile manufacturers and retailers. Many of these
competitors have substantially greater financial resources than us. In addition, our competitors often provide
financing on terms more favorable to automobile purchasers or dealers than we offer. Many of these competitors
also have long-standing relationships with automobile dealerships and may offer dealerships, or their customers,
other forms of financing including dealer floor-plan financing and leasing, which are not provided by us. Providers
of non-prime consumer financing have traditionally competed primarily on the basis of:
•
•
•
•
interest rates charged;
the quality of credit accepted;
dealer discount;
amount paid to dealers relative to the wholesale book value;
12
•
•
the flexibility of Contract and Direct Loan terms offered; and
the quality of service provided.
Our ability to compete effectively with other companies offering similar financing arrangements depends in part on
our ability to maintain close relationships with dealers of used and new vehicles. We may not be able to compete
successfully in this market or against these competitors. In recent years, it has become increasingly difficult for the
Company to match or exceed pricing of its competitors, which has generally resulted in declining Contract
acquisition rates during the 2018 and 2019 fiscal years.
We have focused on a segment of the market composed of consumers who typically do not meet the more stringent
credit requirements of traditional consumer financing sources and whose needs, as a result, have not been addressed
consistently by such financing sources. As new and existing providers of consumer financing have undertaken to
penetrate our targeted market segment, we have experienced increasing pressure to reduce our interest rates, fees
and dealer discounts in order to maintain our market share. The Company’s average dealer discount on Contracts
purchased for the fiscal years ended March 31, 2019 and 2018 was 8.2% and 7.4%, respectively. The Company’s
average APR on Contracts purchased for the fiscal years ended March 31, 2019 and 2018, was 23.5% and 22.4%,
respectively. These competitive factors continue to exist and may impact our ability to secure quality loans on our
preferred terms in significant quantities.
In addition, the number of Contracts and Direct Loans under which customers decided to discontinue contractually
required payments to us after they were approved by other lenders for new vehicle financing has recently increased.
We are particularly vulnerable to the effects of these practices because of our focus on providing financing with
respect to used vehicles.
Our business depends on our continued access to bank financing on acceptable terms.
Prior to March 2019, we financed our operations through traditional bank credit facilities and cash flows generated
from operations. On March 29, 2019, we entered into a new senior secured credit facility (the “Credit Facility”).
Our ability to access capital through our existing facility, or undertake a future facility, or other debt or equity
transactions on economically favorable terms or at all, depends in large part on factors that are beyond our control,
including:
•
Conditions in the securities and finance markets generally, and for securitized instruments in particular;
• A negative bias toward our industry;
• General economic conditions and the economic health of our earnings, cash flows and balance sheet;
•
Security or collateral requirements;
•
The credit quality and performance of our customer receivables;
•
Regulatory restrictions applicable to us;
• Our overall business and industry prospects;
• Our overall sales performance, profitability, cash flow, balance sheet quality, and regulatory restrictions;
• Our ability to provide or obtain financial support for required credit enhancement;
• Our ability to adequately service our financial instruments;
• Our ability to meet debt covenant requirements; and
•
Prevailing interest rates.
13
Our existing and future levels of indebtedness could adversely affect our financial health, ability to obtain
financing in the future, ability to react to changes in our business and ability to fulfill our obligations under
such indebtedness.
As of March 31, 2019, we had aggregate outstanding indebtedness, under our Credit Facility, of $145.0 million. This
level of indebtedness could:
• Make it more difficult for us to satisfy our obligations with respect to our outstanding notes and other
indebtedness, resulting in possible defaults on and acceleration of such indebtedness;
•
•
•
•
•
Require us to dedicate a substantial portion of our cash flow from operations to the payment of principal
and interest on our indebtedness, thereby reducing the availability of such cash flows to fund working
capital, acquisitions, new store openings, capital expenditures and other general corporate purposes;
Limit our ability to obtain additional financing for working capital, acquisitions, new store openings,
capital expenditures, debt service requirements and other general corporate purposes;
Limit our ability to refinance indebtedness or cause the associated costs of such refinancing to increase;
Increase our vulnerability to general adverse economic and industry conditions, including interest rate
fluctuations (because a portion of our borrowings are at variable rates of interest); and
Place us at a competitive disadvantage compared to our competitors with proportionately less debt or
comparable debt at more favorable interest rates which, as a result, may be better positioned to withstand
economic downturns.
Any of the foregoing impacts of our level of indebtedness could have a material adverse effect on us.
Our Credit Facility is subject to certain defaults and negative covenants.
The Credit Facility loan documents contain customary events of default and negative covenants, including but not
t
limited to those governing indebtedness, liens, fundamental changes, investments, and sales of receivables. Such
loan documents also restrict the Company’s ability, without lenders’ consent, to modify its credit policies or make
changes to its form of Direct Loan contract or its form of dealer agreement. If an event of default occurs, the lenders
could increase borrowing costs, restrict the our ability to obtain additional advances under the Credit Facility,
accelerate all amounts outstanding under the Credit Facility, enforce their interest against collateral pledged under
r
the Credit Facility or enforce their rights under the guarantees.
If we fail to maintain an effective system of internal control over financial reporting and disclosure controls
and procedures, we may not be able to accurately and timely report our financial results, which could lead to
a loss of investor confidence in our financial statements and have an adverse effect on our stock price.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to
provide reliable and accurate financial statements and to effectively prevent fraud and to operate successfully as a
public company. As further described in Item 9A. Controls and Procedures, our management has concluded that,
because of a material weakness, our internal control over financial reporting and our disclosure controls and
procedures were not effective as of March 31, 2018 or as of March 31, 2019. The Company has and will continue to
enhance its controls and expects to remediate the material weakness. However, we cannot be certain that these
measures will be successful or that we will be able to prevent future significant deficiencies or material weaknesses.
Inadequate internal control over financial reporting or inadequate disclosure controls and procedures could cause
investors to lose confidence in our reported financial information, which could hurt our reputation and have a
negative effect on the trading price of our stock and our access to capital.
14
The Dodd-Frank Act authorizes the CFPB to adopt rules that could potentially have a material adverse effect
on our operations and financial performance.
Title X of the Dodd-Frank Act established the 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 Direct Loans that we offer, including explicit supervisory authority to examine
and require registration of installment lenders such as ourselves. Included among the powers afforded to the CFPB is
the authority to adopt rules describing specified acts and practices as being “unfair,” “deceptive” or “abusive,” and
hence unlawful. The CFPB has outlined several proposals under consideration for the purpose of requiring lenders to
take steps to ensure consumers have the financial ability to repay their loans. The proposals under consideration
would require lenders to determine at the outset of each loan whether a consumer can afford to borrow from the
lender and would require that lenders comply with various restrictions designed to ensure that consumers can
affordably repay their debt to the lender. To date, the proposals under consideration by the CFPB have not been
adopted. If adopted, the proposals outlined by the CFPB may require the Company to make significant changes to its
lending practices to develop compliance procedures.
Although the Dodd-Frank Act expressly provides that the CFPB has no authority to establish usury limits, 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 operation,
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.
In addition to the Dodd-Frank Act’s grant of regulatory powers to the CFPB, the Dodd-Frank Act gives the CFPB
authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws. In
these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution or
rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per
day for minor violations of federal consumer financial laws (including the CFPB’s own rules) to $25,000 per day for
reckless violations and $1 million per day for knowing violations. If we are subject to such administrative
proceedings, litigation, orders or monetary penalties in the future, this could have a material adverse effect on our
operations and financial performance. Also, where a company has violated Title X of the Dodd-Frank Act or CFPB
regulations under Title X, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil
actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or one
or more state officials believe we have violated the foregoing laws, they could exercise their enforcement powers in
ways that would have a material adverse effect on us. See “Item 1. Business – Regulation” for additional
information.
Pursuant to the authority granted to it under the Dodd-Frank Act, the CFPB adopted rules that subject
larger nonbank automobile finance companies such as us to supervision and examination by the CFPB. Any
such examination by the CFPB likely would have a material adverse effect on our operations and financial
performance.
The CFPB issued rules regarding the supervision and examination of non-depository “larger participants” in the
automobile finance business, including us. 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. Thus, 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. At the current time, the Company is not deemed a larger
participant.
15
We have evaluated our existing compliance management systems and are in the process of updating, improving
and/or replacing such 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
would 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.
We are subject to many other laws and governmental regulations, and any material violations of or changes
in these laws or regulations could have a material adverse effect on our financial condition and business
operations.
Our financing operations are subject to regulation, supervision, and licensing under various other federal, state and
local statutes and ordinances. Additionally, the procedures that we must follow in connection with the repossession
of vehicles securing Contracts are regulated by each of the states in which we do business. The various federal, state
and local statutes, regulations, and ordinances applicable to our business govern, among other things:
•
•
•
licensing requirements;
requirements for maintenance of proper records;
payment of required fees to certain states;
• maximum interest rates that may be charged on loans to finance used and new vehicles;
•
debt collection practices;
•
•
•
•
•
•
proper disclosure to customers regarding financing terms;
privacy regarding certain customer data;
interest rates on loans to customers;
late fees and insufficient fees charged;
telephone solicitation of Direct Loan customers; and
collection of debts from loan customers who have filed bankruptcy.
We believe that we maintain all material licenses and permits required for our current operations and are in
substantial compliance with all applicable local, state and federal regulations. Our failure, or the failure by dealers
who originate the contracts we purchase, to maintain all requisite licenses and permits, and to comply with other
regulatory requirements, could result in consumers having rights of rescission and other remedies that could have a
material adverse effect on our financial condition. Furthermore, any changes in applicable laws, rules and
regulations, such as the passage of the Dodd-Frank Act and the creation of the CFPB, may make our compliance
therewith more difficult or expensive or otherwise materially adversely affect our business and financial condition.
The loss of our key executives could have a material adverse effect on our business.
Our future growth and development are significantly dependent upon the skills and experience of our senior
management team and our ability to retain that team.
We do not maintain key-man life insurance policies on any of these executives. The loss of services of one or more
of the executives could have a material adverse effect on our business, results of operations, and financial condition.
In fact, the turnover of our CEO, CFO, and Controller during the year ended March 31, 2018 contributed to a
material weakness in our internal control over financial reporting for the fiscal year ended March 31, 2018. See Item
9A. Controls and Procedures in this Annual Report, the text of which is incorporated herein by reference.
16
We are subject to risks associated with litigation.
As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and
statutory penalties, based upon, among other things:
•
usury laws;
•
disclosure inaccuracies;
• wrongful repossession;
•
violations of bankruptcy stay provisions;
•
•
•
•
certificate of title disputes;
fraud;
breach of contract; and
discriminatory treatment of credit applicants.
Some litigation against us could take the form of class action complaints by consumers. As the assignee of contracts
originated by dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against
dealers. The damages and penalties claimed by consumers in these types of actions can be substantial. The relief
requested by the plaintiffs varies but may include requests for compensatory, statutory, and punitive damages. We
also are periodically subject to other kinds of litigation typically experienced by businesses such as ours, including
employment disputes and breach of contract claims. No assurances can be given that we will not experience material
financial losses in the future as a result of litigation or other legal proceedings.
We depend upon our relationships with our dealers.
Our business depends in large part upon our ability to establish and maintain relationships with reputable dealers
who originate the Contracts we purchase. Although we believe we have been successful in developing and
maintaining such relationships, such relationships are not exclusive, and many of them are not longstanding. There
can be no assurances that we will be successful in maintaining such relationships or increasing the number of dealers
with whom we do business, or that our existing dealer base will continue to generate a volume of Contracts
comparable to the volume of such Contracts historically generated by such dealers.
Our success depends upon our ability to implement our business strategy.
Our financial position depends on management’s ability to execute our business strategy. Key factors involved in the
execution of our business strategy include achievement of the desired contract purchase volume, the use of effective
risk management techniques and collection methods, continued investment in technology to support operating
efficiency, and continued access to significant funding and liquidity sources.
With the recent change in senior management, the Company’s business strategy has been redefined. This strategy
includes remaining committed to the branch-based model, focusing on financing primary transportation to and from
work for the subprime borrower, pricing based on risk (rate, yield, advance, etc.), and a commitment to the
underwriting discipline required for optimal portfolio performance.
Our failure or inability to execute any element of our business strategy could have a material adverse effect on our
business and financial condition.
17
Our business is highly dependent upon general economic conditions.
We are subject to changes in general economic conditions that are beyond our control. During periods of economic
uncertainty, such as has existed for much of the past few years, delinquencies, defaults, repossessions, and losses
generally increase, absent offsetting factors. These periods also may be accompanied by decreased consumer
demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral
coverage on our loans and increases the amount of a loss we would experience in the event of default. Because we
focus on non-prime borrowers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans
are higher than those experienced in the general automobile finance industry and could be more dramatically
affected by a general economic downturn. In addition, during an economic slowdown or recession, our servicing
costs may increase without a corresponding increase in our servicing income. No assurances can be given that our
underwriting criteria and collection methods to manage the higher risk inherent in loans made to non-prime
borrowers will afford adequate protection against these risks. Any sustained period of increased delinquencies,
defaults, repossessions, or losses, or increased servicing costs could have a material adverse effect on our business
and financial condition.
Furthermore, in a low interest-rate environment such as has existed in the United States in recent years, the level of
competition increases in the non-prime consumer-finance industry as new competitors enter the market and many
existing competitors expand their operations. Such increased competition, in turn, has exerted increased pressure on
us to reduce our interest rates, fees, and dealer discount rates in order to maintain our market share. Although the
Company has recently shifted its focus on not reducing APR and discounts to secure new loan volume, it can
provide no assurances that it will be successful in doing so. Any further reductions in our interest rates, fees or
dealer discount rates could have a material adverse impact on our profitability or financial condition.
The auction proceeds we receive from the sale of repossessed vehicles and other recoveries are subject to
fluctuation due to economic and other factors beyond our control.
If we repossess a vehicle securing a Contract, we typically have it transported to an automobile auction for sale.
Auction proceeds from the sale of repossessed vehicles and other recoveries are usually not sufficient to cover the
outstanding balance of the Contract, and the resulting deficiency is charged off. In addition, there is, on average,
approximately a 30-day lapse between the time we repossess a vehicle and the time it is sold. The proceeds we
receive from such sales depend upon various factors, including the supply of, and demand for, used vehicles at the
time of sale. Such supply and demand are dependent on many factors. For example, during periods of economic
uncertainty, the demand for used cars may soften, resulting in decreased auction proceeds to us from the sale of
repossessed automobiles. Furthermore, depressed wholesale prices for used automobiles may result from significant
liquidations of rental or fleet inventories, and from increased volume of trade-ins due to promotional financing
programs offered by new vehicle manufacturers. Newer, more expensive vehicles securing our larger dollar loans
are more susceptible to wholesale pricing fluctuations than are older vehicles and also experience depreciation at a
much greater rate. Until the Company’s portfolio has been successfully converted to primarily consisting of our
target vehicle (primary transportation to and from work for the subprime borrower), the Company expects to be
affected by softer auction activity and reduced vehicle values.
An increase in market interest rates may reduce our profitability.
Our long-term profitability may be directly affected by the level of and fluctuations in interest rates. Sustained,
significant increases in interest rates may adversely affect our liquidity and profitability by reducing the interest rate
spread between the rate of interest we receive on our Contracts and interest rates that we pay under our Credit
Facility. As interest rates increase, our gross interest rate spread on new originations will generally decline since the
rates charged on the contracts originated or purchased from dealers generally are limited by statutory maximums,
restricting our opportunity to pass on increased interest costs. We monitor the interest rate environment and, on
occasion, enter into interest rate swap agreements relating to a portion of our outstanding debt. Such agreements
effectively convert a portion of our floating-rate debt to a fixed-rate, thus reducing the impact of interest rate
changes on our interest expense. However, the interest rate swap agreements in effect for most of the past five years
matured during the fiscal year ended March 31, 2018, and we have not entered into new arrangements. We will
continue to evaluate interest rate swap pricing and we may or may not enter into interest rate swap agreements in the
future.
18
We may experience problems with integrated computer systems or be unable to keep pace with developments
in technology or conversion to new integrated computer systems.
We use various technologies in our business, including telecommunication, data processing, and integrated
computer systems. Technology changes rapidly. Our ability to compete successfully with other financing companies
may depend on our ability to efficiently and cost-effectively implement technological changes. Moreover, to keep
pace with our competitors, we may be required to invest in technological changes that do not necessarily improve
our profitability.
In February 2019, we converted from our internally developed loan operating system to a third-party loan operating
system. This system is used to respond to customer inquiries and to monitor the performance of our Contract and
Direct Loan portfolios and the performance of individual customers under our Contracts and Direct Loans. Problems
with the system conversion could adversely impact our ability to monitor our portfolios or collect amounts due
under our Contracts and Direct Loans, which could have a material adverse effect on our financial condition and
results of operations.
In fact, delays completing the system integration with the accounting system contributed to a material weakness in
our internal control over financial reporting for the fiscal year ended March 31, 2019. See Item 9A. Controls and
Procedures in this Annual Report, the text of which is incorporated herein by reference.
Failure to properly safeguard confidential customer information could subject us to liability, decrease our
profitability, and damage our reputation.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business
information and personally identifiable information of our customers, on our computer networks, and share such
data with third parties. The secure processing, maintenance and transmission of this information is critical to our
operations and business strategy.
Any failure, interruption, or breach in our cyber security, including through employee misconduct or any failure of
our back-up systems or failure to maintain adequate security surrounding customer information, could result in
reputational harm, disruption in the management of our customer relationships, or the inability to originate, process
and service our products. Further, any of these cyber security and operational risks could result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose us to lawsuits by customers for identity theft or other
damages resulting from the misuse of their personal information and possible financial liability, any of which could
have a material adverse effect on our results of operations, financial condition and liquidity. In addition, regulators
may impose penalties or require remedial action if they identify weaknesses in our security systems, and we may be
required to incur significant costs to increase our cyber security to address any vulnerabilities that may be
discovered or to remediate the harm caused by any security breaches. As part of our business, we may share
confidential customer information and proprietary information with clients, vendors, service providers, and business
partners. The information systems of these third parties may be vulnerable to security breaches and we may not be
able to ensure that these third parties have appropriate security controls in place to protect the information we share
with them. If our confidential information is intercepted, stolen, misused, or mishandled while in possession of a
third party, it could result in reputational harm to us, loss of customer business, and additional regulatory scrutiny,
and it could expose us to civil litigation and possible financial liability, any of which could have a material adverse
effect on our results of operations, financial condition, and liquidity.
We rely on encryption and authentication technology licensed from third parties to provide the security and
authentication necessary to secure online transmission of confidential customer information. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or developments may result in a
compromise or breach of the algorithms that we use to protect sensitive customer data. A party who is able to
circumvent our security measures could misappropriate proprietary information or cause interruptions in our
operations. We may be required to expend capital and other resources to protect against, or alleviate problems
caused by, security breaches or other cybersecurity incidents. Although we have not experienced any material
cybersecurity incidents to dates, there can be no assurance that a cyber-attack, security breach or other cybersecurity
incident will not have a material adverse effect on our business, financial condition or results of operations in the
future. Our security measures are designed to protect against security breaches, but our failure to prevent security
breaches could subject us to liability, decrease our profitability and damage our reputation.
19
We partially rely on third parties to deliver services, and failure by those parties to provide these services or
meet contractual requirements could have a material adverse effect on our business, financial condition and
results of operations.
We depend on third-party service providers for many aspects of our business operations, including loan origination,
title processing, and online payments, which increases our operational complexity and decreases our control. We
rely on these service providers to provide a high level of service and support, which subjects us to risks associated
with inadequate or untimely service. If a service provider fails to provide the services that we require or expect, or
fails to meet contractual requirements, such as service levels or compliance with applicable laws, a failure could
negatively impact our business by adversely affecting our ability to process customers’ transactions in a timely and
accurate manner, otherwise hampering our ability to service our customers, or subjecting us to litigation or
regulatory risk for poor vendor oversight. We may be unable to replace or be delayed in replacing these sources and
there is a risk that we would be unable to enter into a similar agreement with an alternate provider on terms that we
consider favorable or in a timely manner. Such a failure could have a material and adverse effect on our business,
financial condition, and results of operations.
Our growth depends upon our ability to retain and attract a sufficient number of qualified employees.
To a large extent, our growth strategy depends on the opening of new offices that focus primarily on purchasing
Contracts and making Direct Loans in markets we have not previously served. Future expansion of our branch office
network depends, in part, upon our ability to attract and retain qualified and experienced office managers and the
ability of such managers to develop relationships with dealers that serve those markets. We generally do not open a
new office until we have located and hired a qualified and experienced individual to manage the office. Typically,
this individual will be familiar with local market conditions and have existing relationships with dealers in the area
to be served. Although we believe that we can attract and retain qualified and experienced personnel as we proceed
with planned expansion into new markets, no assurance can be given that we will be successful in doing so.
Competition to hire personnel possessing the skills and experience required by us could contribute to an increase in
our employee turnover rate. High turnover or an inability to attract and retain qualified personnel could have an
adverse effect on our origination, delinquency, default, and net loss rates and, ultimately, our business and financial
condition.
Our stock is thinly traded, which may limit your ability to resell your shares.
The average daily trading volume of our common shares on the NASDAQ Global Select Market for the fiscal year
ended March 31, 2019 was approximately 9,000 shares. Thus, our common shares are thinly traded. Thinly traded
stock can be more volatile than stock trading in an active public market. Factors such as our financial results, the
introduction of new products and services by us or our competitors, and various factors affecting the consumer-
finance industry generally may have a significant impact on the market price of our common shares. In recent years,
the stock market has experienced a high level of price and volume volatility, and market prices for the stocks of
many companies, including ours, have experienced wide price fluctuations that have not necessarily been related to
their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices,
or times that they desire.
Natural disasters, acts of war, terrorist attacks and threats, or the escalation of military activity in response
to these attacks or otherwise may negatively affect our business, financial condition, and results of operations.
Natural disasters (such as hurricanes), acts of war, terrorist attacks and the escalation of military activity in response
to these attacks or otherwise may have negative and significant effects, such as disruptions in our operations,
imposition of increased security measures, changes in applicable laws, market disruptions and job losses. These
events may have an adverse effect on the economy in general. Moreover, the potential for future terrorist attacks and
the national and international responses to these threats could affect the business in ways that cannot be predicted.
The effect of any of these events or threats could have a material adverse effect on our business, financial condition
and results of operations.
20
Changes in U.S. federal, state and local tax law or interpretations of existing tax law could increase our tax
burden or otherwise adversely affect our financial condition or results of operations.
We are subject to taxation at the federal, state, and local levels in the United States. On December 22, 2017, the U.S.
government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”).
The changes included in TCJA are broad and complex. The final transition impacts of TCJA may differ from the
estimates provided elsewhere in this Annual Report, possibly materially, due to, among other things, changes in
interpretations of TCJA, any legislative action to address questions that arise because of TCJA, any changes in
accounting standards for income taxes or related interpretations in response to TCJA, or any updates or changes to
estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current
year earnings estimates. The estimated impact of the new law is based on management’s current knowledge and
assumptions and recognized impacts could be materially different from current estimates.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company leases its corporate headquarters and branch office facilities. The Company’s headquarters, located at
2454 McMullen Booth Road, Building C, in Clearwater, Florida, consist of approximately 15,000 square feet of
office space leased at an annual rate of approximately $18.00 per square foot. The current lease relating to this space
was entered into effective April 1, 2015 and expires on March 31, 2020.
As of June 2019, each of the Company’s 50 branch offices located in Alabama, Florida, Georgia, Illinois, Indiana,
Kansas, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, and Tennessee
consists of approximately 1,400 square feet of office space. These offices are located in office parks, shopping
centers, or strip malls and are occupied pursuant to leases with an initial term of one to five years at annual rates
ranging from approximately $11.00 to $25.00 per square foot. The Company believes that these facilities and
additional or alternate space available to it are adequate to meet its needs for the foreseeable future.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
Not Applicable.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The Company’s common shares are traded on the NASDAQ Global Select Market under the symbol “NICK.”
The following table sets forth the high and low sales prices of the Company’s common shares for the fiscal years
ended March 31, 2019 and 2018, respectively.
Fiscal year ended March 31, 2019
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended March 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
$
$
$
$
9.50 $
12.50 $
12.42 $
10.95 $
8.36
9.01
9.07
8.50
High
Low
11.15 $
9.46 $
9.44 $
9.49 $
7.65
8.25
7.59
8.51
As of June 21, 2019, there were approximately 118 holders of record of the Company’s common shares.
The Company has not declared and paid cash dividends on its common shares in the recent past and has no current
plans to declare or pay any cash dividends in the foreseeable future. The payment of future dividends, if any, is
reviewed periodically by the Company’s directors and management and will depend upon, among other things,
existing conditions, including earnings, financial condition and capital requirements, restrictions in financing
agreements, business opportunities, tax considerations, and other conditions and factors.
There are no Canadian foreign exchange controls or laws that would affect the remittance of dividends or other
payments to the Company’s non-Canadian resident shareholders. There are no Canadian laws that restrict the export
or import of capital, other than the Investment Canada Act (Canada), which requires the notification or review of
certain investments by non-Canadians to establish or acquire control of a Canadian business. The Company is not a
Canadian business as defined under the Investment Canada Act because it has no place of business in Canada, has
no individuals employed in Canada in connection with its business, and has no assets in Canada used in carrying on
its business.
Canada and the United States of America are signatories to the Convention Between the United States of America
and Canada With Respect to Taxes on Income and on Capital (the “Tax Treaty”). The Tax Treaty contains
provisions governing the tax treatment of interest, dividends, gains, and royalties paid to or received by a person
residing in the United States. The Tax Treaty also contains provisions to prevent the occurrence of double taxation,
essentially by permitting the taxpayer to claim a tax credit for taxes paid in the foreign jurisdiction.
Earnings from U.S. subsidiaries are permanently invested in the U.S. The Company has not provided any Canadian
income tax or U.S. withholding tax on unremitted earnings. If a dividend was paid to the Company from the current
or accumulated earnings and profits of the U.S. subsidiary, the dividend would be subject to a U.S. withholding tax
of 5%. The gross dividend (i.e., before payment of the withholding tax) would generally be included in the
Company's Canadian taxable income. However, under certain circumstances, the Company may be allowed to
deduct the dividends in the calculation of its Canadian taxable income. If the Company has no other foreign (i.e.,
non-Canadian) non-business income, no relief is available in that case to recover the withholding taxes previously
paid.
22
A 15% Canadian withholding tax applies to dividends paid by the Company to a U.S. shareholder (including those
that own less than 10% of the Company’s voting shares) that is an individual. The U.S. shareholder must include the
gross amount of the dividends in the shareholder’s net income to be taxed at the regular rates. In general, a U.S.
shareholder can obtain a foreign tax credit for U.S. federal income tax purposes with respect to the Canadian
withholding tax on such dividends, but the amount of such credit is subject to a limitation that depends, in part, on
the amount of the shareholder’s income and losses from other sources. A U.S. shareholder that is an individual also
can elect to claim a deduction (rather than a foreign tax credit) for all non-U.S. income taxes paid by the shareholder
during the particular year. U.S. shareholders are urged to consult their own tax advisors regarding the U.S. federal
income tax treatment of any Canadian withholding tax imposed on dividends from the Company.
Performance Graph
Set forth below is a graph comparing the cumulative total return on the Company’s common shares for the five-year
period ended March 31, 2019, with that of an overall stock market (NASDAQ Composite) and the Company’s peer
group index (Dow Jones US General Financial Index). The stock performance graph assumes that the value of the
investment in each of the Company’s common shares, the NASDAQ Composite Index, and the Dow Jones US
General Financial Index was $100 on April 1, 2014 and that all dividends were reinvested.
The graph displayed below is presented in accordance with SEC requirements. Shareholders are cautioned against
drawing any conclusions from the data contained therein, as past results are not necessarily indicative of future
performance. This graph in no way reflects the Company’s forecast of future financial performance.
Nicholas Financial, Inc.
NASDAQ Composite
Dow Jones US General Financial
Index
04/1/2014 04/1/2015 04/1/2016 04/1/2017 04/1/2018
$
100.00 $
100.00
89.07 $
116.72
68.60 $
115.98
67.58 $
140.79
57.66 $
168.22
04/1/2019
57.22
184.08
100.00
110.58
100.92
126.99
161.35
164.65
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Unregistered Sales of Equity Securities
None.
23
Item 6. Selected Financial Data
The following tables present selected consolidated financial data of the Company as of and for the fiscal years ended
March 31, 2019, 2018, 2017, 2016, and 2015. The selected consolidated financial data has been derived from our
consolidated financial statements. You should read the selected consolidated financial data below in conjunction
with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our
audited consolidated financial statements and notes thereto that are included elsewhere in this Report and, for the
fiscal years ended March 31, 2017, 2016 and 2015 and as of March 31, 2017, 2016 and 2015, that are included in
our annual reports for such fiscal years. Quarterly results of operations are incorporated herein by reference to Note
13 – Quarterly Results of Operations (Unaudited) in the notes to the consolidated financial statements included
elsewhere in this Report.
Fiscal Year ended March 31,
(In thousands, except earnings per share numbers)
2017
2018
2016
2015
2019
Statement of Operations Data
Interest and fee income on finance receivables
Interest expense
Provision for credit losses
Salaries and employee benefits
Change in fair value of interest rate swaps
Other expenses
Operating income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share – basic:
Weighted average shares outstanding
Earnings (loss) per share – diluted:
Weighted average shares outstanding
$ 71,300 $ 83,917 $ 90,466 $ 90,707 $ 86,790
5,970
9,007
9,222
20,371
26,278
37,177
20,835
22,313
21,437
364
24
(222)
13,154
12,980
14,112
60,694
70,602
81,726
26,096
20,105
8,740
3,331
9,240
7,726
5,409 $ 12,379 $ 16,856
1.40
12,013
1.38
12,192
10,137
37,450
19,868
17
13,282
80,754
3,163
4,261
(1,098) $
(.14) $
7,819
(.14) $
7,819
9,504
32,836
18,998
—
14,550
75,888
(4,588)
(940)
(3,648) $
(0.46) $
7,861
(0.46) $
7,861
1.60 $
7,622
1.59 $
7,692
.70 $
7,664
.69 $
7,726
$
$
$
24
As of and for the Fiscal Year ended March 31,
(In thousands, except number of branch locations)
2017
2018
2016
2015
2019
Balance Sheet Data
Total assets
Finance receivables, net
Debt
Shareholders’ equity
Operating Data
Return on average assets
Return on average equity
Gross portfolio yield (1)
Pre-tax yield (1)
Total delinquencies over 30 days, excluding
Chapter 13 bankruptcy accounts
Write-off to liquidation (1)
Net charge-off percentage (1)
Automobile Finance Data & Direct Loan
Origination
Contracts purchased/Direct Loans originated
Average dealer discount on Contracts purchased
Average contractual rate on Contracts &
Direct Loans purchased
Number of branch locations
$ 252,420
202,042
145,000
104,885
$ 280,840
266,573
165,750
108,437
$ 333,612
317,205
213,000
108,860
$ 325,309
311,837
211,000
102,849
$ 302,529
288,904
199,000
89,888
(1.41%)
(3.36%)
26.40%
(1.70%)
(0.36%)
(1.01%)
25.60%
0.98%
1.64%
5.11%
26.04%
2.46%
3.94%
12.85%
27.10%
6.02%
9.89%
23.02%
13.39%
8.67%
13.92%
10.65%
9.92%
11.81%
9.37%
5.50%
9.10%
7.56%
5.75%
14.54%
28.00%
8.54%
4.11%
8.13%
7.04%
$ 85,240
$ 117,217
$ 179,617
$ 196,853
$ 187,893
8.22%
7.41%
7.08%
7.51%
8.08%
22.98%
53
22.54%
60
22.40%
65
22.81%
67
23.08%
66
(1)
See the definitions set forth in the notes to the Portfolio Summary table under “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Overview.”
“
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Nicholas Financial-Canada is a Canadian holding company incorporated under the laws of British Columbia in
1986. Nicholas Financial-Canada currently conducts its business activities exclusively through a wholly-owned
indirect Florida subsidiary, Nicholas Financial. Nicholas Financial is a specialized consumer finance company
engaged primarily in acquiring and servicing automobile finance installment contracts (“Contracts”) for purchases of
used and new automobiles and light trucks. To a lesser extent, Nicholas Financial also originates direct consumer
loans (“Direct Loans”) and sells consumer-finance related products. Nicholas Financial’s financing activities
accounted for 100% of the Company’s consolidated revenue for the fiscal years ended March 31, 2019 and 2018. A
second Florida subsidiary, Nicholas Data Services, Inc. (“NDS”), serves as an intermediate holding company for
Nicholas Financial. In addition, NF Funding I, LLC (“NF Funding I”) is a newly formed, wholly-owned, special
purpose financing subsidiary of Nicholas Financial.
Nicholas Financial-Canada, Nicholas Financial, NDS, NF Funding I are collectively referred to herein as the
“Company”.
Introduction
The Company’s consolidated revenues decreased from $83.9 million for the fiscal year ended March 31, 2018 to
$71.3 million for the fiscal year ended March 31, 2019. The Company’s diluted earnings per share decreased from a
net loss of $0.14 per share for the fiscal year ended March 31, 2018 to a loss of $0.46 per share for the fiscal year
ended March 31, 2019. The Company reported a $4.6 million operating loss for the year ended March 31, 2019
compared to operating income of $3.2 million for the year ended March 31, 2018. The decrease was a result of:
•
•
•
decreased revenues due to a reduction in volume slightly offset by a higher portfolio yield;
a change in the charge-off policy from 181 days to 121 days, resulting in a one-time charge of $4.9 million;
and
the closing or consolidating of 7 branches during the year, resulting in approximately $0.3 million in
charges associated with accelerated rent expense and severance payments.
The Company’s consolidated net loss for the fiscal years ended March 31, 2019 and 2018 was $3.6 million and
$1.1 million, respectively.
The Company’s operating results during fiscal 2018 generally deteriorated as a result of several factors, including,
but not limited to, loosened underwriting guidelines, more aggressive pricing on originations, the acquisition of
Contracts that contained some degree of fraudulent information that at the time of Contract acquisition was not
identified, and an increase in the number of Contracts and Direct Loans under which customers decided to
discontinue payments to the Company after they were approved by other lenders for new vehicle financing. In
addition, aggressive competition had previously influenced the Company to purchase lower credit quality Contracts.
Historically, the Company was able to expand its automobile finance business in the non-prime credit market by
offering to purchase Contracts on terms that were competitive with those of other companies. However, it became
increasingly difficult for the Company to match or exceed pricing of its competitors, which resulted in declining
Contract acquisition rates during the 2016, 2017 and 2018 fiscal years.
Starting in January 2018 the Company became recommitted to financing primary transportation to and from work
for the sub-prime borrower. The Company began focusing on smaller amounts financed over shorter terms with
reasonable payments. As expected, and previously disclosed, the Company’s renewed focus on the Company’s core
principles, did result in downward pressure on the volume of Contracts purchased and may continue to cause
downward pressure, due to a highly competitive environment. While it is difficult to predict the level of competition
long-term, the Company believes that the current highly competitive environment will prevail for the foreseeable
future.
26
The gross portfolio yield of the portfolio for the fiscal years ended March 31, 2019 and 2018, was 26.4% and
25.6%, respectively. The average dealer discount as a percent of finance receivables associated with new volume for
the fiscal years ended March 31, 2019 and 2018 was 8.2% and 7.4%, respectively. The increase in APR and
discount (and therefore overall yield) on new purchases in fiscal 2019 as compared with fiscal 2018 was primarily
driven by the Company’s recommitment to its core principles.
Portfolio Summary
Average finance receivables (1)
Average indebtedness (2)
Interest and fee income on finance receivables
Interest expense
Net interest and fee income on finance receivables
Gross portfolio yield (3)
Interest expense as a percentage of average finance
receivables
Provision for credit losses as a percentage of average
finance receivables
Net portfolio yield (3)
Operating expenses as a percentage of average finance
receivables
Pre-tax yield as a percentage of average finance
receivables(4)
Write-off to liquidation (5)
Net charge-off percentage (6)
Fiscal Year ended March 31,
(In thousands)
$
$
$
$
$
2019
270,106
136,386
71,300
9,504
61,796
$
26.40%
2018
327,832
189,375
83,917
10,137
73,780
25.60%
3.52%
3.09%
12.16%
10.72%
11.42%
11.09%
12.42%
10.11%
(1.70)%
23.02%
13.39%
0.98%
13.92%
10.65%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Average finance receivables represent the average of finance receivables throughout the period.
Average indebtedness represents the average outstanding borrowings under the Credit Facility.
Gross 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.
Pre-tax yield represents net portfolio yield minus administrative expenses (marketing, salaries, employee
benefits, depreciation, and administrative), as a percentage of average finance receivables.
Write-off to liquidation percentage is defined as net charge-offs divided by liquidation. Liquidation is
defined as beginning finance receivables balance plus current period purchases and originations minus
ending finance receivables balance.
Net charge-off percentage represents net charge-offs divided by average finance receivables outstanding
during the period.
Allowance percentage represents the allowance for credit losses divided by average finance receivables
outstanding during the period.
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.
27
During the first quarter of fiscal 2019, the Company began using the trailing six-month net charge-off percentage,
annualized, applied to ending finance receivables, to calculate the allowance for credit losses. This change was
made to reflect changes in the Company’s lending policies and underwriting standards, which resulted from the
Company changing its business strategies. The change in the Company’s method for calculating the allowance for
credit losses was accounted for as a change in estimate. The Company re-focused on financing primary
transportation to and from work for the subprime borrower. This change resulted in purchasing higher yielding
loans, with smaller amounts financed and shorter monthly terms. A trailing six-month net charge-off percentage,
annualized, applied to ending finance receivables is also more in line with the industry practice, which typically uses
a trailing twelve-month net charge-off methodology. Management believes a trailing six-month will more quickly
reflect changes in the portfolio.
In addition, the Company takes into consideration 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
the adequacy of the allowance for credit losses. If the allowance for credit losses is 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.
Prior to the first quarter of fiscal 2019, the Company calculated the allowance for credit losses by reference to static
pools, with each pool consisting of Contracts purchased during a three-month period for a given branch location, as
management considered the Contracts in those pools to have similar risk characteristics. The Company analyzed
each consolidated static pool at specific points in time to estimate losses that were likely to be incurred as of the
reporting date. The Company maintained historical write-off information for over 10 years with respect to every
consolidated static pool and segregated each static pool by liquidation, thereby creating snapshots or buckets of each
pool’s historical write-off-to liquidation ratio at five different points in each pool’s liquidation cycle. These
snapshots were then used to assist in determining the allowance for credit losses. The five snapshots were tracked at
liquidation levels of 20%, 40%, 60%, 80%, and 100%.
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 utilizes the branch model, which allows for Contract purchasing to be done at the branch level. 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 that the Company purchases have
common risk characteristics. The Company utilizes its District Managers to evaluate their respective branch
locations for adherence to these underwriting guidelines, as well as approve underwriting exceptions. The Company
also utilizes internal audit (“IA”) to assure adherence to its underwriting guidelines. Any Contract that does not meet
the Company’s underwriting guidelines can be submitted by a branch manager for approval from the Company’s
District Managers or senior management.
Fiscal 2019 Compared to Fiscal 2018
Interest and Fee Income on Finance Receivables
Interest and fee income on finance receivables, predominantly finance charge income, decreased to $71.3 million in
fiscal 2019 as compared to $83.9 million in fiscal 2018. The average finance receivables totaled $270.1 million for
the fiscal year ended March 31, 2019, a decrease of 17.6% from $327.8 million for the fiscal year ended March 31,
2018. Purchasing volume has continued to decrease from fiscal 2018 as a result of tightening the Company’s credit
underwriting standards and a reduction in auto sales year over year.
28
Competition also continued to affect the Company’s ability to acquire Contracts, furthermore, the Company’s
renewed strategic focus of financing primary transportation to and from work for the subprime borrower has
impacted the Company’s ability to acquire Contracts at desired yields. The yield on new Contract purchases
increased from 22.4% for fiscal 2018 to 23.5% for fiscal 2019 and the average discount increased from 7.4% for
fiscal 2018 to 8.2% for fiscal 2019. Although the Company will continue to try and find ways to grow market share,
it will continue to be focused on yield.
The gross portfolio yield increased to 26.4% for the fiscal year ended March 31, 2019 as compared to 25.6% for the
fiscal year ended March 31, 2018. The gross portfolio yield increased primarily due to the increase in the average
APR and average discount on contracts purchased since January 2018. The net portfolio yield decreased to 10.7%
for the fiscal year ended March 31, 2019 from 11.1% for the fiscal year ended March 31, 2018. The net portfolio
yield decreased due to an increase in the provision for credit losses as a percentage of finance receivables, as
described under “Analysis of Credit Losses” below, offset by a decrease in interest expense.
Operating Expenses
Operating expenses increased slightly to $33.5 million for the fiscal year ended March 31, 2019 compared to
$33.2 million for the fiscal year ended March 31, 2018 because of increased marketing expense partially offset by a
decrease in salaries and employee benefits. Marketing expenses increased approximately $1.0 million due the
Company no longer capitalizing bonuses (“Spiffs”) paid to the dealers. The Company accounted for this change as a
change in accounting estimate. Beginning in fiscal 2019, spiffs are expensed when incurred. Salaries and employee
benefits decreased by approximately $0.9 million, resulting from a reduction in the number of employees.
Interest Expense
Interest expense decreased to $9.5 million for the fiscal year ended March 31, 2019, as compared to $10.1 million
for the fiscal year ended March 31, 2018, due to a decrease in average outstanding debt and interest rate. The
average outstanding debt during the year ended March 31, 2019 decreased to $136.4 million from $189.4 million
during the year ended March 31, 2018. The following table summarizes the Company’s average cost of borrowed
funds for the fiscal years ended March 31:
Variable interest under the line of credit and credit
facility
Settlements under interest rate swap agreements
Credit spread under the line of credit and credit
facility
Average cost of borrowed funds
2019
2018
2.97%
(—%)
2.76%
(0.01%)
4.00%
6.97%
4.35%
7.10%
LIBOR rates have increased (2.49% as of March 31, 2019 compared to 1.88% as of March 31, 2018) which was
offset by a decrease in the credit spread under the line of credit. For further discussions regarding interest rates see
“Note 5 – Credit Facility”.
29
Analysis of 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 fiscal years ended March 31:
Balance at beginning of year
Provision for credit losses
Charge-offs
Recoveries
Balance at end of year
Balance at beginning of year
Provision for credit losses
Charge-offs
Recoveries
Balance at end of year
$
$
$
$
For the year ended March 31, 2019
(In thousands)
Direct
Total
Indirect
19,433 $
32,715
(37,514)
1,941
16,575 $
833 $
121
(638)
41
357 $
20,266
32,836
(38,152)
1,982
16,932
For the year ended March 31, 2018
(In thousands)
Direct
Total
Indirect
$
16,885
36,890
(36,183)
1,841
19,433 $
773 $
560
(536)
36
833 $
17,658
37,450
(36,719)
1,877
20,266
During the first quarter of the fiscal year ended March 31, 2019, the Company began using the trailing six-
month charge-offs, annualized, to calculate the allowance for credit losses. This change was made to reflect changes
in the Company’s lending policies and underwriting standards, which resulted from the Company changing its
business strategies. The Company re-focused on financing primary transportation to and from work for the subprime
borrower. This change resulted in purchasing higher yielding loans, with smaller amounts financed and shorter
monthly terms. A trailing six-month, annualized, is also more in line with the industry practice, which uses a trailing
twelve-month. Management believes a trailing six-month will more quickly reflect changes in the portfolio.
In addition, the Company takes into consideration 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 is 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.
The provision for credit losses decreased to $32.8 million for the fiscal year ended March 31, 2019 from
$37.5 million for the fiscal year ended March 31, 2018, largely due to the 17.6% decrease in the average finance
receivables.
Net charge-offs increased to 13.4% for the fiscal year ended March 31, 2019 from 10.7% for the fiscal year ended
March 31, 2018, primarily resulting from the Company changing its charge-off policy from 181 days past due to 121
days past due, which resulted in the Company charging-off approximately $6.4 million of finance receivables during
the fourth quarter of fiscal 2019.
The Company’s losses as a percentage of liquidation (see note 5 in the Portfolio Summary table in the
“Introduction” above for the definition of write-off to liquidation) increased to 23.0% for the fiscal year ended
March 31, 2019 as compared to 13.9% for the fiscal year ended March 31, 2018. This increase was the result of the
Company changing its charge-off policy from 181+ days to 121+ days, which resulted in a one-time charge-off of
$6.4 million.
30
Recoveries as a percentage of charge-offs were approximately 5.2% and 5.1% for the fiscal years ended March 31,
2019 and 2018, respectively. The Company attributes a large portion of this decrease simply to the increase in
charge-offs; historically, there is typically a six to twelve-month lag period prior to receiving any benefits from post
charge-off collection activity. Periodically, the Company will aggregate charge-off accounts it deems uncollectible
and sell them to a third-party.
The delinquency percentage for Contracts more than thirty days past due, excluding Chapter 13 bankruptcy
accounts, as of March 31, 2019 was 10.1%, an increase from 8.8% as of March 31, 2018. The delinquency
percentage for Direct Loans more than thirty days past due, excluding Chapter 13 bankruptcy accounts, as of
March 31, 2019 was 3.8%, a decrease from 5.2% as of March 31, 2018. The increase in delinquency percentage for
Contracts was due to the Company tightening its deferral policy, starting in January 2018.
In accordance with Company policies and procedures, certain borrowers qualify for, and the Company offers, one-
month principal payment deferrals on Contracts and Direct Loans. For the fiscal years ended March 31, 2019 and
March 31, 2018 the Company granted deferrals to approximately 13.2% and 38.4%, respectively, of total Contracts
and Direct Loans. The decrease in the number of deferrals in fiscal 2019 compared to fiscal 2018 resulted from the
Company tightening its deferral policy, starting in January 2018.
Amount of Deferrals Per Month
FY19
FY18
2000
1000
0
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Income Taxes
The Company recorded a tax benefit of approximately $0.9 million during fiscal 2019 compared to a $4.3 million
income tax expense during fiscal 2018. The Company’s effective tax rate in fiscal 2019 was 20.5% compared to
134.7% in fiscal 2018. The decrease was primarily the result of the U.S. Tax Cuts and Jobs Act ( "TCJA"), which
was enacted on December 22, 2017. For further discussion regarding income taxes see “Note 7 – Income Taxes”.
Liquidity and Capital Resources
The Company’s cash flows are summarized as follows:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash
Fiscal Year ended March 31,
(In thousands)
2019
2018
$
$
14,404 $
44,159
(23,547)
35,016 $
25,152
21,826
(47,207)
(229)
The Company made certain reclassifications to the fiscal 2018 statement of cash flows to reclass unearned insurance
and fee commissions from operating activities to investing activities. In addition, debt origination costs were
reclassed from operating activities to financing activities. Net loss and shareholders’ equity were not impacted.
31
The Company’s primary use of working capital for the fiscal year ended March 31, 2019 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 March 29, 2019, NF Funding I, a special purpose financing subsidiary of Nicholas Financial, entered into a
senior secured credit facility (the “Credit Facility”) pursuant to a credit agreement with Ares Agent Services, L.P., as
administrative agent and collateral agent, and the lenders that are party thereto (the “Credit Agreement”). The
Company’s prior line of credit was paid off in connection with this Credit Facility.
Pursuant to the Credit Agreement, the lenders agreed to extend to the Company a line of credit of up to
$175,000,000, which will be used to purchase Contracts from Nicholas Financial on a revolving basis pursuant to a
related receivables purchase agreement between NF Funding I and Nicholas Financial (the “Receivables Purchase
Agreement”). Under the terms of the Receivables Purchase Agreement, Nicholas Financial sells to NF Funding I the
receivables under Contracts. Nicholas Financial continues to service the Contracts transferred to NF Funding I
pursuant to a related servicing agreement (the “Servicing Agreement”).
The availability of funds under the Credit Facility is generally limited to 82.5% of the value of non-
delinquent receivables, and outstanding advances under the Credit Facility will accrue interest at a rate of LIBOR
plus 3.75%. The commitment period for advances under the Credit Facility is three years. At the end of the
commitment period, the outstanding balance would be paid off over a four-year amortization period.
The Company will continue to depend on the availability the Credit Facility, together with cash from operations, to
finance future operations. The availability of funds under the Credit Facility generally depends on availability
calculations as defined in the Credit Agreement. In addition, 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 receivables. See “Risk Factors—Our Credit
Facility is subject to certain defaults and negative covenants.” If an event of default occurs under the Credit
Facility, the Company’s lenders could increase the Company’s borrowing costs, restrict the Company’s ability to
obtain additional borrowings under the facility, accelerate all amounts outstanding under the facility, or enforce their
interest against collateral pledged under the facility, or enforce their rights under guarantees.
Impact of Inflation
The Company is affected by inflation primarily through increased operating costs and expenses including increases
in interest rates. Inflationary pressures on operating costs and expenses historically have been largely offset by the
Company’s continued emphasis on stringent operating and cost controls, although no assurances can be given
regarding the Company’s ability to offset the effects of inflation in the future.
Contractual Obligations
The following table summarizes the Company’s material obligations as of March 31, 2019.
Operating leases
Line of credit
Interest on credit facility
Total
$
$
Total
3,444 $
145,000
50,550
198,994 $
Payments Due by Period
(In thousands)
1 to 3
years
Less than
1 year
3 to 5
years
More than
5 years
2,032 $
—
10,107
12,139 $
1,379 $
—
20,213
21,592 $
33 $
108,750
18,958
127,741 $
—
36,250
1,272
37,522
32
The Company’s $175.0 million commitment period for advances under the Credit Facility matures March 31, 2022.
At the end of the commitment period, the outstanding balance would be paid off over a four-year amortization
period. The pricing of the Credit Facility is 375 basis points above 30-day LIBOR. The unused line fee on the Credit
Facility is 0.50%. Interest on outstanding borrowings under the Credit Facility as of March 31, 2019, is based on an
effective interest rate of 6.97%. The effective interest rate used in the above table does not contemplate the
possibility of entering into interest rate swap agreements in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company’s operations result primarily from changes in interest rates. The Company
does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading
purposes.
Interest Rate Risk
Management’s objective is to minimize the cost of borrowing through an appropriate mix of fixed and floating rate
debt. Derivative financial instruments, such as interest rate swap agreements, may be used for the purpose of
managing fluctuating interest rate exposures that exist from ongoing business operations. The Company does not use
interest rate swap agreements for speculative purposes.
As of March 31, 2019, $145.0 million, or 100% of our total debt, was subject to floating interest rates. A
hypothetical increase in the variable interest rates of 1% or 100 basis points would result in an annual pre-tax
increase of interest expense of approximately $1.5 million.
33
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Report:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
35
36
37
38
39
40
41
34
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Nicholas Financial, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Nicholas Financial, Inc. and subsidiaries (the
Company) as of March 31, 2019, the related consolidated statements of loss, shareholders’ equity and cash flows,
for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019, and
the results of its operations and its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audit we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2018.
Raleigh, North Carolina
June 28, 2019
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Nicholas Financial, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Nicholas Financial, Inc. and Subsidiaries (the
“Company”) as of March 31, 2018, the related consolidated statements of loss, shareholders’ equity, and cash flows
for the year ended March 31, 2018, and the related notes (collectively referred to as the “financial statements”). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as
of March 31, 2018, and the results of their operations and their cash flows for the year ended March 31, 2018, in
conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company was not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ Dixon Hughes Goodman LLP
We served as the Company’s auditor from 2003 to 2018.
Atlanta, Georgia
June 27, 2018
36
Nicholas Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Assets
Cash
Restricted cash
Finance receivables, net
Assets held for resale
Prepaid expenses and other assets
Income taxes receivable
Property and equipment, net
Deferred income taxes
Total assets
Liabilities and shareholders’ equity
Credit facility
Unamortized debt issuance costs
Net long-term debt
Drafts payable
Accounts payable and accrued expenses
Total liabilities
Shareholders’ equity:
Preferred stock, no par: 5,000 shares authorized; none issued
Common stock, no par: 50,000 shares authorized; 12,624 and 12,609
shares issued respectively; 7,910 and 7,895 shares outstanding,
respectively
Treasury stock: 4,714 common shares, at cost
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
March 31,
2019
2018
35,595 $
2,047
202,042
1,924
1,378
1,654
656
7,124
252,420 $
145,000 $
(2,381)
142,619
1,312
3,604
147,535
2,626
—
266,573
2,117
887
1,505
843
6,289
280,840
165,750
(19)
165,731
1,672
5,000
172,403
—
—
34,660
(70,459)
140,684
104,885
252,420 $
34,564
(70,459)
144,332
108,437
280,840
$
$
$
$
The following table represents the assets and liabilities of our consolidated variable interest entity as of March 31:
Assets
Restricted cash
Finance receivables, net
Total assets
Liabilities
Credit facility
Total liabilities
2019
2018
$
$
$
$
2,047
187,584
189,631
142,619
142,619
$
$
$
$
—
—
—
—
—
See accompanying notes to the Consolidated Financial Statements.
37
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Loss
(In thousands, except per share amounts)
Interest and fee income on finance receivables
Expenses:
Marketing
Salaries and employee benefits
Administrative
Provision for credit losses
Depreciation
Interest expense
Change in fair value of interest rate swap agreements
Operating income (loss) before income taxes
Income tax expense (benefit)
Net loss
Loss per share:
Basic
Diluted
See accompanying notes to the Consolidated Financial Statements.
Fiscal Year ended March 31,
2018
2019
$
71,300 $
83,917
2,446
18,998
11,724
32,836
380
9,504
—
75,888
(4,588)
(940)
(3,648) $
(.46) $
(.46) $
1,489
19,868
11,324
37,450
469
10,137
17
80,754
3,163
4,261
(1,098)
(.14)
(.14)
$
$
$
38
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(In thousands)
Common Stock
Shares
Amount
Treasury
Stock
Retained
Earnings
Balance at March 31, 2017
Net loss
Issuance of common stock under stock options
Forfeitures of restricted share awards
Share-based compensation
Balance at March 31, 2018
Net loss
Issuance of common stock under stock options
Grants of restricted share awards, net of forfeitures
Share-based compensation
Balance at March 31, 2019
—
—
—
—
—
91
(6)
—
—
458
—
217
7,810 $ 33,889 $ (70,459) $ 145,430 $
(1,098)
—
—
—
7,895 $ 34,564 $ (70,459) $ 144,332 $
(3,648)
—
—
—
7,910 $ 34,660 $ (70,459) $ 140,684 $
—
12
3
—
—
16
—
80
—
—
—
—
Total
Shareholders'
Equity
108,860
(1,098)
458
—
217
108,437
(3,648)
16
—
80
104,885
See accompanying notes to the Consolidated Financial Statements.
39
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation
Gain on sale of property and equipment
Provision for credit losses
Amortization of dealer discounts
Amortization of commission for products
Deferred income taxes
Share-based compensation
Change in fair value of interest rate swap agreements
Changes in operating assets and liabilities:
Accrued interest receivable
Prepaid expenses and other assets
Accounts payable and accrued expenses
Decrease in assets held for resale
Income taxes receivable/payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase and origination of finance contracts
Principal payments received including recoveries
Purchase of property and equipment
Proceeds from sale of property and equipment
Net cash provided by investing activities
Cash flows from financing activities:
Net repayments on line of credit
Net proceeds from new credit facility
Decrease in drafts payable
Payment of debt origination costs
Proceeds from exercise of share awards
Net cash used in financing activities
Net increase (decrease) in cash
Cash and restricted cash, beginning of year
Cash and restricted cash, end of year
Fiscal Year ended March 31,
2018
2019
$
(3,648) $
(1,098)
380
(62)
32,836
(10,641)
(1,797)
(835)
80
—
(157)
(110)
(1,686)
193
(149)
14,404
(85,240)
129,530
(228)
97
44,159
(165,750)
145,000
(360)
(2,453)
16
(23,547)
35,016
2,626
37,642 $
$
469
(66)
37,450
(11,488)
(1,656)
2,216
217
17
469
4
(932)
336
(786)
25,152
(117,217)
139,105
(130)
68
21,826
(47,250)
—
(179)
(236)
458
(47,207)
(229)
2,855
2,626
The following table reconciles cash and restricted cash from the Consolidated Balance Sheets to the statements above:
Cash
Restricted cash
Total cash and restricted cash
See accompanying notes to the Consolidated Financial Statements.
Fiscal Year ended March 31,
2018
2019
$
$
35,595 $
2,047
37,642 $
2,626
—
2,626
40
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorporated under the
laws of British Columbia with two wholly owned United States subsidiaries, Nicholas Data Services, Inc. (“NDS”)
and Nicholas Financial, Inc. (“NFI”). NDS historically was engaged in supporting and updating industry-specific
computer application software for small businesses located primarily in the Southeastern United States. NDS has
ceased its operations; however, it continues as the interim holding company for Nicholas Financial. NFI is a
specialized consumer finance company engaged primarily in acquiring and servicing automobile finance installment
contracts (“Contracts”) for purchases of used and new automobiles and light trucks. To a lesser extent, NFI also
offers direct consumer loans (“Direct Loans”) and sells consumer-finance related products. In addition, NF Funding
I, LLC (“NF Funding I”), is a newly formed, wholly-owned, special purpose financing subsidiary of NFI. All three
companies are based in Florida, U.S.A. The accompanying consolidated financial statements are stated in U.S.
dollars and are presented in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”).
The Company has one reportable segment, which is the consumer finance company.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Nicholas Financial – Canada and its wholly owned
subsidiaries, NDS, NFI, and NF Funding I, collectively referred to as the “Company”. All intercompany transactions
and balances have been eliminated.
Use of Estimates
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.
Restricted Cash
Restricted cash includes cash and cash equivalents for which the Company’s ability to withdraw funds is
contractually limited. The Company’s restricted cash consist of cash restricted for debt serving of the Company’s
variable interest entity.
Finance Receivables
Finance receivables are recorded at cost, net of unearned dealer discounts, unearned insurance and commissions (see
“Revenue Recognition”), and the allowance for credit losses (See Note 3). Beginning in the fiscal year ended March
31, 2019, the Company ceased capitalizing compensation to the dealers. This change resulted in an increase in
marketing expenses of approximately $1.0 million for the fiscal year ended March 31, 2019.
41
Allowance for Credit Losses
During the first quarter of the fiscal year ended March 31, 2019, the Company began using the trailing six-month net
charge-off percentage, annualized, applied to ending finance receivables to calculate the allowance for credit losses.
Management believes a trailing six-month net charge-off percentage will more quickly reflect changes in the
portfolio. Using the prior method (discussed below), the allowance and provision expense for the first quarter of
fiscal 2019 would have been approximately $151,000 lower.
In addition, the Company takes into consideration 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 is 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.
Prior to the first quarter of fiscal 2019, the Company calculated the allowance for credit losses by reference to static
pools, with each pool consisting of Contracts purchased during a three-month period for a given branch location, as
management considered the Contracts in those pools to have similar risk characteristics. The Company analyzed
each consolidated static pool at specific points in time to estimate losses that were likely to be incurred as of the
reporting date. The Company maintained historical write-off information for over 10 years with respect to every
consolidated static pool and segregated each static pool by liquidation, thereby creating snapshots or buckets of each
pool’s historical write-off-to liquidation ratio at five different points in each pool’s liquidation cycle. These
snapshots were then used to assist in determining the allowance for credit losses. The five snapshots were tracked at
liquidation levels of 20%, 40%, 60%, 80%, and 100%.
Assets Held for Resale
Assets held for resale are stated at net realizable value and consist primarily of automobiles that have been
repossessed by the Company and are awaiting final disposition. Most costs associated with repossession, transport,
and auction preparation expenses are reported under operating expenses in the period in which they are incurred.
Property and Equipment
Property and equipment is recorded at cost, net of accumulated depreciation. Expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Automobiles
Equipment
Furniture and fixtures
Software
Leasehold improvements
3 years
5 years
7 years
7 years
Lesser of lease term or useful life (generally 6 - 7 years)
Drafts Payable
Drafts payable represent checks disbursed for loan purchases which have not yet been funded. Amounts generally
clear within two business days of period end and then increase the Credit Facility or reduce cash.
42
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax bases along with operating loss and tax
credit carryforwards, if any. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that
includes the enactment date.
The Company recognizes tax benefits from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the consolidated financial statements from any such position would be measured based on the
largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. It is the
Company’s policy to recognize interest and penalties accrued on any uncertain tax benefits as a component of
income tax expense. There were no unrecognized tax positions as of March 31, 2019 or 2018.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few
exceptions the Company is no longer subject to U.S. federal and state tax examinations for fiscal years prior to
2015.
The effect on deferred taxes of a change in tax rates is recognized in income tax expense in the period that includes
the enactment date. See Note 7 for details regarding the impact of TCJA enacted by the U.S. government on
n
December 22, 2017.
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.
As of February 2019, Chapter 13 bankruptcy accounts are charged-off at the time the accounts enters bankruptcy
status. Prior to February 2019, Chapter 13 bankruptcy accounts were accounted for under the cost-recovery method.
Interest income on Chapter 13 bankruptcy accounts did not resume until all principal amounts were recovered (see
Note 3).
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
from which the Company is purchasing the Contract, 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, as a percent of the amount financed, associated with
new volume for the fiscal years ended March 31, 2019 and 2018, was 8.2% and 7.4%, respectively.
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, and forced placed automobile insurance.
These commissions are amortized over the life of the Contract using the interest method.
43
Loss Per Share
The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered
participating securities. Earnings (loss) per share is calculated using the two-class method, as such awards are more
dilutive under this method than the treasury stock method. Ordinarily, 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. Ordinarily, diluted loss per share includes
the dilutive effect of additional potential common shares from stock compensation awards. However, in the years
where the Company experiences a net loss, which existed for the years ended March 31, 2019 and 2018,
respectively, net loss is not allocated to participating securities as their effect is antidilutive. Loss per share has been
computed based on the following weighted average number of common shares outstanding:
Numerator:
Net loss per consolidated statements of
loss
Less: Allocation of loss to participating
securities
Net loss allocated to common stock
Basic loss per share computation:
Net loss allocated to common stock
Weighted average common shares outstanding,
including shares considered participating
securities
Less: Weighted average participating securities
outstanding
Weighted average shares of common stock
Basic loss per share
Diluted loss per share computation:
Loss allocated to common stock
Undistributed earnings re-allocated to participating
securities
Numerator for diluted loss per share
Weighted average common shares outstanding for
basic loss per share
Incremental shares from stock options
Weighted average shares and dilutive potential
common shares
Diluted loss per share
Fiscal Year ended March 31,
(In thousands, except earnings
per share numbers)
2019
2018
$
(3,648) $
(1,098)
—
(3,648) $
—
(1,098)
(3,648) $
(1,098)
7,861
7,819
—
7,861
(0.46) $
—
7,819
(0.14)
(3,648) $
(1,098)
—
(3,648) $
—
(1,098)
7,861
—
7,861
(0.46) $
7,819
—
7,819
(0.14)
$
$
$
$
$
$
Diluted loss per share does not include the effect of certain stock options as their impact would be anti-dilutive.
Approximately 68,600 and 124,000 stock options were not included in the computation of diluted loss per share for
the years ended March 31, 2019 and 2018 respectively, because their effect would have been anti-dilutive.
44
Share-Based Payments
The grant date fair value of share awards is recognized in earnings over the requisite service period (presumptively,
the vesting period), net of estimated forfeitures. The Company estimates the fair value of option awards using the
Black-Scholes option pricing model. The risk-free interest rate is based upon a U.S. Treasury instrument with a life
that is similar to the expected term of the options. Expected volatility is based upon the historical volatility for the
previous period equal to the expected term of the options. The expected term is based upon the average life of
previously issued options. The expected dividend yield is based upon the yield expected on date of grant to occur
over the term of the option.
The fair value of non-vested restricted shares and performance units are measured at the market price of a share on a
grant date. Restricted shares have a three-year service period. Performance units include a performance period
(generally ending at the end of the fiscal year in which the units were granted) followed by a two-year service
period. At the end of the performance period, these units effectively become restricted shares for the remaining two-
year service period at which time they become vested.
Fair Value Measurements
The Company measures specific assets and liabilities at fair value, which is an exit price, representing the price that
would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market
participants at the measurement date. When applicable, the Company utilizes market data or assumptions that
market participants would use in pricing the asset or liability under a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted
prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists,
therefore requiring an entity to develop its own assumptions (see Note 6).
Financial Instruments and Concentrations
The Company’s financial instruments consist of cash, finance receivables (accrued interest receivable is a part of
finance receivables), and a Credit Facility. Financial instruments that are exposed to concentrations of credit risk are
primarily finance receivables and cash.
As of March 31, 2019, the Company operated in 15 states through 53 branch locations. Of the finance receivables
total as of March 31, 2019, Florida represented 28%, Ohio represented 14%, Georgia represented 10%, North
Carolina represented 8%, and Indiana represented 5%. Of the remaining states, no one state represented more than
5% of the total finance receivables. The Company provides credit during the normal course of business and
performs ongoing credit evaluations of its customers.
The Company maintains reserves for potential credit losses which, when realized, have been within the range of
management’s expectations. The Company perfects a primary security interest in all vehicles financed as a form of
collateral.
The combined account balances the Company maintains at financial institutions typically exceed federally insured
limits, and there is a concentration of credit risk related to accounts on deposit in excess of federally insured limits.
The Company has not experienced any losses in such accounts and believes this risk of loss is not significant.
45
Variable Interest Entity
In March 2019, the Company entered into a new senior secured credit facility collateralized by customer financed
receivables by transferring the receivables into a bankruptcy-remote variable interest entity (VIE). Under the terms
of the transaction, all cash collections and other cash proceeds of the customer receivables go first to the servicer
and the holders of the asset-backed notes, and then to the residual equity holder. The Company retained the
servicing of the portfolio and receives a monthly fee of 2.5% (annualized) based on the outstanding balance of the
financed receivables, and the Company currently holds all of the residual equity. In addition, the Company, rather
than the VIE, will retain certain credit insurance income together with certain recoveries related to credit insurance
and on charge-offs of the financed receivables, which will continue to be reflected as a reduction of net charge-offs
on a consolidated basis for as long as the Company consolidates the VIE.
The Company consolidated the VIE’s when the Company determines that it is the primary beneficiary, the Company
has the power to direct the activities that most significantly impact the performance of the VIE and it has the
obligation to absorb losses and has the right to receive residual returns is significant.
Statements of Cash Flows
Cash paid for income taxes for the years ended March 31, 2019 and 2018 was approximately $44 thousand and
$2.8 million respectively. Cash paid for interest, including debt origination costs for the years ended March 31, 2019
and 2018 was approximately $11.6 and $10.1 million, respectively.
Reclassifications
Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications
had no impact on previously reported net loss or shareholders’ equity.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The
ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers. The guidance also requires disclosures regarding the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. Entities have the option to apply the new guidance under a
retrospective approach to each prior reporting period presented or a modified retrospective approach with the
cumulative effect of initially applying the new guidance recognized at the date of initial application within the
Statement of Consolidated Financial Position. On July 9, 2015, the FASB approved the deferral of the effective date
of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period. On April 1, 2018, the Company adopted
the new guidance utilizing the modified retrospective transition method. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718). The guidance
provides clarification on when modification accounting should be used for changes to the terms or conditions of a
share-based payment award. This guidance is effective for fiscal years beginning after December 15, 2017 and for
interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on
April 1, 2018, and it believes the adoption of this guidance did not have a material impact on its Consolidated
Financial Statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805). The guidance clarifies the
definition of a business, which assists entities when evaluating whether transactions should be accounted for as
acquisitions of businesses or assets. This guidance is effective on a prospective basis for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. The Company adopted the guidance on
April 1, 2018 and the adoption of this guidance did not have a material impact on its Consolidated Financial
Statements.
46
In August 2016, the FASB issued the Accounting Standards Update (“ASU”) 2016-15 Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payment. The new guidance focuses on making the
Statement of Cash Flows more uniform for companies. The amendments in this Update are effective for public
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company adopted the guidance on April 1, 2018 and did not have a material impact on its Consolidated
Financial Statements.
Recent Accounting Pronouncements
In February 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-02, “Income Statement-
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income” was issued to address a narrow-scope financial reporting issue that arose as a consequence
of the change in the tax law. On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act
to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year
2018 (Tax Cuts and Jobs Act of 2017). The ASU No. 2018-02 permits a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal
corporate income tax rate. The amount of the reclassification would be the difference between the historical
corporate income tax rate of 35 percent and the newly enacted 21 percent corporate income tax rate.
The ASU No. 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years with early adoption permitted, including adoption in any interim period, for
(i) public business entities for reporting periods for which financial statements have not yet been issued and (ii) all
other entities for reporting periods for which financial statements have not yet been made available for issuance. The
adoption of this guidance will not impact the Company’s Consolidated Financial Statements or disclosures.
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12 Derivatives and
Hedging (Topic 815). The guidance is intended to better align an entity’s risk management activities and financial
reporting for hedging relationships. This guidance is effective for fiscal years beginning after December 15, 2018
and for interim periods within those fiscal years, with early adoption permitted. The Company is currently
evaluating impact of the adoption of this guidance on its Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued the 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. Financial institutions and other
organizations 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, 2019. Early application will be permitted for all
organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 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 February 2016, the FASB issued ASU No. 2016-02, “Leases”, intended to improve financial reporting about
leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate,
airplanes, and manufacturing equipment. “The ASU will require organizations that lease assets—referred to as
“lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those
leases. The accounting by organizations that own the assets leased by the lessee—also known as lessor accounting—
will remain largely unchanged from current U.S. GAAP. ASU 2016-02 is effective for annual periods beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Upon
adoption, the Company will add the impact of the full operating lease terms, using the present value of future
minimum lease payments to the balance sheet. The Company will continue to evaluate the impact of the adoption of
this ASU on the Consolidated Financial Statements
47
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.
3. Finance Receivables
Finance receivables consist of Contracts and Direct Loans, each of which comprise a portfolio segment. Each
portfolio segment consists of smaller balance homogeneous loans which are collectively evaluated for impairment.
The Company purchases individual Contracts from used and new automobile dealers in its markets. There is no
relationship between the Company and the dealer with respect to a given Contract once the assignment of that
Contract is complete. The dealer has no vested interest in the performance of any Contract the Company purchases.
Beginning February 2019, the Company charges-off receivables when an individual account becomes 121 days
contractually delinquent or is in Chapter 13 bankruptcy. In the event of repossession, the charge-off will occur in the
month in which the vehicle was repossessed. Prior to February 2019, an individual account was charged-off at 181
days contractually delinquent.
Contracts and Direct Loans included in finance receivables are detailed as follows as of fiscal years ended
March 31:
Finance receivables
Accrued interest receivable
Unearned dealer discounts
Unearned insurance and fee commissions
Finance receivables, net of unearned
Allowance for credit losses
Finance receivables, net
(In thousands)
2019
228,994 $
2,889
(10,083)
(2,826)
218,974
(16,932)
202,042 $
2018
301,065
2,732
(13,655)
(3,303)
286,839
(20,266)
266,573
$
$
Contracts
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 March 31, 2019, the average model year of vehicles collateralizing the portfolio was a 2010 vehicle.
The terms of the Contracts range from 12 to 60 months and bear an average contractual interest rate of 22.7% and
22.6% as of March 31, 2019 and 2018, respectively.
Direct Loans
Direct Loans are typically for amounts ranging from $1,000 to $15,000 and are generally secured by a lien on an
automobile, watercraft or other permissible tangible personal property. The majority of Direct Loans are originated
with current or former customers under the Company’s automobile financing program. The typical Direct Loan
represents a better credit risk than Contracts due to the customer’s historical payment history with the Company;
however, the underlying collateral is less valuable. In deciding whether or not to make a loan, the Company
considers 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 borrowers under Contracts previously purchased by the Company, the payment history of the borrower
under the Contract is a significant factor in making the loan decision. As of March 31, 2019, loans made by the
Company pursuant to its Direct Loan program constituted approximately 3% of the aggregate principal amount of
the Company’s loan portfolio. The terms of the Direct Loans range from 12 to72 months and bear an average
contractual interest rate of 26.0% and 26.1% as of March 31, 2019 and 2018, respectively.
48
Allowance for Credit Losses
During the first quarter of the fiscal year ended March 31, 2019, the Company began using the trailing six-
month charge-offs, annualized, to calculate the allowance for credit losses. This change was made to reflect changes
in the Company’s lending policies and underwriting standards, which were a result of the Company changing its
business strategies. The Company changed its focus to financing primary transportation to and from work for the
subprime borrower.
In addition, the Company takes into consideration 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 is 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.
Prior to June 30, 2018, the Company calculated the allowance for credit losses by reference to static pools, which
each pool consisted of Contracts purchased during a three-month period for each branch location as management
considers these pools to have similar risk characteristics and were considered smaller-balance homogenous loans.
The Company analyzed each consolidated static pool at specific points in time to estimate losses that were probable
of being incurred as of the reporting date. The Company maintained historical write-off information for over 10
years with respect to every consolidated static pool and segregated such static pool by liquidation, thereby creating
snapshots or buckets of each pool’s historical write-off-to liquidation ratio at five different points in each vintage
pool’s liquidation cycle. These snapshots were then used to assist in determining the allowance for credit losses. The
five snapshots were tracked at liquidation levels of 20%, 40%, 60%, 80%, and 100%.
The following presents the activity in our allowance for credit losses:
Balance at beginning of year
Provision for credit losses
Charge-offs
Recoveries
Balance at end of year
Balance at beginning of year
Provision for credit losses
Charge-offs
Recoveries
Balance at end of year
$
$
$
$
For the year ended March 31, 2019
(In thousands)
Direct
Indirect
19,433 $
32,715
(37,514)
1,941
16,575 $
833 $
121
(638)
41
357 $
For the year ended March 31, 2018
(In thousands)
Direct
Indirect
16,885 $
36,890
(36,183)
1,841
19,433 $
773 $
560
(536)
36
833 $
Total
20,266
32,836
(38,152)
1,982
16,932
Total
17,658
37,450
(36,719)
1,877
20,266
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 25% of a payment contractually due by a certain date has not
been paid by the immediately 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.
49
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, 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, and the accrual of interest income is suspended. As of February 2019, the Company
changed the charge-off policy from 181 days contractually delinquent to 121 days contractually delinquent. This
change aligned the Company’s charge-off policy with practices within the subprime auto financing segment. See
“Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
” for more
“
details. Also, as of February 2019, upon notification of a Chapter 13 bankruptcy, an account is charged-off. The
Company recorded a $4.9 million increase to the provision for credit losses, resulting from this change.
In the event an account is dismissed from bankruptcy, the Company will decide, based on several factors, to begin
repossession proceedings or to allow the customer to begin making regularly scheduled payments.
The following table is an assessment of the credit quality by creditworthiness as of March 31:
(In thousands)
Performing accounts
Non-performing accounts
Total
Chapter 13 bankruptcy
Finance receivables
Contracts
$
213,542 $
7,453
220,995
—
220,995 $
$
2019
Direct
Loans
7,889
110
7,999
—
7,999
$
$
2018
Direct
Loans
Contracts
Total
221,431 $
7,563
228,994
—
228,994 $
279,688 $
9,503
289,191
4,073
293,264 $
7,528 $
217
7,745
56
7,801 $
Total
287,216
9,720
296,936
4,129
301,065
The following tables present certain information regarding the delinquency rates experienced by the Company with
respect to Contracts and Direct Loans, excluding any Chapter 13 bankruptcy accounts:
(In thousands)
Balance
Contracts
March 31, 2019
Outstanding
$
220,995 $
March 31, 2018 $
289,191 $
Balance
Direct Loans
March 31, 2019
Outstanding
$
7,999 $
March 31, 2018 $
7,745 $
30 – 59 days
14,897
$
6.74%
$
5.47%
15,828
60 –89 days
5,155
90-119 days
$
2,288
2.33%
5,711
$
1.97%
$
1.04%
2,124
$
0.73%
120+ days
Total
10
$
0.00%
1,668
$
0.58%
22,350
10.11%
25,331
8.76%
30 – 59 days
197
$
2.46%
189
$
2.44%
60 –89 days
90-119 days
31
79
$
0.39%
0.99%
62
77
$
$
0.80%
0.99%
120+ days
Total
—
$
0.00%
78
$
1.01%
307
3.84%
406
5.24%
50
4. Property and Equipment
Property and equipment as of March 31, 2019 and 2018 is summarized as follows:
2019
Automobiles
Software
Equipment
Furniture and fixtures
Leasehold improvements
2018
Automobiles
Equipment
Furniture and fixtures
Leasehold improvements
Cost
(In thousands)
Accumulated
Depreciation
Net Book
Value
$
$
$
$
488 $
127
1,535
535
1,187
3,872 $
646 $
1,496
546
1,207
3,895 $
415 $
3
1,263
465
1,070
3,216 $
468 $
1,071
457
1,056
3,052 $
73
124
272
70
117
656
178
425
89
151
843
5. Credit Facility
Senior Secured Credit Facility
On March 29, 2019, NF Funding I, a newly-formed, wholly-owned, special purpose financing subsidiary of NFI
entered into a senior secured credit facility (the “Credit Facility”) pursuant to a credit agreement with Ares Agent
Services, L.P., as administrative agent and collateral agent, and the lenders that are party thereto (the “Credit
Agreement”). The Company’s prior credit facility was paid off in connection with this Credit Facility.
Pursuant to the Credit Agreement, the lenders have agreed to extend to the NF Funding I a line of credit of up to
$175,000,000, which will be used to purchase motor vehicle retail installment sale contracts from NFI on a
revolving basis pursuant to a related receivables purchase agreement between NF Funding I and NFI (the
“Receivables Purchase Agreement”). Under the terms of the Receivables Purchase Agreement, NFI will sell to NF
Funding I the receivables under the installment sale contracts. NFI will continue to service the motor vehicle retail
installment sale contracts transferred to NF Funding I pursuant to a related servicing agreement (the “Servicing
Agreement”).
The availability of funds under the Credit Facility is generally limited to 82.5% of the value of non-
delinquent receivables, and outstanding advances under the Credit Facility will accrue interest at a rate of LIBOR
plus 3.75%. The commitment period for advances under the Credit Facility is three years. At the end of the
commitment period, the outstanding balance would be paid off over a four-year amortization period.
In connection with the Credit Facility, NFI has guaranteed the NF Funding I ’s obligations under the Credit
Agreement up to 10% of the highest aggregate principal amount outstanding under the Credit Agreement at any time
pursuant to the Limited Guaranty. The Company is also obligated to cover any losses of the lender parties resulting
from certain “bad acts” of the Company or its subsidiaries, such as fraud, misappropriation of funds or unpermitted
disposition of the assets.
Pursuant to a related security agreement (the “Security Agreement”), NF Funding I granted a security interest in
substantially all of its assets as collateral for its obligations under the Credit Facility. In addition, NFI pledged the
equity interests of NF Funding I as additional collateral.
51
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
receivables. If an event of default occurs, the lenders could increase borrowing costs, restrict the NF Funding I ’s
ability to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit
Facility, enforce their interest against collateral pledged under the Credit Facility or enforce their rights under the
Company’s guarantees.
Once sold to the NF Funding I , the assets described above will be separate and distinct from the Company’s own
assets and will not be available to its creditors should the Company become insolvent, although they will be
presented on a consolidated basis on the Company’s balance sheet.
Future maturities of debt as of March 31, 2019 are as follows:
(in thousands)
Year Ended March 31,
2020
2021
2022
2023
2024
Thereafter
$
$
—
—
—
36,250
36,250
72,500
145,000
Line of Credit
t
Prior to March 29, 2019, the Company utilized a line of credit facility (the “Line of Credit”) ranging from
m
$140 million to $225 million during fiscal years 2019 and 2018.
On March 29, 2019 the Company paid-off in full
the Line of Credit in connection with the new Credit Facility. Pledged as collateral for this Line of Credit were all
the assets of the Company.
The credit agreement required compliance with certain financial ratios and covenants and satisfaction of specified
financial tests, including maintenance of asset quality and performance tests. The Company’s operating results over
the past two years provide indicators that the Company may not be able to continue to comply with certain of the
required financial ratios, covenants and financial tests prior to the maturity date of the Line of Credit in the absence
of an amendment to the corresponding credit agreement or waiver. On November 2, 2018, the Company entered into
a Waiver and Amendment No. 9 (“Amendment No. 9”) to the Second Amended and Restated Loan and Security
Agreement governing the Line of Credit. Among other things, Amendment No. 9 waived compliance with the
minimum interest coverage ratio and minimum loss reserve requirements for the measurement period ending August
31, 2018. On February 12, 2019, the Company entered into a Waiver and Amendment No. 10 (Amendment No. 10)
to the Second Amended and Restated Loan and Security Agreement. Among other things, Amendment No. 10:
• waived compliance with the minimum interest coverage ratio for the measurement period ended November
30, 2018; and
• modifies the minimum interest coverage ratio to 0.44 to 1.0 for the measurement period ended on
December 31, 2018, 0.20 to 1.0 for the measurement period ending January 31, 2019, and 1.0 to 1.0 for the
measurement period ending February 28, 2019 and thereafter; and
•
reduced the Line of Credit to $140 million.
52
On March 30, 2018, a one-year renewal was executed extending the maturity date to March 30, 2019 and reducing
the line of credit facility to $200 million. The pricing of the Line of Credit remained at 400 basis points above 30-
day LIBOR, with a 1% floor on LIBOR and the beneficial ownership limit remained at 30%. On November 8, 2017,
the Company executed amendment 7 to this existing Line of Credit which extended the maturity date to March 31,
2018 and increased the pricing of the Line of Credit to 400 basis points above 30-day LIBOR, while maintaining the
1% floor on LIBOR. The amendment also increased the beneficial ownership limit from 20% to 30% and revised the
calculation of availability and the minimum interest coverage ratio. The threshold for the minimum interest coverage
ratio was lowered for the period ending December 31, 2017.
6. Fair Value Disclosures
Financial Instruments Not Measured at Fair Value
The Company’s financial instruments consist of cash and restricted cash, finance receivables, repossessed assets,
and the Credit Facility. For the cash and the credit facility, the carrying value approximates fair value.
Finance receivables, net, approximates fair value based on the price paid to acquire Contracts. The price 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 to72 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 the projected
cash value upon liquidation plus insurance claims outstanding, if any.
Based on current market conditions, any new or renewed credit facility would contain pricing that approximates the
Company’s current Credit Facility. Based on these market conditions, the fair value of the Credit Facility as of
March 31, 2019 was estimated to be equal to the book value. The interest rate for the Credit Facility is a variable
rate based on LIBOR pricing options.
Description
Cash and restricted cash:
March 31, 2019
March 31, 2018
Finance receivables:
March 31, 2019
March 31, 2018
Repossessed assets:
March 31, 2019
March 31, 2018
Credit facility:
March 31, 2019
March 31, 2018
Fair Value Measurement Using
(In thousands)
Level 2
Level 3
Level 1
Fair
Value
Carrying
Value
$ 37,642 $
2,626 $
$
— $
— $
— $ 37,642 $ 37,642
2,626
2,626 $
— $
$
$
$
$
$
$
— $
— $
— $
— $
— $ 202,042 $ 202,042 $ 202,042
— $ 267,101 $ 267,101 $ 266,573
— $
— $
1,924 $
2,117 $
1,924 $
2,117 $
1,924
2,117
— $ 145,000 $
— $ 165,750 $
— $ 145,000 $ 145,000
— $ 165,750 $ 165,750
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a
nonrecurring basis. At each reporting period, all assets and liabilities for which the fair value measurement is based
on significant unobservable inputs are classified as a Level 3.
53
7. Income Taxes
The U.S. Tax Cuts and Jobs Act (“TCJA") was enacted on December 22, 2017 and introduces significant changes to
U.S. income tax law. TCJA includes a broad range of tax reform including changes to tax rates and deductions that
includes a broad range of tax reform including changes to tax rates and deductions that
were effective January 1, 2018. The decrease in the enacted corporate tax rate to be applied when the temporary
y
differences are realized or settled ultimately resulted in a one-time revaluation of the net deferred tax asset of
f
$3.1 million with a corresponding charge to income tax expense. The effects of
to a level that reduced net income to a net loss for the twelve months ended March 31, 2018.
increased income tax expense
TCJA increased income tax expense
The provision for income taxes (income tax benefits) consists of the following for the years ended March 31:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Income tax expense (benefit)
(In thousands)
2019
2018
$
$
(39) $
(66)
(105)
(844)
9
(835)
(940) $
1,705
340
2,045
1,847
369
2,216
4,261
The net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes are reflected in deferred income taxes. Significant
components of the Company’s deferred tax assets consist of the following as of March 31:
Deferred Tax Assets
Allowance for credit losses not currently deductible
for tax purposes
Share-based compensation
Federal and state net operating loss carryforwards
Other items
Total deferred tax assets
Deferred tax liabilities
Other items
Total deferred tax liabilities
Deferred income taxes
(In thousands)
2019
2018
$
$
4,431 $
276
2,293
201
7,201
77
77
7,124 $
5,811
266
—
212
6,289
—
—
6,289
The provision (benefit) for income taxes reflects an effective U.S tax rate, which differs from the corporate tax rate
for the following reasons:
Provision (benefit) for income taxes at Federal statutory rate $
Increase (decrease) resulting from:
State income taxes, net of Federal benefit
Tax Reform – Rate Change
Other
Income tax expense (benefit)
$
(In thousands)
2019
2018
(845) $
976
(206)
160
(49)
(940) $
491
3,127
(333)
4,261
54
The Company’s effective tax rate decreased to 20.5% in fiscal 2019 from 134.7% in fiscal 2018, resulting from
TCJA.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable
income will be generated to permit use of the existing deferred tax assets. A significant piece of objective positive
evidence evaluated was the cumulative pre-tax over the three-year period ended March 31, 2019.
On the basis of this evaluation, as of March 31, 2019, a valuation allowance was not required. The amount of the
deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are
reduced.
The Company has U.S. federal, state, and municipal income tax net operating loss carryforwards of $1.9 million and
$0.4 million. The U.S. federal net operating loss carryforward and a portion of the state net operating loss
carryforwards will not expire. The remaining state net operating loss carryforwards will begin to expire as of March
31, 2020.
The Company considers the earnings of the Company’s U.S. subsidiaries to be indefinitely invested outside Canada
on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs
and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not recorded a
deferred tax liability related to the Canadian income taxes and U.S. withholding taxes on approximately $3.6 million
of undistributed earnings of the U.S. subsidiaries indefinitely invested outside Canada. If the Company decided to
repatriate the U.S. earnings, it would need to adjust its income tax provision in the period the Company determined
that the earnings will no longer be indefinitely invested outside of Canada.
8. Share-Based Payments
The Company has share awards outstanding under two share-based compensation plans (the “Equity Plans”). The
Company believes that such awards generally align the interests of its employees with those of its shareholders.
Under the shareholder-approved 2006 Equity Incentive Plan (the “2006 Plan”) the Board of Directors was
authorized to grant option awards for up to approximately 1.1 million common shares. On August 13, 2015, the
Company’s shareholders approved the Nicholas Financial, Inc. Omnibus Incentive Plan (the “2015 Plan”) for
employees and non-employee directors. Under the 2015 Plan, the Board of Directors is authorized to grant total
share awards for up to 750,000 common shares. Awards under the 2006 Plan will continue to be governed by the
terms of that plan. The 2015 Plan replaced the 2006 Plan; accordingly, no additional option awards may be granted
under the 2006 Plan. In addition to option awards, the 2015 Plan provides for restricted stock, restricted stock units,
performance shares, performance units, and other equity-based compensation.
Option awards previously granted to employees and directors under the 2006 Plan generally vest ratably based on
service over a five- and three-year period, respectively, and generally have a contractual term of ten years. Vesting
and contractual terms for option awards under the 2015 Plan are essentially the same as those of the 2006 Plan.
Restricted stock awards generally cliff vest over a three-year period based on service conditions. Vesting of
performance units generally does not commence until the attainment of Company-wide performance goals including
annual revenue growth and operating income targets. There are no post-vesting restrictions for share awards.
55
The Company funds share awards from authorized but unissued shares and does not purchase shares to fulfill its
obligations under the Equity Plans. Cash dividends, if any, are not paid on unvested performance units or
unexercised options but are paid on unvested restricted stock awards.
The Company did not grant any options during the years ended March 31, 2019 or 2018.
A summary of option activity under the Equity Plans as of March 31, 2019, and changes during the year are
presented below.
Options
Outstanding at March 31, 2018
Granted
Exercised
Forfeited
Outstanding at March 31, 2019
Exercisable at March 31, 2019
(Shares and Aggregate Intrinsic Value in thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
151 $
—
(12)
(67)
72 $
67 $
11.25
—
1.33
12.78
10.71
10.64
4.10 $
3.96 $
51
51
The total intrinsic value of options exercised during the years ended March 31, 2019 and 2018 was approximately
$98,000 and $343,000, respectively.
During the fiscal year ended March 31, 2019, approximately 12,000 options were exercised at exercise prices
ranging from $0.77 to $4.18 per share. During the same period, approximately 67,000 options were forfeited at
exercise prices ranging from $10.87 to $14.36 per share.
During the fiscal year ended March 31, 2018, approximately 91,000 options were exercised at exercise prices
ranging from $3.50 to $8.44 per share. During the same period, approximately 91,000 options were forfeited at
exercise prices ranging from $8.21 to $14.36 per share.
Cash received from options exercised during the fiscal years ended March 31, 2019 and 2018 totaled approximately
$16,000 and $458,000, respectively. As of March 31, 2019, there was approximately $10,000 of total unrecognized
compensation cost related to options granted. That remaining cost is expected to be recognized over the next year.
A summary of the status of the Company’s non-vested restricted shares under the Equity Plan as of March 31, 2019,
and changes during the year then ended is presented below.
Restricted Share Awards
Non-vested at March 31, 2018
Granted
Vested
Forfeited
Non-vested at March 31, 2019
(Shares and Aggregate Intrinsic Value in thousands)
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
77 $
28
(35)
(25)
45 $
11.25
10.79
12.27
10.63
10.51
1.96 $
404
56
The Company awarded approximately 28,000 restricted shares during the fiscal year ended March 31, 2019. There
are no performance shares included within the 28,000 restricted shares granted that resulted from the Company
meeting a performance threshold. During the same period there were approximately 25,000 restricted shares
forfeited. With the adoption of ASU 2016-09 on January 1, 2017, the Company no longer reduces stock-based
of ASU 2016-09 on January 1, 2017, the Company no longer reduces stock-based
compensation by estimated forfeitures. Instead the Company accounts for forfeitures when they occur. For any
vesting tranche of an award, the cumulative amount of compensation cost recognized is at least equal to the portion
n
of the grant-date value of the award tranche that is actually vested at that date.
As of March 31, 2019, there was approximately $321,000 of total unrecognized compensation cost related to non-
vested restricted share awards granted under the Equity Plans. That cost is expected to be recognized over a
weighted-average period of approximately 1.96 years.
9. Employee Benefit Plan
The Company has a 401(k)-retirement plan under which all employees are eligible to participate. Employee
contributions are voluntary and subject to Internal Revenue Service limitations. The Company did not make a
discretionary matching employee contribution. The Board will re-evaluate the Company’s matching policy for plan
year 2019 later in the year.
10. Commitments and Contingencies
The Company leases corporate and branch offices under operating lease agreements which provide for annual
minimum rental payments as follows:
Fiscal Year Ending March 31
2020
2021
2022
2023
2024
(In thousands)
2,032
$
1,026
353
33
—
3,444
$
Rent expense for the fiscal years ended March 31, 2019 and 2018 was approximately $2.6 million and $2.3
million, respectively. The Company recognizes rent expense on a straight-line basis over the term of the lease,
taking into account, when applicable, lessor incentives for tenant improvements, periods where no rent payment is
required and escalations in rent payments over the term of the lease.
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.
11. Variable Interest Entity
In March 2019, the Company entered into a new senior secured credit facility collateralized by customer financed
receivables by transferring the receivables into a bankruptcy-remote variable interest entity (VIE). Under the terms
of the transaction, all cash collections and other cash proceeds of the customer receivables go first to the servicer
and the holders of the asset-backed notes, and then to the residual equity holder. The Company retained the
servicing of the portfolio and receives a monthly fee of 2.5% (annualized) based on the outstanding balance of the
financed receivables, and the Company currently holds all of the residual equity. In addition, the Company, rather
than the VIE, will retain certain credit insurance income together with certain recoveries related to credit insurance
and on charge-offs of the financed receivables, which will continue to be reflected as a reduction of net charge-offs
on a consolidated basis for as long as the Company consolidates the VIE.
57
The Company consolidated the VIE’s when the Company determines that it is the primary beneficiary, the Company
has the power to direct the activities that most significantly impact the performance of the VIE and it has the
obligation to absorb losses and has the right to receive residual returns is significant. The Company determined it is
the primary beneficiary of the VIE.
The assets of the VIE serve as collateral for the obligations of the VIE. The lender has no recourse to assets outside
of the VIE.
The following table presents the assets and liabilities held by the VIE (for legal purposes, the assets and the
liabilities of the VIE will remain distinct from the Company):
Assets
Restricted cash
Finance receivables, net
Total assets
Liabilities
Credit facility
Total liabilities
12. Subsequent Event
2019
2018
$
$
$
$
2,047 $
187,584
189,631 $
142,619
142,619 $
—
—
—
—
—
the Company paid $21.0 million to acquire substantially all of the assets of ML Credit Group,
On April 30, 2019, the Company paid $21.0 million to acquire substantially all of the assets of ML Credit Group,
LLC (d/b/a Metrolina Credit Company) (“Metrolina”). Metrolina provided automobile financing to consumers by
direct loans and through purchases of retail installment sales contracts originated by automobile dealers in the states
of North Carolina and South Carolina. At the time of this filing, it is impracticable for the Company to disclose the
information required by paragraph ASC 805-10-50-2, as the Company is in process of evaluating the transaction.
13. Quarterly Results of Operations (Unaudited)
Fiscal Year ended March 31, 2019
(In thousands, except earnings per share amounts)
First
Quarter
Third
Quarter
Second
Quarter
Fourth
Quarter
Total revenue
Interest expense
Provision for credit losses
Non-interest expense
Operating income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
18,759 $
2,540
5,426
8,801
1,992
572
1,420 $
19,404 $
2,386
8,374
7,966
678
96
582 $
16,740 $
2,303
7,871
7,847
(1,281)
(376)
(905) $
16,397
2,275
11,165
8,934
(5,977)
(1,232)
(4,745)
0.18 $
0.18 $
0.07 $
0.07 $
(0.12) $
(0.12) $
(0.60)
(0.60)
$
$
$
$
58
Fiscal Year ended March 31, 2018
(In thousands, except earnings per share amounts)
First
Quarter
Third
Quarter
Second
Quarter
Fourth
Quarter
Total revenue
Interest expense
Provision for credit losses
Non-interest expense
Operating income before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
$
$
$
$
22,198 $
2,455
9,752
8,679
1,312
500
812 $
21,338 $
2,443
10,146
8,185
564
220
344 $
20,526 $
2,585
8,989
8,138
814
3,712
(2,898) $
19,855
2,654
8,563
8,165
473
(171)
644
0.10 $
0.10 $
0.04 $
0.04 $
(0.37) $
(0.37) $
0.08
0.08
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Effective July 2, 2018 (the “Effective Time”), the Audit Committee (the “Committee”) of the Board of Directors of
Nicholas Financial, Inc. (the “Company”) approved the engagement of RSM US LLP (“RSM”) as the Company’s
new independent registered public accounting firm for the fiscal year ending March 31, 2019, and dismissed Dixon
Hughes Goodman LLP (“DHG LLP”) as the Company’s independent registered public accounting firm.
The audit reports of DHG LLP on the Company’s consolidated financial statements for the fiscal year ended
March 31, 2018 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
During the Company’s fiscal year ended March 31, 2018, and in the subsequent interim period preceding the
Effective Time, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
During the Company’s fiscal year ended March 31, 2018, and in the subsequent interim period preceding the
Effective Time, neither the Company nor anyone acting on its behalf consulted with RSM with respect to either
(i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of
audit opinion that would have been rendered on the Company’s financial statements, and no written report or oral
advice was provided to the Company that RSM concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing, or financial reporting issue, or (ii) any matter that was the subject
of either a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in
Item 304(a)(1)(v) of Regulation S-K.
The Company had no disagreements on accounting or financial disclosure matters with its independent registered
public accountants to report under this Item 9.
59
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed
in its reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such
information is accumulated and communicated to management, including the Chief Executive Officer and Chief
Financial Officer as appropriate, to allow timely decisions regarding required disclosure. The Company’s
management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s
disclosure controls and procedures or internal controls will prevent all possible error and fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of March 31, 2019. Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of
March 31, 2019. Notwithstanding the material weakness described in Management’s Report on Internal Control
over Financial Reporting below, the Company’s management, including its Chief Executive Officer and Chief
Financial Officer, has concluded that the consolidated financial statements included in this Annual Report present
fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the
periods presented, in conformity with accounting principles generally accepted in the United States.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation and fair presentation of financial statements in accordance with generally accepted
accounting principles. The Company’s management, including its Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of
March 31, 2019, the end of the fiscal year covered by this Report, based on the criteria set forth in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management has concluded that the Company’s internal control over financial reporting
was not effective as of March 31, 2019 as a result of a material weakness. A material weakness is a deficiency or a
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or
detected on a timely basis. Specifically, management identified the following internal control deficiencies that are
considered to be material weaknesses:
1) Management Turnover
The Company experienced significant management turnover in the year ended March 31, 2018, and during
fiscal year 2019. The turnover included the Chief Executive Officer, the Chief Financial Officer, and the
Controller, which all have significant roles in the structure of the Company’s internal control over financial
reporting. In addition to this, the Company hired an Assistant Controller during fiscal 2019, which has a
significant impact on the day-to-day operation of the accounting function. With the implementation of new
management, there was an acclimation period, in which management had to familiarize themselves with the
systems and processes of the Company. The new management team implemented certain policies and
procedures that changed the way the Company was previously operating, particularly surrounding the loans
receivable portfolio, and the underwriting standards, by tightening the underwriting standards and lessening
payment deferrals. These policy and procedure changes changed the design of the internal controls, and
some of the previous controls were no longer applicable to the Company.
60
On February 1, 2019, the new management team implemented a conversion of the Company’s in-house
loan operating system to a third-party loan operating system. The new loan system has improved internal
controls since it’s serviced by a third-party and not managed in-house.
Due to the turnover and system conversion, the Company was unable to maintain consistent internal control
processes, testing and documentation at a level necessary to enable management to assess the effectiveness
of internal control over financial reporting as of March 31, 2019.
2) Lack of Segregation of Duties
Due to the limited number of employees with accounting experience at the Company, many of the
schedules prepared, including schedules surrounding critical accounting areas, were performed without
proper review, therefore, segregation of duties did not exist at the Company.
Notwithstanding the material weakness, the Company’s management, including its Chief Executive Officer and
Chief Financial Officer, has concluded that the consolidated financial statements included in this Annual Report
present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and
for the periods presented, in conformity with accounting principles generally accepted in the United States.
Remedial Actions
The Company has taken the following remedial actions to address the material weakness:
•
The Company is in the process of ensuring the mapping between the loan operating system and the
financial reporting system are correct.
• With the arrival of the permanent Chief Financial Officer, the Company will undergo a review of its
internal control policies and procedures, and make changes if deemed necessary, to ensure items noted in
the above Management’s Report on Internal Control over Financial Reporting are in place and operating as
intended.
• Hired an additional Assistant Controller in the first quarter of fiscal 2020.
Management believes the foregoing efforts will effectively remediate the material weakness. As management
continues to evaluate and work to improve internal control over financial reporting, management may determine to
take additional measures to address control deficiencies or determine to modify or supplement the remediation plan
described above. Management cannot assure you, however, when the Company will remediate such weakness, nor
can management be certain of whether additional actions will be required or the costs of any such actions.
Attestation report of the registered public accounting firm
This Annual Report does not include an attestation report of the Company’s independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm pursuant to the rules of the Securities
and Exchange Commission.
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 March 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting, except as identified in Management’s Report on Internal Control over
Financial Reporting above.
Item 9B. Other Information
None
61
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The relevant information to be set forth in the definitive Proxy Statement and Information Circular for the 2019
Annual General Meeting of Shareholders of the Company (the “Proxy Statement”), is incorporated herein by
reference.
The Company has adopted a written code of ethics applicable to its chief executive officer, chief financial officer,
principal accounting officer and persons performing similar functions. A copy of the code of ethics is posted on the
Company’s web site at www.nicholasfinancial.com. The Company intends to satisfy the disclosure requirements
under Item 5.05 of Form 8-K regarding amendments to, or waivers from, the code of ethics by posting such
information on the Company’s web site at www.nicholasfinancial.com. The Company is not including the
information contained on or available through its web site as a part of, or incorporating such information by
reference into, this Report.
Item 11. Executive Compensation, Compensation Interlocks and Insider Participation
The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information, as of March 31, 2019, with respect to compensation plans under
which equity securities of the Company were authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
(In thousands, except exercise price)
Plan Category
Number of
Securities to
be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
Weighted –
Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)
Equity Compensation Plans
Approved by Security Holders
Equity Compensation Plans
Not Approved by Security Holders
TOTAL
72 $
10.71
None Not Applicable
10.71
72 $
662
None
662
The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors
The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.
62
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
PART IV
(1) Financial Statements
See Part II, Item 8, of this Report.
(2) Financial Statement Schedules
All financial schedules are omitted as the required information is not applicable or the information is presented
in the consolidated financial statements or related notes.
(3) Exhibits
Exhibit No.
Description
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Articles of Nicholas Financial, Inc. (1)
Notice of Articles of Nicholas Financial, Inc. (2)
Form of Common Stock Certificate (3)
Second Amended and Restated Loan and Security Agreement, dated as of January 12, 2010, by and
among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the
Lenders parties thereto (4)
Amendment No. 1, dated as of September 1, 2011, to Second Amended and Restated Loan and Security
Agreement, dated as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation,
Bank of America, N.A., as agent, and each of the Lenders parties thereto (5)
Amendment No. 2, dated as of December 21, 2012, to Second Amended and Restated Loan and Security
Agreement, dated as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation,
Bank of America, N.A., as agent, and each of the Lenders parties thereto (6)
Amendment No. 3, dated as of November 14, 2014, to Second Amended and Restated Loan and
Security Agreement, dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida
corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (7)
Amendment No. 4, dated as of January 30, 2015, to Second Amended and Restated Loan and Security
Agreement, dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation,
Bank of America, N.A., as agent, and each of the Lenders parties thereto (8)
Amendment No. 5, dated as of December 30, 2016, to Second Amended and Restated Loan and Security
Agreement, dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation,
Bank of America, N.A., as agent, and each of the Lenders parties thereto (9)
Amendment No. 6 to Second Amended and Restated Loan and Security Agreement, dated June 20,
2017, among Nicholas Financial, Inc., Bank of America, N.A., and each of the Lenders party thereto
(10)
Waiver and Amendment No. 7 to Second Amended and Restated Loan and Security Agreement, dated
November 8, 2017, among Nicholas Financial, Inc., Bank of America, N.A., and the Lenders party
thereto (11)
Waiver and Amendment No. 8 to Second Amended and Restated Loan and Security Agreement, dated
March 30, 2018, among Nicholas Financial Inc., Bank of America, N.A., and the Lenders thereto (12)
Waiver and Amendment No. 9 to Second Amended and Restated Loan and Security Agreement, dated
November 2, 2018, among Nicholas Financial, Inc., Bank of America, N.A., and the Lenders party
thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on November 6, 2018 (13)
63
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Waiver and Amendment No. 10 to Second Amended and Restated Loan and Security Agreement, dated
February 12, 2019, among Nicholas Financial, Inc., Bank of America, N.A., and the Lenders party
thereto incorporated in this filing. (14)
Credit Agreement dated as of March 29, 2019 by and among NF Funding I, LLC, Ares Agent Services,
L.P., as administrative agent and collateral agent, and the lenders that are party thereto (15)
Receivables Purchase Agreement dated as of March 29, 2019 by and between NF Funding I, LLC and
Nicholas Financial, Inc. (16)
Servicing Agreement dated as of March 29, 2019 by and between NF Funding I, LLC and Nicholas
Financial, Inc. (17)
Limited Guaranty dated as of March 29, 2019 by Nicholas Financial, Inc. in favor of Ares Agent
Services, L.P., as administrative agent and collateral agent (18)
Security Agreement dated as of March 29, 2019 by and between NF Funding I, LLC, Ares Agent
Services, L.P., as collateral agent (19)
ISDA Master Agreement, dated as of March 30, 1999, between Bank of America, N.A. and Nicholas
Financial, Inc. (20)
Letter Agreement, dated June 4, 2012, and effective June 13, 2012, by and between Nicholas Financial,
Inc. and Bank of America, N.A. relating to interest-rate swap transaction (21)
Letter Agreement, dated June 30, 2012, and effective August 13, 2012, by and between Nicholas
Financial, Inc. and Bank of America, N.A. relating to interest-rate swap transaction (22)
Nicholas Financial, Inc. 2015 Omnibus Incentive Plan (23)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Stock Option Award (24)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Restricted Stock Award (25)*
Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Performance Share Award (26)*
Employment Agreement between the Company and Douglas W. Marohn, dated as of December 5, 2018
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-k filed on
December 6, 2018) (27)*
Employment Agreement between the Company and Kelly M. Malson, dated as of December 5, 2018
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-k filed on
December 6, 2018) (28)*
10.26
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements (29)
21
23.1
23.2
24
31.1
31.2
32.1
32.2
Subsidiaries of Nicholas Financial, Inc. (30)
Consent of RSM, LLP
Consent of Dixon Hughes Goodman LLP
Powers of Attorney (included on signature page hereto)
Certification of President and Chief Executive Officer
Certification of Chief Financial Officer
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. § 1350
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. § 1350
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
64
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
Represents a management contract or compensatory plan, contract or arrangement in which a director or
named executive officer of the Company participated.
Incorporated by reference to Appendix B to the Company’s Proxy Statement and Information Circular for
the 2006 Annual General Meeting of Shareholders filed with the SEC on June 30, 2006 (File No. 0-26680).
Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed with the
SEC on May 24, 2007 (SEC File No. 0-26680).
Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-KSB for the fiscal year
ended March 31, 2004, as filed with the SEC on June 29, 2004.
Incorporated by reference to Exhibit 10.1 to the Company’s Amendment No. 1 to Quarterly Report on Form
10-Q/A for the fiscal quarter ended December 31, 2009, as filed with the SEC on March 23, 2010.
Incorporated by reference to Exhibit 10.1.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2011, as filed with the SEC on November 9, 2011.
Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2013, as filed with the SEC on June 14, 2013.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated
November 14, 2014, as filed with the SEC on November 18, 2014.
Incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 2014, as filed with the SEC on February 9, 2015.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated January 11,
2017, as filed with the SEC on January 11, 2017.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated August 1,
2017, as filed with the SEC on August 1, 2017.
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2017, as filed with the SEC on November 9, 2017.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated April 4,
2018, as filed with the SEC on April 4, 2018.
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, for the fiscal
quarter ended September 30, 2018, as filed with the SEC on November 14, 2018.
Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, for the fiscal
quarter ended December 31, 2018, as filed with the SEC on February 14, 2019.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated March 29,
2019, as filed with the SEC on April 1, 2019.
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated March 29,
2019, as filed with the SEC on April 1, 2019.
Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated March 29,
2019, as filed with the SEC on April 1, 2019.
Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated March 29,
2019, as filed with the SEC on April 1, 2019.
Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, dated March 29,
2019, as filed with the SEC on April 1, 2019.
Incorporated by reference to Exhibit 10.10 to Amendment No. 2 to the Company’s Registration Statement on
Form S-2 (Reg. No. 333-113215), as filed with the SEC on April 7, 2004
Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2013, as filed with the SEC on June 14, 2013.
Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2013, as filed with the SEC on June 14, 2013.
Incorporated by reference to Appendix A to the Company’s Proxy Statement and Information Circular for
the 2015 Annual General Meeting of Shareholders, as filed with the SEC on July 6, 2015.
65
(24)
(25)
(26)
(27)
(28)
(29)
(30)
Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2016, as filed with the SEC on June 14, 2016.
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December 5,
2018, as filed with the SEC on December 6, 2018.
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated December 5,
2018, as filed with the SEC on December 6, 2018.
Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2017, as filed with the SEC on June 14, 2017
Incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-KSB for the fiscal
year ended March 31, 2004, as filed with the SEC on June 29, 2004.
66
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Dated: June 28, 2019
NICHOLAS FINANCIAL, INC.
By: /s/ Douglas Marohn
Douglas Marohn
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and
appoints Douglas Marohn, his or her true and lawful attorney-in-fact and agent, with full power of substitution and
re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the
U.S. Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to
perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Douglas Marohn
Douglas Marohn
/s/ Kelly M. Malson
Kelly M. Malson
/s/ Jeffrey C. Royal
Jeffrey C. Royal
/s/ Robin Hastings
Robin Hastings
/s/ Adam K. Peterson
Adam K. Peterson
/s/ Jeremy Q. Zhu
Jeremy Q. Zhu
President, Chief Executive Officer, and Director
June 28, 2019
Chief Financial Officer (Principal Accounting Officer)
June 28, 2019
Chairman of the Board of Directors
June 28, 2019
Director
Director
Director
June 28, 2019
June 28, 2019
June 28, 2019
67
S H A R E H O L D E R
I N F O R M A T I O N
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:86)(cid:29)
Nicholas Financial, Inc.
2454 McMullen Booth Road
Clearwater, Florida 33759
Directors:
Jeffrey C. Royal
Chairperson of the Board of Directors
President
Dundee Bank
Robin Hastings
Audit Committee Chairperson
Former COO
United Maritime Group
Jeremy Zhu
Compensation Committee Chairperson
& Nominating/Corporate Governance
Committee Chairperson
Managing Director
Sepulveda Management, LLC
(cid:68)(cid:81)(cid:3)(cid:68)(cid:73)(cid:191)(cid:79)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:55)(cid:38)(cid:58)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:56)(cid:81)(cid:76)(cid:87)
Adam Peterson
General Partner
Magnolia Capital Fund, LP
Douglas Marohn
President & CEO
Corporate Secretary
Nicholas Financial, Inc.
Independent Auditors:
RSM US LLP
Raleigh, North Carolina
General Counsel:
Hill Ward Henderson
Tampa, Florida
Transfer Agent & Registrar:
Computershare Investor Services
Vancouver, BC, Canada V6C 3B9
Stock Information:
Listed on the NASDAQ National
Market System
Trading Symbol: NICK
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)(cid:86)(cid:29)
Douglas Marohn
President & CEO
Kelly Malson
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:191)(cid:70)(cid:72)(cid:85)
Notice To Shareholders:
The Company will supply to any owner
of Common Stock, upon written re-
(cid:84)(cid:88)(cid:72)(cid:86)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)
below and without charge, a copy of
the Annual Report and Form 10-K for
the year ended March 31, 2019, which
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Exchange Commission.
The Annual Report and 10-K are also
available on the Company's internet
website at:
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The Annual Meeting is on August 29, 2019
at 10:30 am, at Nicholas Financial, Inc.,
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:43)(cid:72)(cid:68)(cid:71)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:38)(cid:79)(cid:72)(cid:68)(cid:85)(cid:90)(cid:68)(cid:87)(cid:72)(cid:85)(cid:15)(cid:3)
Florida:
Nicholas Financial, Inc.
2454 McMullen-Booth Road N.
Building C
Clearwater, FL 33759
(727) 726-0763