Nicholas Financial Inc.
Annual Report 2023

Plain-text annual report

Nicholas Financial, Inc. 2023 Annual Report (cid:4) (cid:69)(cid:4)(cid:94)(cid:24)(cid:4)(cid:89) (cid:410)(cid:396)(cid:258)(cid:282)(cid:286)(cid:282) (cid:272)(cid:381)(cid:373)(cid:393)(cid:258)(cid:374)(cid:455) (cid:449)(cid:449)(cid:449)(cid:856)(cid:69)(cid:349)(cid:272)(cid:346)(cid:381)(cid:367)(cid:258)(cid:400)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:856)(cid:272)(cid:381)(cid:373) 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 fiff scal year ended March 31, 2023 OR (cid:4)(cid:4) TRARR NSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRARR NSITION PERIOD FROM Commission File Number 0-26680 TO NICHOLAS FINANCIAL, INC. (Exact name of Registrant as specififf ed in its Charter) British Columbia, Canada ( State or other jurisdiction of incorporation or organization) 26133 US Hwy 19 North, Suite 300 Clearwater, Florida (Address of principal executive offff iff ces) 59-2506879 (I.R.S. Employer Identififf cation No.) 33763 (Zip Code) Registrant’s telephone number, including area code: (727) 726-0763 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common shares, no par value Trading Symbol(s) NICK Name of each exchange on which registered NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defiff ned in RulRR e 405 of the Securities Act. YES (cid:4) NO (cid:3) Indicate by check mark if the Registrant is not required to fiff le reports pursuant to Section 13 or 15(d) of the Act. YES (cid:4) NO (cid:3) Indicate by check mark whether the Registrant: (1) has fiff led all reports required to be fiff led by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forff days. YES (cid:3) NO (cid:4) Indicate by check mark whether the Registrant has submitted electronically everyrr (§232.405 of this chapta er) during the preceding 12 months (or forff Indicate by check mark whether the registrant is a large accelerated fiff ler, an accelerated fiff ler, a non-accelerated fiff ler, a smaller reporting company, or an emerging growth company. See the defiff nitions of “large accelerated fiff ler,” “accelerated fiff ler,” “smaller reporting company,” and “emerging growth company” in RulRR e 12b-2 of the Exchange Act. such shorter period that the Registrant was required to fiff le such reports), and (2) has been subject to such fiff ling requirements forff such shorter period that the Registrant was required to submit such fiff les). YES (cid:3) NO (cid:4) Interactive Data File required to be submitted pursuant to RulRR e 405 of Regulation S-T the past 90 (cid:4) (cid:3) (cid:4) Accelerated fiff ler Smaller reporting company Large accelerated fiff ler Non-accelerated fiff ler Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period forff fiff nancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4) Indicate by check mark whether the Registrant has fiff led a report on and attestation to its management's assessment of the effff eff ctiveness of its internal control over fiff nancial reporting under Section 404(b) of the Sarbar nes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting fiff rm that prepared or issued its audit report. (cid:4) Indicate by check mark whether the Registrant is a shell company (as defiff ned in RulRR e 12b-2 of the Exchange Act). YES (cid:4) NO (cid:3) If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the fiff nancial statements of the registrant included in the fiff ling reflff ect the correction of an error to previously issued fiff nancial statements. (cid:4) Indicate by check mark whether any of those error corrections are statements that required a recoveryrr analysis of incentive-based compensation received by any of the registrant's executive offff iff cers during the relevant recoveryrr period pursuant to §240.10D-1(b). (cid:4) The aggregate market value of the voting and non-voting common equity held by non-affff iff liates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on September 30, 2022, was appr oximately $41.6 million. The number of shares of Registrant’s Common Stock outstanding as of March 31, 2023 was appr 5.4 million shares were held by the Registrant’s principal operating subsidiaryrr and pursuant to appl a were entitled to vote). oximately 12.7 million shares, no par value (of which appr a oximately 7.3 million shares icabla e law, not entitled to vote and appr complying with any new or revised oximately (cid:4) (cid:3) a a a Portions of the Registrant’s defiff nitive Proxy Statement and Inforff mation Circular forff into Part III, Items 10 through 14, of this Annual Report on Form 10-K. the 2023 Annual General Meeting of Shareholders are incorpor rr ated by refeff rence DOCUMENTS INCORPORAR TED BY REFERENCE Forward-Looking Inforff mation This Annual Report on Form 10-K (this “Report” or “Annual Report”) contains various forff ward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on management’s current beliefsff and assumptions, as well as inforff mation currently availabla e to management. When used in this document, the words “anticipate,” “estimate,” “expect,” “will,” “may,” “plan,” “believe,” “intend” and similar expressions are intended to identifyff forff ward-looking statements. Although Nicholas Financial, Inc. and its subsidiaries (collectively the “Company,” “we,” “us,” or “our”) believes that the expectations reflff ected or implied in such forff ward-looking statements are reasonabla e, we can give no assurance that such expectations will prove to be correct. As a result, actuat diffff eff r materially frff om those indicated in these forff ward-looking statements. Forward-looking statements in this Annual Report may include, without limitation: (1) the projected impact of the novel coronavirusrr disease (“COVID- 19”) outbrt eak on our customers and our business, (2) projections of revenue, income, and other items relating to our fiff nancial position and results of operations, (3) statements of our capia tal allocation plans, particularly alternatives forff futff urt e use of excess equity capia tal, (4) statements of other plans, objectives, strategies, goals and intentions, (5) statements regarding the capaa bia lities, capaa operations, and (6) statements of expected industryrr and general economic trends. These statements are subject to certain risks, uncertainties and assumptions that may cause results to diffff eff r materially frff om those expressed or implied in forff ward-looking statements, including without limitation: cities, market position and expected development of our business l results could • • • • • • • • • • • • • • • • • legal and tax complexities surrounding our corpor primarily U.S. shareholders and exclusively U.S. operations; ate strucr r turt e as a British Columbia company with futff urt e impacts of the COVID-19 outbrt eak and measures taken in response thereto, including without limitation the successfulff futff urt e developments are highly uncertain and diffff iff cult to predict; deliveryrr of vaccines effff eff ctive against the diffff eff rent variants of the virusr , forff which availabia lity of capia tal (including the abia lity to access bank fiff nancing); recently enacted, proposed or futff urt e legislation and the manner in which it is implemented, including tax legislation initiatives or challenges to our tax positions and/or interprr etations, and state sales tax rulr es and regulations; flff uctuat tions in the economy; the degree and naturt e of competition and its effff eff cts on the Company’s fiff nancial results; flff uctuat tions in interest rates; effff eff ctiveness of our risk management processes and procedures, including the effff eff ctiveness of the Company’s internal control over fiff nancial reporting and disclosure controls and procedures; demand forff consumer fiff nancing in the markets served by the Company; our abia lity to successfulff ly develop and commercialize new or enhanced products and services; the suffff iff ciency of our allowance forff preparing our fiff nancial statements; credit losses and the accuracy of the assumptions or estimates used in increases in the defaff ult rates experienced on automobile fiff nance installment contracts (“Contracts”); higher borrowing costs and adverse fiff nancial market conditions impacting our fundi ff ng and liquidity; our abia lity to securitize our loan receivabla es, occurrence of an early amortization of our securitization faff cilities, loss of the right to service or subservice our securitized loan receivabla es, and lower payment rates on our securitized loan receivabla es; regulation, supervision, examination and enforff cement of our business by governmental authorities, and adverse regulatoryrr changes in the Company’s existing and futff urt e markets, including the impact of the Dodd-Frank Wall Street Reforff m and Consumer Protection Act (the “Dodd-Frank Act”) and other legislative and regulatoryrr developments, including regulations relating to privacy, inforff mation security and data protection and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business frff audulent activity; faff ilure of third parties to provide various services that are important to our operations, including without limitation the collection services being provided by a new third-party service provider; • • • • • • • • alleged infrff ingement of intellectuat property; litigation and regulatoryrr actions; l property rights of others and our abia lity to protect our intellectuat l our abia lity to attract, retain and motivate key offff iff cers and employees; use of third-party vendors and ongoing third-party business relationships; cyber-attacks or other security breaches; r disrupt ions in the operations of our computer systems and data centers; our abia lity to realize our intentions regarding strategic alternatives; and the risk faff ctors discussed herein under “Item 1A – Risk Factors.” Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, l results may varyrr materially frff om those anticipated, estimated or expected. All forff ward-looking statements actuat included in this Report are based on inforff mation availabla e to the Company as the date of fiff ling of this Annual Report, and the Company assumes no obligation to update any such forff ward-looking statement. Prospective investors should also consult the risk faff ctors described frff om time to time in the Company’s other fiff lings made with the U.S. Securities and Exchange Commission (“SEC”), including its reports on Forms 10-Q, 8-K and annual reports to shareholders. Item 1. Business General PART I Nicholas Financial, Inc. (“Nicholas Financial-Canada”) is a Canadian holding company incorpor of British Columbia in 1986. The business activities of Nicholas Financial-Canada are currently conducted exclusively through its wholly-owned indirect subsidiary,rr Nicholas Financial, Inc., a Florida corpor Financial”). Nicholas Financial is a specialized consumer fiff nance company engaged primarily in acquiring and purchases of used and new automobiles and servicing automobile fiff nance installment contracts (“Contracts”) forff light trucr ks. Additionally, Nicholas Financial sells consumer-fiff nance related products and, prior to the end of the third fiff scal quarter of the fiff scal year ended March 31, 2023, Nicholas Financial originated direct consumer loans (“Direct Loans”). Nicholas Data Services, Inc. (“NDS”), is a second Florida subsidiaryrr of Nicholas Financial- Canada and it serves as the intermediate holding company forff Nicholas Financial. NF Funding I, LLC (“NF Funding I”), was a wholly-owned, special purpos served any purpos e and, as a result, it was dissolved prior to the end of the fiff scal year ended March 31, 2023. e fiff nancing subsidiaryrr of Nicholas Financial, but that subsidiaryrr no longer ated under the laws ation (“Nicholas rr r r rr Nicholas Financial-Canada, Nicholas Financial, and NDS are hereaftff er collectively refeff rred to as the “Company”. All fiff nancial inforff mation herein is designated in United States dollars. Refeff rences to “fiff scal 2023” are to the fiff scal year ended March 31, 2023 and refeff rences to “fiff scal 2022” are to the fiff scal year ended March 31, 2022. The Company’s principal executive offff iff ces are located at 26133 US HWY 19 North, Suite 300, Clearwater, Florida 33763, and its telephone number is (727) 726-0763. Available Inforff mation The Company’s fiff lings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, defiff nitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports fiff led pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, are made availabla e frff ee of charge through the Investor Center section of the Company’s Internet website at http:t p //// www.nicholasfiff nancial.com as soon as reasonabla y practicabla e aftff er the Company electronically fiff les such material with, or furff nishes it to, the SEC. The Company is not including the inforff mation contained on or availabla e through its website as a part of,ff or incorpor ating such inforff mation by refeff rence into, this Report. Copies of any materials the Company fiff les with the SEC can also be p obtained frff ee of charge through the SEC’s website at http:t //// www.sec.gov. g r p turt ing plan with the goal of reducing operating expenses and frff eeing up capia tal. As part of this plan, the Operating Strategy gy g The Company announced on Form 8-K fiff led on November 3, 2022 a change in its operating strategy and restrucrr Company has shiftff ed frff om a decentralized to a regionalized business model in which each of its originators focff uses on a specififf c region in the Company’s smaller target market foot servicing agreement with Westlake Portfolff Westlake Capia tal Finance, LLC, “Westlake”). An affff iff liate of Westlake, Westlake Services, LLC, is the benefiff cial owner of appr io Management, LLC (“WPM”, and, collectively with its affff iff liate, oximately 6.8% of the Company’s common stock. int, and the Company has entered into a loan prt a ff While the Company intends to continue Contract purchase and origination activities, albeit on a much smaller scale, its servicing, collections and recoveryrr operations have been outsourced to Westlake. The Company has ceased all originations of Direct Loans. The Company anticipates that execution of its evolving restrucrr ios or Company to allocate excess capia tal to increase shareholder returt ns, whether by acquiring loan portfolff businesses or by investing outside of the Company’s traditional business. The overall timefrff ame and strucr Company’s restrucr tut ring plan will frff ee up capa ital and permit the ing remains uncertain. turt turt e of the Although the Company no longer employs the branch-based model, it remains committed to its core product of fiff nancing primaryrr automobile dealership. The Company's strategy includes risk-based pricing (rate, yield, advance, term, collateral value) and a commitment to the underwriting discipline required forff the subprime borrower through the local independent transportation to and frff om work forff io perforff mance. The Company’s optimal portfolff 1 principal goals are to increase its profiff tabia lity and its long-term shareholder value. During fiff scal 2023, the Company focff used on the folff lowing items: • • • • • restrucr turt expenses; ing the Company’s business by downsizing and streamlining operations and reducing outsourcing servicing, collections and recoveryrr operations; discontinuing our local branch model in faff vor of a regionalized business model; optimizing our technology to better fiff t the Company’s restrucr turt ed operations; and terminating our live checks program forff prospective new customers turt ed and consolidated its operations by closing all of its brick and mortar In fiff scal 2023, the Company also restrucrr branch locations in 18 states — Alabaa ma, Florida, Georgia, Idaho, Illinois, Indiana, Kentuct ky, Michigan, Missouri, North Carolina, Nevada, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wisconsin. As a result, as of March 31, 2023, the Company only had two offff iff ces in two states – its headquarters in Florida and its central business operations hub in North Carolina, and the Company expects to focff us its business operations in the forff eseeabla e futff urt e in seven states — Florida, Georgia, Ohio, Kentuct ky, Indiana, North Carolina, and South Carolina. During fiff scal 2023, the Company did not have any completed bulk portfolff not complete any bulk portfolff bulk portfolff io purchases if and when any faff vorabla e opportuni t ties present themselves. io purchases during fiff scal 2023, the Company would consider pursuing one or more io purchases. Although the Company did During fiff scal 2022, the Company completed bulk portfolff the fiff rst quarter, $0.6 million in the second quarter, $1.1 million in the third quarter, and $0.2 million in the four quarter. a total of $3.1 million, with $1.2 million in io purchases forff th ff Although the Company had been licensed to provide Direct Loans in 14 states — Alabaa ma, Florida, Georgia (over $3,000), Illinois, Indiana, Kansas, Kentuct ky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, and Tennessee during fiff scal 2023 the Company has cancelled, not renewed, or otherwise terminated all of such Direct Loan licenses. Consequently, the Company has not originated any new Direct Loans since the end of the third quarter of fiff scal 2023 and the Company does not intend to originate any new Direct Loans going forff ward. However, the Company expects its third-party service provider to continue to service the Company’s existing Direct Loans. The Company’s total Direct Loans portfolff Direct Loans portfolff are no Direct Loans in the Company’s portfolff sometime during the fiff scal year ending March 31, 2027. io, which at the current rate of such activity is expected to occur io to be reduced over time as such Direct Loans are paid offff forff io, and the Company expects its total oximately 27% of its total portfolff otherwise liquidated until there io comprises appr a Following the restrucr in either its current markets or any new markets. turt ing and consolidation of the Company’s operations, the Company does not expect to expand Automobile Finance Business – Contracts The Company is engaged in the business of providing fiff nancing programs, primarily to purchasers of used cars and light trucr ks 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,rr vehicle being fiff nanced, or some other faff ctor(s). Unlike lenders that look primarily to the credit historyrr of the borrower in making lending decisions, typically fiff nancing new automobiles, the Company is willing to purchase Contracts forff older model and high- mileage automobiles. In making decisions regarding the purchase of a particular Contract, the Company considers in making installment payments historyrr the folff forff ; and place and length of residence. In addition, the Company examines its prior experience with Contracts purchased frff om the dealer frff om 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. purchases made by borrowers who do not have a good credit historyrr and forff lowing faff ctors related to the borrower: current income; credit history;rr automobiles; current and prior job statust job instabia lity, the age of the As of the date of this Annual Report, the number of states in which the Company’s automobile fiff nance programs have been conducted has been reduced frff om 19 states during fiff scal 2023 - Alabaa ma, Arizona, Florida, Georgia, Idaho, Illinois, Indiana, Kentuct ky, Michigan, Missouri, North Carolina, Nevada, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wisconsin - to just six of such states continuing - Florida, Indiana, Kentuct ky, 2 oximately 586 were active, forff North Carolina, Ohio, and South Carolina. The Company acquires Contracts in these states through its originators who work frff om home in the states of Florida, Indiana, Kentuct ky, North Carolina, Ohio and South Carolina. As of March 31, 2023, the Company had non-exclusive agreements with appr appr a The Company considers a dealer agreement to be active if the contract is complete and executed. 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 faff vor of the Company. the purchase of individual Contracts that meet the Company’s fiff nancing criteria. oximately 3000 dealers, of which a a icabla e, premiums forff insurance are generally fiff nanced over a period of 12 to 60 months. At A customer under a Contract typically makes a down payment, in the forff m of cash and/or trade-in, ranging frff om 5% to 35% of the sale price of the vehicle fiff nanced. The balance of the purchase price of the vehicle plus taxes, title feff es and, if appl extended service contracts, GAP waiver coverage, roadside assistance plans, credit disabia lity insurance and/or credit lifeff appr oximately the time of origination, the Company purchases a Contract frff om an automobile dealer at a negotiated a price that is less than the original principal amount being fiff nanced by the purchaser of the automobile. The Company refeff rs to the diffff eff rence between the negotiated price and the original principal amount being fiff nanced as the dealer discount. The amount of the dealer discount depends upon faff ctors such as the age and value of the automobile and the creditworthiness of the customer. The Company has recommitted to maintaining pricing discipline and thereforff e places less emphasis on competition when pricing the discount. Generally, the Company will pay more (i.e., purchase the Contract at a smaller discount frff om the original principal amount) forff Contracts as the credit risk of the customer improves. To date, the Contracts purchased by the Company have been purchased at discounts that range frff om 1% to 15% of the original principal amount of each Contract, with the typical average discount being between 6% and 8%. As of March 31, 2023, the Company’s indirect loan portfolff io consisted of Contracts purchased frff om a dealer or acquired through a bulk acquisition. Such Contracts are purchased without recourse to the dealer, however each dealer remains potentially liabla e to the Company forff by the dealer with respect to compliance with appl Company’s policy is to only purchase a Contract aftff er the dealer has provided the Company with the requisite proof that (a) the Company has a fiff rst priority lien on the fiff nanced vehicle (or the Company has, in faff ct, perfeff cted such fiff rst priority lien), (b) the customer has obtained the required collision insurance naming the Company as loss payee ly and accurately completed and validly with a deductible of not more than $1,000 and (c) the Contract has been fulff executed. Once the Company has received and appr the Contract and servicing of the Contract commences. icabla e feff deral and state laws and valid title to the vehicle. The breaches of certain representations and warranties made oved all required documents, it pays the dealer forff a a 3 Contract Procurement The Company purchased Contracts in the states listed in the tabla e below during the periods indicated. The Contracts purchased by the Company are predominantly forff the periods shown below, less than 1% were forff used vehicles; forff new vehicles. The average model year collateralizing the portfolff dollar amounts shown in the tabla e below represent the Company’s fiff nance receivabla es on Contracts purchased within the respective fiff scal year: io as of March 31, 2023 was a 2012 vehicle. The State Alabaa ma Arizona Florida Georgia Idaho Illinois Indiana Kansas Kentuct ky Michigan Missouri Nevada North Carolina Ohio Pennsylvania South Carolina Tennessee Texas Utah Wisconsin Total Maximum allowable interest rate (1) 18-36%(2) (2) 18-30%(3) 18-30%(3) (2) (2) 25% (2) 18-25%(3) 25% (2) (2) 18-29%(3) 25% 18-21%(3) (2) (2) 18-23%(3) (2) (2) Number of Branches on March 31, 2023 - - - - - - - - - - - - - - - - - - - - - $ $ $ Fiscal year ended March 31, (In thousands) 2023 2022 2,919 128 10,410 5,103 343 1,109 2,363 75 2,887 549 2,841 1,150 3,989 7,345 1,139 2,932 1,203 594 102 344 47,526 $ $ 4,121 343 13,886 11,007 828 1,632 4,878 - 5,458 2,947 5,459 2,434 6,997 12,495 2,441 5,432 2,046 1,762 460 1,178 85,804 (1) (2) (3) The maximum allowabla e interest rates are subject to change and varyrr based on the laws of the individual states. None of these states currently impose a maximum allowabla e 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 36% per annum. The maximum allowabla e interest rate in each of these states varies depending upon the model year of the vehicle being fiff nanced. In addition, Georgia does not currently impose a maximum allowabla e interest rate with respect to Contracts over $5,000. The folff lowing tabla e presents selected inforff mation on Contracts purchased by the Company: Contracts Purchases Average APR Average dealer discount Average term (months) Average loan Number of Contracts purchased Fiscal year ended March 31, (Purchases in thousands) 2022 2023 $ $ 47,526 $ 22.5% 6.5% 48 11,932 4,040 $ 85,804 23.1% 6.9% 47 11,002 7,793 4 Direct Loans a oximately $4,300. Most of the Direct Loans were originated with current or forff mer Effff eff ctive during the third quarter of fiff scal 2023, the Company no longer originates any Direct Loans. Previous to that time, the Company originated Direct Loans in Alabaa ma, Florida, Georgia (over $3,000), Illinois, Indiana, Kansas, Kentuct ky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, and Tennessee. Direct Loans were loans originated directly between the Company and the consumer. These loans were typically forff amounts ranging frff om $500 to $11,000 and are generally secured by a lien on an automobile, watercraftff or other permissible tangible personal property. The average loan made during fiff scal 2023 by the Company had an initial principal balance of appr customers under the Company’s automobile fiff nancing program. The typical Direct Loan represented a better credit risk than our typical Contract due to the customer’s payment historyrr with the Company, as well as their establa ished relationship with the local branch staffff .ff The size of the loan and maximum interest rate that may be (and is) charged varies frff om state to state. The Company considered the individual’s income, credit history,rr value of the collateral offff eff red by the borrower to secure the loan as the primaryrr a appl Company to date have been made to borrowers under Contracts previously purchased by the Company, the collection experience of the borrower under the Contract was a signififf cant faff ctor in making the underwriting decision. The Company’s Direct Loan program was implemented in April 1995 and accounted forff 13% of the Company’s annual consolidated revenues during the fiff scal 2023. such loan. Additionally, because most of the Direct Loans made by the faff ctors in determining whether an icant would receive an appr job stabia lity, and the oximately oval forff a appr a In connection with its Direct Loan program, the Company also made availabla e credit disabia lity insurance, credit lifeff insurance, and involuntaryrr unemployment insurance coverage to customers through unaffff iff liated third-party insurance carriers. Approximately 63% of the Direct Loans outstanding as of March 31, 2023 elected to purchase third-party insurance coverage made availabla e by the Company. The cost of this insurance to the customer, which included a commission forff the Company, was included in the amount fiff nanced by the customer. The folff lowing tabla e presents selected inforff mation on Direct Loans originated by the Company: Direct Loans Originations Average APR Average term (months) Average loan Number of contracts originated g Underwriting Guidelines Fiscal year ended March 31, (Originations in thousands) 2023 2022 15,822 $ 28,740 30.4% 26 4,277 3,662 $ 30.5% 26 4,307 6,770 $ $ The Company’s typical customer has a credit historyrr credit unions. Some of the credit problems experienced by the Company’s customers that resulted in a poor credit include but are not limited to: prior automobile account repossessions, unpaid revolving credit card historyrr obligations, unpaid medical bills, unpaid stude nt loans, prior bankrupt t Company believes that its customer profiff le is similar to that of its direct competitors. that faff ils to meet the lending standards of most banks and cy, and evictions forff nonpayment of rent. The rr a a The Company’s process to appr ove the purchase of a Contract begins with the Company receiving a standardized ication completed by the consumer which contains inforff mation relating to the consumer’s background, credit appl employment, and credit history.rr The Company also obtains credit reports frff om Equifaff x and/or TransUnion, which are independent credit reporting services. The Company verififf es the consumer’s employment history,rr income, and residence. In most cases, consumers are interviewed via telephone by a Company appl Branch Manager or Assistant Branch Manager when the Company employed its branch-based model, and the originators in the Company's regionalized business model aftff er the branches were closed). The Company also considers the customer’s prior payment historyrr with the Company, if any, as well as the collateral value of the vehicle being fiff nanced. ication processor (usually the a The Company has establa ished internal underwriting guidelines that were used by its Branch Managers and internal underwriters when Contracts were purchased by the Company prior to the restrucr Company has adopted updated guidelines consistent with its post-restrucrr be used by the Company’s originators and internal underwriters when purchasing Contracts in the Company’s ing operations, which guidelines are to ing of its operations. The turt turt 5 oved by the senior regionalized business model. Any Contract that does not meet these guidelines must be appr management of the Company. In addition to a variety of administrative duties, the Company's management is responsible forff monitoring compliance with the Company’s underwriting guidelines as well as appr underwriting exceptions. oving a a When the Company was originating Direct Loans, the Company used similar criteria in analyzing a Direct Loan as it did in analyzing the purchase of a Contract. Lending decisions regarding Direct Loans were made based upon a review of the customer’s loan appl by the borrower to secure the loan. To date, since the maja ority of the Company’s Direct Loans have been made to individuals whose automobiles have been fiff nanced by the Company, the customer’s payment historyrr under his or her existing or past Contract was a signififf cant faff ctor in the lending decision. job stabia lity, and the value of the collateral offff eff red ication, income, credit history,rr a Aftff er reviewing the inforff mation included in the Contract or, when appl other faff ctors into account, the Company’s loan origination system categorizes the customer using internally developed credit classififf cations frff om “1,” indicating higher creditworthiness, through “4,” indicating lower creditworthiness. Contracts are fiff nanced forff acceptabla e rating categories utilized, “1” through “4”. Usually a customer who faff lls within the two highest categories (i.e., “1” or “2”) is purchasing a two to fiff ve-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 frff om an independent used automobile dealer. individuals who faff ll within all four icabla e, Direct Loan appl ication and taking the a a ff Prior to the closure of the Company’s branches, the Company perforff med audits of its branches’ compliance with Company underwriting guidelines. The Company audited branches on a schedule that was variabla e depending on the size of the branch, length of time a branch had been open, then current tenure of the Branch Manager, previous branch audit score, and then current and historical branch profiff tabia lity. Additionally, fiff eld supervisions and audits were conducted by District Managers, Divisional Vice Presidents and Divisional Administrative Assistants to tryrr ensure operational and underwriting compliance throughout the forff mer branch network. to g Monitoring and Enforff cement of Contracts On November 3, 2022, the Company entered into a loan servicing agreement with Westlake (the “Servicing Agreement”). Under the Servicing Agreement, the Company will originate and acquire receivabla es and Westlake will perforff m the servicing duties with respect to such receivabla es, including without limitation that Westlake shall manage, service, administer and make collections on the receivabla es, including with respect to any repossession of any fiff nanced vehicle securing a receivabla e under which it is determined that payments thereunder are not likely to be resumed. Unless earlier terminated in accordance with its provisions, the Servicing Agreement shall expire upon the earliest to occur of (i) the date on which the Company sells, transfeff rs or assigns all outstanding receivabla es to a third party (including Westlake), (ii) the date on which the last receivabla e is repaid or otherwise terminated, or (iii) three years frff om the closing date of the Servicing Agreement. The Company requires each customer under a Contract to obtain and maintain collision insurance covering damage to the vehicle. Failure to maintain such insurance constitutt es a defaff ult under the Contract, that would permit the repossession of the vehicle. To reduce potential loss due to insurance lapsa 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. e, the Company has the contractuat l right to The servicer monitors compliance by the Company's customers with their obligations under Contracts and Direct Loans made by the Company and the servicer provides reports to the Company on such activity. These reports may be accessed throughout the Company by management personnel at computer terminals located in the Company's offff iff ces. These reports include delinquency reports, customer promise reports, vehicle inforff mation reports, purchase reports, dealer analysis reports, static pool reports, and repossession reports. A delinquency report is an aging report that provides basic inforff mation regarding each customer account and indicates accounts that are past due. The report includes inforff mation 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 customer is promptly contacted to determine the reason forff delinquency and to determine if appr payment can be made. If acceptabla e payment opriate arrangements forff the a 6 arrangements can be made, the inforff mation is entered into a databaa account folff report, which is utilized forff low up. se and is used to generate a customer promises The servicer prepares a repossession report that provides inforff mation regarding repossessed vehicles and aids in disposing of repossessed vehicles. In addition to inforff mation regarding the customer, this report provides inforff mation regarding the date of repossession, date the vehicle was sold, number of days it was held in inventoryrr prior to sale, year, make and model of the vehicle, mileage, payoffff 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 and other inforff mation that may be helpfulff . If an account is 121 days delinquent and the related vehicle has not yet been repossessed, the account is charged-offff and transfeff rred to the servicer's loss prevention and recoveryrr department. Once a vehicle has been repossessed, the related loan balance no longer appe repossession report and is generally sold at auction. ars on the delinquency report. Instead, the vehicle appe ars on the servicer's a a The servicer also prepares a dealer report that provides inforff mation regarding each dealer frff om which the Company 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 frff om such dealer, as well as the overall portfolff Contracts purchased frff om the dealer. io perforff mance of The Company is subject to seasonal variations within the subprime marketplt ace. While the APR, discount, and term remain consistent across quarters, write-offff sff and delinquencies tend to be lower while purchases tend to be higher in the four ff write-offff sff and delinquencies, and a lower level of purchases. Despite the forff egoing, during fiff scal 2023 the four quarter had the most write-offff sff and delinquencies. th and fiff rst quarters of the fiff scal year. The second and third quarters of the fiff scal year tend to have higher th ff g Marketing and Advertising g ts currently are directed primarily toward automobile dealers. The The Company’s Contract marketing effff orff Company attempts to meet dealers’ needs by offff eff ring highly responsive, cost-competitive, and service-oriented fiff nancing programs. The Company relies on its staffff of originators to solicit agreements forff Contracts with automobile dealers based within the regions located in the seven states in which the Company conducts operations as of the date of this Annual Report. The Company provides dealers with inforff mation regarding itself and the general terms upon which the Company is willing to purchase Contracts. The Company uses web advertising, social media and print ads in dealer association publications forff marketing purpos member and corpor state-level associations. Its representatives attend confeff rences and events forff market its products directly to dealers in attendance. es. The Company is a ate sponsor of the National Independent Auto Dealers Association, which also gives it access to both state and national associations to the purchase of r r When the Company was originating Direct Loans, the Company solicited customers under its Direct Loan program primarily through direct mailings, folff lowed by telephone calls to individuals who had a good credit historyrr with the Company in connection with Contracts purchased by the Company. It also relied on other forff ms of electronic messaging and in-store advertising. Computerized Inforff mation System p y All Company personnel are provided with real-time access to inforff mation. The Company has purchased or otherwise has access through its servicer to the specialized programs to monitor the Contracts and Direct Loans frff om inception. The Company’s computer network encompasses both its corpor r forff operations hub. See “Monitoring and Enforff cement of Contracts” above availabla e to the Company. ate headquarters and its central business a summaryrr of the diffff eff rent reports a p Competition The consumer fiff nance industryrr competitiveness of the industryrr continues to increase as new competitors continue to enter the market and certain existing competitors continue to expand their operations. There are numerous fiff nancial service companies that is highly frff agmented and highly competitive. Due to various faff ctors, the 7 the purchase of Contracts enabla es automobile dealers to shop forff provide consumer credit in the markets served by the Company, including banks, credit unions, other consumer fiff nance companies, and capta ive fiff nance companies owned by automobile manufaff cturt ers and retailers. Increased competition forff an erosion in the dealer discounts frff om the initial principal amounts at which the Company is willing to purchase Contracts and higher advance rates. However, the Company instead focff uses on purchasing Contracts that are priced to reflff ect the inherent risk level of the Contract, and sacrififf ces loan volume, if necessary,rr discipline. For the fiff scal year ended March 31, 2023, the Company’s average dealer discount on Contracts purchased decreased to 6.5%, compared to 6.9% forff the fiff scal year ended March 31, 2022. The tabla e below shows the number the best price, which can result in to maintain that pricing 8 and principal amount of Contracts purchased, average amount fiff nanced, average term, and average APR and discount forff the periods presented: Key Perforff mance Indicators on Contracts Purchased (Purchases in thousands) Average Amount Financed*^ Average APR* Principal Amount Purchased# Average Discount%* Average Term* Fiscal Year /Quarter Number of Contracts Purchased 2023 4 3 2 1 2022 4 3 2 1 2021 4 3 2 1 2020 4 3 2 1 $ $ $ $ 4,040 127 383 1,595 1,935 7,793 2,404 1,735 1,707 1,947 7,307 2,429 1,483 1,709 1,686 7,647 1,991 1,753 2,011 1,892 47,526 $ 1,579 4,511 19,082 22,354 85,804 $ 27,139 19,480 18,880 20,305 74,025 $ 24,637 15,285 17,307 16,796 76,696 $ 19,658 17,880 20,104 19,054 11,932 12,433 11,778 11,964 11,552 11,002 11,289 11,228 11,061 10,429 10,135 10,143 10,307 10,127 9,962 10,035 9,873 10,200 9,997 10,071 22.5 % 22.2 % 22.4 % 22.7 % 22.9 % 23.1 % 22.9 % 23.1 % 23.0 % 23.2 % 23.4 % 23.2 % 23.4 % 23.5 % 23.5 % 23.4 % 23.5 % 23.3 % 23.5 % 23.4 % Key Perforff mance Indicators on Direct Loans Originated (Originations in thousands) Fiscal Year /Quarter Number of Contracts Originated Principal Amount Originated# Average Amount Financed*^ Average APR* Average Term* 2023 4 3 2 1 2022 4 3 2 1 2021 4 3 2 1 2020 4 3 2 1 $ $ $ $ 3,662 0 245 1,427 1,990 6,770 1,584 2,282 1,588 1,316 3,497 753 1,265 924 555 3,142 720 1,137 739 546 15,822 $ 0 1,080 6,527 8,215 28,740 $ 7,458 8,505 7,040 5,737 14,148 $ 3,284 4,605 3,832 2,427 12,638 $ 3,104 4,490 2,988 2,056 4,277 0 4,128 4,574 4,128 4,307 4,708 3,727 4,433 4,359 4,131 4,362 3,641 4,147 4,373 4,017 4,310 3,949 4,043 3,765 30.4 % 0.0 % 29.6 % 30.3 % 31.2 % 30.5 % 30.0 % 31.8 % 30.0 % 30.1 % 29.6075 % 29.6 % 30.9 % 29.23 % 28.7 % 28.2 % 28.6 % 28.4 % 27.4 % 28.2 % *Each average included in the tabla es is calculated as a simple average. ^Average amount fiff nanced is calculated as a single loan amount. #Bulk portfolff io purchase excluded forff period-over-period comparabia lity. 9 48 49 48 48 48 47 47 47 47 46 46 46 46 46 46 47 46 47 46 47 6.5 % 6.2 % 6.8 % 6.4 % 6.6 % 6.9 % 6.9 % 6.8 % 6.7 % 7.0 % 7.5 % 7.5 % 7.5 % 6.8 % 8.0 % 7.9 % 7.9 % 7.6 % 7.9 % 8.3 % 26 0 27 25 25 26 27 24 26 25 25 25 22 25 26 25 25 24 25 24 The Company’s abia lity to compete effff eff ctively with other companies offff eff ring similar fiff nancing arrangements depends in part upon the Company maintaining close business relationships with dealers of used and new vehicles. No single dealer out of the appr relationships represents a signififf cant amount of the Company’s business volume forff March 31, 2023 or 2022. oximately 586 dealers with which the Company currently has active contractuat any of the fiff scal years ended a l t g Regulation Numerous feff deral and state consumer protection laws and related regulations impose substantial requirements upon creditors and servicers involved in consumer fiff nance. These laws include the Trutrr h-in-Lending Act, the Equal Credit ty Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Debt Collection Opportuni Practices Act, the Gramm-Leach-Bliley Act, the Servicemembers Civil Relief Act, the Telephone Consumer Protection Act, state adapta ations of the National Consumer Act and of the Uniforff m Consumer Credit Code and state lending acts, motor vehicle retail installment acts and other similar laws. Also, the laws of certain states impose fiff nance charge ceilings and other restrictions on consumer transactions and require contract disclosures in addition to those required under feff deral law. These requirements impose specififf c statutt oryrr liabia lities upon creditors who faff il to comply with their provisions. In some cases, this liabia lity could affff eff ct the abia lity of an assignee such as the Company to enforff ce consumer fiff nance contracts such as the Contracts. The Company’s fiff nancing operations are subject to regulation, supervision and licensing under many feff deral, state and local statutt es, regulations and ordinances. In addition, the Company and its service providers must comply with certain feff deral and state requirements in connection with the servicing and collection on Direct Loans and Contracts, and the repossession of vehicles securing Direct Loans and Contracts in the states in which the Company does business. The Company and its third-party service providers must comply with feff deral, state and local regulatoryrr icabla e to consumer credit transactions. In particular, the Company may be subject to regimes, including those appl laws such as: a • • • • • e atoryr requirementstt . Pursuant to state laws and regulations, on-site or any of our locations. Examinations monitor compliance with icabla e regulations. These laws and regulations include, but are not limited to: licensure requirements, State consumer statutoryr and regul offff -ff site examinations can be conducted forff a appl requirements forff maintenance of proper records, feff e requirements, maximum interest rates that may be charged on loans to fiff nance used vehicles, and proper disclosure to customers regarding fiff nancing terms. These may also include state laws and regulations that impose requirements related to data privacy, credit discrimination, credit reporting, debt servicing and collection, and unfaff ir or deceptive business practices. State licensing requirementstt . The Company must comply with state licensing requirements and varyirr ng compliance requirements in all the states in which it operates. The Company fiff les a notififf cation or obtains a license to acquire Contracts in each state in which it acquires Contracts. Furthermore, some states require dealers to maintain a Retail Installment Seller’s License, and where appl business with dealers who hold such a license. For Direct Loan activities, the Company obtained licenses, where required, frff om each state in which it offff eff red consumer loans. icabla e, the Company only conducts a FaiFF r Debt ColCC lection Practices Act. The feff deral Fair Debt Collection Practices Act (“FDCPA”) provides guidelines and limitations on the conduct of third-party debt collectors and debt buyers when collecting consumer debt. While the FDCPA generally does not appl y to fiff rst-party creditors collecting their own debts or to servicers when collecting debts that were current when servicing began, the Company uses the FDCPA as a guideline forff providers that provide collection services on the Company’s behalf to comply with the FDCPA to the extent appl guidance and limitations similar to the FDCPA. all collections. The Company requires all vendors and third-party service icabla e. The Company also complies with state and local laws that appl y to creditors and provide a a a TrTT uth in Lending Act. The Trutr h 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 fiff nance charge and the annual percentage rate charged on each Contract or Direct Loan. O tunitytt Act. The Equal Credit Opportuni Equal CrCC edit Oppor discriminating against loan appl Regulation B promulgated under the ECOA, creditors are required to make certain disclosures regarding the a consumer rights and advise consumers whose credit appl reje ection. icants on the basis of race, color, sex, age or marital statust ty Act (“ECOA”) prohibits creditors frff om oved of the reasons forff ications are not appr . Pursuant to a a t 10 • • i ures in Global and NatNN ional ComCC merce Act. The Electronic Signaturt es in Global and Electronic Signat National Commerce Act requires the Company to provide consumers with clear and conspicuous disclosures beforff e the consumer gives consent to authorize the use of electronic signaturt es, electronic contracts, and electronic records. e ting Act. The Fair Credit Reporting Act (“FCRARR ”) and similar state laws regulate the use FaiFF r CrCC edit Repor of consumer reports and the reporting of inforff mation to credit reporting agencies. Specififf cally, the FCRARR establa ishes requirements that appl notififf cations to consumers, including when an adverse action, such as a loan declination, is based on inforff mation contained in a consumer report. y to the use of “consumer reports” and similar data, including certain a • Gramm-Leach-Blileye 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. • • Federal Trade Commission Act. Section 5 of the Federal Trade Commission Act (the “FTC Act”) prohibits unfaff ir and deceptive acts or practices in or affff eff cting commerce. Servicemembersrr Civil Reliefe Act. The Servicemembers Civil Relief Act (“SCRARR ”) 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 militaryrr duty and places limitations on collection and repossession activity. Under the terms of the SCRARR , an obligor who enters the militaryrr service aftff er the origination of that obligor’s Direct Loan or Contract (including an obligor who is a member of the National Guard or is in reserve statust at the time of the origination of the obligor’s Direct Loan or Contract and is later called to the duration of the active duty) is entitled to have the interest rate reduced and cappe militaryrr service, may be entitled to a stay of proceedings on forff eclosures and similar actions and may have the maturt payment schedule adjusted. In addition, pursuant to the laws of various states, under certain circumstances residents thereof called into active duty with the National Guard or the reserves can appl y to a court to delay payments on loans or retail installment sale contracts such as the Direct Loans and the Contracts. ity of the loan or retail installment sale contract extended or the payments lowered and the d at 6% per annum forff a a • MiMM litaryr Lending Act. The Militaryrr Lending Act requires the Company to limit the militaryrr annual percentage rate that the Company may charge to a maximum of 36 percent, requires certain disclosures to militaryrr consumers, and provides other substantive consumer protections on credit extended to Servicemembers and their faff milies. • • • FF TrTT ansfs eff r Act. The Electronic Funds Transfeff r Act (“EFTA”) prohibits the Company frff om Electronic Funds requiring its customers to repay a loan or other credit by electronic funds limited situat documentation to its customers when an EFT is initiated and to provide certain notififf cations to its customers with regard to preauthorized payments. y to the Company. The Company is also required to provide certain transfeff r (“EFT”), except in tions which do not appl a ff e ConsCC umer Protection Act. The Telephone Consumer Protection Act governs the Company’s TeTT lephone practice of contacting customers by certain means (i.e., auto-dialers, pre-recorded or artififf cial voice calls on customers’ land lines, faff x machines and cell phones, including text messages). r cy and related state laws may interfeff re with or affff eff ct the Company’s abia lity to Bankrkk uptcyc . Federal bankrupt recover collateral or enforff ce a defiff ciency judgment. For example, in a Chapta er 13 proceeding under the Bankrupt cy Code, a court may prevent a creditor frff om repossessing a motor vehicle and, as part of the r rehabia litation plan, reduce the amount of the secured indebtedness to the market value of the motor vehicle at the time of bankrupt unsecured creditor forff payments due under the related contract or change the rate of interest and time of repayment of the indebtedness. cy, as determined by the court, leaving the party providing fiff nancing as a general the remainder of the indebtedness. A bankrupt cy court may also reduce the monthly rr rr • Dodd-FrFF ank WalWW l Street Refe orff m and ConsCC umer Protection Act of 2010 (“D“ odd-FrFF ank Act”)” . Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which has the authority to issue and enforff ce regulations under the feff deral “enumerated consumer laws,” including (subject to certain statutt oryrr enforff cement authority over certain non-depositoryrr ions, including the Company. The CFPB is specififf cally authorized, among other things, to take actions to prevent companies providing consumer fiff nancial products or services and their service providers frff om engaging in unfaff ir, deceptive or abus limitations) FDCPA, TILA, ECOA, FCRARR , GLBA and EFTA. The CFPB has rulr emaking and institutt a ive acts 11 consumer fiff nancial products or services. Under the Dodd-Frank Act, the CFPB or practices in connection with consumer fiff nancial products and services, and to issue rulr es requiring enhanced disclosures forff also may restrict the use of pre-dispute mandatoryrr arbir a consumer fiff nancial product or service. The CFPB also has authority to interprr et, and consumers forff enforff ce, and issue regulations implementing enumerated consumer laws, including certain laws that appl a to the Company’s business. The CFPB issued rulr es regarding the supervision and examination of non- depositoryrr “larger participants” in the automobile fiff nance business. At this time, the Company is not deemed a larger participant. tration clauses in contracts between covered persons y • Holder RulRR e. The Federal Trade Commission’s (the “FTC”) so-called “Holder-in-Due-Course RulRR e” (the “Holder RulRR e”), and equivalent state laws, make the Company or any other holder of a consumer credit contract include the required notice and become subject to all claims and defeff nses that a borrower could assert against the seller of goods or services. Failure to comply with these laws or regulations could have a material adverse effff eff ct on the Company by, among other things, limiting the jurisdictions in which the Company may operate, restricting the Company’s or its service provider's abia lity to realize the value of the collateral securing the Contracts, and making it more costly or burdensome to do business or resulting in potential liabia lity. The volume of new or modififf ed laws and regulations and the activity of agencies enforff cing 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 affff eff ct the competitive balance among fiff nancial services providers. Proposals to change the laws and regulations governing the operations and taxation of fiff nancial institutt various regulatoryrr agencies. This legislation may change the Company’s operating environment in substantial and unpredictabla e ways and may have a material adverse effff eff ct on the Company’s business. ions and fiff nancial services providers are frff equently made in the U.S. Congress, in the state legislaturt es and by In particular, the Dodd-Frank Act and regulations promulgated thereunder, are likely to affff eff ct the Company’s cost of doing business, may limit or expand the Company’s permissible activities, may affff eff ct the competitive balance within the Company’s industryrr and market areas and could have a material adverse effff eff ct on the Company. The Company’s management continues to assess the Dodd-Frank Act’s probabla e impact on the Company’s business, fiff nancial condition and results of operations, and to monitor developments involving the entities charged with promulgating regulations thereunder. However, the ultimate effff eff ct of the Dodd-Frank Act on the fiff nancial services industryrr in general, and on the Company in particular, is uncertain at this time. In addition to the CFPB, other state and feff deral agencies have the abia lity to regulate aspects of the Company’s business. For example, the Dodd-Frank Act provides a mechanism forff Company. Additionally, the FTC has jurisdiction to investigate aspects of the Company’s business. The Company expects that regulatoryrr investigations could have a material adverse impact on the Company. investigation by both state and feff deral agencies will continue and that the results of these state Attorneys General to investigate the The Holder RulRR e of the FTC has the effff eff ct of subjecting a seller, and certain related lenders and their assignees, in a consumer credit transaction to all claims and defeff nses which the obligor in the transaction could assert against the seller of the goods. Liabia lity under the Holder RulRR e is limited to the amounts paid by the obligor under the contract, and the holder of the contract may also be unabla e to collect any balance remaining due thereunder frff om the obligor. The Holder RulRR e is generally duplicated by the Uniforff m Consumer Credit Code, other state statutt es or the common law in certain states. Most of the Contracts will be subject to the requirements of the Holder RulRR e. Accordingly, the Company, as holder of the Contracts, will be subject to any claims or defeff nses that the purchaser of a fiff nanced vehicle may assert against the seller of the fiff nanced vehicle. Such claims are limited to a maximum liabia lity equal to the amounts paid by the obligor on the Contract. Dealers with which the Company does business must also comply with credit and trade practice statutt es and regulations. Failure of these dealers to comply with such statutt es and regulations could result in customers having rights of rescission and other remedies that could have a material adverse effff eff ct on the Company. The sale of vehicle service contracts and other ancillaryrr products by dealers in connection with Contracts assigned to the Company frff om dealers is also subject to state laws and regulations. As the Company is the holder of the Contracts that may, in part, fiff nance these products, some of these state laws and regulations may appl Company’s servicing and collection of the Contracts. Although these laws and regulations may not signififf cantly affff eff ct the Company’s business, there can be no assurance that insurance or other regulatoryrr authorities in the y to the a 12 jurisdictions in which these products are offff eff red 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 affff eff ct the income received frff om these products. a The Company’s management believes that the Company maintains all requisite licenses and permits and is in icabla e local, state and feff deral laws and regulations. The Company periodically material compliance with appl reviews its practices in an effff orff t to ensure such compliance. Although compliance with existing laws and regulations has not had a material adverse effff eff ct on the Company’s operations to date, given the increasingly complex regulatoryrr environment, the increasing costs of complying with such laws and regulations, and the increasing risk of penalties, fiff nes or other liabia lities 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 faff ilure to be in such compliance, will not have a material adverse effff eff ct on the Company’s business, fiff nancial condition or results of operations. reforff m could have an adverse For more inforff mation, please refeff r to the risk faff ctors titled “Federal or state regulatoryrr impact on the Company”, “On October 5, 2017, the CFPB released the fiff nal rulr e Payday, Vehicle Title and Certain High-Cost Installment Loans under the Dodd Frank Act, which as adopted could potentially have a material adverse effff eff ct on our operations and fiff nancial perforff mance”, “The CFPB has broad authority to pursue administrative proceedings and litigation forff under the Dodd-Frank Act, the CFPB adopted rulrr es that subject larger nonbank automobile fiff nance companies to supervision and examination by the CFPB”. Any such examination by the CFPB likely would have a material adverse effff eff ct on our operations and fiff nancial perforff mance”, “Our use of vendors and our other ongoing third-party business relationships is subject to increasing regulatoryrr requirements and attention”, and “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 effff eff ct on our fiff nancial condition and business operations”, all of which are r incorpor violations of feff deral consumer fiff nancing laws”, “Pursuant to the authority granted to it ated herein by refeff rence. In July 2020, the CFPB rescinded provisions of the Payday, Vehicle Title, and Certain High-Cost Installment Loans rulr e (the "RulRR e") governing the abia lity to repay requirements. The payment requirements took effff eff ct in June 2022. Any regulatoryrr changes could have effff eff cts beyond those currently contemplated that could furff ther materially and adversely impact our business and operations. Unless rescinded or otherwise amended, the Company will have to comply with the RulRR e’s payment requirements if it continues to allow consumers to set up futff urt e recurring payments certain covered loans such that it meets the defiff nition of having a “leveraged payment mechanism” under online forff the RulRR e. If the payment provisions of the RulRR e appl its loan payment procedures to comply with the required notices and mandated timefrff ames set forff y, the Company will have to modifyff th in the fiff nal rulr e. a Human Capital Resources The Company’s management and various support func in Clearwater, Florida. In connection with the closure of all of the Company’s brick and mortar branch locations in 18 states, the Company’s staffff was signififf cantly downsized during fiff scal 2023, both as a result of layoffff sff and other voluntaryrr and involuntaryrr persons, of which six persons were employed at the Company’s Clearwater Corpor Company’s employees are subject to a collective bargaining agreement, and the Company considers its relations with its employees generally to be good. terminations. As a result, as of March 31, 2023, the Company employed a total of sixteen tions are centralized at the Company’s corpor ate offff iff ce. None of the ate headquarters r rr ff tering, cultivating, and preserving a culturt e of diversity, equity, and inclusion We are also committed to fosff (“DE&I”). We believe that the collective sum of the individual diffff eff rences, lifeff experiences, knowledge, inventiveness, self-ff expression, unique capaa bia lities, and talent that our employees invest in their work represent a signififf cant part of our culturt e, reputation, and achievement. We believe that an emphasis on DE&I drives value forff our employees, customers, and shareholders, and that our DE&I commitment enabla es us to better serve our communities. In fiff scal 2023, the Company continued focff using on and invested in maintaining the health and safeff ty of our employees in the midst of the COVID-19 pandemic. We also offff eff r our employees a variety of training and development opportuni comprehensive training curriculum that focff uses on the Company- and position-specififf c competencies needed to be ties. New employees complete a t 13 . The training includes a blended appr successfulff assessments. Training content is focff used on our operating policies and procedures, as well as several key compliance areas. oach utilizing eLearning modules, hands-on exercises, webinars, and a 14 Item 1A. Risk Factors folff lowing facff TheTT torsrr , as well as other facff fiff nancial condition or resultstt of operations of the ComCC pany “our”)” . torsrr not set forff m th below,w may adversrr elyll affff eff ct the business, operations, (s(( ometimes refe eff rred to in thisii section as “we” “us” or Risks Related to COVID-19 ThTT e extee ett nt tott which COC VIVV DII -19 and measures take operatitt ons and fiff nii ancial conditii itt on wilii lll contitt nii ue tott depeee nd on facff and isii heighi lill keii tett ns manyn of our known risii ks. respons n inii lyll tt se thtt eretott tortt tott contitt nii ue tott have a matett rial imii pacm t on our resultll stt of operatitt ons and fiff nii ancial conditii itt on and imii pacm t our businii ess,s resultll stt of srr outstt ide of our contrtt ol.ll COC VIVV DII -19 has had The outbrt eak of the global pandemic of COVID-19 and resultant economic effff eff cts of preventative measures taken across the United States and worldwide have been weighing on the macroeconomic environment, negatively impacting consumer confiff dence, employment rates and other economic indicators that contribute to consumer spending behavior and demand forff operations and fiff nancial condition will continue to depend on faff ctors outside of our control, which are highly uncertain and diffff iff cult to predict, including, but not limited to, the duration and spread of the outbrt eak in light of diffff eff rent levels of vaccination across the globe and new variants of the virusr severity, actions to contain the virusrr pandemic economic and operating conditions in the United States can continue in light of inflff ationaryrr pressure and higher insurance costs. For more inforff mation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” or treat its impact, and whether the recently observabla e resumption of pre- credit. The extent to which COVID-19 impacts our business, results of or additional waves of cases, its In addition, the spread of COVID-19 has caused us to modifyff our business practices (including restricting employee travel, developing social distancing plans forff our employees and cancelling physical participation in meetings, ther actions as may be required by government authorities or as we events and confeff rences), and we may take furff determine is in the best interests of our employees, partners and customers. The outbrt eak has adversely impacted and may furff suppliers and third-party vendors, throughout the time period during which the spread of COVID-19 continues and related restrictions remain in place, and even aftff er the COVID-19 outbrt eak has subsided. ther adversely impact our workforff ce and operations and the operations of our partners, customers, Even aftff er the COVID-19 outbrt eak has subsided and despite the forff mal declaration of the end of the COVID-19 global health emergency by the World Health Organization in May 2023, our business may continue to experience materially adverse impacts as a result of the virusr ng and any recession that has occurred or may occur in the futff urt e. There are no comparabla e recent events that provide guidance as to the effff eff ct COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbrt eak is highly uncertain and subject to change. ’s economic impact, including the availabia lity and cost of fundi ff Additionally, many of the other risk faff ctors described below are heightened by the effff eff cts of the COVID-19 pandemic and related economic conditions, which in turt n could materially adversely affff eff ct our business, fiff nancial condition, results of operations, access to fiff nancing and liquidity. Risks Related to Our Business and Industry Our success isii depeee ndent on our abilii ill tii ytt Loans. tott forff ecast thtt e perfr orff mrr ance ofo our ConCC trtt actstt and remainii inii g Diri ect We have in the past experienced and may in the futff urt e experience high delinquency and loss rates in our portfolff This has in the past reduced and may continue to reduce our profiff tabia lity. In addition, our inabia lity to accurately forff ecast and estimate the amount and timing of futff urt e collections could have a material adverse effff eff ct on our fiff nancial position, liquidity and results of operations. ios. Our consolidated net loss forff million forff attributabla e to our previously announced change in operating strategy and restrucr the year ended March 31, 2022. Although our signififf cant net loss during fiff scal 2023 was largely the year ended March 31, 2023 was $34.1 million as compared to net income of $3.0 ing plan, our profiff tabia lity usually turt 15 depends, to a material extent, on the perforff mance of Contracts that we purchase. Historically, we have experienced higher delinquency rates than traditional fiff nancial institutt remaining Direct Loans are to non-prime borrowers, who are unabla e to obtain fiff nancing frff om traditional sources due primarily to their credit history.rr Contracts and Direct Loans made to these individuals generally entail a higher risk of delinquency, defaff ult, repossession, and higher losses than loans made to consumers with better credit. ions because substantially all of our Contracts and Our underwriting standards and collection procedures may not offff eff r adequate protection against the risk of defaff ult, especially in periods of economic uncertainty. In the event of a defaff ult, the collateral value of the fiff nanced vehicle usually does not cover the outstanding Contract or Direct Loan balance and costs of recovery.rr Our abia lity to accurately forff ecast perforff mance and determine an appr losses is critical to our business and fiff nancial results. The allowance forff provision forff io, specififf c impaired Contracts and Direct Loans, and current economic conditions. Please see the portfolff “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Item 7 of this Form 10-K, which is incorpor credit losses based on management’s evaluation of the risk inherent in the portfolff credit losses is establa ished through a opriate provision and allowance forff ated herein by refeff rence. credit a r io, the composition of credit losses is an estimate, and if actuat There can be no assurance that our perforff mance forff ecasts will be accurate. In periods with changing economic conditions, such as is the case currently, accurately forff ecasting the perforff mance of Contract and Direct Loans is more diffff iff cult. Our allowance forff materially greater than our allowance forff fiff nancial position, liquidity and results of operations could be materially adversely affff eff cted. For example, uncertainty surrounding the continuing economic impact of COVID-19 and the indirect effff eff cts of the conflff ict between RusRR sia and Ukraine, whether through increases in the price of gasoline and other consumer goods or otherwise, on our customers has made historical inforff mation on credit losses slightly less reliabla e in the current environment, and there can be no assurances that we have accurately estimated loan losses. l Contract and Direct Loan losses are credit losses, or more generally, if our forff ecasts are not accurate, our Other than limited representations and warranties made by dealers in faff vor of the Company, Contracts are purchased frff om the dealers without recourse, and we are thereforff e only abla e to look to the borrowers forff repayment. ions and other organizations will now use forff ward-looking inforff mation to better inforff m ied today will still be permitted, although the In June 2016, the Financial Accounting Standards Board (“FASB”) issued the ASU 2016-13 Financial ents—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrumrr Instrumr things, the amendments in this ASU require the measurement of all expected credit losses forff held at the reporting date based on historical experience, current conditions and reasonabla e and supportabla e forff ecasts. Financial institutt their credit loss estimates. Many of the loss estimation techniques appl inputs to those techniques will change to reflff ect the fulff l amount of expected credit losses. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses. For smaller reporting companies like us, the new guidance is effff eff ctive forff years, beginning aftff er December 15, 2022, and early adoption is permitted. The Company is evaluating the impact of the adoption of this ASU on the consolidated fiff nancial statements by collecting and analyzing data that will be needed to produce historical inputs, evaluating current conditions and reasonabla e and supportabla e forff ecasts, which are inputs into models created as a result of adopting this ASU. The Company believes the adoption of this ASU will likely result in an increase of between $0.9 million and $1.9 million to its allowance forff fiff scal years, and interim periods within those fiff scal ents. Among other fiff nancial instrumr credit losses. ents a We operate in an increasingly competitive market. is highly competitive, and the competitiveness of the market continues to The non-prime consumer-fiff nance industryrr increase as new competitors continue to enter the market and certain existing competitors continue to expand their operations and become more aggressive in offff eff ring competitive terms. There are numerous fiff nancial service companies that provide consumer credit in the markets served by us, including banks, credit unions, other consumer fiff nance companies and capta ive fiff nance companies owned by automobile manufaff cturt ers and retailers. Many of these competitors have substantially greater fiff nancial resources than us. In addition, some of our competitors oftff en provide fiff nancing on terms more faff vorabla e to automobile purchasers or dealers than we offff eff r. Many of these competitors also have long-standing relationships with automobile dealerships and may offff eff r dealerships, or their customers, 16 other forff ms of fiff nancing including dealer flff oor-plan fiff nancing and leasing, which are not provided by us. Providers of non-prime consumer fiff nancing have traditionally competed primarily on the basis of:ff • • • • • • interest rates charged; the quality of credit accepted; dealer discount; amount paid to dealers relative to the wholesale book value; the flff exibility of Contract and Direct Loan terms offff eff red; and the quality of service provided. Our abia lity to compete effff eff ctively with other companies offff eff ring similar fiff nancing arrangements depends in part on our abia lity to maintain close relationships with dealers of used and new vehicles. We may not be abla e to compete successfulff Company to match or exceed pricing of its competitors, which has generally resulted in declining Contract acquisition rates during the 2022 and 2023 fiff scal years. ly in this market or against these competitors. In recent years, it has become increasingly diffff iff cult forff the We have focff used on a segment of the market composed of consumers who typically do not meet the more stringent credit requirements of traditional consumer fiff nancing sources and whose needs, as a result, have not been addressed consistently by such fiff nancing sources. As new and existing providers of consumer fiff nancing have undertaken to penetrate our targeted market segment, we have experienced increasing pressure to reduce our interest rates, feff es and dealer discounts. The Company’s average dealer discount on Contracts purchased forff the fiff scal years ended March 31, 2023 and 2022 was 6.5% and 6.9%, respectively. The Company’s average APR on Contracts purchased forff continue to exist and may impact our abia lity to secure quality loans on our prefeff rred terms in signififf cant quantities. the fiff scal years ended March 31, 2023 and 2022, were 22.5% and 23.1%, respectively. These competitive faff ctors We are particularly vulnerabla e to the effff eff cts of these practices because of our focff us on providing fiff nancing with respect to used vehicles. Our business depends on our continued access to bank fiff nancing on acceptable terms. On Januaryrr 18, 2023, we entered into a new senior secured revolving credit faff cility (the “Credit Facility”) with Westlake Capia tal Finance, LLC (the “Lender”), who is an affff iff liate of Westlake, the servicer of substantially all of our receivabla es. Our abia lity to access capia tal through our Credit Facility, or undertake a futff urt e faff cility, or other debt or equity transactions on economically faff vorabla e terms or at all, depends in large part on faff ctors that are beyond our control, including: • Conditions in the securities and fiff nance markets generally; • A negative bias toward our industry;rr • General economic conditions and the economic health of our earnings, cash flff ows and balance sheet; • • • Security or collateral requirements; The credit quality and perforff mance of our customer receivabla es; Regulatoryrr restrictions appl a icabla e to us; • Our overall business and industryrr prospects; • Our overall sales perforff mance, profiff tabia lity, cash flff ow, balance sheet quality, and regulatoryrr restrictions; • Our abia lity to provide or obtain fiff nancial support forff required credit enhancement; • Our abia lity to adequately service our fiff nancial instrumrr ents; 17 • Our abia lity to meet debt covenant requirements; and • Prevailing interest rates. Our Credit Facility is subject to certain defauff lts and negative covenants. The Credit Facility’s loan documents contain customaryrr events of defaff ult and negative covenants, including but not limited to those governing indebtedness, liens, funda documents also restrict the Company’s abia lity to make distributions to its shareholders or enter into certain mental transactions. If an event of defaff ult occurs, the lender could increase borrowing costs, restrict our ff funda abia lity to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforff ce their interest against collateral pledged under the Credit Facility or enforff ce such other rights and remedies as they have under the loan documents or appl mental changes, investments, and sales of assets. Such loan icabla e law as secured lenders. a ff ity date, then we would be obligated to pay If we prepay the loan and terminate the Credit Facility prior to its maturt the Lender a termination feff e in an amount equal to a percentage of the average outstanding principal balance of the Credit Facility during the immediately preceding 90 days. If we were to sell our accounts receivabla e to a third party prior to the maturt percentage of the proceeds of such sale. ity date, then we would be obligated to pay the Lender a feff e in an amount equal to a specififf ed Our existing and fuff ture levels of indebtedness could adversely affff eff ct our fiff nancial health, ability to obtain fiff nancing in the fuff ture, ability to react to changes in our business and ability to fuff lfiff ll our obligations under such indebtedness. As of March 31, 2023, we had aggregate outstanding indebtedness under our Credit Facility of $29.1 million compared to $55.0 million under our predecessor faff cility as of March 31, 2022. This level of indebtedness could: • Make it more diffff iff cult forff us to satisfyff our obligations with respect to our outstanding notes and other indebtedness, resulting in possible defaff ults on and acceleration of such indebtedness; • • • • • Require us to dedicate a substantial portion of our cash flff ow frff om operations to the payment of principal and interest on our indebtedness, thereby reducing the availabia lity of such cash flff ows to fund capia tal, acquisitions, capia tal expenditurt es and other general corpor ate purpos working es; rr ff r Limit our abia lity to obtain additional fiff nancing forff working capia tal, acquisitions, capia tal expenditurt es, debt r service requirements and other general corpor ate purpos es; r Limit our abia lity to refiff nance indebtedness or cause the associated costs of such refiff nancing to increase; Increase our vulnerabia lity to general adverse economic and industryrr conditions, including interest rate flff uctuat tions (because our borrowings are at variabla e rates of interest); and Place us at a competitive disadvantage compared to our competitors with proportionately less debt or comparabla e debt at more faff voraba le interest rates which, as a result, may be better positioned to withstand economic downturt ns. its payroll costs and other expenses in accordance with the requirements of the Paycheck On May 27, 2020, the Company obtained a loan in the amount of $3.2 million frff om a bank in connection with the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forff given if the Company used the proceeds of the PPP Loan forff payroll costs and other covered expenses Protection Program. The Company used the proceeds of the PPP Loan forff and sought fulff ication to Fiftff h Third Bank, the lender, on December 7, 2020 and submitted supplemental documentation on Januaryrr 16, 2021. On December 27, 2021 SBA inforff med the Company that no forff giveness was granted. The Company fiff led an appe Januaryrr 5, 2022. On May 6, 2022 the Offff iff ce of Hearing and Appeals SBA (OHA) rendered a decision to deny the a appe of $65 thousand on May 23, 2022. al. The Company subsequently repaid the outstanding principal of $3.2 million plus accruer d and unpaid interest l forff giveness of the PPP Loan. The Company submitted a forff giveness appl al with SBA on a a 18 Any of the forff egoing impacts of our level of indebtedness could have a material adverse effff eff ct on us. An increase in market interest rates may reduce our profiff tability. Our long-term profiff tabia lity may be directly affff eff cted by the level of and flff uctuat signififf cant increases in interest rates may adversely affff eff ct our liquidity and profiff tabia lity 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 frff om dealers generally are limited by statutt oryrr maximums, restricting our opportuni ty to pass on increased interest costs. tions in interest rates. Sustained, t Currently, due to a number of faff ctors including the ongoing conflff ict between RusRR sia and Ukraine and supply chain problems caused in part by the COVID-19 pandemic, the global economy is experiencing inflff ationaryrr pressures not seen in a signififf cant period of time. We cannot predict the timing or the duration of any inflff ation. More specififf cally, we cannot predict whether the inflff ationaryrr pressure will reduce our interest rate spread and thereforff e our profiff tabia lity. We monitor the interest rate environment and, on occasion, enter into interest rate swapa agreements relating to a portion of our outstanding debt. Such agreements effff eff ctively convert a portion of our flff oating-rate debt to a fiff xed- rate, thus reducing the impact of interest rate changes on our interest expense. However, we have not recently entered into new arrangements. We will continue to evaluate interest rate swapa pricing and we may or may not enter into interest rate swapa agreements in the futff urt e. We have recently experienced turnover in our senior management. The loss of our key executives could have a material adverse effff eff ct on our business. On May 6, 2022, the President and Chief Executive Offff iff cer of Nicholas Financial, Inc. (the “Company”) inforff med the Board of Directors of the Company (the “Board”) of his intention to resign his position as President and Chief Executive Offff iff cer, and to retire frff om the Board, in each case, effff eff ctive as of May 9, 2022. On May 10, 2022, the Company entered into a separation and release of claims agreement with the previous CEO. Pursuant to the agreement, the previous CEO’s resignation was effff eff ctive as of May 9, 2022. In addition to unpaid salaryrr and accruer d vacation pay through May 9, 2022, the previous CEO was entitled to receive a severance payment of $131,250 and continuation of COBRARR benefiff ts forff be governed by the award agreements forff release of claims agreement contains a one year non-compete provision that has elapsa CEO frff om soliciting customers forff continues through May 10, 2024. each award, with all unvested restricted stock forff 4.5 months. His restricted stock awards continue to ed, and Company employees forff ed, and prohibits the previous one year, which has elapsa two years, which feff ited. The separation and a On August 30, 2022 the Board appoi nted Michael Rost as the Chief Executive Offff iff cer, effff eff ctive immediately. On September 14, 2022 the Company and Mr. Rost entered into an employment agreement with a term that continues until August 29, 2023, subject to automatic renewal forff Company forff more than 20 years. Prior to his appoi Vice President of Branch Operations forff President frff om June 2018 until April 2021, as District Manager frff om December 2010 until June 2018, and as Branch Manager frff om December 2001 until December 2010. the Company frff om April 2021 until May 2022, as Divisional Vice ntment, Mr. Rost served as Interim CEO since May 2022, as successive one-year terms. Mr. Rost has worked at the a We are subject to risks associated with litigation. As a consumer fiff nance company, we are subject to various consumer claims and litigation seeking damages and statutt oryrr penalties, based upon, among other things: • • usuryrr laws; disclosure inaccuracies; • wrongfulff repossession; • • violations of bankrupt r cy stay provisions; certififf cate of title disputes; 19 • • • frff aud; breach of contract; and discriminatoryrr treatment of credit appl a icants. Some litigation against us could take the forff m of class action complaints by consumers. As the assignee of Contracts originated by dealers, we may also be named as a co-defeff ndant in lawsuits fiff led 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 plaintiffff sff varies but may include requests forff 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 fiff nancial losses in the futff urt e as a result of litigation or other legal proceedings. compensatory,rr statutt ory,rr We depend upon our relationships with our dealers. Our business depends in large part upon our abia lity to establa ish and maintain relationships with reputabla e dealers who originate the Contracts we purchase. Although we believe we have been successfulff maintaining such relationships in the markets that we continue to service aftff er the closing of all of our brick and mortar branches, such relationships are not exclusive, and many of them are not longstanding. There can be no assurances that we will be successfulff in maintaining such relationships or increasing the number of dealers with whom we do business, or that our existing smaller dealer base will continue to generate a volume of Contracts comparabla e to the volume of such Contracts historically generated by such dealers. in developing and 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 forff much of the past years, delinquencies, defaff ults, repossessions, and losses ent offff sff etting faff ctors. These periods also may be accompanied by decreased consumer generally increase, absa demand forff 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 defaff ult. Because we focff us on non-prime borrowers, the actuat l rates of delinquencies, defaff ults, repossessions, and losses on these loans are higher than those experienced in the general automobile fiff nance industryrr and could be more dramatically affff eff cted by a general economic downturt n. 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 affff orff d adequate protection against these risks. Any sustained period of increased delinquencies, defaff ults, repossessions, or losses, or increased servicing costs could have a material adverse effff eff ct on our business and fiff nancial condition. Furthermore, in a low interest-rate environment such as has existed in the United States until recent years, the level of competition increases in the non-prime consumer-fiff nance industryrr as new competitors enter the market and many existing competitors expand their operations. Such increased competition, in turt n, has exerted increased pressure on us to reduce our interest rates, feff es, and dealer discount rates in order to maintain our market share. Any furff reductions in our interest rates, feff es or dealer discount rates could have a material adverse impact on our profiff tabia lity or fiff nancial condition. ther The auction proceeds received frff om the sale of repossessed vehicles and other recoveries are subject to flff uctuation due to economic and other facff tors beyond our control. If a vehicle securing a Contract, is repossessed, it will typically be transported to an automobile auction forff Auction proceeds frff om the sale of repossessed vehicles and other recoveries are usually not suffff iff cient to cover the outstanding balance of the Contract, and the resulting defiff ciency is charged offff .ff In addition, there is, on average, appr a receive frff om such sales under our servicing agreement depend upon demand forff during periods of economic uncertainty, the demand forff u , used vehicles at the time of sale. Such supply and demand are dependent on many faff ctors. For example, e between the time of repossession of a vehicle and the time it is sold. The proceeds we used cars may softff en, resulting in decreased auction various faff ctors, including the supply of,ff and oximately a 30-day lapsa sale. 20 proceeds to us frff om the sale of repossessed automobiles. Furthermore, depressed wholesale prices forff automobiles may result frff om signififf cant liquidations of rental or flff eet inventories, and frff om increased volume of trade-ins due to promotional fiff nancing programs offff eff red by new vehicle manufaff cturt ers. Newer, more expensive vehicles securing our larger dollar loans are more susceptible to wholesale pricing flff uctuat vehicles and also experience depreciation at a much greater rate. Until the Company’s portfolff successfulff subprime borrower), the Company expects to be affff eff cted by softff er auction activity and reduced vehicle values. ly converted to primarily consisting of our target vehicle (primaryrr tions than are older io has been transportation to and frff om work forff used the We partially rely on third parties to deliver services, and faiff lure by those parties to provide these services or meet contractual requirements could have a material adverse effff eff ct on our business, fiff nancial condition and results of operations. We depend on third-party service providers forff many aspects of our business operations, including loan origination, loan servicing, 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 faff ils to provide the services that we require or expect, or faff ils to meet contractuat could negatively impact our business by adversely affff eff cting our abia lity to process customers’ transactions in a timely and accurate manner, otherwise hampering our abia lity to service our customers, or subjecting us to litigation or regulatoryrr poor vendor oversight. We may be unabla e to replace or be delayed in replacing these sources and there is a risk that we would be unabla e to enter into a similar agreement with an alternate provider on terms that we consider faff vorabla e or in a timely manner. Such a faff ilure could have a material and adverse effff eff ct on our business, fiff nancial condition, and results of operations. l requirements, such as service levels or compliance with appl icabla e laws, a faff ilure risk forff a The success of our business depends upon our ability to retain and attract a suffff iff cient number of qualififf ed employees. Although we believe that we can attract and retain qualififf ed and experienced personnel needed to conduct our business operations, no assurance can be given that we will be successfulff possessing the skills and experience required by us could contribute to an increase in our employee turt nover rate. High turt nover or an inabia lity to attract and retain qualififf ed personnel could have an adverse effff eff ct on our origination, delinquency, defaff ult, and net loss rates and, ultimately, our business and fiff nancial condition. in doing so. Competition to hire personnel Natural disasters, acts of war, terrorist attacks and threats, or the escalation of military activity in response to these attacks or otherwise may negatively affff eff ct our business, fiff nancial condition, and results of operations. Naturt al disasters (such as hurricanes), acts of war, terrorist attacks and the escalation of militaryrr activity in response to these attacks or otherwise may have negative and signififf cant effff eff cts, such as disrupt imposition of increased security measures, changes in appl icabla e laws, market disrupt headquarters are located in Clearwater, Florida and much of our revenue is generated in Florida. Florida is particularly susceptible to hurricanes. These events may have an adverse effff eff ct on the economy in general. Moreover, the potential forff affff eff ct the business in ways that cannot be predicted. The effff eff ct of any of these events or threats could have a material adverse effff eff ct on our business, fiff nancial condition and results of operations. futff urt e terrorist attacks and the national and international responses to these threats could ions in our operations, ions and job losses. Our rr r a Risks Related to Regulation reforff m could have an adverse impact on the Company. The Dodd-Frank Act is extensive Federal or state regulatoryrr legislation that impacts fiff nancial institutt addition, the Dodd-Frank Act impacts the offff eff ring, marketing and regulation of consumer fiff nancial products and services. Many of the implementing regulations have been fiff nalized, but in some cases, additional rulr emaking has not yet been fiff nalized. Until all of the implementing regulations have been issued, there can be no assurance that any new requirements will not have an adverse impact on the servicing of the Direct Loans and the Contracts or on the regulation and supervision of the Company. ions and other non-bank fiff nancial companies, such as the Company. In 21 The Dodd-Frank Act establa ished the CFPB with broad authority over feff deral consumer fiff nancial laws and regulations (“Consumer Financial Laws”). In December 2020, the CFPB issued a fiff nal rulr e governing the activities of third-party debt collectors. The fiff nal rulr e was effff eff ctive on November 30, 2021. While the fiff nal rulrr e did not address fiff rst-party debt collectors, the CFPB has previously indicated that it would address this activity in a later rulr emaking. It is unclear what effff eff ct, if any, the fiff nal rulrr e or any subsequent changes may have on Direct Loans and Contracts or the servicer’s practices, procedures and other servicing activities relating to Direct Loans and Contracts in ways that could reduce the associated recoveries. a ryrr 2022 stating its position that automobile loan holders and The CFPB also issued a Compliance Bulletin in Februar ensuring that their repossession-related practices, and the practices of their service servicers are responsible forff icabla e law, and the CFPB also described its intention to hold loan holders and servicers providers do not violate appl liabla e forff unfaff ir, deceptive, or aba usive acts or practices related to the repossession of automobiles. In its Supervisoryrr Highlights forff Spring and Fall of 2022, the CFPB also identififf ed certain auto loan servicing concerns, including the faff ilure to ensure customers received add-on product refunds aftff er events such as repossession or early payoffff of the account. It is possible that the CFPB may bring enforff cement actions against holders of automobile loans, such as the Company, and servicers, such as Westlake, in the futff urt e. ff In addition, the FTC and state attorneys general have recently increased their scrutrr iny of motor vehicle dealers and auto lending, particularly with respect to antidiscrimination and deception concerns related to the prices of and feff es charged in connection with automobile fiff nancing, including add-on products such as GAP insurance and extended warranties. Also, on June 23, 2022 the FTC issued a proposed rulr e that would (i) prohibit motor vehicle dealers frff om making certain misrepresentations in the course of selling, leasing, or arranging fiff nancing forff motor vehicles, (ii) require accurate pricing disclosures in dealers’ advertising and sales discussions, (iii) require dealers to obtain charges, (iv) prohibit the sale of any add-on product or service that consumers’ express, inforff med consent forff confeff rs no benefiff t to the consumer, and (v) require dealers to keep records of advertisements and customer transactions. At this stage, it is unknown whether a fiff nal rulr e will be issued, the exact requirements of any fiff nal rulrr e if issued or if any fiff nal rulrr e would have a broader potential impact on auto lending practices, including the auto lending practices of the Company. frff amework in which the Company operates, including, forff Further, changes to the regulatoryrr regulations enacted to address the potential impacts of climate change (including laws which may adversely impact the auto industryrr regulations, executive orders or other guidance enacted in response to the COVID-19 pandemic, increased inflff ation or a recession or period of economic contraction or volatility could have a signififf cant impact on the Company. See “Item 1. Business – Regulation” forff ts to mitigate the faff ctors contributing to climate change) or laws, in particular as a result of effff orff additional inforff mation. example, laws or On October 5, 2017, the CFPB released the fiff nal rule Payday, Vehicle Title and Certain High-Cost Installment Loans under the Dodd Frank Act, which as adopted could potentially have a material adverse effff eff ct on our operations and fiff nancial perforff mance. a lenders to folff icabla e to payday, title and certain high cost installment loans. The rulrr es address In 2017, the CFPB adopted rulr es appl the underwriting of covered short-term loans and longer-term balloon-payment loans, including payday and vehicle title loans, as well as related reporting and recordkeeping provisions. These provisions have become known as the “mandatoryrr underwriting provisions” and include rulrr es forff low to determine whether or not consumers have the abia lity to repay the loans according to their terms. On July 7, 2020, the CFPB released a new fiff nal rulrr e that revoked the underwriting provisions of the rulr e but retained and ratififf ed the payment provisions. Implementation of such loans, the rulr e’s payment requirements may require changes to the Company’s practices and procedures forff which could materially and adversely affff eff ct the Company’s abia lity to make such loans, the cost of making such loans, the Company’s abia lity to, or frff equency with which it could, refiff nance any such loans, and the profiff tabia lity of such loans. Additionally, the CFPB may target specififf c feff aturt es of loans by rulr emaking that could cause us to cease offff eff ring certain products, or adopt rulrr es imposing new and potentially burdensome requirements and limitations with respect to any of our current or futff urt e lines of business, which could have a material adverse effff eff ct on our operations and fiff nancial perforff mance. The CFPB could also implement rulr es that limit our abia lity to continue servicing our fiff nancial products and services. The CFPB has broad authority to pursue administrative proceedings and litigation forff consumer fiff nancing laws. violations of feff deral 22 The CFPB has the authority to obtain cease and desist orders (which can include orders forff of contracts, as well as other kinds of affff iff rmative relief)ff and monetaryrr penalties ranging frff om $6,323 per day forff minor violations of Consumer Financial Laws (including the CFPB’s own rulrr es) to $31,616 per day forff reckless violations and $1,264,622 per day forff knowing violations. If we are subject to such administrative proceedings, litigation, orders or monetaryrr penalties in the futff urt e, this could have a material adverse effff eff ct on our operations and fiff nancial perforff mance. 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 forff the kind of cease and desist orders availabla e to the CFPB (but not forff civil penalties). If the CFPB or one or more state offff iff cials believe we have violated the forff egoing laws, they could exercise their enforff cement powers in ways additional inforff mation. that would have a material adverse effff eff ct on us. See “Item 1. Business – Regulation” forff ion or rescission restitutt Pursuant to the authority granted to it under the Dodd-Frank Act, the CFPB adopted rules that subject larger nonbank automobile fiff nance companies to supervision and examination by the CFPB. Any such examination by the CFPB likely would have a material adverse effff eff ct on our operations and fiff nancial perforff mance. The CFPB’s “larger participant” rulr e extends supervision and examination to any nonbank auto fiff nance company that makes, acquires, or refiff nances 10,000 or more loans or leases in a year. Under the rulr e, those companies will be considered “larger participants,” and the CFPB may oversee their activity to ensure they are complying with Consumer Financial Laws. The Company does not meet the threshold of at least 10,000 aggregate annual direct loan originations, and thereforff e does not faff ll under the CFPB’s supervisoryrr authority. The CFPB issued rulr es regarding the supervision and examination of non-depositoryrr “larger participants” in the automobile fiff nance business. The CFPB’s stated objectives of such examinations are: to assess the quality of a larger participant’s compliance management systems forff preventing violations of Consumer Financial Laws; to identifyff acts or practices that materially increase the risk of violations of Consumer Financial Laws and associated harm to consumers; and to gather faff cts that help determine whether the larger participant engages in acts or practices that are likely to violate Consumer Financial Laws in connection with its automobile fiff nance business. If we become a “larger participant”, we will be subject to examination by the CFPB forff , among other things, ECOA compliance, TILA compliance, Consumer Leasing Act compliance, compliance with the Dodd-Frank Act’s prohibition on unfaff ir, deceptive or a abus ive acts or practices, and the adequacy of our compliance management systems. We have continued to evaluate our existing compliance management systems. We expect this process to continue as the CFPB promulgates new and evolving rulr es and interprrr etations. Given the time and effff orff t needed to establa ish, implement and maintain adequate compliance management systems and the resources and costs associated with being examined by the CFPB, such an examination could likely have a material adverse effff eff ct on our business, fiff nancial condition and profiff tabia lity. Moreover, any such examination by the CFPB could result in the assessment of penalties, including fiff nes, and other remedies which could, in tut rn, have a material effff eff ct on our business, fiff nancial condition, and profiff tabia lity. Our use of vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention. We regularly use vendors and subcontractors as part of our business. We also depend on our substantial ongoing business relationships with our dealers, merchants, and other third parties. These types of third-party relationships, particularly with our dealer partners and our third-party servicing and collection vendors, are subject to increasingly demanding regulatoryrr requirements and oversight by regulators. Regulators may expect certain non-bank entities to maintain an effff eff ctive process forff managing risks associated with vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we may be expected to perforff m due diligence reviews of potential vendors, review their policies and procedures and internal training materials to confiff rm compliance-related focff us, include enforff ceabla e consequences in contracts with vendors regarding faff ilure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors faff il to meet our expectations. Regulators may hold us responsible forff the perforff mance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over vendors and subcontractors or other ongoing third-party business relationships or that such third parties have not perforff med appr enforff cement actions, including civil money penalties or other administrative or judicial penalties or fiff nes, as well as requirements forff defiff ciencies in our oversight and control of third-party relationships and in opriately, we could be subject to consumer remediation. a 23 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 effff eff ct on our fiff nancial condition and business operations. As a provider of consumer fiff nancial services, the Company operates in a highly regulated environment. The Company is subject to state licensing requirements and state and feff deral laws and regulations. In addition, the Company may be subject to governmental and regulatoryrr examinations, inforff mation gathering requests, and investigations frff om time to time at the state and feff deral levels. Compliance with appl affff eff ct the Company’s results of operations. Compliance requires forff ms, processes, procedures, controls and the turt e to support these requirements. Compliance may create operational constraints and place limits on infrff astrucr the protection of pricing, as the laws and regulations in the fiff nancial services industryrr are designed primarily forff consumers. Changes in laws and regulations could restrict the Company’s abia lity to operate its business as currently operated, could impose substantial additional costs or require it to implement new processes, which could adversely affff eff ct the Company’s business, prospects, fiff nancial perforff mance or fiff nancial condition. The faff ilure to comply with icabla e laws and regulations could result in signififf cant statutt oryrr civil and criminal fiff nes, penalties, monetaryrr a appl damages, attorney or legal feff es and costs, restrictions on the Company’s abia lity to operate its business, possible revocation of licenses and damage to the Company’s reputation, brand and valued customer relationships. Any such costs, restrictions, revocations or damage could adversely affff eff ct the Company’s business, prospects, results of operations or fiff nancial condition. See “Item 1. Business – Regulation” forff icabla e law is costly and can additional inforff mation. a The CFPB and the FTC may investigate the products, services and operations of credit providers, including banks and other fiff nance companies engaged in auto fiff nance activities. As a result of such investigations, the CFPB and the FTC have announced various enforff cement actions against lenders in the past feff w years involving signififf cant penalties, consent orders, cease and desist orders and similar remedies that, if appl products, services and operations the Company offff eff rs, may require the Company to cease or alter certain business practices, which could have a material adverse effff eff ct on the Company’s results of operations, fiff nancial condition, and liquidity. Supervision and investigations by these agencies may result in monetaryrr penalties, increase the Company’s compliance costs, require changes in its business practices, affff eff ct its competitiveness, impair its profiff tabia lity, harm its reputation or otherwise adversely affff eff ct its business. icabla e to the Company or the a Our fiff nancing operations are subject to regulation, supervision, and licensing under various other feff deral, state and local statutt es and ordinances. In addition, the Company and its service providers must comply with certain feff deral and state requirements in connection with the servicing and collection on Direct Loans and Contracts, and the repossession of vehicles securing Direct Loans and Contracts in the states the Company does business. The various icabla e to our business govern, among other things: feff deral, state and local statutt es, regulations, and ordinances appl a • • • licensing requirements; requirements forff maintenance of proper records; payment of required feff es to certain states; • maximum interest rates that may be charged on loans to fiff nance used and new vehicles; • • • • • • • debt collection practices; proper disclosure to customers regarding fiff nancing terms; privacy regarding certain customer data; interest rates on loans to customers; late feff es and insuffff iff cient feff es charged; telephone solicitation of Direct Loan customers; and collection of debts frff om loan customers who have fiff led bankrupt r cy. We believe that we maintain all material licenses and permits required forff icabla e local, state and feff deral regulations. Our faff ilure, or the faff ilure by dealers substantial compliance with all appl who originate the Contracts we purchase, or the faff ilure by our service providers, to maintain all requisite licenses and permits, and to comply with other regulatoryrr requirements, could result in consumers having rights of rescission and other remedies that could have a material adverse effff eff ct on our fiff nancial condition. Furthermore, any changes in our current operations and are in a 24 icabla e laws, rulr es and regulations, such as the passage of the Dodd-Frank Act and the creation of the CFPB, may a appl make our compliance therewith more diffff iff cult or expensive or otherwise materially adversely affff eff ct our business and fiff nancial condition. Some litigation against us could take the forff m of class action complaints by consumers. As the assignee of contracts originated by dealers, we may also be named as a co-defeff ndant in lawsuits fiff led 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 plaintiffff sff varies but may include requests forff 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 fiff nancial losses in the futff urt e as a result of litigation or other legal proceedings. compensatory,rr statutt ory,rr Risks Related to Privacy and Cybersecurity FaiFF lii ure tott properlyll safeff gue tt profiff tii abi lii ill tii ytt ,yy and damage our repuee ard confn iff dentitt al customtt itt on. tattt er inii fn orff mrr atitt on couldll subject us tott lill abilii ill tii ytt ,yy decrease our In the ordinaryrr course of our business, we collect and store sensitive data, including our proprietaryrr business inforff mation and personally identififf abla e inforff mation of our customers, on our computer networks, and share such data with third parties, including our service providers. The secure processing, maintenance and transmission of this inforff mation is critical to our operations and business strategy. r r iny, or expose us to lawsuits by customers forff ion, or breach in our cyber security, including through employee misconduct or any faff ilure of Any faff ilure, interrupt our back-up systems or faff ilure to maintain adequate security surrounding customer inforff mation, could result in reputational harm, disrupt ion in the management of our customer relationships, or the inabia lity 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 regulatoryrr scrutrr identity theftff or other damages resulting frff om the misuse of their personal inforff mation and possible fiff nancial liabia lity, any of which could have a material adverse effff eff ct on our results of operations, fiff nancial condition and liquidity. In addition, regulators may impose penalties or require remedial action if they identifyff weaknesses in our security systems, and we may be required to incur signififf cant costs to increase our cyber security to address any vulnerabia lities that may be discovered or to remediate the harm caused by any security breaches. As part of our business, we may share confiff dential customer inforff mation and proprietaryrr partners. The inforff mation systems of these third parties may be vulnerabla e to security breaches and we may not be abla e to ensure that these third parties have appr opriate security controls in place to protect the inforff mation we share with them. If our confiff dential inforff mation 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 regulatoryrr scrutr iny, and it could expose us to civil litigation and possible fiff nancial liabia lity, any of which could have a material adverse effff eff ct on our results of operations, fiff nancial condition, and liquidity. If any vendor faff ils to provide the services we require, faff ils to meet contractuat icabla e laws and regulations), faff ils to maintain adequate data privacy controls and electronic security systems, or suffff eff rs a cyber-attack or other security breach, we could be subject to CFPB, FTC and other regulatoryrr enforff cement actions, claims frff om third parties, including our consumers, and suffff eff r economic and reputational harm that could have an adverse effff eff ct on our business. Further, we may incur signififf cant costs to resolve any such disrupt affff eff ct our business. inforff mation with clients, vendors, service providers, and business l requirements (including compliance with appl ions in service, which could adversely a a r Providers of consumer fiff nancial services are subject to specififf c requirements to protect consumer data. In 2021, the FTC updated its Safeff guards RulRR e implementing Section 501(b) of GLBA, to set forff th specififf c criteria relating to the safeff guards that certain nonbank fiff nancial institutt programs. These safeff guards, among other things, limit who can access customer inforff mation, require the use of encrypt ion to secure such inforff mation, and require the designation of a single qualififf ed individual to oversee an rr ion’s inforff mation security program and report at least annually to the institutt institutt equivalent governing body. The CFPB recently issued Consumer Financial Protection Circular 2022-04, which warned that data security shortcomings could subject fiff nancial services companies to unfaff irness claims under the Consumer Financial Protection Act—e security regulation forff ven if those fiff rms comply with the GLBA Safeff guards RulRR e, the primaryrr data ions must implement as a part of their inforff mation security tt non-bank fiff nancial institutt ion’s board of directors or ions. We rely on encrypt authentication necessaryrr rr ion and authentication technology licensed frff om third parties to provide the security and to secure online transmission of confiff dential customer inforff mation. Advances in computer 25 rr a ography or other events or developments may result in a capaa bia lities, new discoveries in the fiff eld of crypt compromise or breach of the algorithms that we use to protect sensitive customer data. A party who is abla e to circumvent our security measures could misappr ions in our operations. We may be required to expend capia tal 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 effff eff ct on our business, fiff nancial condition or results of operations in the futff urt e. Our security measures are designed to protect against security breaches, but our faff ilure to prevent security breaches could subject us to liabia lity, decrease our profiff tabia lity and damage our reputation. inforff mation or cause interrupt opriate proprietaryrr a r Risks Related to our Common Stock Our stoctt k isii thtt inii lyll trtt aded, which may lill mii itii your abilii ill tii ytt tott resellll your shares. oximately 6,800 shares, which makes ours a thinly traded stock. Thinly traded The average daily trading volume of our common shares on the NASDAQ Global Select Market forff a ended March 31, 2023 was appr stocks pose several risks forff investors because they have wider spreads and less displayed size than other stocks that trade in higher volumes or an active trading market. Other risks posed by thinly traded stocks include diffff iff culty selling the stock, challenges attracting market makers to make markets in the stock, and diffff iff culty with fiff nancings. Our fiff nancial results, the introduction of new products and services by us or our competitors, and various faff ctors affff eff cting the consumer-fiff nance industryrr generally may also have a signififf cant 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 forff not necessarily been related to their operating perforff mance. These risks could affff eff ct a shareholder’s abia lity to sell their shares at the volumes, prices, or times that they desire. the stocks of many companies, including ours, have experienced wide price flff uctuat tions that have the fiff scal year WeWW currentltt yll do not have anyn analyll ststt coverinii g our stoctt k which couldll negat trtt adinii g volume of our stoctt k. e itt velyll imii pacm t bothtt thtt e stoctt k price and a us, our business, our market or our competitors. We do not currently have, and our common stock will likely be inflff uenced by the research and reports that industryrr or The trading market forff securities analysts may publish about may never obtain, research coverage by fiff nancial analysts. If no or feff w analysts commence coverage of us, the trading price of our stock may not increase. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluation of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market forff our stock, which in turt n could cause our stock price to decline. Furthermore, if our operating results faff il to meet analysts’ expectations our stock price would likely decline. 26 e provisii ions of our Artitt clell s may detett r thtt SomSS stoctt k. Our Articles provide forff , among other things: iri d partitt es frff om acquirii inii g us and dimii inii isii h thtt e value of our common • • • division of our board of directors into three classes of directors serving staggered three-year terms; our abia lity to issue additional shares of common stock and to issue prefeff rred stock with terms that our board of directors may determine, in each case without shareholder appr oval (unless required by law); and a the absa ence of cumulative voting in the election of directors. These provisions may discourage, delay or prevent a transaction involving a change in control of our Company that is in the best interest of our shareholders. Even in the absa provisions may adversely affff eff ct the prevailing market price of our common stock if they are viewed as discouraging futff urt e takeover attempts. These provisions could also make it more diffff iff cult forff forff election to our board of directors and take other corpor ence of a takeover attempt, the existence of these shareholders to nominate directors ate actions. rr WeWW are a “smallll ell r repor ee applill cablell tott smallll ell r repor titt nii g companm yn ” as defe iff nii ed inii SESS C regue latll ies may make our common stoctt k lell ss atttt rtt actitt ve tott titt nii g companm ee itt ons,s and thtt e reduced disii closll ure requirii ementstt inii vestortt srr . We are a “smaller reporting company” as defiff ned under SEC regulations and we may take advantage of certain exemptions frff om various reporting requirements that are appl reporting companies including, among other things, reduced fiff nancial disclosure requirements including being permitted to provide only two years of audited fiff nancial statements and reduced disclosure obligations regarding executive compensation. As a result, our shareholders may not have access to certain inforff mation that they may deem important. We could remain a smaller reporting company indefiff nitely. As a smaller reporting company, investors may deem our stock less attractive and, as a result, there may be less active trading of our common stock, and our stock price may be more volatile. icabla e to other public companies that are not smaller a General Risk Factors We have in the past had material weaknesses in our internal control over fiff nancial reporting. Failure to maintain an effff eff ctive system of internal control over fiff nancial reporting and disclosure controls and procedures could lead to a loss of investor confiff dence in our fiff nancial statements and have an adverse effff eff ct on our stock price. We may in the futff urt e discover areas of our internal fiff nancial and accounting controls and procedures that need improvement. Our internal control over fiff nancial reporting will not prevent or detect all errors and all frff aud. A control system, regardless of how well designed and operated, can provide only reasonabla e, not absa olute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absa olute assurance that misstatements due to error or frff aud will not occur or that all control issues and instances of frff aud will be detected. If we are not abla e to comply with the requirements of Section 404 of the Sarbar nes-Oxley Act in a timely manner, or if we are unabla e to maintain proper and effff eff ctive internal controls, we may not be abla e to produce timely and n, investors could lose confiff dence in our reported fiff nancial accurate fiff nancial statements. If that were to happe inforff mation, which could lead to a decline in the market price of our common stock and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatoryrr authorities. a Additionally, the existence of any material weakness could require management to devote signififf cant time and incur signififf cant expense to remediate any such material weakness and management may not be abla e to remediate any such material weakness in a timely manner. The existence of any material weakness in our internal control over fiff nancial reporting could also result in errors in our fiff nancial statements that could require us to restate our fiff nancial statements, cause us to faff il to meet our reporting obligations and cause the holders of our common stock to lose confiff dence in our reported fiff nancial inforff mation, all of which could materially adversely affff eff ct our business and share price. 27 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 rapia dly. Our abia lity to compete successfulff may depend on our abia lity to effff iff ciently and cost-effff eff ctively 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 profiff tabia lity. ly with other fiff nancing companies Item 1B. Unresolved Staffff Comments None. Item 2. Properties rr ate headquarters and branch offff iff ce faff cilities. The Company’s headquarters, located at a oximately 1,769 square feff et of offff iff ce The Company leases its corpor 26133 US HWY 19 North, Suite 300, in Clearwater, Florida, consist of appr space leased at an annual rate of appr entered into effff eff ctive Februar hub, located at 452 Lakeshore Parkway, Suite 115, Rock Hill, South Carolina consists of appr square feff et of offff iff ce space leased at an annual rate of appr relating to this space was entered into effff eff ctive March 20, 2023 and expires on March 19, 2026. a oximately $16.08 per square foot oximately $18.50 per square foot ryrr 1, 2023 and expires on Januaryrr 31, 2026. The Company’s central business operations . The current lease relating to this space was oximately 1,990 . The current lease a a ff ff As of March 31, 2023, the Company has closed each of its 47 branch offff iff ces located in Alabaa ma, Florida, Georgia, Idaho, Illinois, Indiana, Kentuct ky, Michigan, Missouri, Nevada, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wisconsin. The Company previously acquired Contracts in Idaho and Texas through its virtuat Company believes that its two remaining offff iff ce faff cilities in Clearwater, Florida and Rock Hill, South Carolina and additional or alternate space availabla e to it are adequate to meet its needs forff l expansion offff iff ce operations based in the Charlotte, North Carolina corpor the forff eseeabla e futff urt e. ate location. The r Item 3. Legal Proceedings In the ordinaryrr course of its business operations, the Company is involved, frff om time to time, in ordinaryrr litigation and other legal proceedings incidental to its business. No such current litigation or proceedings, individually or in the aggregate, are expected to have a material effff eff ct on the business or fiff nancial condition of the Company, other than the specififf c litigation involving Jeremiah Gross, which is disclosed as part of Note 11, Commitments and Contingencies, to the Company’s consolidated fiff nancial statements. For a summaryrr of such litigation, see Note 11, Commitments and Contingencies, to the Company’s consolidated fiff nancial statements. routine Item 4. Mine Safeff ty Disclosures Not Applicabla e. 28 PART II Item 5. Market forff Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market forff Common Stock The Company’s common shares are traded on the NASDAQ Global Select Market under the symbol “NICK.” Holders of Record of Common Stock As of June 10, 2023, there were appr a oximately 114 holders of record of the Company’s common shares. Dividends 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 forff eseeabla e futff urt e. There are no Canadian forff eign exchange controls or laws that would affff eff ct 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 capia tal, other than the Investment Canada Act (Canada), which requires the notififf cation or review of certain investments by non-Canadians to establa ish or acquire control of a Canadian business. The Company is not a Canadian business as defiff ned 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 carryirr ng 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 Capia tal (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 forff taxes paid in the forff eign jurisdiction. Earnings frff om 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 frff om the current or accumulated earnings and profiff ts of the U.S. subsidiary,rr the dividend would be subject to a U.S. withholding tax of 5%. The gross dividend (i.e., beforff e payment of the withholding tax) would generally be included in the Company's Canadian taxabla e income. However, under certain circumstances, the Company may be allowed to deduct the dividends in the calculation of its Canadian taxabla e income. If the Company has no other forff eign (i.e., non-Canadian) non-business income, no relief is availabla e in that case to recover the withholding taxes previously paid. a ies to dividends paid by the Company to a U.S. shareholder (including those A 15% Canadian withholding tax appl 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 forff eign tax credit forff U.S. feff deral income tax purpos 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 frff om other sources. A U.S. shareholder that is an individual also all non-U.S. income taxes paid by the shareholder can elect to claim a deduction (rather than a forff eign tax credit) forff forff eign taxes may be negatively impacted by the overall during the particular year. The benefiff t of any deduction forff limitation on deducting income and other taxes. U.S. shareholders are urged to consult their own tax advisors regarding the U.S. feff deral income tax treatment of any Canadian withholding tax imposed on dividends frff om the Company. es with respect to the Canadian rr Purchases of Equity Securities by the Company and Affff iff liated Purchasers p y q y y In May 2019, the Company’s Board of Directors (“Board”) authorized a stock repurchase program allowing forff the repurchase of up to $8.0 million of the Company’s outstanding shares of common stock in open market purchases, icabla e feff deral securities laws. privately negotiated transactions, or through other strucrr The authorization was effff eff ctive immediately. turt es in accordance with appl a 29 The timing and actuat regulatoryrr be suspended or discontinued at any time. l number of sharers will depend on a variety of faff ctors, including stock price, corpor requirements and other market and economic conditions. The Company’s stock repurchase program may ate and r In August 2019, the Company’s Board authorized additional repurchase of up to $1.0 million of the Company’s outstanding shares. There were no shares of our Common Stock repurchased by or on behalf of the Company or any “affff iff liated purchaser” (as defiff ned in RulRR e 10b-18(a)(3) under the Exchange Act) during the fiff nal three months of the fiff scal year ended March 31, 2023. Item 6. [Reserved] 30 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview rr Nicholas Financial-Canada is a Canadian holding company incorpor ated under the laws of British Columbia in 1986. Nicholas Financial-Canada currently conducts its business activities exclusively through a wholly-owned indirect Florida subsidiary,rr Nicholas Financial. Nicholas Financial is a specialized consumer fiff nance company engaged primarily in acquiring and servicing automobile fiff nance installment contracts (“Contracts”) forff purchases of used and new automobiles and light trucr ks. To a lesser extent, prior to the end of the third fiff scal quarter of the fiff scal year ended March 31, 2023, Nicholas Financial also originated direct consumer loans (“Direct Loans”) and sold consumer-fiff nance related products. Nicholas Financial’s fiff nancing activities represent a primaryrr source of consolidated revenue forff as an intermediate holding company forff Nicholas Financial. the fiff scal years ended March 31, 2023 and 2022. A second Florida subsidiary,rr NDS, serves Nicholas Financial-Canada, Nicholas Financial, and NDS are collectively refeff rred to herein as the “Company”. Introduction the fiff scal year ended March 31, 2023. The Company’s diluted earnings per share decreased frff om the fiff scal year ended March 31, 2022 to a net loss of $4.65 per share forff The Company’s consolidated revenues decreased frff om $49.8 million forff $44.3 million forff $0.39 per share forff March 31, 2023. The Company’s operating income beforff e income taxes decreased frff om $4.0 million forff ended March 31, 2022 to a loss beforff e income tax of $32.7 million forff in profiff tabia lity was primarily driven by an increase in the provision forff million and a decrease in average fiff nance receivabla es frff om $178.7 million to $165.4 million forff March 31, 2022 and 2023, respectively. the year ended March 31, 2023. The decrease credit losses frff om $6.0 million to $40.7 the years ended the fiff scal year ended the year the fiff scal year ended March 31, 2022 to The Company’s consolidated net income decreased frff om $3.0 million forff net loss of $34.1 million forff the fiff scal year ended March 31, 2023. the fiff scal year ended March 31, 2022 to io forff io yield of the portfolff The gross portfolff 27.86%, respectively. For the fiff scal years ended March 31, 2023 and 2022, the average dealer discount decreased frff om 6.9% to 6.5% primarily as a result of market conditions in the 2023 fiff scal year. The APR (and thereforff e overall yield) on new purchases declined in fiff scal 2023 and fiff scal 2022 to 22.2% frff om 22.9%, which was primarily driven by the Company’s continuing commitment to its core principles of disciplined underwriting and risk-based pricing. the twelve months ended March 31, Operating expenses as presented include restrucr the fiff scal years ended March 31, 2023 and 2022 was 26.76% and ing costs of $4.8 million forff turt 31 2023. Operating expenses net of restrucr 16.7% forff the twelve months ended March 31, 2023. turt ing costs as a percentage of average fiff nance receivabla es would have been Portfolff io Summary Average fiff nance receivabla es (1) Average indebtedness (2) Interest and feff e income on fiff nance receivabla es Interest expense Net interest and feff e income on fiff nance receivabla es Gross portfolff Interest expense as a percentage of average fiff nance io yield (3) receivabla es Provision forff credit losses as a percentage of average fiff nance receivabla es io yield (3) Net portfolff Operating expenses as a percentage of average fiff nance receivabla es Pre-tax yield as a percentage of average fiff nance receivabla es(4) Net charge-offff percentage (5) Finance receivabla es Allowance percentage (6) Total reserves percentage (7) Fiscal Year ended March 31, (In thousands) 2023 165,412 54,214 44,270 3,931 40,339 26.76% $ $ $ 2022 178,686 67,684 49,779 5,366 44,413 27.86% $ $ $ 2.38% 3.00% 24.58% (0.20)% 3.34% 21.52% 19.62% 19.25% (19.82)% 15.86% 2.27% 5.13% $ 128,170 $ 178,786 13.57% 16.98% 1.61% 5.62% (1) (2) (3) (4) (5) (6) (7) io yield represents interest and feff e income on fiff nance receivabla es as a percentage of average Average fiff nance receivabla es represent the average of fiff nance receivabla es throughout the period. Average indebtedness represents the average outstanding borrowings under the Credit Facility throughout the period. Average indebtedness does not include the PPP loan. Gross portfolff fiff nance receivabla es. Net portfolff (b) interest expense minus (c) the provision forff Pre-tax yield represents net portfolff depreciation, and administrative), as a percentage of average fiff nance receivabla es. Net charge-offff percentage represents net charge-offff sff (charge-offff sff less recoveries) divided by average fiff nance receivabla es, outstanding during the period. Allowance percentage represents the allowance forff as of ending balance sheet date. Total reserves percentage represents the allowance forff unearned dealer discounts divided by fiff nance receivabla es outstanding as of ending balance sheet date. io yield represents (a) interest and feff e income on fiff nance receivabla es minus credit losses, as a percentage of average fiff nance receivabla es. io yield minus operating expenses (marketing, salaries, employee benefiff ts, credit losses divided by fiff nance receivabla es outstanding credit losses, unearned purchase price discount, and Critical Accounting Estimates g A critical accounting estimate is an estimate that: (i) is made in accordance with generally accepted accounting principles, (ii) involves a signififf cant level of estimation uncertainty and (iii) has had or is reasonabla y likely to have a material impact on the Company’s fiff nancial condition or results of operations. credit losses. It is based on management’s The Company’s critical accounting estimate relates to the allowance forff judgement of an amount that is adequate to absa orbr io. Because of the naturt e of the customers under the Company’s Contracts and Direct Loan program, the Company considers the establa ishment of adequate reserves forff losses incurred in the existing portfolff credit losses to be imperative. io, current economic conditions, the estimated The Company takes into consideration the composition of the portfolff net realizabla e value of the underlying collateral, historical loan loss experience, delinquency, non-perforff ming assets, and bankrupt accounts when determining management’s estimate of probabla e credit losses and the adequacy of the r 32 a oach aligns with the Company’s lending policies and io. Management believes that estimating the allowance forff credit losses. Management utilizes signififf cant judgment in determining probabla e incurred losses and in allowance forff identifyiff ng and evaluating qualitative faff ctors. This appr underwriting standards. If the allowance forff credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolff credit losses using the trailing twelve-month seasonality and encompasses historical charge-offff analysis accurately reflff ects portfolff collection practices. Under the current methodology the management continues to evaluate qualitative faff ctors to support its allowance forff over-year inflff ation, as well as portfolff collateral, level of nonperforff ming accounts, delinquency trends, and accounts with extended terms. As a result, the Company incorpor adequate reserves. ated an additional $1.4 million as a qualitative component amount to its current estimate of credit losses. The Company examines the impact of macro-economic faff ctors, such as year- io perforff mance characteristics, such as changes in the value of underlying io perforff mance adjusted forff rr icabla e state maximum interest rate, if any, or the maximum interest rate which the customer will accept. In most Contracts are purchased frff om many diffff eff rent 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 appl a markets, competitive forff ces will drive down Contract rates frff om the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company generally purchases Contracts on an individual basis. The Company has establa ished internal underwriting guidelines that were used by its Branch Managers and internal underwriters when Contracts were purchased by the Company prior to the restrucr ing of its operations. The Company has adopted updated guidelines consistent with its post-restrucr to be used by the Company’s originators and internal underwriters when purchasing Contracts in the Company’s regionalized business model. Any Contract that does not meet these guidelines must be appr management of the Company. In addition to a variety of administrative duties, the Company’s management is responsible forff monitoring compliance with the Company’s underwriting guidelines as well as appr underwriting exceptions. ing operations, which guidelines are oved by senior oving turt turt a a p Fiscal 2023 Compared to Fiscal 2022 Interest and Fee Income on Finance Receivables Interest and feff e income on fiff nance receivabla es, predominantly fiff nance charge income, decreased to $44.3 million in fiff scal 2023 as compared to $49.8 million in fiff scal 2022. The average fiff nance receivabla es totaled $165.4 million forff the fiff scal year ended March 31, 2023, a decrease of 7.4% frff om $178.7 million forff the fiff scal year ended March 31, 2022. Purchasing volume decreased to $47.5 million in fiff scal 2023 frff om $85.8 million in fiff scal 2022. Purchasing volume decreased frff om fiff scal 2022 primarily as a result of our focff us on restrucr ing to a remote purchasing model. turt Competition continued to affff eff ct the Company’s abia lity to acquire Contracts at desired yields. The average APR on fiff scal 2022. Concurrently, the dealer discount on new Contract purchases was 22.5% forff new Contract purchases decreased frff om 6.9% forff fiff scal 2023, primarily as a result of competitive pressures. Overall, the Company maintains its strategy focff used on risk-based pricing (rate, yield, advance, term, etc.) and a commitment to the underwriting discipline required forff fiff scal 2023 and 23.1% forff fiff scal 2022 to 6.5% forff io perforff mance. optimal portfolff io yield decreased to 26.76% forff The gross portfolff the fiff scal year ended March 31, 2022. The gross portfolff average fiff nance receivabla es year over year. the fiff scal year ended March 31, 2023 as compared to 27.86% forff io yield decreased primarily as a result of the decrease in io yield decreased to (0.2)% forff The net portfolff ended March 31, 2022. The net portfolff losses as a percentage of fiff nance receivabla es, as described under “Analysis of Credit Losses” below. the fiff scal year ended March 31, 2023 frff om 21.5% forff io yield decreased primarily due to an increase in the provision forff the fiff scal year credit Operating Expenses Our operating expenses consisted primarily of servicing and administrative expenses, payroll and employee benefiff ts, and marketing expenses. Operating expenses decreased to $32.5 million forff compared to $34.4 million forff by the Company. the fiff scal year ended March 31, 2022 as a result of restrucrr the fiff scal year ended March 31, 2023 ing initiatives undertaken turt 33 Interest Expense Interest expense decreased to $3.9 million forff the fiff scal year ended March 31, 2022, due to a decrease in average outstanding debt, which was partly offff sff et by a higher interest rate. The average outstanding debt during the year ended March 31, 2023 decreased to $54.2 million lowing tabla e summarizes the Company’s average frff om $67.7 million during the year ended March 31, 2022. The folff cost of borrowed funds the fiff scal year ended March 31, 2023, as compared to $5.4 million forff the fiff scal years ended March 31: forff ff Variabla e interest under the line of credit and credit faff cility Credit spread under the line of credit and credit faff cility Average cost of borrowed funds ff 2023 2022 2.70% 0.63% 3.27% 5.97% 3.15% 3.78% Analysis of Credit Losses lowing tabla e sets forff th a reconciliation of the changes in the allowance forff credit losses on Contracts and The folff Direct Loans forff the fiff scal years ended March 31: credit losses Balance at beginning of year Provision forff Charge-offff sff Recoveries Balance at end of year credit losses Balance at beginning of year Provision forff Charge-offff sff Recoveries Balance at end of year For the year ended March 31, 2023 (In thousands) Direct Total Indirect 1,961 37,125 (28,391) 5,570 16,265 $ $ 988 3,533 (3,621) 231 1,131 $ $ 2,949 40,658 (32,012) 5,801 17,396 For the year ended March 31, 2022 (In thousands) Direct Total Indirect 6,001 4,210 (13,515) 5,265 1,961 $ $ 153 1,755 (980) 60 988 $ $ 6,154 5,965 (14,495) 5,325 2,949 $ $ $ $ r The Company defiff nes non-perfoff rming assets as accounts that are contractuat due or Chapta er 13 bankrupt cy accounts. For these accounts, the accruarr previously accruerr d interest is reversed. Upon notififf cation of a bankrupt with other Chapta er 13 accounts. In the event the debtors’ balance is reduced by the bankrupt will record a loss equal to the amount of principal balance reduction. The remaining balance will be reduced as payments are received by the bankrupt will decide based on several faff ctors, whether to begin repossession proceedings or allow the customer to begin making regularly scheduled payments. l of interest income is suspended, and any collection cy, an account is monitored forff cy court. In the event an account is dismissed frff om bankrupt lly delinquent forff cy court, the Company 60 or more days past cy, the Company rr rr r rr The Company defiff nes a Chapta er 13 bankrupt records a specififf c reserve forff Chapta er 13 bankrupt allowance forff balance of the Chapta er 13 Bankrupt was $241 thousand and $138 thousand, respectively. rr rr cy account as a Troubled Debt Restrucrr r cy accounts which is considered a qualitative reserve to the turt ing (“TDR”). The Company credit losses. The Company records the reserve based on the expected collectabia lity of the principal cy and the specififf c reserves recorded as of March 31, 2023 and March 31, 2022 The provision forff forff credit losses increased to $40.7 million forff the fiff scal year ended March 31, 2023 frff om $6.0 million the fiff scal year ended March 31, 2022, due to an increase in net charge-offff percentage frff om 5.13% to 15.86%. 34 The Company’s allowance forff assets, and bankrupt the portfolff r cy. The Company believes that this appr ates recent trends such as delinquency, non-perforff ming credit losses also incorpor a oach reflff ects the current trends of incurred losses within rr io and better aligns the allowance forff credit losses with the portfolff io’s perforff mance indicators. Net charge-offff sff as a percentage of average fiff nance receivabla es increased to 15.9% forff 31, 2023 frff om 5.1% forff portfolff io its perforff mance trends. the fiff scal year ended March 31, 2022, primarily reflff ecting the Company's analysis of the fiff scal year ended March The delinquency percentage forff Contracts more than thirty days past due, excluding Chapta er 13 bankrupt cy accounts, as of March 31, 2023 was 15.7%, an increase frff om 7.3% as of March 31, 2022. The delinquency percentage forff Direct Loans more than thirty days past due, excluding Chapta er 13 bankrupt 31, 2023 was 17.0%, an increase frff om 3.6% as of March 31, 2022. The delinquency percentage forff and Direct Loans increased as enhanced unemployment benefiff ts and stimulus programs came to an end. rr r cy accounts, as of March both Contracts In accordance with Company policies and procedures, certain borrowers qualifyff month principal payment defeff rrals on Contracts and Direct Loans. For the fiff scal years ended March 31, 2023 and March 31, 2022 the Company granted defeff rrals to appr oximately 37.3% and 11.8%, respectively, of total Contracts and Direct Loans. The increase in the total number of defeff rrals in fiff scal 2023 compared to fiff scal 2022 was primarily inflff uenced by portfolff competition at the time of Contract acquisition, and general economic conditions. io perforff mance, including but not limited to, inflff ation, credit quality of loans purchased, , and the Company offff eff rs, one- forff a Income Taxes The Company recorded a tax expense of appr appr a compared to (4.3)% in fiff scal 2023. For furff a oximately $1.4 million during fiff scal 2023. The Company’s effff eff ctive tax rate in fiff scal 2022 was 25.9% ther discussion regarding income taxes see “N“ otNN e 7 – IncII ome TaxTT es”. oximately $1.0 million during fiff scal 2022 compared to a tax expense of Liquidity and Capital Resources q p y The Company’s cash flff ows are summarized as folff lows: Cash provided by (used in): Operating activities Investing activities Financing activities Net increase (decrease) in cash Fiscal Year ended March 31, (In thousands) 2023 2022 $ $ (2,182) $ 29,894 (32,033) (4,321) $ 3,487 3,862 (35,551) (28,202) Our maja or source of liquidity and capia tal is cash generated frff om our ongoing operations and our borrowing capaa under our Credit Facility. city We believe that our current cash balance, together with the futff urt e cash generated frff om operations and our borrowing capaa city under our Credit Facility, will be suffff iff cient to satisfyff our requirements and plans forff months. We also believe that futff urt e cash generated frff om operations and our borrowing capaa Facility, will be suffff iff cient to satisfyff our requirements and plans forff and the availabia lity of,ff fiff nancing on acceptabla e terms in the futff urt e will be affff eff cted by many faff ctors including overall liquidity in the capia tal or credit markets, the state of the economy and our credit strength as viewed by potential lenders. We cannot provide assurances that we will have futff urt e access to the capia tal or credit markets on acceptabla e terms. cash beyond the next 12 months. Our access to, the next 12 city under our Credit cash forff On Januaryrr 18, 2023, Nicholas Financial and NDS (collectively, the “Borrowers”), two wholly-owned subsidiaries of Nicholas Financial-Canada, entered into a Loan and Security Agreement (the “Loan Agreement”) forff senior secured revolving credit faff cility (the “Credit Facility”) with Westlake Capia tal Finance, LLC (the “Lender”), a new 35 who is an affff iff liate of Westlake, the servicer of substantially all of the Company's receivabla es, pursuant to which the Lender is providing the Borrowers with a senior secured revolving credit faff cility in the principal amount of up to $50 million. ff under the Credit Facility is generally limited to an advance rate of between 70% and 85% The availabia lity of funds of the value of the Borrowers’ eligible receivabla es. Outstanding advances under the Credit Facility will accruer interest at a rate equal to the secured overnight fiff nancing rate (SOFR) plus a specififf ed margin, subject to a specififf ed flff oor interest rate. Unused availabia lity under the Credit Facility will accruerr commitment period forff ity Date.” as the “Maturt advances under the Credit Facility is two years. We refeff r to the expiration of that time period interest at a rate of 0.25% . The ff mental changes, and sales of assets. The Loan Agreement also requires The Loan Agreement contains customaryrr events of defaff ult and negative covenants, including but not limited to those governing indebtedness, liens, funda the Borrowers to maintain (i) a minimum tangible net worth equal to the lower of $40 million and an amount equal to 60% of the outstanding balance of the Credit Facility and (ii) an excess spread ratio of less than 8.0%. Pursuant to the Loan Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral forff their obligations under the Credit Facility. If an event of defaff ult occurs, the Lender could increase borrowing costs, restrict the Borrowers’ abia lity to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforff ce their interest against collateral pledged under the Loan Agreement or icabla e law as secured lenders. enforff ce such other rights and remedies as they have under the loan documents or appl a If the Borrowers prepay the loan and terminate the Credit Facility prior to the Maturt would be obligated to pay the Lender a termination feff e in an amount equal to a percentage of the average outstanding principal balance of the Credit Facility during the 90-day period immediately preceding such termination. If the Borrowers were to sell their accounts receivabla e to a third-party prior to the Maturt the Borrowers would be obligated to pay the Lender a feff e in an amount equal to a specififf ed percentage of the proceeds of such sale. ity Date, then the Borrowers ity Date, then The proceeds of the Credit Facility were used in part to refiff nance the Company’s existing indebtedness under the Loan and Security Agreement dated as of November 5, 2021 by and among the Borrowers, the lenders party thereto, and Wells Fargo Bank, N.A., as agent forff lenders. its payroll costs and other expenses in accordance with the requirements of the Paycheck On May 27, 2020, the Company obtained a loan in the amount of $3.2 million frff om a bank in connection with the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forff given if the Company used the proceeds of the PPP Loan forff payroll costs and other covered expenses Protection Program. The Company used the proceeds of the PPP Loan forff ication to Fiftff h Third Bank, and sought fulff the lender, on December 7, 2020 and submitted supplemental documentation on Januaryrr 16, 2021. On December 27, 2021 SBA inforff med the Company that no forff giveness was granted. The Company fiff led an appe Januaryrr 5, 2022. On May 6, 2022 the Offff iff ce of Hearing and Appeals SBA (OHA) rendered a decision to deny the appe a of $65 thousand on May 23, 2022. al. The Company subsequently repaid the outstanding principal of $3.2 million plus accruer d and unpaid interest l forff giveness of the PPP Loan. The Company submitted a forff giveness appl al with SBA on a a t to achieve a higher dollar value of receivabla es forff The Company is currently evaluating its capia tal allocation goals and may in the futff urt e decide to change its mix of capia tal resources in an effff orff invested. To do so, the Company may, if so agreed with its lender, distribute futff urt e excess profiff ts generated at its U.S. subsidiaries to the Company, or reinvest excess equity capia tal into its U.S. subsidiaries when opportuni warrant. In addition, the Company may determine to continue its share repurchases at a higher volume than previously and/or acquire businesses or assets that are related or unrelated to its current business, including securities in publicly-held companies. However, the Company is not limited to these alternatives. In addition, the Company may determine not to pursue these or any other alternatives to change its capia tal allocation, forff example because it determines that such path is not prude a British Columbia company listed in the United States with primarily United States shareholders and, through its U.S. subsidiaries, exclusively United States operations. nt in light of legal and tax requirements appl everyrr dollar of equity capia tal ties ying to the Company as a r t 36 Impact of Inflff ation p The Company is affff eff cted by inflff ation primarily through increased operating costs and expenses including increases in interest rates. Inflff ationaryrr pressures on operating costs and expenses historically have been largely offff sff et by the Company’s continued emphasis on stringent operating and cost controls, although no assurances can be given regarding the Company’s abia lity to offff sff et the effff eff cts of inflff ation in the futff urt e. Management believes the rise in inflff ation can impact the subprime borrower due to rising cost of housing, consumer goods, gas prices, etc. and believes it could have an impact on the perforff mance and collectabia lity of the portfolff io. Item 7A. Quantitative and Qualitative Disclosure About Market Risk a Not appl icabla e. 37 Item 8. Financial Statements and Supplementary Data The folff lowing fiff nancial statements are fiff led as part of this Report: Report of Independent Registered Public Accounting Firm (FORVIS, LLP, Atlanta, GA, PCAOB Firm No. 686) Report of Independent Registered Public Accounting Firm (RSM US LLP, Raleigh, NC, PCAOB ID: 49) Audited Consolidated Financial Statements Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements 38 40 41 42 43 44 45 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors Nicholas Financial, Inc. OpiOO nii ion on thtt e ConCC solill datett d FiFF nii ancial StSS attt ett mentstt We have audited the accompanying consolidated balance sheet of Nicholas Financial, Inc. and Subsidiaries (the “Company”) as of March 31, 2023, the related consolidated statements of income, shareholders’ equity, and cash the year ended March 31, 2023, and the related notes (collectively refeff rred to as the “fiff nancial statements”). flff ows forff present faff irly, in all material respects, the fiff nancial position In our opinion, the fiff nancial statements refeff rred to above the year ended March of the Company as of March 31, 2023, and the results of its operations and its cash flff ows forff 31, 2023, in conforff mity with accounting principles generally accepted in the United States of America. a Basisii forff OpiOO nii ion These fiff nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s fiff nancial statements based on our audit. We are a public accounting fiff rm 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. feff deral icabla e rulr es and regulations of the Securities and Exchange Commission and the PCAOB. securities laws and the appl a We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perforff m the audit to obtain reasonabla e assurance about whether the fiff nancial statements are frff ee of material misstatement, whether due to error or frff aud. The Company is not required to have, nor were we engaged to perforff m, an audit of its internal control over fiff nancial reporting. As part of our audit, we are required to obtain an understanding of internal control over fiff nancial reporting but not forff e of expressing an opinion on the effff eff ctiveness of the the purpos Company’s internal control over fiff nancial reporting. Accordingly, we express no such opinion. a r Our audit included perforff ming procedures to assess the risks of material misstatement of the fiff nancial statements, whether due to error or frff aud, and perforff ming procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the fiff nancial statements. Our audit also included evaluating the accounting principles used and signififf cant estimates made by management, as well as evaluating the overall presentation of the fiff nancial statements. We believe that our audit provides a reasonabla e basis forff our opinion. 38 CrCC itii itt cal Auditii MatMM ttt ett r The critical audit matter communicated below is a matter arising frff om the current-period audit of the fiff nancial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the fiff nancial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the fiff nancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance forff CrCC edit Losses losses incurred in the existing fiff nance receivabla e portfolff credit losses (the “Allowance”) on fiff nance receivabla es is based on management’s judgment of an The allowance forff amount that is adequate to absa orbr ther described in Notes 2 and 3 to the fiff nancial statements, the Company estimates the Allowance using a trailing twelve-month net ying this percentage to ending fiff nance receivabla es charge-offff sff as a percentage of average fiff nance receivabla es and appl to estimate incurred credit losses. Management takes into consideration the composition of the portfolff io, current economic conditions, the estimated net realizabla e value of the underlying collateral, historical loan loss experience, delinquency, non-perforff ming assets, and bankrupt accounts when determining probabla e incurred credit losses and the adequacy of the Allowance. Management also evaluates qualitative faff ctors to support the Allowance. io. As furff a rr We identififf ed the Company’s estimate of the Allowance as a critical audit matter. The principal considerations forff that determination were the degree of subjectivity in evaluating management’s estimate and the qualitative faff ctor pertaining to customer accounts with extended terms which increased the level of audit effff orff t. This required a higher degree of auditor effff orff t and judgment. The primaryrr procedures we perforff med to address this critical audit matter included the folff lowing: • • • • • • We obtained an understanding of the Company’s process forff identififf cation and basis forff qualitative faff ctor components of the Allowance. establa ishing the Allowance, including the We tested the completeness and accuracy of the data used by the Company to calculate the historical trailing twelve-month net charge-offff rate. We recomputed the mathematical accuracy of the quantitative and qualitative calculations used by the Company. We evaluated the reasonabla eness of the Company’s calculations of estimated incurred credit losses by comparing historical estimates with actuat l loss experience in subsequent periods. We evaluated management’s delinquency and past-due calculations of estimated incurred credit losses forff fiff nance receivabla es by re-perforff ming the Company’s loan system’s calculations on a sample of fiff nance receivabla es and perforff ming analytical review procedures over the Company’s historical and current delinquency trends and historical losses. We evaluated key assumptions and qualitative faff ctors and assessed management’s conclusions regarding the appr and directional a consistency with external sources forff qualitative faff ctors, including the magnitude opriateness of the adjustments forff the consumer fiff nance industry,rr and subsequent events. t /s/ FORVIS, LLP We have served as the Company’s auditor since 2022. Atlanta, Georgia June 27, 2023 39 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, 2022, the related consolidated statements of income, stockholders’ equity and cash flff ows the year then ended, and the related notes to the consolidated fiff nancial statements (collectively, the fiff nancial forff statements). In our opinion, the fiff nancial statements present faff irly, in all material respects, the fiff nancial position of the Company as of March 31, 2022, and the results of its operations and its cash flff ows forff conforff mity with accounting principles generally accepted in the United States of America. the year then ended, in Basis forff Opinion These fiff nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s fiff nancial statements based on our audit. We are a public accounting fiff rm 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. feff deral securities laws and the appl the Securities and Exchange Commission and the PCAOB. icabla e rulr es and regulations of a We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perforff m the audit to obtain reasonabla e assurance about misstatement, whether due to error or frff aud. The Company is not required to have, nor were we engaged to perforff m, an audit of its internal control over fiff nancial reporting. As part of our audit we are required to obtain an understanding of internal control over fiff nancial reporting but not forff effff eff ctiveness of the Company’s internal control over fiff nancial reporting. Accordingly, we express no such opinion. whether the fiff nancial statements are frff ee of material e of expressing an opinion on the the purpos a rr Our audit included perforff ming procedures to assess the risks of material misstatement of the fiff nancial statements, whether due to error or frff aud, and perforff ming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the fiff nancial statements. Our audit also included evaluating the accounting principles used and signififf cant estimates made by management, as well as evaluating the overall presentation of the fiff nancial statements. We believe that our audit provides a reasonabla e basis forff our opinion. /s/ RSM US LLP We served as the Company's auditor frff om 2018 through 2022. Raleigh, North Carolina June 24, 2022 40 Nicholas Financial, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands) Assets Cash Finance receivabla es, net Repossessed assets Operating lease right-of-ff use assets Prepaid expenses and other assets Income taxes receivabla e Property and equipment, net Defeff rred income taxes Total assets Liabilities and shareholders’ equity Credit faff cility, net of debt issuance costs Note payabla e Net long-term debt Operating lease liabia lities Accounts payabla e and accruer d expenses Total liabia lities Commitments and contingencies (see Note 11) Shareholders’ equity: Prefeff rred stock, no par: 5,000 shares authorized; none issued Common stock, no par: 50,000 shares authorized; 12,658 and 12,673 shares issued respectively; 7,290 and 7,546 shares outstanding, respectively Treasuryrr stock: 5,368 and 5,127 common shares, at cost, respectively Retained earnings Total shareholders’ equity Total liabia lities and shareholders’ equity March 31, 2023 2022 $ $ $ 454 106,919 1,491 176 140 946 222 - 110,348 28,936 - 28,936 176 1,427 30,539 4,775 168,600 658 4,277 1,103 989 1,783 1,385 183,570 54,813 3,244 58,057 4,410 4,717 67,184 — — 35,223 (76,794) 121,380 79,809 110,348 $ 35,292 (74,405) 155,499 116,386 183,570 $ $ $ $ See accompany m ing notes to the ConsCC olidated FiFF nancial Statementstt . 41 Nicholas Financial, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share amounts) Revenue: Interest and feff e income on fiff nance receivabla es Net gain on equity investments Total revenue Expenses: Marketing Administrative Provision forff Depreciation and amortization of intangibles Interest expense credit losses Total expenses Operating (loss) income beforff e income taxes Income tax expense Net (loss) income (Loss) earnings per share: Basic Diluted Fiscal Year ended March 31, 2022 2023 $ $ $ $ $ 44,270 66 44,336 1,166 30,880 40,658 403 3,931 77,038 (32,702) 1,417 (34,119) $ (4.65) $ (4.65) $ 49,779 - 49,779 1,831 32,170 5,965 401 5,366 45,733 4,046 1,048 2,998 0.39 0.39 See accompany m ing notes to the ConsCC olidated FiFF nancial Statementstt . 42 Nicholas Financial, Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity (In thousands) Common Stock Shares Amount Treasury Stock Retained Earnings 7,708 $ 35,064 $ (72,343) $ 152,501 $ — 18 2 (182) - — — 28 — 200 — — — (2,062) — 2,998 — — — — 7,546 $ 35,292 $ (74,405) $ 155,499 $ — 11 (27) (241) — — — (175) — 106 — (34,119) — — — — — (2,389) — — 7,289 $ 35,223 $ (76,794) $ 121,380 $ Total Shareholders' Equity 115,222 2,998 — 28 (2,062) 200 116,386 (34,119) — (175) (2,389) 106 79,809 Balance at March 31, 2021 Net income Issuance of restricted stock awards Exercise of stock options Treasuryrr stock repurchases Share-based compensation Balance at March 31, 2022 Net loss Issuance of restricted stock awards Restricted stock cancellations Treasuryrr stock repurchases Share-based compensation Balance at March 31, 2023 See accompany m ing notes to the ConsCC olidated FiFF nancial Statementstt . 43 Nicholas Financial, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Cash flff ows frff om operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Fiscal Year ended March 31, 2022 2023 $ (34,119) $ Depreciation and amortization of intangibles Amortization of debt issuance costs Change in operating right of use assets Realized gains on equity investments (Gain) on termination of leases Loss (gain) on sale of property and equipment Provision forff Amortization of dealer discounts Amortization of insurance and feff e commissions Accretion of purchase price discount Defeff rred income taxes Change in operating lease liabia lities Cancellations of restricted stock awards Share-based compensation credit losses Changes in operating assets and liabia lities: Repossessed assets Accruerr d interest receivabla e Prepaid expenses and other assets Accounts payabla e and accruerr d expenses Income taxes receivabla e Net cash (used in) provided by operating activities Cash flff ows frff om investing activities: Purchase and origination of fiff nance receivabla es Principal payments received on fiff nance receivabla es and proceeds frff om repossessed assets sales Purchase of property and equipment Purchases of equity investments Proceeds frff om sales of equity investments Proceeds frff om sale of property and equipment Net cash provided by investing activities Cash flff ows frff om fiff nancing activities: Repayments on credit faff cilities Proceeds frff om the credit faff cilities Payment of debt issuance costs Repayment of PPP Loan Proceeds frff om exercise of stock options Repurchases of treasuryrr stock Net cash used in fiff nancing activities Net (decrease) increase in cash Cash, beginning of year Cash, end of year Supplemental Disclosures: Interest paid, including debt originations cost Income taxes paid Leased assets obtained in exchange forff new operating lease liabia lities $ $ 390 523 1,763 (66) (131) 1,090 40,658 (5,902) (3,512) (130) 1,385 (1,663) (175) 106 - (12) 860 (3,290) 43 (2,182) (63,348) 93,095 (59) (7,237) 7,303 140 29,894 (43,700) 17,800 (500) (3,244) - (2,389) (32,033) (4,321) 4,775 454 3,351 27 183 $ $ 2,998 401 2,176 1,388 - - (20) 5,965 (6,411) (2,821) (152) 898 (1,591) - 200 27 (30) 168 627 (336) 3,487 (114,544) 119,711 (1,312) - - 7 3,862 (105,830) 72,530 (217) - 28 (2,062) (35,551) (28,202) 32,977 4,775 3,415 541 2,504 See accompany m ing notes to the ConsCC olidated FiFF nancial Statementstt . 44 Nicholas Financial, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Organization and Basis of Presentation a ication softff ware forff Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorpor 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-rr computer appl ceased its operations; however, it continues as the interim holding company forff Nicholas Financial. NFI is a specialized consumer fiff nance company engaged primarily in acquiring and servicing automobile fiff nance installment contracts (“Contracts”) forff consumer loans (“Direct Loans”) and sells consumer-fiff nance related products. NFI has and NDS are based in Florida, U.S.A. specififf c small businesses located primarily in the Southeastern United States. NDS has purchases of used and new automobiles and light trucr ks. NFI has also offff eff red direct ated under the rr During the year ended March 31, 2023, the Company shiftff ed frff om a decentralized business model to a regionalized business model in which each of its originators focff uses on a specififf c region in the Company’s smaller target market foot int with an expectation that Contract purchase and origination activities will proceed on a much smaller scale. ff As part of a restrucr activities and ceased originations of Direct Loans. ing plan (see note 12) the Company has outsourced servicing, collections and recoveryrr prt turt turt ing is to frff ee up capia tal and permit the Company to allocate excess The goal of the strategy and related restrucr capia tal to increase shareholder returt ns, whether by acquiring loan portfolff the Company’s traditional business. While the overall timefrff ame and fiff nal strucr uncertain, the Company is committed to its core product of fiff nancing primaryrr the subprime borrower through the local independent automobile dealership which includes risk-based pricing (rate, yield, advance, term, collateral value) and a commitment to the underwriting discipline required forff portfolff ios or businesses or by investing outside of turt e of the Company remains transportation to and frff om work forff io perforff mance. optimal The accompanying consolidated fiff nancial 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”). Canadian income taxes are not reported as they are immaterial. 2. Summary of Signififf cant Accounting Policies Consolidation The consolidated fiff nancial statements include the accounts of Nicholas Financial – Canada and its wholly owned subsidiaries, NDS, and NFI, collectively refeff rred to as the “Company”. All intercompany transactions and balances have been eliminated. Segment Reporting The Company reports operating segments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codififf cation (“ASC”) Topic 280, Segme an enterprr operating decision maker in deciding how to allocate resources and assesses perforff mance. FASB ASC Topic 280 requires that a public enterprr items, segment assets, inforff mation about which separate fiff nancial inforff mation is availabla e that is evaluated regularly by the chief ise report a measure of segment profiff t or loss, certain specififf c revenue and expense the way the operating segments where determined and other items. ting. Operating segments are components of e ent Repor a ise about a The Company has one reportabla e segment, which is the consumer fiff nance company. Use of Estimates The preparation of consolidated fiff nancial statements in conforff mity with U.S. GAAP requires management to make estimates and assumptions that affff eff ct the reported amounts of assets and liabia lities and disclosure of contingent assets and liabia lities at the date of the consolidated fiff nancial statements and the reported amounts of revenues and 45 expenses during the reporting period. Actuat particularly susceptible to signififf cant change relate to the determination of the allowance forff receivabla es. l results could diffff eff r frff om those estimates. Material estimates that are credit losses on fiff nance Finance Receivables Finance receivabla es are recorded at cost, net of unearned dealer discounts, unearned insurance and commissions (see “Revenue Recognition”), and the allowance forff credit losses (see Note 3). Allowance forff Credit Losses r accounts when determining management’s estimate of probabla e credit losses and the adequacy of the credit losses. Management utilizes signififf cant judgment in determining probabla e incurred losses and in The Company takes into consideration the composition of the portfolff io, current economic conditions, the estimated net realizabla e value of the underlying collateral, historical loan loss experience, delinquency, non-perforff ming assets, and bankrupt allowance forff identifyiff ng and evaluating qualitative faff ctors. This appr credit losses is determined to be inadequate, then an additional charge to underwriting standards. If the allowance forff the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolff oach aligns with the Company’s lending policies and io. a io’s perforff mance indicators. Estimating the allowance forff ies this percentage to ending fiff nance receivabla es to estimate probabla e credit losses. This appr The Company uses a trailing twelve-month net charge-offff as a percentage of average fiff nance receivabla es, and appl a current trends of incurred losses within the portfolff portfolff charge-offff analysis reflff ects portfolff to support its allowance forff year-over-year inflff ation, as well as portfolff collateral, level of nonperforff ming accounts, delinquency trends, and accounts with extended terms. As a result, the Company incorpor adequate reserves. credit losses with the credit losses using the trailing twelve-month ated an additional $1.4 million as a qualitative component amount to its current estimate of credit losses. The Company examines the impact of macro-economic faff ctors, such as io perforff mance characteristics, such as changes in the value of underlying seasonality. Management evaluates qualitative faff ctors io and closely aligns the allowance forff io perforff mance adjusted forff oach reflff ects the a rr Repossessed Assets Repossessed assets are stated at net realizabla e value and consist primarily of automobiles that have been repossessed by the Company and are awaiting fiff nal disposition. Costs associated with repossession, transport, and auction preparation expenses are reported as expenses in the period in which they are incurred. Property and Equipment Property and equipment is recorded at cost, net of accumulated depreciation. Expenditurt es forff maintenance are charged to expense as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated usefulff lives of the assets as folff repairs and lows: Automobiles Equipment Furniturt e and fiff xturt es Softff ware Leasehold improvements 3 years 5 years 7 years 7 years Lesser of lease term or usefulff lifeff (generally 6 - 7 years) 46 Income Taxes under the asset and liabia lity method. Defeff rred tax assets and liabia lities are the futff urt e tax consequences attributabla e to diffff eff rences between the consolidated fiff nancial statement Income taxes are accounted forff recognized forff carryirr ng amounts of existing assets and liabia lities and their respective tax bases along with operating loss and tax credit carryfrr orff wards, if any. Defeff rred tax assets and liabia lities are measured using enacted tax rates expected to appl a The effff eff ct on defeff rred tax assets and liabia lities of a change in tax rate is recognized in income in the period that includes the enactment date. y to taxabla e income in the years in which those temporaryrr diffff eff rences are expected to be recovered or settled. The Company recognizes tax benefiff ts frff om 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 benefiff ts recognized in the consolidated fiff nancial statements frff om any such position would be measured based on the largest benefiff t that has a greater than fiff ftff y percent likelihood of being realized upon ultimate settlement. It is the Company’s policy to recognize interest and penalties accruer d on any uncertain tax benefiff ts as a component of income tax expense. There were no uncertain tax positions as of March 31, 2023 or 2022. The Company fiff les income tax returt ns in the U.S. feff deral jurisdiction, various state jurisdictions, and Canada. The effff eff ct on defeff rred taxes of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. Revenue Recognition Interest income on fiff nance receivabla es is recognized using the interest method. Accruarr fiff nance receivabla es is suspended when a loan is contractuat repossessed, whichever is earlier. The Company reverses the accruarr contractuat lly delinquent 61 days or more. lly delinquent forff l of interest income on 61 days or more, or the collateral is l of interest income when the loan is r The Company defiff nes a non-perforff ming asset as one that is 60 or more days past due, a Chapta er 7 bankrupt account, or a Chapta er 13 bankrupt cy account that has not been confiff rmed by the courts, forff which the accruar interest income is suspended. Upon receiving notice that a Chapta er 13 bankrupt confiff rmed, the account is immediately charged-offff .ff Upon notififf cation of a Chapta er 7 bankrupt monitored forff records a loss equal to the amount of principal balance reduction. The remaining balance is reduced as payments are received. In the event an account is dismissed frff om bankrupt r repossession proceedings or to allow the customer to make regularly scheduled payments (see Note 3). cy l of tee’s plan (BK13) was not collectabia lity. In the event the debtors’ balance is reduced by the bankrupt cy, an account is cy court, the Company cy, the Company will decide whether to begin cy trusrr r r r rr lly pays forff the Contract. The discount negotiated by the Company is a func A dealer discount represents the diffff eff rence between the fiff nance receivabla e of a Contract, and the amount of money the Company actuat tion 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 folff in making installment payments forff residence; current and prior job statust credit history.rr In addition, the Company examines its prior experience with Contracts purchased frff om the dealer frff om 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 lifeff of the loan. The average dealer discount, as a percent of the amount fiff nanced, associated with new volume forff the fiff scal years ended March 31, 2023 and 2022, were 6.5% and 6.9%, respectively. lowing faff ctors related to the borrower: place and length of automobiles; current income; and ; historyrr ff Unearned insurance and feff e commissions consist primarily of commissions received frff om the sale of ancillaryrr products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit lifeff These commissions are amortized over the lifeff of the Contract using the interest method. insurance, involuntaryrr unemployment insurance, and forff ced placed automobile insurance. 47 Origination and processing feff es are an upfrff ont feff e charged by the Company to process a new loan appl are recognized over the lifeff of the loan using the interest method. a ication. These Non-suffff iff cient funds ff feff es and late feff es are recognized when collected. Earnings Per Share feff itabla e dividend rights which are considered The Company has granted stock compensation awards with nonforff participating securities. Earnings per share is calculated using the two-class method, as such awards are more dilutive under this method than the treasuryrr 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. The Company's participating securities are non-vested restricted shares which are not required to share losses, and accordingly, are not allocated losses in periods of net loss. Dilutive earnings per share are calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which includes the dilutive effff eff ct of additional potential common shares frff om stock compensation awards. For the years ended March 31, 2023 and 2022, the Company experienced net loss and net income, respectively. In a period of loss, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. For the year ended March 31, 2023, potentially dilutive securities that were not included in the diluted per share calculation because they would be anti-dilutive comprise 10,000 shares frff om options to purchase common shares and 12,010 unvested restricted shares. Loss and income per share has been computed based on the folff lowing weighted average number of common shares outstanding: Numerator: Net (loss) income per consolidated statements of income Percentage allocated to shareholders * Numerator forff basic and diluted earnings (loss) per share basic earnings (loss) per share - weighted- Denominator: Denominator forff average shares outstanding Dilutive effff eff ct of stock options Denominator forff diluted earnings (loss) per share Fiscal Year ended March 31, (In thousands, except earnings per share numbers) 2023 2022 $ (34,119) $ 100.0% (34,119) 2,998 99.5% 2,983 7,330 — 7,330 7,572 — 7,572 Per share (loss) income frff om continuing operations Basic Diluted $ $ (4.65) $ (4.65) $ 0.39 0.39 i *Basic weight Basic weight stock unitstt exee pex i cted to vest ed-average shares outstt tanding ed-average shares outstt tanding and unvested restricted Percentage allocated to shareholdel rsrr Share-Based Payments 7,330 7,572 7,330 100.0% 7,612 99.5% The grant date faff ir value of share awards is recognized in earnings over the requisite service period (presumptively, the vesting period). The Company estimates the faff ir value of option awards using the Black-Scholes option pricing model. The risk-frff ee interest rate is based upon a U.S. Treasuryrr that is similar to the expected the previous period equal to the term of the options. Expected volatility is based upon the historical volatility forff expected term of the options. The expected term is based upon the average lifeff of previously issued options. The expected dividend yield is based upon the yield expected on the date of grant to occur over the term of the option. ent with a lifeff instrumr 48 The faff ir value of non-vested restricted shares and perforff mance units are measured at the market price of a share on a grant date. Restricted shares have a three-year service period. Perforff mance units include a perforff mance period (generally ending at the end of the fiff scal year in which the units were granted) folff lowed by a two-year service period. At the end of the perforff mance period, these units effff eff ctively become restricted shares forff year service period at which time they become vested. the remaining two- Fair Value Measurements The Company measures specififf c assets and liabia lities at faff ir value, which is an exit price, representing the price that would be received to sell an asset, or paid to transfeff r a liabia lity, in an orderly transaction between market participants at the measurement date. When appl market participants would use in pricing the asset or liabia lity under a three-tier faff ir value hierarchy, which prioritizes the inputs used in measuring faff ir value. These tiers include: Level 1, defiff ned as observabla e inputs such as quoted prices in active markets; Level 2, defiff ned as inputs other than quoted prices in active markets that are either directly or indirectly observabla e; and Level 3, defiff ned as unobservabla e inputs about thereforff e requiring an entity to develop its own assumptions (see Note 6). icabla e, the Company utilizes market data or assumptions that which little or no market data exists, a a Financial Instruments and Concentrations The Company’s fiff nancial instrumr fiff nance receivabla es), a note payabla e, and a Credit Facility. Financial instrumrr of credit risk are primarily fiff nance receivabla es and cash. ents consist of cash, fiff nance receivabla es (accruer d interest receivabla e is a part of ents that are exposed to concentrations During the year ended, March 31, 2023, the Company operated in 19 states through its branch locations. Of the aggregate fiff nance receivabla es as of March 31, 2023, Florida represented 22%, Ohio represented 15%, Georgia represented 11%, and North Carolina represented 8%. Each of Kentuct ky, Missouri, and South Carolina represented 6%, and Indiana represented 5%. Of the remaining states, no one state represented more than 5% of the total fiff nance receivabla es. The Company provides credit during the normal course of business and perforff ms ongoing credit evaluations of its customers. The Company maintains reserves forff management’s expectations. The Company perfeff cts a primaryrr security interest in all vehicles fiff nanced as a forff m of collateral. potential credit losses which, when realized, have been within the range of The combined account balances that the Company maintains at fiff nancial institutt insured limits, and there is a concentration of credit risk related to accounts on deposit in excess of feff derally insured limits. The Company has not experienced any losses in such accounts and believes this risk of loss is not signififf cant. ions typically exceed feff derally Reclassififf cations Certain prior-period amounts have been reclassififf ed to conforff m to the current presentation. Such reclassififf cations had no impact on previously reported net income or shareholders’ equity. Recent Accounting Pronouncements trumentstt —CrCC edit trtt umentstt . Among other things, the amendments ents held at the reporting date In June 2016, the FASB issued the Accounting Standards Update ("ASU") 2016-13, FiFF nancial InsII Losses (T(( opiTT c 326): MeMM asurement of CrCC edit Losses on FiFF nancial InsII in this ASU require the measurement of all expected credit losses forff based on historical experience, current conditions and reasonabla e and supportabla e forff ecasts. Financial institutt and other organizations will now use forff ward-looking inforff mation to better inforff m their credit loss estimates. Many ied today will still be permitted, although the inputs to those techniques will of the loss estimation techniques appl change to reflff ect the fulff l 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 was originally effff eff ctive forff fiff scal years, and interim periods within those fiff scal years, beginning aftff er December 15, 2020, however, the FASB voted to delay the implementation date forff this accounting standard, forff effff eff ctive date is forff fiff scal years beginning aftff er December 15, 2022, and early adoption is permitted. The Company smaller reporting companies, the new fiff nancial instrumr ions a 49 is evaluating the impact of the adoption of this ASU on the consolidated fiff nancial statements by collecting and analyzing data that will be needed to produce historical inputs, evaluating current conditions and reasonabla e and supportabla e forff ecasts, which are inputs into models created as a result of adopting this ASU. The Company believes the adoption of this ASU will likely result in an increase of between $0.9 million and $1.9 million to our allowance forff credit losses. trumentstt —CrCC edit Losses (T(( opiTT c 326). The amendments in this ASU eliminate the TDR In March 2022, the FASB issued ASU 2022-02, TrTT oubled Debt Restructurings (“TDTT RDD s”)” and ViVV ntage Disii closures as an update to FiFF nancial InsII recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting other loan modififf cations) whether the modififf cation represents a new loan or a continuation of an existing loan. forff The amendments enhance existing disclosure requirements and introduce new requirements related to certain modififf cations of receivabla es made to borrowers experiencing fiff nancial diffff iff culty. In addition, ASU 2022-02 requires that an entity disclose current-period gross write-offff sff by year of origination forff scope of Subtopic 326-20, FiFF nancial InsII ASU 2022-02 will be effff eff ctive forff adoption of this ASU will not have a material impact on the Company's consolidated fiff nancial statements. the Company with its adoption of ASU 2016-13. The Company believes the trumentstt —CrCC edit Losses—M— eMM asured at Amortizii ed CosCC t. The amendments in fiff nancing receivabla es within the 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 fiff nancial statements. 3. Finance Receivables Finance receivabla es consist of Contracts and Direct Loans, each of which comprise a portfolff portfolff io segment consists of smaller balance homogeneous loans which are collectively evaluated forff io segment. Each impairment. The Company purchases individuad l Contracts frff om 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 perforff mance of any Contract the Company purchases. The Company’s charge offff policy is 121 days past due. In addition, Chapta er 13 Bankrupt cies, once the Company is notififf ed of such, is notated on the customer's account of the bankrupt . When the Company receives notice that a Chapta er 13 Bankrupt charged offff .ff This policy is in line with industryrr standards, considering the sub-prime naturt e of our customers. In the event of repossession, the charge-offff will occur aftff er standard collection practices by the Company, as determined by the residency state of a customer. This practice is consistent with the sub-prime industry.rr cy plan is not confiff rmed by the courts or the loan is 121 days past due, the loan is cy statust rr rr rr Contracts and Direct Loans included in fiff nance receivabla es are detailed as folff 31: lows as of fiff scal years ended March Finance receivabla es Accruer d interest receivabla e Unearned dealer discounts Unearned purchase price discounts Unearned insurance and feff e commissions Finance receivabla es, net of unearned Allowance forff Finance receivabla es, net credit losses Contracts (In thousands) 2023 128,170 $ 1,932 (4,286) (82) (1,419) 124,315 (17,396) 106,919 $ 2022 178,786 2,315 (6,894) (212) (2,446) 171,549 (2,949) 168,600 $ $ The Company purchases Contracts frff om automobile dealers at a negotiated price that is less than the original principal amount being fiff nanced by the purchaser of the automobile. The Contracts are predominantly forff vehicles. As of March 31, 2023, the average model year of vehicles collateralizing the portfolff The terms of the Contracts range frff om 12 to 84 months and bear an average contractuat 22.9% as of March 31, 2023 and 2022, respectively. l interest rate of 22.2% and io was a 2012 vehicle. used 50 Direct Loans Direct Loans are typically forff amounts ranging frff om $1 thousand to $15 thousands and are generally secured by a lien on an automobile, watercraftff or other permissible tangible personal property. The maja ority of Direct Loans are originated with current or forff mer customers under the Company’s automobile fiff nancing program. The typical Direct Loan represents a better credit risk than Contracts due to the customer’s historical payment historyrr with the Company; however, the underlying collateral is less valuabla e. In deciding whether or not to make a loan, the Company considers the individual’s credit history,rr interview with a Company loan offff iff cer. 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 historyrr of the borrower under the Contract is a signififf cant faff ctor in making the loan decision. job stabia lity, income, and impressions created during a personal During fiff scal 2023, the Company has cancelled, not renewed, or otherwise terminated all of such Direct Loan licenses. Consequently, the Company has not originated any new Direct Loans since the end of the third quarter of fiff scal 2023 and the Company does not intend to originate any new Direct Loans going forff ward. However, the Company expects its third-party service provider to continue to service the Company’s existing Direct Loans. Direct Loans constitutt ed appr March 31, 2023, and 14% of the aggregate principal amount of the Company’s loan portfolff The terms of the Direct Loans range frff om 6 to 72 months and bear an average contractuat 29.8% as of March 31, 2023 and 2022, respectively. The Company expects its total Direct Loans portfolff io to be reduced over time as such Direct Loans are paid offff or otherwise liquidated until there are no Direct Loans in the Company’s portfolff ending March 31, 2027. io, which at the current rate of such activity, is expected to occur sometime during the fiff scal year oximately 15% of the aggregate principal amount of the Company’s loan portfolff io as of March 31, 2022. l interest rate of 30.4% and io as of a Allowance forff Credit Losses The folff lowing presents the activity in our allowance forff credit losses: credit losses Balance at beginning of year Provision forff Charge-offff sff Recoveries Balance at end of year credit losses Balance at beginning of year Provision forff Charge-offff sff Recoveries Balance at end of year $ $ $ $ For the year ended March 31, 2023 (In thousands) Direct Total Indirect 1,961 $ 37,125 (28,391) 5,570 16,265 $ 988 $ 3,533 (3,621) 231 1,131 $ 2,949 40,658 (32,012) 5,801 17,396 For the year ended March 31, 2022 (In thousands) Direct Total Indirect 6,001 $ 4,210 (13,515) 5,265 1,961 $ 153 $ 1,755 (980) 60 988 $ 6,154 5,965 (14,495) 5,325 2,949 A perforff ming account is defiff ned as an account that is less than 60 days past due. The Company defiff nes an automobile contract as delinquent when more than 25% of payments contractuat paid by the immediately folff servicing agreements or as a result of a defeff rral. The period of delinquency is based on the number of days payments are contractuat lowing due date, which date may have been extended within limits specififf ed in the lly due by a certain date has not been lly past due, as extended where appl icabla e. a 51 In certain circumstances, the Company will grant obligors one-month payment extensions. The only modififf cation of terms in those circumstances is to advance the obligor’s next due date by one month and extend the maturt ity date of the receivabla e. There are no other concessions, such as a reduction in interest rate, forff giveness of principal or of accruer d interest. Accordingly, the Company considers such extensions to be insignififf cant delays in payments rather than troubled debt restrucr ings. turt A non-perforff ming account is defiff ned as an account that is contractuat Chapta er 13 bankrupt cy account, and the accruar forff auto fiff nancing segment. contractuat r l of interest income is suspended. The Company’s charge-offff policy lly delinquent forff 60 days or more or is a lly delinquent is 121 days. The Company’s charge-offff policy aligns with practices within the subprime In the event an account is dismissed frff om bankrupt repossession proceedings or to allow the customer to begin making regularly scheduled payments. cy, the Company will decide, based on several faff ctors, to begin r The folff lowing tabla e is an assessment of the credit quality by creditworthiness as of March 31: Perforff ming accounts Non-perforff ming accounts Total Chapta er 13 bankrupt Finance receivabla es cy r Contracts $ $ 101,856 $ 6,972 108,828 590 109,418 $ 2023 Direct Loans 16,926 1,728 18,654 98 18,752 $ $ (In thousands) Total 118,782 $ 8,700 127,482 688 128,170 $ Contracts 149,976 $ 4,167 154,143 254 154,397 $ 2022 Direct Loans 24,102 $ 274 24,376 13 24,389 $ Total 174,078 4,441 178,519 267 178,786 lowing tabla es present certain inforff mation regarding the delinquency rates experienced by the Company with The folff respect to Contracts and Direct Loans, excluding any Chapta er 13 bankrupt cy accounts: r Balance Outstanding (In thousands) 30 – 59 days 60 –89 days 90-119 days 120+ days Total Contracts March 31, 2023 $ 108,828 $ 10,083 March 31, 2022 $ 154,143 $ 9.27% 7,097 4.60% $ $ $ $ 3,274 3.01% 2,936 1.90% 3,698 3.40% 1,183 0.77% $ $ $ $ - 0.00% 48 0.03% 17,055 15.67% 11,264 7.31% Direct Loans March 31, 2023 $ Balance Outstanding 18,654 $ March 31, 2022 $ 24,376 $ 30 – 59 days 60 –89 days 90-119 days 120+ days Total $ $ 1,448 7.76% 607 2.49% $ $ 654 3.51% 197 0.81% 1,074 5.76% 77 0.32% $ $ $ $ - 0.00% - 0.00% 3,176 17.03% 881 3.61% 52 4. Property and Equipment Property and equipment as of March 31, 2023 and 2022 is summarized as folff lows: 2023 Automobiles Softff ware Equipment Furniturt e and fiff xturt es Leasehold improvements 2022 Automobiles Softff ware Equipment Furniturt e and fiff xturt es Leasehold improvements Cost (In thousands) Accumulated Depreciation Net Carrying Value $ $ $ $ - $ 113 323 9 2 447 $ 230 $ 246 1,735 728 1,297 4,236 $ - 36 183 6 - 225 195 74 664 477 1,043 2,453 $ $ $ $ - 77 140 3 2 222 35 172 1,071 251 254 1,783 5. Credit Facility Westlake Credit Facilityy On Januaryrr 18, 2023, NFI and NDS (collectively, the “Borrowers”), two wholly-owned subsidiaries of Nicholas Financial-Canada, entered into a Loan and Security Agreement (the "Loan Agreement") forff a new senior secured revolving credit faff cility (the “Credit Facility”) with Westlake Capia tal Finance, LLC (the “Lender”), who is an affff iff liate of Westlake, the servicer of substantially all of the Company's receivabla es, pursuant to which the Lender is providing the Borrowers with a senior secured revolving credit faff cility in the principal amount of up to $50 million. ff under the Credit Facility is generally limited to an advance rate of between 70% and 85% The availabia lity of funds of the value of the Borrowers’ eligible receivabla es. Outstanding advances under the Credit Facility will accruer interest at a rate equal to the secured overnight fiff nancing rate (SOFR) plus a specififf ed margin, subject to a specififf ed flff oor interest rate. Unused availabia lity under the Credit Agreement will accruer commitment period forff to as the “Maturt advances under the Credit Facility is two years. The expiration of that time period is refeff rred interest at a rate of 0.25%. The ity Date.” ff mental changes, and sales of assets. The Loan Agreement also requires The Loan Agreement contains customaryrr events of defaff ult and negative covenants, including but not limited to those governing indebtedness, liens, funda the Borrowers to maintain (i) a minimum tangible net worth equal to the lower of $40 million and an amount equal to 60% of the outstanding balance of the Credit Facility and (ii) an excess spread ratio of less than 8.0%. Pursuant to the Loan Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral forff their obligations under the Credit Facility. If an event of defaff ult occurs, the Lender could increase borrowing costs, restrict the Borrowers’ abia lity to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforff ce their interest against collateral pledged under the Loan Agreement or icabla e law as secured lenders. enforff ce such other rights and remedies as they have under the loan documents or appl a If the Borrowers prepay the loan and terminate the Credit Facility prior to the Maturt would be obligated to pay the Lender a termination feff e in an amount equal to a percentage of the average outstanding principal balance of the Credit Facility during the 90-day period immediately preceding such termination. If the Borrowers were to sell their accounts receivabla e to a third-party prior to the Maturt ity Date, then the Borrowers ity Date, then 53 the Borrowers would be obligated to pay the Lender a feff e in an amount equal to a specififf ed percentage of the proceeds of such sale. The proceeds of the Credit Facility were used in part to refiff nance $50 million of the Company’s existing indebtedness under the Loan and Security Agreement dated as of November 5, 2021 by and among the Borrowers, the lenders party thereto, and Wells Fargo Bank, N.A., as agent forff lenders. The Credit Agreement contains customaryrr events of defaff ult and covenants, including but not limited to fiff nancial and operating results around tangible net worth, collateral perforff mance indicator, excess spread ratio. Subject to Company’s compliance with certain terms and conditions, the lender waived its rights and remedies under the Agreement appl date March 31, 2023 and continuing through September 30, 2024. icabla e to the excess spread ratio covenant and collateral perforff mance indicator effff eff ctive as of the a y Wells Fargo Credit Facility g On November 5, 2021, NFI and NDS entered into a senior secured credit faff cility (the “Wells Fargo Credit Facility”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “Credit Agreement”). The prior credit faff cility (the "Ares Credit Facility") pursuant to a credit agreement among the Company’s subsidiaryrr NF Funding I, Ares Agent Services, L.P. and the lenders party thereto was paid offff in connection with entering into the Wells Fargo Credit Facility. As a result, the Company recognized an acceleration of unamortized debt issuance costs (non-cash interest expense) related to the extinguishment of the Ares Credit Facility in the amount of $1.9 million as interest expense within the Consolidated Statements of Income. Pursuant to the Credit Agreement, the lenders agreed to extend to the Borrowers a line of credit of up to $175 million. The availabia lity of funds under the Wells Fargo Credit Facility was generally limited to an advance rate of between 80% and 85% of the value of eligible receivabla es, and outstanding advances under the Wells Fargo advances under Credit Facility accruer d interest at a rate equal to the SOFR plus 2.25%. The commitment period forff the Credit Facility was three years. ff Pursuant to the Credit Agreement, the Borrowers granted a security interest in substantially all of the Company's assets as collateral forff their obligations under the Wells Fargo Credit Facility. Furthermore, pursuant to a separate collateral pledge agreement, NDS pledged its equity interest in NFI as additional collateral. The Credit Agreement and the other loan documents contained customaryrr events of defaff ult and negative covenants, including but not limited to those governing indebtedness, liens, funda assets. If an event of defaff ult occurred, the lenders could have increased borrowing costs, restricted the Borrowers’ abia lity to obtain additional advances under the Wells Fargo Credit Facility, accelerated all amounts outstanding under the Credit Facility, enforff ced their interest against collateral pledged under the Wells Fargo Credit Facility or icabla e law as secured lenders. enforff ced such other rights and remedies as they had under the loan documents or appl mental changes, investments, and sales of a ff As previously announced on Form 8-K fiff led on October 27, 2022, the Company received a letter frff om the agent of its lenders, notifyiff ng the Company that it was in defaff ult and institutt August 31, 2022. In the letter, the lenders expressly reserved all rights and remedies availabla e under the credit agreement. Among those rights and remedies was the abia lity of the lenders to accelerate all of the Company’s obligations under the loan. The Company subsequently announced on Form 8-K fiff led on December 12, 2022 that it entered into an amendment to the Wells Fargo Credit Agreement. Pursuant to the amendment, the lenders waived the event of defaff ult and the defaff ult rate of interest ceased being appl ing the defaff ult rate of interest effff eff ctive as of icabla e as of December 6, 2022. a thermore reducd ed the maximum amount availabla e under the Wells Fargo Credit Facility frff om The amendment furff $175 million to $60 million, and also reduced the availabia lity of funds of between 80% and 85% of the value of eligible receivabla es to an advance rate of 50% of the value of eligible receivabla es, and changed the maturt 2023. The Company incurred overall costs associated with the restrucr ity date of the Wells Fargo Credit Facility frff om November 5, 2024 to May 31, ing in the amount of $0.3 million. under the credit faff cility frff om an advance rate turt ff 54 As of March 31, 2023, the Company had aggregate outstanding indebtedness, net of debt issuance costs, under the Credit Facility of $29.1 million, compared to $54.8 million outstanding under the Wells Fargo Credit Facility as of March 31, 2022. Futurt e maturt ities of debt as of March 31, 2023 are as folff lows: (in thousands) Year Ended March 31, 2024 2025 $ $ - 29,100 29,100 its payroll costs and other expenses in accordance with the requirements of the Paycheck On May 27, 2020, the Company obtained a loan in the amount of $3.2 million frff om a bank in connection with the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forff given if the Company used the proceeds of the PPP Loan forff Protection Program. The Company used the proceeds of the PPP Loan forff payroll costs and other covered expenses ication to Fiftff h Third Bank, and sought fulff the lender, on December 7, 2020 and submitted supplemental documentation on Januaryrr 16, 2021. On December 27, 2021 SBA inforff med the Company that no forff giveness was granted. The Company fiff led an appe Januaryrr 5, 2022. On May 6, 2022 the Offff iff ce of Hearing and Appeals SBA (OHA) rendered a decision to deny the a appe of $65 thousand on May 23, 2022. al. The Company subsequently repaid the outstanding principal of $3.2 million plus accruer d and unpaid interest l forff giveness of the PPP Loan. The Company submitted a forff giveness appl al with SBA on a a 6. Fair Value Disclosures In fiff scal year 2023 the Company initiated certain equity investments. The Company defiff ned these equity investments as trading securities forff which the changes in faff ir value were immediately recognized through net income in each quarter, respectively. The Company sold all equity investments as of March 31, 2023, all gains were recognized in the Consolidated Statements of Income, forff the year ended March 31, 2023. The carryirr ng value of cash, repossessed assets, the Credit Facility, and note payabla e appr a oximates faff ir value. Based on current market conditions, any new or renewed credit faff cility would contain pricing that appr Company’s current Credit Facility. Based on these market conditions, the faff ir value of the Credit Facility as of March 31, 2023 was estimated to be equal to the book value. The interest rate forff rate based on SOFR pricing options. Similarly, the faff ir value forff the book value. The interest rate forff the note payabla e was 1%. the Credit Facility is a variabla e the note payabla e as of March 31, 2023 was equal to oximates the a Level 1 is used forff value. These assets are considered to have readily observabla e, transparent prices and thereforff e a reliabla e, faff ir market a value. Management has determined this level to be most appr assets and liabia lities that have a regular mark to market mechanism forff cash and the note payabla e. setting a faff ir market opriate forff Level 2 is used forff determined based on other data values or market pricing. Management has determined that this level is not a appr assets and liabia lities that do not have regular market pricing, but whose faff ir value can be any of the Company's assets and liabia lities. opriate forff 55 The Company may be required, frff om time to time, to measure certain assets and liabia lities at faff ir value on a nonrecurring basis. At each reporting period, all assets and liabia lities forff which the faff ir value measurement is based on signififf cant unobservabla e inputs are classififf ed as Level 3. Management has determined that this level to be most a appr fiff nance receivabla es, repossessed assets, and the Credit Facility shown in the tabla e below. opriate forff Fair Value Measurement Using (In thousands) Level 2 Level 3 Level 1 Fair Value Carrying Value $ $ $ $ $ $ $ $ $ $ 454 $ 4,775 $ — $ — $ — $ — $ 454 $ 4,775 $ 454 4,775 — $ — $ — $ — $ — $ — $ — $ 105,971 $ 105,971 $ 106,919 — $ 168,600 $ 168,600 $ 168,600 — $ — $ 1,491 $ 658 $ 1,491 $ 658 $ 1,491 658 — $ 29,100 $ 29,100 $ 29,100 — $ 55,000 $ 55,000 $ 55,000 — $ 3,244 $ — $ — $ — $ — $ — $ 3,244 $ — 3,244 Description Cash: March 31, 2023 March 31, 2022 Finance receivabla es: March 31, 2023 March 31, 2022 Repossessed assets: March 31, 2023 March 31, 2022 Credit faff cility: March 31, 2023 March 31, 2022 Note payabla e: March 31, 2023 March 31, 2022 7. Income Taxes Income tax expense consists of the folff lowing forff the years ended March 31: Current: Federal State Total current Defeff rred: Federal State Total defeff rred Income tax expense (In thousands) 2023 2022 $ $ 22 $ 10 32 708 677 1,385 1,417 $ 116 35 151 800 97 897 1,048 56 The net tax effff eff cts of temporaryrr diffff eff rences between the carryirr ng amounts of assets and liabia lities forff reporting purpos components of the Company’s defeff rred tax assets consist of the folff es and the amounts used forff lowing as of March 31: income tax purpos es are reflff ected in defeff rred income taxes. Signififf cant fiff nancial r rr Defeff rred Tax Assets Allowance forff forff tax purpos r credit losses not currently deductible es Share-based compensation Federal and state net operating loss carryfrr orff wards Right of use liabia lity Other items Valuation Allowance Total defeff rred tax assets Defeff rred tax liabia lities Right of use asset Other items Total defeff rred tax liabia lities Defeff rred income taxes (In thousands) 2023 2022 $ 4,538 $ 20 4,812 43 87 (9,457) 43 43 - 43 $ - $ 900 79 507 1,094 175 - 2,755 1,062 308 1,370 1,385 Income tax expense reflff ects an effff eff ctive U.S. tax rate, which diffff eff rs frff om the corpor reasons: r ate tax rate forff the folff lowing Income tax (benefiff t) expense at Federal statutt oryrr Increase (decrease) resulting frff om: Change in Valuation Allowance State income taxes, net of Federal benefiff t Other Income tax expense (In thousands) 2023 2022 rate $ (6,838) $ 855 9,457 (1,207) 5 1,417 $ - 142 51 1,048 $ Management assesses the availabla e positive and negative evidence to estimate whether suffff iff cient futff urt e taxabla e income will be generated to permit use of the existing defeff rred tax assets. A signififf cant piece of negative evidence evaluated was the cumulative pre-tax loss over the three-year period ended March 31, 2023. As of March 31, 2023, l valuation allowance was recorded against the Company’s net defeff rred tax asset. The feff deral net operating loss a fulff ("NOL") generated forff the year ended March 31, 2023 will carryfrr orff ward indefiff nitely. Generally, state NOLs begin to expire March 31, 2039. The Company considers the earnings of the Company’s U.S. subsidiaries to be indefiff nitely invested outside Canada on the basis of estimates that futff urt e domestic cash generation will be suffff iff cient to meet futff urt e domestic cash needs and the Company’s specififf c plans forff reinvestment of those subsidiaryrr earnings. The Company has not recorded a oximately $121.0 defeff rred tax liabia lity related to the Canadian income taxes and U.S. withholding taxes on appr million of undistributed earnings of the U.S. subsidiaries indefiff nitely 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 indefiff nitely invested outside of Canada. a 8. Leases rr ate headquarters and branch offff iff ce faff cilities. The Company’s headquarter is located The Company leases its corpor in Clearwater, Florida. The current lease relating to this space was entered into effff eff ctive Februarr expires on Januaryrr 31, 2026. The Company’s central business operations hub is located in Rock Hill, South Carolina. The current lease relating to this space was entered into effff eff ctive March 20, 2023 and expires on March 19, 2026. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease ryrr 1, 2023 and 57 payments are dependent on a rate or index that may change aftff er the commencement date, other than the passage of time. As of March 31, 2023, the Company has closed each of its 47 branch offff iff ces located in Alabaa ma, Florida, Georgia, Idaho, Illinois, Indiana, Kentuct ky, Michigan, Missouri, Nevada, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wisconsin. The Company’s lease liabia lity was $0.2 million as of March 31, 2023 and $4.4 million as of March 31, 2022. The liabia lity is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate. The right of use asset was $0.2 million as of March 31, 2023 and $4.3 million as of March 31, 2022. The Company combines lease and non-lease components forff the fiff xed payments. Futurt e minimum lease payments under non-cancellabla e operating leases in effff eff ct as of March 31, 2023, are as folff its real estate leases in calculating the present value of lows: in thousands 2024 2025 2026 Thereaftff er Total futff urt e minimum lease payments Present value adjustment Operating lease liabia lity $ $ 65 67 61 — 193 (17) 176 The folff lowing tabla e reports inforff mation about a the Company’s lease cost forff the twelve months ended March 31: Lease cost: Operating lease cost Variabla e lease cost Total lease cost (In thousands) 2023 2022 $ $ 1,425 297 1,722 $ $ 1,736 347 2,083 The folff lowing tabla e reports other inforff mation about a the Company’s leases forff the twelve months ended March 31: (In thousands) 2023 2022 Other Lease Inforff mation Operating Lease - Operating Cash Flows (Fixed Payments) Operating Lease - Operating Cash Flows (Liabia lity Reduction) $ $ 1,663 1,763 $ $ 1,591 1,388 The folff lowing tabla e reports other inforff mation about a the Company’s leases as of March 31: Weighted Average Lease Term - Operating Leases Weighted Average Discount Rate - Operating Leases 2023 3.0 years 6.50% 2022 3.9 years 6.50% the fiff scal years ended March 31, 2023 and 2022 was appr Rent expense forff respectively. For any new or modififf ed lease, the Company, at the inception of the contract, determines whether a contract is or contains a lease. The Company records right-of-ff use ("ROU") assets and lease obligations forff operating leases, which are initially recognized based on the discounted futff urt e lease payments over the term of the lease. The Company uses its effff eff ctive annual interest rate as the discount rate when evaluating leases under Topic 842. oximately $1.8 million and $2.1 million, its a 58 Lease term is defiff ned as the non-cancelabla e period of the lease plus any options to extend or terminate the lease when it is reasonabla y certain that the Company will exercise the option. Further, the Company has elected to not separate lease frff om non-lease components. Variabla e lease costs include expenses such as common area maintenance, utilities, and repairs and maintenance. 9. Share-Based Payments a oved 2006 Equity Incentive Plan (the “2006 Plan”) the Board of Directors was 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-appr authorized to grant option awards forff Company’s shareholders appr employees and non-employee directors. Under the 2015 Plan, the Board of Directors is authorized to grant total share awards forff 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 forff restricted stock, restricted stock units, perforff mance shares, perforff mance units, and other equity-based compensation. up to 750,000 common shares. Awards under the 2006 Plan will continue to be governed by the oved the Nicholas Financial, Inc. Omnibus Incentive Plan (the “2015 Plan”) forff oximately 1.1 million common shares. On August 13, 2015, the a up to appr a Option awards previously granted to employees and directors under the 2006 Plan generally vested ratabla y based on service over a fiff ve- and three-year period, respectively, and generally have a contractuat and contractuat Restricted stock awards generally cliffff vest over a three-year period based on service conditions. Vesting of perforff mance units generally does not commence until the attainment of Company-wide perforff mance goals including annual revenue growth and operating income targets. There are no post-vesting restrictions forff option awards under the 2015 Plan are essentially the same as those of the 2006 Plan. l term of ten years. Vesting share awards. l terms forff ff The Company funds share awards frff om authorized but unissued shares and does not purchase shares to fulff obligations under the Equity Plans. Cash dividends, if any, are not paid on unvested perforff mance units or unexercised options but are paid on unvested restricted stock awards. fiff ll its The Company did not grant any options during the years ended March 31, 2023 or 2022. A summaryrr of option activity under the Equity Plans as of March 31, 2023, and changes during the year, are presented below. Options Outstanding at March 31, 2022 Granted Exercised Forfeff ited Outstanding at March 31, 2023 Exercisabla e at March 31, 2023 (Shares and Aggregate Intrinsic Value in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Shares 37 $ — — (27) 10 $ 10 $ 11.85 — — 11.54 12.68 12.68 1.45 $ 0.80 $ 0.80 $ - - - During the fiff scal year ended March 31, 2023, no options were exercised. During the same period, options to purchase appr feff ited at an exercise price of $11.54 per share. oximately 27 thousand shares were forff a 59 During the fiff scal year ended March 31, 2022, options to purchase appr During the same period, options to purchase appr frff om $10.96 to $12.95 per share. a oximately 16,100 shares were forff a oximately 2,500 shares were exercised. feff ited at exercise prices ranging Cash received frff om options exercised during the fiff scal years ended March 31, 2023 and 2022 totaled appr oximately $0 and $0, respectively. As of March 31, 2023, the Company had no unrecognized compensation related to options grants. For the fiff scal years ended, March 31, 2023 and March 31, 2022, the Company had appr oximately $0 and $0, respectively, of total unrecognized compensation cost related to options granted. a a A summaryrr of the statust and changes during the year then ended is presented below. of the Company’s non-vested restricted shares under the Equity Plan as of March 31, 2023, (Shares and Aggregate Intrinsic Value in thousands) Restricted Share Awards Non-vested at March 31, 2022 Granted Vested Forfeff ited Non-vested at March 31, 2023 Shares Weighted Average Grant Date Fair Value 10.26 8.84 12.01 9.75 8.97 37 $ 11 (8) (28) 12 $ Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 0.92 $ 377 0.51 $ 74 a oximately 11,000 restricted shares during the fiff scal year ended March 31, 2023. There The Company awarded appr are no perforff mance shares included within the 11,000 restricted shares granted that resulted frff om the Company meeting a perforff mance threshold. During the same period there were appr forff cumulative amount of compensation cost recognized is at least equal to the portion of the grant-date value of the award tranche that is actuat feff iturt es when they occur. For any vesting tranche of an award, the oximately 28,000 restricted shares feff ited. The Company accounts forff lly vested at that date. forff a As of March 31, 2023, there was appr vested restricted share awards granted under the Equity Plans. That cost is expected to be recognized over a weighted-average period of appr oximately $0.1 million of total unrecognized compensation cost related to non- oximately 0.51 years. a a 10. Employee Benefiff t Plan The Company has a 401(k)-retirement plan under which all employees are eligible to participate. Employee contributions are voluntaryrr and subject to Internal Revenue Service limitations. The Company made a discretionaryrr matching employee contribution forff the year ended March 31, 2023. $88 thousand forff 11. Commitments and Contingencies The Company is involved in certain claims and legal proceedings in the normal course of business of which one, if decided adversely to the Company, would, in the opinion of management, have a material adverse effff eff ct on the Company’s fiff nancial condition or results of operations. Specififf cally, the Company has been sued together with several other defeff ndants, in a lawsuit styled: Nicholas Financial, Inc. v. Jeremiah Gross, No. 21CY-CV02148-01, 7th Judicial Circuit, Clay County, Missouri. On March 9, lowing the 2021 the Company fiff led suit against Jeremiah Gross forff 2018 surrender and sale of his motor vehicle which secured a loan frff om the Company. On April 22, 2021 a defaff ult judgment forff the defaff ult judgment. The Court granted his motion on March 23, 2022. In his answer he asserted a class-action counterclaim against the Company seeking to represent a nationwide class of the Company’s customers who received allegedly defiff cient notices regarding the sale of their vehicles and whose vehicles were recovered and sold by the Company, and on behalf of Missouri customers who received allegedly defiff cient notices frff om the Company regarding the sale of their recovered vehicles and the calculation of the defiff ciency owed the Company. The $7,984.18 was entered against Mr. Gross. On December 22, 2021 Mr. Gross fiff led a motion to set aside a defiff ciency balance owed to the Company folff 60 summaryrr ryrr 16, 2023. On March 27, 2023 the Court entered an order granting the motion in part and Company fiff led its answer to the counterclaim on May 13, 2022. On September 9, 2022 the Company fiff led a motion forff judgment as to all counts of the counterclaim and the Company's claim against Mr. Gross. The motion was argued on Februar denying the motion in part. The Court found notices and preje udgment interest, and in Mr. Gross’s faff vor forff denied the Company’s motion foff r summaryrr remaining claim relates to post-sale notices sent to Missouri customers. The Company’s insurer has accepted the defeff nse of this litigation under a reservation of rights. in faff vor of the Company as to the counterclaim regarding presale the counterclaim as to post-sale notices. The Court a defiff ciency against Mr. Gross. The judgment as to its claim forff ff 12. Restructuring Activities On July 18, 2022, the Company announced its plan to close eleven branches and a consolidate its workforff ce, impacting appr oximately 44 employees. a turt The Company then announced on a Form 8-K fiff led on November 3, 2022 a change in its operating strategy and restrucrr ing plan with the goal of reducing operating expenses and frff eeing up capia tal. As part of this plan, the Company shiftff ed frff om a decentralized business model to a regionalized business model and entered into a loan servicing agreement with Westlake Portfolff io Management, LLC ("WPM"). While the Company intends to continue Contract purchase and origination activities, albeit on a much smaller scale, its servicing, collections and recoveryrr operations will be outsourced to WPM. The Company has ceased originations of Direct Loans. ing plan, the Company announced the closure of its branches and will continue operating ate headquarters in Clearwater, Florida and its central business operational hub in Charlotte, North turt As part of this restrucr frff om its corpor r Carolina. Consistent with this signififf cant reduction in foot oximately 16 employees as of March 31, 2023. a appr ff prt int, the Company reduced its workforff ce to The Company anticipates that execution of its evolving restrucrr Company to allocate excess capia tal to increase shareholder returt ns, whether by acquiring loan portfolff ios or businesses or by investing outside of the Company’s traditional business. The overall timefrff ame and strucr Company’s restrucr tut ring plan will frff ee up capa ital and permit the ing remains uncertain. turt turt e of the Costs related to the restrucr turt ing plan are summarized as folff lows: Branch Closures Severance Cease-use of contractuat Profeff ssional feff es Other Total restrucr ing cost turt l services Total Cost Estimated (In thousands) Incurred to Date $ $ 3,203 570 749 260 26 4,808 $ $ 3,203 570 749 260 17 4,799 Remaining cost - $ - - - 9 9 $ 13. Stock Plans In May 2019, the Company’s Board of Directors (“Board”) authorized a stock repurchase program allowing forff the repurchase of up to $8.0 million of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other strucrr icabla e feff deral securities laws. The authorization was effff eff ctive immediately. turt es in accordance with appl a The timing and actuat regulatoryrr be suspended or discontinued at any time. l number of shares will depend on a variety of faff ctors, including stock price, corpor requirements and other market and economic conditions. The Company’s stock repurchase program may ate and r 61 In August 2019, the Company’s Board authorized an additional repurchase of up to $1.0 million of the Company’s outstanding shares. The tabla e below summarizes treasuryrr share transactions under the Company’s stock repurchase program. Treasuryrr shares at the beginning of period Treasuryrr shares purchased Treasuryrr shares at the end of period Twelve months ended March 31, (In thousands) 2023 2022 Number of Shares Amount Number of Shares 5,127 241 5,368 $ $ (74,405) (2,389) (76,794) 4,945 182 5,127 $ $ Amount (72,343) (2,062) (74,405) Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 62 Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures a opriate, to allow timely decisions regarding required disclosure. The Company’s management, The Company maintains disclosure controls and procedures designed to ensure inforff mation required to be disclosed in its reports fiff led or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is (i) recorded, processed, summarized and reported within the time periods specififf ed in the SEC’s rulr es and forff ms and (ii) accumulated and communicated to management, including the Chief Executive Offff iff cer and Chief Financial Offff iff cer as appr including its Chief Executive Offff iff cer and Chief Financial Offff iff cer, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all possible error and frff aud. A control system, no matter how well conceived and operated, can provide only reasonabla e, not absa olute, assurance that the objectives of the control system are met. Further, the design of a control system must reflff ect the faff ct there are resource constraints, and the benefiff ts of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absa olute assurance that all control issues and instances of frff aud, if any, within the Company have been detected. The Company’s management, including its Chief Executive Offff iff cer and Chief Financial Offff iff cer, conducted an evaluation of the effff eff ctiveness of the Company’s disclosure controls and procedures (as defiff ned in RulRR e 13a-15(e) under the Exchange Act) as of March 31, 2023. Based upon this evaluation, the Chief Executive Offff iff cer and Chief Financial Offff iff cer have concluded that the Company’s disclosure controls and procedures were effff eff ctive as of March 31, 2023. g Management’s Report on Internal Control over Financial Reporting p p g establa ishing and maintaining adequate internal control over fiff nancial The Company’s management is responsible forff reporting, as such term is defiff ned in RulRR e 13a-15(f)ff under the Exchange Act. The Company’s internal control over fiff nancial reporting is a process designed to provide reasonabla e assurance regarding the reliabia lity of fiff nancial reporting and the preparation of fiff nancial statements forff accounting principles. The Company’s management, including its Chief Executive Offff iff cer and Chief Financial Offff iff cer, conducted an evaluation of the effff eff ctiveness of the Company’s internal control over fiff nancial reporting as of March 31, 2023, the end of the fiff scal year covered by this Report, based on the criteria set forff th in IntII ernal ContCC rol- IntII egre ated FrFF ameworkrr (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 fiff nancial reporting was effff eff ctive as of March 31, 2023. es in accordance with generally accepted external purpos rr No Attestation Report of the Independent Registered Public Accounting Firm This Annual Report does not include an attestation report of the Company’s independent registered public accounting fiff rm regarding internal control over fiff nancial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting fiff rm pursuant to the rulr es of the Securities and Exchange Commission. g Changes in Internal Control Over Financial Reporting p g No change in the Company’s internal control over fiff nancial reporting occurred during the Company’s fiff scal year ended March 31, 2023 that has materially affff eff cted, or is reasonabla y likely to materially affff eff ct, the Company’s internal control over fiff nancial reporting, other than the folff lowing: turt ing and change in operating strategy, the Company has outsourced its servicing, In connection with its restrucrr collection and recoveryrr operations to a third party (Westlake) and has reduced its fulff accounting, compliance, and clerical personnel frff om 23 to 3 employees, including its Chief Financial Offff iff cer. The outsourcing of servicing, collection and recoveryrr operations affff eff cts the initiation, authorization, recording, processing and/or reporting of transactions in the Company’s fiff nancial statements. l-time fiff nancial reporting, 63 Item 9B. Other Inforff mation None 64 Item 10. Directors, Executive Offff iff cers and Corporate Governance PART III The relevant inforff mation to be set forff Annual General Meeting of Shareholders of the Company (the “Proxy Statement”), is incorpor refeff rence. th in the defiff nitive Proxy Statement and Inforff mation Circular forff r ated herein by the 2023 a of Ethics - The Company has adopted a written code of ethics appl CodeCC Financial Offff iff cer, principal accounting offff iff cer and persons perforff ming similar func ethics is posted on the Company’s web site at www.nicholasfiff nancial.com. Anyone who wishes to receive a written copy of the code of ethics may receive one without charge by submitting a request in writing to Corpor ate Secretary,rr Nicholas Financial, Inc., 26133 US HWY 19 North, Suite 300, Clearwater, Florida 33763. The Company intends to satisfyff code of ethics by posting such inforff mation on the Company’s web site at www.nicholasfiff nancial.com. The Company is not including the inforff mation contained on or availabla e through its web site as a part of,ff or r incorpor the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers frff om, the ating such inforff mation by refeff rence into, this Report. icabla e to its Chief Executive Offff iff cer, Chief tions. A copy of the code of r ff Item 11. Executive Compensation, Compensation Interlocks and Insider Participation The relevant inforff mation to be set forff th in the Proxy Statement is incorpor r ated herein by refeff rence. Item 12. Security Ownership of Certain Benefiff cial Owners and Management and Related Stockholder Matters Securities Authorized forff Issuance under Equity Compensation Plans lowing tabla e sets forff The folff which equity securities of the Company were authorized forff issuance: th certain inforff mation, as of March 31, 2023, with respect to compensation plans under EQUITY COMPENSATION PLAN INFORMATION (In thousands, except exercise price) 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 forff Future Issuance Under Equity Compensation Plans (Excluding Securities Reflff ected in Column (a)) (c) 10$ 12.68 - Not Applicabla e 12.68 10$ 662 - 662 Plan Category Equity Compensation Plans Approved by Security Holders Equity Compensation Plans Not Approved by Security Holders TOTAL The relevant inforff mation to be set forff th in the Proxy Statement is incorpor r ated herein by refeff rence. Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors The relevant inforff mation to be set forff th in the Proxy Statement is incorpor r ated herein by refeff rence. Item 14. Principal Accountant Fees and Services The relevant inforff mation to be set forff th in the Proxy Statement is incorpor r ated herein by refeff rence. 65 Item 15. Exhibits and Financial Statement Schedules (a) The folff lowing documents are fiff led as part of this Report: PART IV (1) Financial Statements See Part II, Item 8, of this Report. (2) Financial Statement Schedules All fiff nancial schedules are omitted as the required inforff mation is not appl presented in the consolidated fiff nancial statements or related notes. a icabla e or the inforff mation is (3) Exhibits Exhibit No. Description 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 Articles of Nicholas Financial, Inc. (1) Notice of Articles of Nicholas Financial, Inc. (2) Form of Common Stock Certificate (3) Description of the Registrant’s Securities (4) Loan and Security Agreement, dated as of January 18, 2023, by and between Westlake Capital Finance, LLC, as lender, and Nicholas Financial, Inc. and Nicholas Data Services, Inc., as borrowers (5) Purchase and Sale Agreement, dated December 11, 2019, by and between Platinum Auto Finance of Tampa Bay, LLC (6) Purchase and Sale Agreement, dated January 30, 2020, by and between Platinum Auto Finance of Tampa Bay, LLC (7) Purchase and Sale Agreement, dated February 20, 2020, by and between Platinum Auto Finance of Tampa Bay, LLC (8) Nicholas Financial, Inc. 2015 Omnibus Incentive Plan (9) * Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Stock Option Award (10) * Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Restricted Stock Award (11) * Form of Nicholas Financial, Inc 2015 Omnibus Incentive Plan Performance Share Award (12) * Employment Agreement between the Company and Michael Rost, dated as of September 14, 2022 (13) * Employment Agreement between the Company and Irina Nashtatik, dated as of July 21, 2022 (14) * Separation and General Release Agreement between the Company and Douglas W. Marohn, dated as of May 9, 2022 (16)* 10.12 Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements (17) 21 23.1 23.2 Subsidiaries of Nicholas Financial, Inc. Consent of FORVIS, LLP Consent of RSM, LLP 66 24 31.1 32.1 32.2 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 Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Defiff nition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Labea ls Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104.The cover page frff om the Company’s Annual Report on forff m 10-K forff the year ended March 31, 2022, has been forff matted in Inline XBRL. * (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) the the fiff scal ryrr 14, 2023. the fiff scal year the fiff scal year ated by refeff rence to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 fiff led with the ated by refeff rence to Appendix B to the Company’s Proxy Statement and Inforff mation Circular forff ated by refeff rence to Exhibit 4.2 to the Company’s Annual Report on Form 10-K forff ated by refeff rence to Exhibit 4 to the Company’s Annual Report on Form 10-KSB forff ated by refeff rence to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q forff ated by refeff rence to Exhibit 10.22.2 to the Company’s Annual Report on Form 10-K forff ated by refeff rence to Exhibit 10.22.1 to the Company’s Annual Report on Form 10-K forff Represents a management contract or compensatoryrr plan, contract or arrangement in which a director or named executive offff iff cer of the Company participated. Incorpor rr 2006 Annual General Meeting of Shareholders fiff led with the SEC on June 30, 2006. rr Incorpor SEC on May 24, 2007. Incorpor rr ended March 31, 2004, as fiff led with the SEC on June 29, 2004. rr Incorpor ended March 31, 2020, as fiff led with the SEC on June 22, 2020. Incorpor rr quarter ended December 31, 2022, as fiff led with the SEC on Februar rr Incorpor year ended March 31, 2020, as fiff led with the SEC on June 22, 2020. Incorpor rr year ended March 31, 2020, as fiff led with the SEC on June 22, 2020. rr Incorpor year ended March 31, 2020, as fiff led with the SEC on June 22, 2020. Incorpor rr 2015 Annual General Meeting of Shareholders, as fiff led with the SEC on July 6, 2015. rr Incorpor ended March 31, 2016, as fiff led with the SEC on June 14, 2016. Incorpor rr ended March 31, 2016, as fiff led with the SEC on June 14, 2016. rr Incorpor ended March 31, 2016, as fiff led with the SEC on June 14, 2016. Incorpor rr 14, 2022, as fiff led with the SEC on July 22, 2016. rr Incorpor as fiff led with the SEC on July 9, 2020. Incorpor rr 2022, as fiff led with the SEC on May 10, 2022. ated by refeff rence to Exhibit 10.22.3 to the Company’s Annual Report on Form 10-K forff ated by refeff rence to Exhibit 10.15 to the Company’s Annual Report on Form 10-K forff ated by refeff rence to Exhibit 10.13 to the Company’s Annual Report on Form 10-K forff ated by refeff rence to Exhibit 10.14 to the Company’s Annual Report on Form 10-K forff ated by refeff rence to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 10, ated by refeff rence to Appendix A to the Company’s Proxy Statement and Inforff mation Circular forff ated by refeff rence to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated September ated by refeff rence to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated July 7, 2020, the fiff scal the fiff scal the fiff scal the fiff scal year the fiff scal year the fiff scal year the 67 ated by refeff rence to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated July 7, 2020, (16) (17) rr Incorpor as fiff led with the SEC on July 9, 2020. Incorpor rr ended March 31, 2017, as fiff led with the SEC on June 14, 2017. ated by refeff rence to Exhibit 10.20 to the Company’s Annual Report on Form 10-K forff the fiff scal year Item16. Form 10-K Summary None. 68 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 27, 2023 NICHOLAS FINANCIAL, INC. By: /s/ Michael Rost Michael Rost Chief Executive Offff iff cer ion and re-substitutt nts Jeffff rff ey C. Royal and Michael Rost, his or her truer KNOW ALL MEN BY THESE PRESENTS that each person whose signaturt e appe a appoi power of substitutt any and all amendments to this Report, and to fiff le 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-faff ct and agent fulff about ly to all intents and purpos a confiff rming all that said attorney-in-faff ct and agent, or his substitutt e, may lawfulff hereof.ff ars below constitutt es and l attorney-in-faff ct and agent, each with fulff l power and authority to perforff m each and everyrr act and thing requisite and necessaryrr es as he might or could do in person, hereby ratifyiff ng and him and in his name, place and stead, in any and all capaa ly do or cause to be done by virtuet the premises, as fulff to be done in and and lawfulff ion, forff a r cities, to sign Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the folff lowing persons on behalf of the Registrant and in the capaa cities and on the dates indicated. Signature Title Date /s/ Michael Rost Michael Rost /s/ Irina Nashtatik Irina Nashtatik /s/ Jeffff rff ey C. Royal Jeffff rff ey C. Royal /s/ Mark Hutchins Mark Hutchins /s/ Adam K. Peterson Adam K. Peterson /s/ Jeremy Q. Zhu Jeremy Q. Zhu /s/ Brendan Keating Brendan Keating Chief Executive Offff iff cer (Principal Executive Offff iff cer) June 27, 2023 Chief Financial Offff iff cer (Principal Financial and Accounting Offff iff cer) June 27, 2023 Chairman of the Board of Directors June 27, 2023 June 27, 2023 June 27, 2023 June 27, 2023 June 27, 2023 Director Director Director Director 69 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] S H A R E H O L D E R I N F O R M A T I O N (cid:44)(cid:81)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87) (cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:29) (cid:41)(cid:50)(cid:53)(cid:57)(cid:44)(cid:54)(cid:15) (cid:47)(cid:47)(cid:51) (cid:36)(cid:87)(cid:79)(cid:68)(cid:81)(cid:87)(cid:68)(cid:15) (cid:42)(cid:72)(cid:82)(cid:85)(cid:74)(cid:76)(cid:68) (cid:42)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79) 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