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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Nicholas Financial Parent started as a Canadian holding company incorporated under the laws of British Columbia in 1986. Nicholas Financial Parent conducted its business activities exclusively through a wholly-owned indirect Florida subsidiary, Nicholas Financial, during the fiscal years ended March 31, 2024 and 2023. Nicholas Financial has been a specialized consumer finance company engaged primarily in servicing automobile finance installment contracts (“Contracts”) for purchases of used and new automobiles and light trucks. To a lesser extent, prior to the end of the third fiscal quarter of the fiscal year ended March 31, 2024, Nicholas Financial also originated Contracts, and prior to the end of the third fiscal quarter of the fiscal year ended March 31, 2023, direct consumer loans (“Direct Loans”) and sold consumer-finance related products. Nicholas Financial’s financing activities represent a primary source of consolidated revenue for the fiscal years ended March 31, 2024 and 2023. A second Florida subsidiary, NDS, serves as an intermediate holding company for Nicholas Financial.

Nicholas Financial Parent, Nicholas Financial, and NDS are collectively referred to herein as the “Company”.

Introduction

The Company’s consolidated revenues decreased from $44.3 million for the fiscal year ended March 31, 2023 to $22.2 million for the fiscal year ended March 31, 2024. The Company’s net loss per share decreased from $4.65 per share for the fiscal year ended March 31, 2023 to a net loss of $2.86 per share for the fiscal year ended March 31, 2024. The Company’s loss before income tax decreased from $32.7 million for the year ended March 31, 2023 to a loss before income tax of $20.8 million for the year ended March 31, 2024. The decrease in profitability was primarily driven by a decrease in average finance receivables from $165.4 million to $88.2 million for the years ended March 31, 2023 and 2024, respectively.

The Company’s consolidated net loss decreased from $34.1 million for the fiscal year ended March 31, 2023 to a net loss of $20.8 million for the fiscal year ended March 31, 2024.

The gross portfolio yield of the portfolio for the fiscal years ended March 31, 2024 and 2023 was 33.6% and 26.8%, respectively. For the fiscal years ended March 31, 2023 and 2024, the average dealer discount decreased from 6.5% to 6.3%, primarily as a result of market conditions in the 2024 fiscal year. The APR (and therefore overall yield) on new purchases declined in fiscal 2024 and fiscal 2023 to 22.1% from 22.5%, which was primarily driven by the Company’s continuing commitment to its core principles of disciplined underwriting and risk-based pricing.

Operating expenses as presented include restructuring costs of $1.2 million for the twelve months ended March 31, 2024 and $4.8 million for the twelve months ended March 31, 2023.

Portfolio Summary Fiscal Year ended March 31,(In thousands)

Interest and fee income on finance receivables 22,237 44,270

Net interest and fee income on finance receivables $ 21,308 $ 40,339

(1)

Average finance receivables represent the average of finance receivables throughout the period.

(2)

Average indebtedness represents the average outstanding borrowings under the Credit Facility throughout the period. Average indebtedness does not include a loan obtained by the Company on May 27, 2020 in

the amount of $3,243,900 from Fifth Third Bank in connection with the U.S. Small Business

Administration’s Paycheck Protection Program (the “PPP Loan”).

(3)

Gross portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables.

(4)

Net charge-off percentage represents net charge-offs (charge-offs less recoveries) divided by average finance receivables, outstanding during the period.

Critical Accounting Estimates

A critical accounting estimate is an estimate that: (i) is made in accordance with generally accepted accounting principles, (ii) involves a significant level of estimation uncertainty and (iii) has had or is reasonably likely to have a material impact on the Company’s financial condition or results of operations.

The Company’s critical accounting estimates (i.e., that involves a significant level of estimation uncertainty and has or is reasonably likely to have a material impact on the Company’s financial condition or results of operations) relates to the determination of the fair value of finance receivables held for sale which determines the held for sale valuation allowance necessary to carry finance receivables held for sale at the lower of amortized cost or fair value.

There have been changes in our critical accounting policies from those disclosed in our 2023 Annual Report on Form 10-K related to the following:

•

On April 1, 2023, the Company adopted of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the guidance: ASU 2018-19 in November 2018, ASU 2019-04 in April 2019, ASU 2019-05 in May 2019, ASU 2019-10 and ASU 2019-11 in November 2019, ASU 2020-02 in February 2020 and ASU 2022-02 in March 2022, and ASC 326 was applicable for the period from April 1, 2023 to October 31, 2023.

•

Upon the Company's decision on November 1, 2023, to sell the portfolio, the Company reclassified its finance receivables to held for sale, which are carried at the lower of amortized cost or fair value. As a result of this reclassification, the Company eliminated the allowance for credit losses established under Accounting Standards Codification ("ASC") 326 which resulted in a reversal of previously recorded provisions for credit losses for the period from April 1, 2023 through October 31, 2023.

Fair Value of Finance Receivables Held for Sale

Finance receivables held for sale are carried at the lower of amortized cost basis or fair value which generally established a new held for sale valuation allowance through earnings in the same reporting period. The Company compared the fair value and amortized cost of finance receivables held for sale and recorded a held for sale valuation allowance through earnings to reduce the amortized cost basis to fair value as of March 31, 2024. The Company estimates the fair value of finance receivables held for sale utilizing a discounted cash flow approach which includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts. In determining the appropriate discount rate, prepayment and credit assumptions, the Company monitors other capital markets activity for similar collateral being traded and /or

interest rates currently being offered for similar products. Significant increases (decreases) in assumptions in isolation could result in a significantly lower (higher) fair value measurement. Changes in the held for sale valuation allowance are recorded through earnings along with charge offs and recoveries as "Fair value and other adjustments, net" in the Consolidated Statements of Operations.

Fiscal 2024 Compared to Fiscal 2023

Interest and Fee Income on Finance Receivables

Interest and fee income on finance receivables, predominantly finance charge income, decreased to $22.2 million in fiscal 2024 as compared to $44.3 million in fiscal 2023. The average finance receivables totaled $88.3 million for the fiscal year ended March 31, 2024, a decrease of 46.6% from $165.4 million for the fiscal year ended March 31, 2023. Specifically, origination of direct loans decreased to $0 in fiscal year 2024 compared to $15.8 million in fiscal year end 2023, and Contract purchases decreased to $5.5 million in fiscal year 2024 compared to $47.5 million in fiscal year 2023.Purchasing volume decreased to $5.5 million in fiscal 2024 from $47.5 million in fiscal 2023. Purchasing volume decreased from fiscal 2023 primarily as a result of implementation of our restructuring strategy.

Competition continued to affect the Company’s ability to acquire Contracts at desired yields. The average APR on new Contract purchases was 22.1% for fiscal 2024 and 22.5% for fiscal 2023. Concurrently, the dealer discount on new Contract purchases decreased from 6.5% for fiscal 2023 to 6.3% for fiscal 2024, primarily as a result of competitive pressures. Overall, the Company maintains its strategy focused on risk-based pricing (rate, yield, advance, term, etc.) and a commitment to the underwriting discipline required for optimal portfolio performance.

The gross portfolio yield decreased to 25.19% for the fiscal year ended March 31, 2024 as compared to 26.76% for the fiscal year ended March 31, 2023. The gross portfolio yield decreased primarily as a result of the decrease in average finance receivables.

Operating Expenses

Our operating expenses consisted primarily of servicing expenses, payroll and employee benefits, administrative expenses, and other miscellaneous expenses. Operating expenses decreased to $15.5 million for the fiscal year ended March 31, 2024 compared to $32.4 million for the fiscal year ended March 31, 2023 as a result of restructuring initiatives undertaken by the Company.

Interest Expense

Interest expense decreased to $0.9 million for the fiscal year ended March 31, 2024, as compared to $3.9 million for the fiscal year ended March 31, 2023, due to a decrease in average outstanding debt, which was partially offset by a higher interest rate. The average outstanding debt during the year ended March 31, 2024 decreased to $8.0 million from $54.2 million during the year ended March 31, 2023. The following table summarizes the Company’s average cost of borrowed funds for the fiscal years ended March 31:

Variable interest under the line of credit and credit facility 5.05 % 2.70 %

Credit spread under the line of credit and credit facility 3.35 % 3.27 %

Average cost of borrowed funds 8.40 % 5.97 %

Analysis of Credit Losses

The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts and Direct Loans under ASC 326 and the impact of adoption of ASU 2016-13 for the fiscal years ended March 31. 2024 and a reconciliation of the changes in the allowance for credit losses on Contracts and Direct Loans under the incurred loss model for the fiscal year ended March 31, 2023:

For the year ended March 31, 2024

(In thousands)

Indirect Direct Total

Balance at end of year $ — $ — $ —

(1) Provision for credit losses and reversal of allowance for credit losses is presented net as "Provision for credit losses" in the Consolidated Statements of Operations.

(2) Amounts shown represents charge-off and recoveries through October 31, 2023. Since November 1, 2023 charge-offs and recoveries are included in "Fair value and other adjustment, net" in the Consolidated Statements of Operations.

For the year ended March 31, 2023

(In thousands)

Indirect Direct Total

Implementation of ASU 2016-13

On April 1, 2023 the Company adopted ASU 2016-13, as further described in "Significant Accounting Policies" to the Consolidated Financial Statements. Upon implementation of ASU 2016-13, the Company recognized a decrease to its opening retained earnings balance of approximately $0.2 million, which reflects an increase to the allowance for credit losses (ACL) of approximately $0.2 million.

ASU 2016-13 introduced a new accounting model to measure credit losses for financial assets measured at amortized costs. In contrast to the previous incurred loss model, ASU 2016-13 requires credit losses for financial assets measured at amortized cost to be determined based on the total current expected credit losses over the life of those financial assets or group of assets.

For the period from April 1, 2023 through October 31, 2023, preceding the decision to sell the portfolio, our process for determining the ACL considered a customer's willingness and ability to pay along with other risk characteristics, including loan size, effective interest rate, loan term, geographic location, expected loss patterns, loan modification programs and other macroeconomic factors. In addition to our quantitative ACL, we also incorporated qualitative adjustments that may relate to risks and changes in current economic conditions that may not be reflected in quantitatively derived results.

On November 1, 2023, concurrent with the decision to sell the portfolio, the Company reclassified its finance receivables to held for sale, which are carried at the lower of amortized cost or fair value. As a result of this reclassification, the Company eliminated the allowance for credit losses under ASC 326, which resulted in a reversal of previously recorded provisions for credit losses for the period from April 1, 2023 through October 31, 2023. The Company compared the fair value and amortized cost of finance receivables to held for sale and recorded a held for sale valuation allowance through earnings to reduce the amortized cost basis to fair value as of March 31, 2024.

Beginning on November 1, 2023, the Company estimates the fair value of these finance receivables held for sale utilizing a discounted cash flow approach which includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts. In determining the appropriate discount rate, prepayment and credit assumptions, the Company monitors other capital markets activity for similar collateral being traded and/or interest rates currently being offered for similar products. Discussions related to the fair value of these finance receivables held for sale are held between Company management and external valuation specialists to review the key assumptions used in arriving at the final estimates. As such, these finance receivables are therefore classified within Level 3 of the valuation hierarchy.

Prior to adoption of ASU 2016-13 the Company used a trailing twelve-month charge-off analysis to calculate the allowance for credit losses and took into consideration the composition of the portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believed that the allowance for credit losses reflected the current trends of incurred losses within the portfolio and was aligned with the portfolio’s performance indicators.

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

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

Beginning March 31, 2018, the Company allocated a specific reserve for the Chapter 13 bankruptcy accounts using a look back method to calculate the estimated losses. Based on this look back, management calculated a specific reserve of approximately $381 thousand for these accounts as of October 31, 2023.

Prior to April 1, 2023, the Company recorded losses based on the trailing twelve-month charge-offs and applied this calculated percentage to ending finance receivables to calculate estimated probable credit losses for purposes of determining the allowance for credit losses. Upon adoption of ASC 326 on April 1, 2023, expected credit losses were determined by comparing the amortized cost of finance receivables with the present value of the estimated future principal and interest cash flows. The current period provision reflects the change in the difference between the amortized cost basis and the present value of the expected cash flows of finance receivables.

The net charge-off percentage increased to 30.6% for the year ended March 31, 2024, from 15.9% for year ended March 31, 2023. (See the Portfolio Summary table in the “Introduction” above for the definition of net charge-off percentage.) Management attributes these increased delinquencies and loan defaults primarily to the fact that the beneficial impact of the government’s prior COVID-19-related assistance to the Company’s customers had subsided at a time when those customers began facing increased inflationary pressures affecting their cost of living, and expects that the net charge-off percentage will remain, for the foreseeable future, at levels higher than those experienced in prior years for the same reasons.

The delinquency percentage for Contracts more than 29 days past due, excluding Chapter 13 bankruptcy accounts, as of March 31, 2024 was 16.9%, an increase from 15.7% as of March 31, 2023. The delinquency percentage for Direct Loans more than 29 days past due, excluding Chapter 13 bankruptcy accounts, as of March 31, 2024 was 16.1%, a decrease from 17.0% as of March 31, 2023. While delinquency percentage declined for Direct Loans, the customers continue experiencing market and economic pressure and its adverse impact on the consumers.

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

Income Taxes

The Company recorded a tax expense of approximately $0 during fiscal 2024 compared to a tax expense of approximately $1.4 million during fiscal 2023. The Company’s effective tax rate in fiscal 2024 was 0.0% compared to (4.3)% in fiscal 2023. For further discussion regarding income taxes see “Note 7 – Income Taxes”.

Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:

Fiscal Year ended March 31,(In thousands)

Cash provided by (used in):

Net increase (decrease) in cash $ 18,528 $ (4,321 )

Our major source of liquidity and capital is cash generated from our operations and our subsequent disposition of substantially all of our finance receivables and repossessed assets in April 2024.

We believe that our current cash balance, together with the future cash generated from operations, will be sufficient to satisfy our requirements and plans for cash for the next 12 months. We also believe that future cash generated from operations and our subsequent disposition of substantially all of our finance receivables and repossessed assets in April 2024 will be sufficient to satisfy our requirements and plans for cash beyond the next 12 months. Our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors including overall liquidity in the capital 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 future access to the capital or credit markets on acceptable terms.

On January 26, 2024 the Company terminated the Credit Facility. The Company did not incur any termination fees or penalties in connection with the termination of the Credit Facility.

The Company is currently evaluating its capital allocation goals and may in the future decide to change its mix of capital resources in an effort to achieve a higher dollar value of receivables for every dollar of equity capital invested. To do so, the Company may, distribute future excess profits generated at its subsidiaries to the Company, or reinvest excess equity capital into its subsidiaries when opportunities 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 capital allocation.

Impact of Inflation

The Company is affected by inflation primarily through increased operating costs and expenses including increases in interest rates. Inflationary pressures on operating costs and expenses historically have been largely offset by the Company’s continued emphasis on stringent operating and cost controls, although no assurances can be given regarding the Company’s ability to offset the effects of inflation in the future. Management believes the rise in inflation 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 performance and collectability of the portfolio.

Subsequent Events

On April 18, 2024, the Company completed its continuation and domestication from British Columbia to the State of Delaware by filing its Certificate of Corporate Domestication and Certificate of Incorporation in the State of Delaware. The Company has estimated a potential tax liability due to Canada ranging between $1.7 million and $2.6 million. In June 2024, the Company made an estimated payment of $1.7 million to Canada and the Company expects to file for the stub period created from the domestication in October 2024.

On April 26, 2024, the Company completed the closing under the master asset purchase agreement with Westlake Services, LLC dba Westlake Financial, a California limited liability company (“Westlake”), to sell substantially all of the Company’s assets, consisting of the Company’s motor vehicle retail installment sale contracts and unsecured consumer loan contracts (collectively, the “Contracts”) and the accounts receivable related to such Contracts (collectively, the “Receivables”). The transaction closed with an aggregate purchase price of $65.6 million pursuant to the terms of the master asset purchase agreement. After adjustments to the gross aggregate purchase price, the Company received net cash proceeds of $40.6 million and retained $25.9 million in principal and interest cash payments collected by the Company prior to the closing that otherwise would have been paid to Westlake.

Pursuant to the terms of the Purchase Agreement, Westlake was due to make additional payments to the Company based on a percentage of cash collections received over a predetermined threshold on the loan portfolio from September 30, 2023 through the closing of the disposition. Pursuant to the terms of the Purchase Agreement, Westlake made a $40.6 million payment to the Company at the closing of the disposition on April 26, 2024. The Company and Westlake subsequently determined that Westlake overpaid the Company approximately $2.6 million at the closing. The final determination of the amount to be repaid to Westlake is still being negotiated and has not been finalized as of the date of this filing. As such, the Company is not able to finalize the accounting related to the disposition at this time. The Company expects the ongoing negotiations with Westlake will be finalized in the second quarter of this fiscal year at which time the amount to be repaid and the calculation of the gain or loss from the disposition will be determined.

On June 15, 2024, the Company completed the closing under the Share Purchase Agreement to acquire Amplex Electric, Inc., an Ohio corporation (“Amplex”), from the sellers (the “Sellers”), pursuant to which the Sellers have agreed to sell, and the Company has agreed to purchase 51% of the issued and outstanding common shares, no par value per share, of Amplex and the Company has agreed to make payment to holders of options for Amplex’s common shares in consideration of cancellation of such options for preliminary purchase consideration of $11.6 million, which was paid in cash on the date of closing. The acquisition will be accounted for using the acquisition method and the results of the acquired business will be included in the Company’s results of operations from the acquisition date. Based on the timing of the acquisition and lack of available information, the Company determined it was impractical to disclose a preliminary purchase price allocation at this time. The Company is currently in the process of completing the accounting for the transaction and expect to have our preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed in the first quarter of the current fiscal year.

As of March 31,2024, the Company has extended $300 thousand in Term Loan Advances to Amplex. Between April 1, 2024 and June 1, 2024, the Company made Term Loan Advances to Amplex in the aggregate amount of $450 thousand. The Term Loan Advances were to be repaid at the earlier of a) the closing of the Share Purchase Agreement and b) the first anniversary of the initial term loan advance date if the negotiations of the Share Purchase Agreement are terminated. In conjunction with the closing of the Share Purchase Agreement, the Term Loan Advances with a total outstanding principal and accrued interest of $754 thousand was converted into 421 shares of Amplex common stock at the share purchase price of $1,792.55 per share.

In conjunction with the closing of the Share Purchase Agreement, the Company purchased 1,674 shares of Amplex common stock at the share purchase price of $1,792.55 per share for an aggregate purchase price of $3 million. Upon the completion of all of the foregoing transactions with Amplex, the Company acquired an aggregate of 56.5% of the issued and outstanding shares of Amplex.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 8. Financial Statements and Supplementary Data

The following financial statements are filed as part of this Report:

Audited Consolidated Financial Statements

Consolidated Balance Sheets 39

Consolidated Statements of Operations 40

Consolidated Statements of Shareholders’ Equity 41

Consolidated Statements of Cash Flows 42

Notes to the Consolidated Financial Statements 43

Report of Independent Registered Public Accounting Firm0F

To the Shareholders, Board of Directors, and Audit Committee

Nicholas Financial, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Nicholas Financial, Inc. and Subsidiaries (the “Company”) as of March 31, 2024 and 2023, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended March 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Finance Receivables Held for Sale

As discussed in Note 2 to the financial statements, subsequent to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument, on November 1, 2023, the Company decided to sell its finance receivable portfolio which resulted in a reclassification of finance receivables from held for investment, at amortized cost, to held for sale, at the lower of amortized cost or fair value. As discussed in Note 14 to the financial statements, subsequent to March 31, 2024, the Company sold substantially all of its finance receivables.

Share Purchase Agreement

As discussed in Note 14 to the financial statements, subsequent to March 31, 2024, the Company entered into a share purchase agreement to acquire a majority ownership interest in Amplex Electric, Inc.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial 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 financial statements, taken as a whole, and we are not, by communicating the critical audit matters

below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Finance Receivables Held for Sale

On November 1, 2023, concurrent with the decision to sell the finance receivable portfolio, the Company reclassified its finance receivables to held for sale, which are carried at the lower of amortized cost or fair value. As further described in Notes 2 and 6 to the financial statements, the Company estimates the fair value of the finance receivable portfolio, which is $38.8 million at March 31, 2024 and is less than the amortized cost basis of the finance receivables held for sale, by utilizing a discounted cash flow approach which includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts.

We identified the Company’s fair value estimate of finance receivables held for sale as a critical audit matter. The principal considerations for that determination were the degree of subjectivity required to audit management’s estimate of fair value including the selection of assumptions, such as the discount rate, and our use of an auditor’s specialist. This required a higher degree of auditor effort and judgment.

The primary procedures we performed to address this critical audit matter included the following:

•

We obtained an understanding of the Company’s process for estimating the fair value of the finance receivables held for sale, including the selection of assumptions used in the estimate.

•

We tested the completeness and accuracy of the data used by the Company to calculate the fair value.

•

We evaluated the sensitivity of the fair value estimate to changes in the discount rate.

•

We involved our internal valuation specialists to assist in:

Evaluating the appropriateness of the methodology and assumptions, such as the discount rate, and;

Testing the design of the model calculation through a re-performance of the discounted cash flow on a sample basis.

/s/ Forvis Mazars, LLP

We have served as the Company’s auditor since 2022.

Atlanta, Georgia

July 1, 2024

Nicholas Financial, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

Assets

Finance receivables held for investment, net - 106,919

Prepaid expenses and other assets 438 316

Income taxes receivable 902 946

Property and equipment, net 75 222

Liabilities and shareholders’ equity

Credit facility, net of debt issuance costs $ - $ 28,936

Accounts payable, accrued expenses, and other liabilities 996 1,603

Commitments and contingencies (see Note 11)

Shareholders’ equity:

Preferred stock, no par: 5,000 shares authorized; none issued — —

Total liabilities and shareholders’ equity $ 59,838 $ 110,348

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

Fiscal Year ended March 31,

Interest and fee income on finance receivables $ 22,237 $ 44,270

Expenses:

Fair value and other adjustments, net 24,164 -

Income from securities:

Net gain on equity investments - 66

Income from cash equivalents 145 -

Total income from securities 145 66

Income tax expense - 1,417

Loss per share:

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands)

Common Stock Total

Shares Amount TreasuryStock RetainedEarnings Shareholders'Equity

Issuance of restricted stock awards 11 — — — —

Restricted stock cancellations (27 ) (175 ) — — (175 )

Share-based compensation - 106 — — 106

Cumulative effect of adoption of ASC 326 — — — (210 ) (210 )

Share-based compensation — 44 — — 44

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Fiscal Year ended March 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities

Depreciation and amortization of intangibles 84 390

Amortization of debt issuance costs 164 523

Non-cash lease expense 59 1,632

Net loss on disposal of property and equipment 89 1,090

Net gain on equity investments — (66 )

Fair value and other adjustments, net 24,164 —

Accretion of dealer discounts (3,182 ) (5,902 )

Accretion of insurance and fee commissions (1,953 ) (3,512 )

Accretion of purchase price discount (62 ) (130 )

Deferred income taxes — 1,385

Cancellations of restricted stock awards — (175 )

Principal reduction on operating lease liabilities (46 ) (1,663 )

Share-based compensation 44 106

Changes in operating assets and liabilities:

Accrued interest receivable 1,108 (12 )

Prepaid expenses and other assets 54 860

Accounts payable, accrued expenses, and other liabilities (509 ) (3,290 )

Income taxes receivable 44 43

Net cash used in operating activities 1,827 (2,182 )

Cash flows from investing activities:

Purchase and origination of finance receivables (5,515 ) (63,348 )

Advancements on Term loan to Amplex (300 ) —

Purchases of equity investments — (7,237 )

Proceeds from sale of equity investments — 7,303

Proceeds from sale of property and equipment — 140

Payments for property and equipment (13 ) (59 )

Net cash provided by investing activities 45,801 29,894

Cash flows from financing activities:

Repayments on credit facilities (29,100 ) (43,700 )

Proceeds from credit facilities — 17,800

Payment of loan originations fees — (500 )

Repayment of PPP Loan — (3,244 )

Repurchases of treasury stock — (2,389 )

Net cash used in financing activities (29,100 ) (32,033 )

Net increase (decrease) in cash 18,528 (4,321 )

Supplemental Disclosures:

Income taxes paid — 27

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorporated under the laws of British Columbia with two wholly owned United States subsidiaries, Nicholas Data Services, Inc. (“NDS”) and Nicholas Financial, Inc. (“NFI”). NDS historically was engaged in supporting and updating industry-specific computer application software for small businesses located primarily in the Southeastern United States. NDS has ceased its operations; however, it continues as the interim holding company for Nicholas Financial. NFI is a specialized consumer finance company engaged primarily in acquiring and servicing automobile finance installment contracts (“Contracts”) for purchases of used and new automobiles and light trucks. NFI has also offered direct consumer loans (“Direct Loans”) and sells consumer-finance related products. NFI has and NDS are based in Florida, U.S.A.

During the year ended March 31, 2024, the Company first shifted from a decentralized business model to a regionalized business model in which each of its originators focuses on a specific region in the Company’s smaller target market footprint with an expectation that Contract purchase and origination activities will proceed on a much smaller scale.

On November 13, 2023, the Company entered into a Master Asset Purchase Agreement (the “Purchase Agreement”) with Westlake Services, LLC dba Westlake Financial, a California limited liability company (“Westlake Financial”), pursuant to which the Company have agreed to sell substantially all of the Company’s assets. In connection with the entering into the Purchase Agreement, the Company has ceased new loan originations of Contracts and Direct Loans. As part of a restructuring plan (see Note 12) the Company has outsourced servicing, collections and recovery activities.

The goal of the strategy and related restructuring is to free up capital and permit the Company to allocate excess capital to increase shareholder returns, whether by acquiring loan portfolios or businesses or by investing outside of the Company’s traditional business.

The accompanying consolidated financial statements are stated in U.S. dollars and are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Canadian income taxes are not reported as they are immaterial. On April 18, 2024, the Company completed its continuation and domestication from British Columbia to the State of Delaware by filing its Certificate of Corporate Domestication and Certificate of Incorporation in the State of Delaware. See Note 14 for additional details.

2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of Nicholas Financial – Canada and its wholly owned subsidiaries, NDS, and NFI, collectively referred 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 Codification (“ASC”) Topic 280, Segment Reporting. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assesses performance. FASB ASC Topic 280 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way the operating segments where determined and other items.

The Company has one reportable segment, which is the consumer finance company.

Cash Equivalents

Short-term highly liquid investments with a maturity date that was 3 months or less at the time of purchase are treated as cash equivalents. Amounts earned from cash equivalents are presented separately in the Consolidated Statements of Operations.

Advertising

Advertising costs are expensed as incurred. Advertising cost were $0.1 million and $1.2 million for the fiscal years ended March 31, 2024 and 2023, respectively.

Use of Estimates

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

Allowance for Credit Losses

The Company adopted ASU 2016-13 for measurement of current expected credit losses on April 1, 2023. An impairment model required by ASU 2016-13 is not prescriptive in the methodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's remaining expected life, adjusted for prepayments, utilizing quantitative and qualitative factors. The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable economic forecasts that affect the collectability of the reported amounts. Historical loss experience is the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms, and differences in economic conditions - both current conditions and reasonable and supportable forecasts. When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it has estimated expected credit losses for the remaining life after the forecasted period using an approach that reverts to historical credit loss information.

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

On November 1, 2023, concurrent with the decision to sell the portfolio, the Company reclassified its finance

receivables to held for sale, which are carried at the lower of amortized cost or fair value, and this resulted in the

Company reversing the allowance for credit losses as of November 1, 2023 through the provision for credit losses in

the Consolidated Statement of Operations.

Finance Receivables

Finance Receivables are reclassified to held for sale at the point the criteria for changing classification is met (when the Company decides to sell finance receivables that were originally classified as held for investment). The previously recorded allowance for credit losses, under Topic 326, associated with the reclassified finance receivables (after applying the write off policy) is released and an offsetting entry recorded to the provision for credit losses. This has had the effect of reversing the pre-transfer held for investment allowance for credit losses through the provision. Finance receivables held for sale are carried at the lower of amortized cost basis or fair value which generally established a new held for sale valuation allowance through earnings in the same reporting period. Changes in the held for sale valuation allowance are recorded through earnings along with charge offs and recoveries as "Fair value and other adjustments net" in the Consolidated Statements of Operations.

The Company estimates the fair value of these finance receivables held for sale utilizing a discounted cash flow approach which includes an evaluation of the collateral and underlying loan characteristics, as well as assumptions to determine the discount rate such as credit loss and prepayment forecasts. In determining the appropriate discount rate, prepayment and credit assumptions, the Company monitors other capital markets activity for similar collateral being traded and/or interest rates currently being offered for similar products. Discussions related to the fair value of these finance receivables held for sale are held between Company management and external valuation specialists to review the key assumptions used in arriving at the final estimates. As such these finance receivables are therefore classified within Level 3 of the valuation hierarchy.

Prior to November 1, 2023, finance receivables were carried at amortized cost, net of unearned dealer discounts, unearned insurance and commissions (see “Revenue Recognition”), and the allowance for credit losses (see Note 3).

Repossessed Assets

Repossessed assets are measured at the lower of carrying value or fair value less cost to sell. When the fair value less cost to sell of the repossessed assets is less than the carrying value, the Company records a valuation allowance which is a non-recurring fair value measurement.

Repossessed assets consist primarily of automobiles that have been repossessed by the Company and are awaiting final 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. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets as follows:

Equipment 5 years

Furniture and fixtures 7 years

Software 7 years

Investments in Debt Securities

The Company and Amplex Electric, Inc. (“Amplex” or the “Borrower”) entered into a Term Loan Agreement (the “Term Loan Agreement”) entered into on February 15, 2024, as amended by the First Amendment dated April 26, 2024 and later amended by the Second Amendment dated June 15, 2024, pursuant to which the Company agreed to make one or more term loan advances (“Term Loan Advances” or “Term Loans”) to Amplex in an aggregate principal amount not to exceed $900 thousand. The Borrower agrees to make monthly payments of interest on each Term Loan Advance, commencing on March 1, 2024 and on the first day of each month thereafter. No payments of principal are due until the earlier of a) closing of a share purchase agreement (the “Transaction Closing Date”) or b) in the event of terminating the negotiation of a share purchase agreement (“Triggering Event”), the first anniversary of the date of initial Term Loan Advance (the “Term Loan Maturity Date”). All unpaid principal and accrued and unpaid interest on the Term Loan Advances is due and payable in cash on the Term Loan Maturity Date. Amounts may be prepaid

without penalty by giving five days written notice to the Lender. Interest is accrued on Term Loan Advances at an interest rate of 12.5% per annum.

Per the amended terms of the Term Loan Agreement, at the Transaction Closing Date, the outstanding debt from the Term Loan Advances relating to MR Seller shall automatically be converted into the number of common shares of Amplex determined by dividing the outstanding debt from the Term Loan Advances by the Share Purchase Price (the “Converted Shares”). The Term Loans were converted upon the Transaction Closing Date of June 15, 2024 at the share purchase price of $1,792.55 per share into 421 shares of Amplex common stock.

The Term Loan Advance receivable is accounted for as an available-for-sale debt security and fair valued using “Level 3” inputs, which consist of unobservable inputs and reflect management’s estimates of assumptions that market participants would use in pricing the asset. The Company subsequently remeasures the Term Loan Advances at each reporting period with any unrealized gains and losses on these available-for-sale securities included in other comprehensive income. The Company’s Term Loan Advances were determined to be an available-for-sale debt securities under Accounting Standards Codification (“ASC”) 320, Investments - Debt Securities. The Company estimates the fair value of the Term Loan Advances using a probability-weighted scenario-based model, which uses as inputs the estimated fair value of the Borrower’s common stock, the estimated volatility of the Borrower’s common stock, the time to expiration of the Term Loan Advances, the discount rate, the stated interest rate compared to the current market rate, and the risk-free interest rate for a period that approximates the time to expiration. The estimated fair value of the Borrower’s common stock is based on the estimated closing price of the Amplex shares to the Company at the time of issuance. The estimated volatility of the Borrower’s common stock is based on the observed volatility range of comparable publicly traded companies. The time to expiration is based on the probability of conversion prior to the contractual maturity date. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of measurement for time periods approximately equal to the time to expiration.

As of March 31, 2024, the Company recognized the Term Loan Advances based on its fair value on the issuance date of $300 thousand and is included within prepaid expenses and other assets on the Consolidated Balance Sheets. During the year ending March 31, 2024, the Company did not recognize a gain or loss given there was only an immaterial change in fair value of the Term Loan Advance receivable during the reporting period.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases along with operating loss and tax credit carryforwards, if any. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.

The Company recognizes tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from any such position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. It is the Company’s policy to recognize interest and penalties accrued on any uncertain tax benefits as a component of income tax expense. There were no uncertain tax positions as of March 31, 2024 or 2023.

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada.

The effect on deferred taxes of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

Revenue Recognition

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

The Company defines a non-performing asset as one that is 60 or more days past due, a Chapter 7 bankruptcy account, or a Chapter 13 bankruptcy account that has not been confirmed by the courts, for which the accrual of interest income is suspended. Upon receiving notice that a Chapter 13 bankruptcy trustee’s plan (BK13) was not confirmed, the account is immediately charged-off. Upon notification of a Chapter 7 bankruptcy, an account is monitored for collectability. In the event the debtors’ balance is reduced by the bankruptcy court, the Company records a loss equal to the amount of principal balance reduction. The remaining balance is reduced as payments are received. In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments (see Note 3).

A dealer discount represents the difference between the finance receivable of a Contract, and the amount of money the Company actually pays for the Contract. The discount negotiated by the Company is a function of the lender, the wholesale value of the vehicle, and competition in any given market. In making decisions regarding the purchase of a particular Contract, the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the purchase price and the term of the Contract. The dealer discount is amortized as an adjustment to yield using the interest method over the life of the loan. The average dealer discount, as a percent of the amount financed, associated with new volume for the fiscal years ended March 31, 2024 and 2023, were 6.3% and 6.5%, respectively.

Unearned insurance and fee commissions consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit life insurance, involuntary unemployment insurance, and forced placed automobile insurance. These commissions are amortized over the life of the Contract using the interest method.

Origination and processing fees are an upfront fee charged by the Company to process a new loan application. These are recognized over the life of the loan using the interest method.

Non-sufficient funds fees and late fees are recognized when collected.

Earnings Per Share

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. Earnings per share is calculated using the two-class method, as such awards are more dilutive under this method than the treasury stock method. 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 effect of additional potential common shares from stock compensation awards. For the years ended March 31, 2024 and 2023, the Company experienced net loss. 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 years ended March 31, 2024 and 2023, potentially dilutive securities that were not included in the diluted per share calculation because they would be anti-dilutive comprise 10,000 shares from options to purchase common shares. Loss and income per share has been computed based on the following weighted average number of common shares outstanding:

Fiscal Year ended March 31,(In thousands, except earnings per share numbers)

Numerator:

Net loss per consolidated statements of operations $ (20,801 ) $ (34,119 )

Percentage allocated to shareholders * 100.0 % 100.0 %

Numerator for basic and diluted loss per share (20,801 ) (34,119 )

Denominator:

Dilutive effect of stock options — —

Denominator for diluted loss per share 7,283 7,330

Per share loss from continuing operations

*Basic weighted-average shares outstanding 7,283 7,330

Percentage allocated to shareholders 100.0 % 100.0 %

Share-Based Payments

The grant date fair value of share awards is recognized in earnings over the requisite service period (presumptively, the vesting period). The Company estimates the fair value of option awards using the Black-Scholes option pricing model. The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected term of the options. Expected volatility is based upon the historical volatility for the previous period equal to the expected term of the options. The expected term is based upon the average life of previously issued options. The expected dividend yield is based upon the yield expected on the date of grant to occur over the term of the option.

The fair value of non-vested restricted shares and performance units are measured at the market price of a share on a grant date. Restricted shares have a three-year service period. Performance units include a performance period (generally ending at the end of the fiscal year in which the units were granted) followed by a two-year service period. At the end of the performance period, these units effectively become restricted shares for the remaining two-year service period at which time they become vested.

Fair Value Measurements

The Company measures specific assets and liabilities at fair value, which is an exit price, representing the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. When applicable, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability under a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions (see Note 6).

Financial Instruments and Concentrations

The Company’s financial instruments consist of cash, cash equivalents, Term loan to Amplex, finance receivables (accrued interest receivable is a part of finance receivables), and a Credit Facility. Financial instruments that are exposed to concentrations of credit risk are primarily finance receivables, cash, and cash equivalents

During the year ended, March 31, 2024, the Company operated in four states through its virtual outreach. Of the aggregate finance receivables as of March 31, 2024, Ohio represented 53%, Kentucky represented 13%, Florida represented 19%, and South Carolina represented 8%. The Company provided credit during the normal course of business and performed ongoing credit evaluations of its customers.

The combined account balances that the Company maintains at financial institutions typically exceed federally insured limits, and there is a concentration of credit risk related to accounts on deposit in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes this risk of loss is not significant.

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net loss or shareholders’ equity.

Recent Accounting Pronouncements

Allowance for Credit Losses (ACL)

In June 2016, the Financial Accounting Standard Board (FASB) issued the Accounting Standards Update (ASU) 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses.

The Company adopted this standard effective April 1, 2023. The initial impact of adoption was a $0.2 million decrease to retained earnings ($0.2 million increase to the allowance for credit losses (ACL)). As of April 1, 2023, there is a full valuation allowance recorded against the deferred tax assets (DTA). Therefore, a net increase of $0.1 million recorded to the DTA was offset by an increase of the same amount to the valuation allowance. The ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a customer results in a new loan or continuation of an existing loan. The amendments enhance existing disclosures and require new disclosures for receivables when there has been a modification in contractual cash flows due to a customer experiencing financial difficulties.

Additionally, the amendments require public business entities to disclose gross charge-off information by year of origination in the vintage disclosures. This ASU became effective for us on April 1, 2023. We adopted this guidance

in the first quarter of fiscal 2024 using the modified retrospective method. Adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements.

Segment Reporting

In November 2023, the FASB issued ASU No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this standard will be effective for the Company for the fiscal year ended March 31, 2025 and subsequent interim periods. The amendments will be applied retrospectively to all prior periods in the consolidated financial statements. The Company is currently evaluating the impact the amendments will have on the consolidated financial statements and related disclosures.

Income Taxes

In December 2023, the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 requires enhanced income tax disclosures primarily related to the rate reconciliation and income taxes paid information to provide more transparency by requiring (i) consistent categories and greater disaggregation of information in the rate reconciliation table and (ii) income taxes paid, net of refunds, to be disaggregated by jurisdiction based on an established threshold. The amendments in this standard will be effective for the Company on April 1, 2025. The Company is currently evaluating the impact the amendments will have the consolidated financial statements and related disclosures.

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

3. Finance Receivables

Finance receivables consist of Contracts and Direct Loans, each of which comprise a portfolio segment.

The Company purchased individual Contracts from used and new automobile dealers in its markets. There is no relationship between the Company and the dealer with respect to a given Contract once the assignment of that Contract is complete. The dealer has no vested interest in the performance of any Contract the Company purchases. The Company’s charge off policy is 121 days past due. In addition, Chapter 13 Bankruptcies, once the Company is notified of such, is notated on the customer's account of the bankruptcy status. When the Company receives notice that a Chapter 13 Bankruptcy plan is not confirmed by the courts or the loan is 121 days past due, the loan is charged off. This policy is in line with industry standards, considering the sub-prime nature of our customers. In the event of repossession, the charge-off will occur after standard collection practices by the Company, as determined by the residency state of a customer. This practice is consistent with the sub-prime industry.

Contracts and Direct Loans included in finance receivables are detailed as follows as of fiscal years ended March 31:

(In thousands)

Finance receivables $ - $ 128,170

Accrued interest receivable - 1,932

Unearned dealer discounts - (4,286 )

Unearned purchase price discounts - (82 )

Unearned insurance and fee commissions - (1,419 )

Finance receivables, net of unearned - 124,315

Allowance for credit losses - (17,396 )

Finance receivables, net $ - $ 106,919

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

(In thousands)

Finance receivables held for sale at amortized cost $ 56,108 -

Held for sale allowance (17,335 ) -

Finance receivables held for sale at fair value $ 38,773 $ -

Contracts

The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The Contracts are predominantly for used vehicles. As of March 31, 2024, the average model year of vehicles collateralizing the portfolio was a 2012 vehicle. The terms of the Contracts range from 12 to 84 months and bear an average contractual interest rate of 22.1% and 22.2% as of March 31, 2024 and 2023, respectively.

In connection with the decision to sell the portfolio, the Company has cancelled, not renewed, or otherwise terminated all of its Contracts loan licenses, except in Florida, during the fourth quarter of fiscal 2024. Consequently, the Company has not originated any new Contracts since the end of the third quarter of fiscal 2024 and the Company does not intend to originate any new Contracts going forward. However, the Company expects its third-party service provider to continue to service the Company’s existing portfolio through the date of sale. The Company expects its total Contracts portfolio to be reduced over time as such Contracts are paid off or otherwise liquidated until there are no Contracts in the Company’s portfolio, which at the current rate of such activity, is expected to occur sometime during the fiscal year ending March 31, 2027.

Direct Loans

Direct Loans are typically for amounts ranging from $1 thousand to $15 thousand and are generally secured by a lien on an automobile, watercraft or other permissible tangible personal property. The majority of Direct Loans are originated with current or former customers under the Company’s automobile financing program. The typical Direct Loan represents a better credit risk than Contracts due to the customer’s historical payment history with the Company; however, the underlying collateral is less valuable. In deciding whether or not to make a loan, the Company considers the individual’s credit history, job stability, income, and impressions created during a personal interview with a Company loan officer. Additionally, because most of the Direct Loans made by the Company to date have been made to borrowers under Contracts previously purchased by the Company, the payment history of the borrower under the Contract is a significant factor in making the loan decision.

During fiscal 2023, the Company has cancelled, not renewed, or otherwise terminated all of its Direct Loan licenses. Consequently, the Company has not originated any new Direct Loans since the end of the third quarter of fiscal 2023 and the Company does not intend to originate any new Direct Loans going forward. However, the Company expects its third-party service provider to continue to service the Company’s existing Direct Loans through the day of sale. Direct Loans constituted approximately 11% of the aggregate principal amount of the Company’s loan portfolio as of March 31, 2024, and 15% of the aggregate principal amount of the Company’s loan portfolio as of March 31, 2023. The terms of the Direct Loans range from 6 to 72 months and bear an average contractual interest rate of 0.0% and 30.4% originated during the fiscal years ended March 31, 2024 and 2023, respectively. The Company expects its total Direct Loans portfolio to be reduced over time as such Direct Loans are paid off or otherwise liquidated until there are no Direct Loans in the Company’s portfolio, which at the current rate of such activity, is expected to occur sometime during the fiscal year ending March 31, 2027.

Allowance for Credit Losses (ACL) and Held for Sale Allowance

The Company adopted ASU 2016-13 on April 1, 2023, and consequently utilized the current expected credit losses model through October 31, 2023, by applying a Discounted Cash Flow (DCF) methodology to its financial assets, measured at amortized cost, over the life of those financial assets. Beginning on November 1, 2023, the Company is carrying its loan portfolio at the lower of amortized cost or fair value.

For the period from April 1, 2023 through October 31, 2023, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows of finance receivables. Provisions for credit losses were recorded in amounts sufficient to maintain an ACL at an adequate level to provide for estimated losses over the lives of the finance receivables. Portfolio segments are comprised of homogeneous loans sharing common risk factors. Accordingly, loans are not individually evaluated for collectability. Consistent with the application during prior reporting years, the Company continued charging credit losses against the allowance when the account reached 120 days contractually delinquent and any recoveries on finance receivables previously charged to the ACL were credited to the ACL when collected.

The Company used a DCF model to forecast expected credit losses. Historical information about losses generally provided a basis for the estimate of expected credit losses. The Company has utilized its own historical data as well as its peer group companies' data from FFIEC Call Report filings. This data was used to produce regression analysesdesigned to quantify the impact of reasonable and supportable forecasts in projective models.

The Company also considered the need to adjust historical information to reflect the extent to which conditions differed from the conditions that existed for the period over which historical information was evaluated. These adjustments to historical loss information may be qualitative or quantitative in nature. The Company considered changes in international, national, regional and local conditions, changes in the volume and severity of past due loans, portfolio bankruptcy trends, maturity terms extensions, changes in the value of underlying collateral for collateral dependent loans, the effect of other external factors, such as competition, legal and regulatory requirements on the level of estimated credit losses, the existence and effect of any concentrations of credit and changes in the levels of such concentrations, changes in the nature and volume of the portfolio and terms of loans, changes in the quality of the loan review system, changes in the experience, depth, and ability of lending management, and reasonable and supportable economic forecasts, which covered the lives of the finance receivables.

The Company discounted expected cash flows at the financial asset’s effective interest rate. The effective interest rate is defined in ASC 326as the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition of the financial assets. For the Company, this was calculated using adjusted contractual cash flows relative to the amortized cost. The Company also considered prepayment and curtailment effects in calculation of its effective interest rate.

According to ASC 326-20-30-9, estimating expected credit losses is highly judgmental and requires management to produce reasonable and supportable forecasts of expected credit losses. The Company elected to forecast the first four quarters of the credit loss estimate and revert to a long-run average of each considered economic factor as permitted in ASC 326-20-30-9. Based on the final values in the forecast and the uncertainty of a post-pandemic recovery, management elected to revert over four quarters. The Company also used information provided by the Federal Open Market Committee (FOMC) to obtain various forecasts for unemployment rate and gross domestic product, as well as other economic factors that were considered as part of its ACL calculations.

The Company elected not to measure an allowance on accrued interest which is included as a component of amortized cost and limited to performing accounts, defined as an account that is less than 61 days past due. Accrual of interest income on finance receivables is suspended when a loan was contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. Consistent with the application in the prior reporting periods, the Company continued timely reversing of the accrual of interest income when the loan was contractually delinquent 61 days or more. All of these accounts were accounted for in the calculation for allowance for credit losses.

The Company defines a non-performing asset as one that is 61 or more days past due, a Chapter 7 bankruptcy account, or a Chapter 13 bankruptcy account that has not been confirmed by the courts, for which the accrual of interest income is suspended. Upon confirmation of a Chapter 13 bankruptcy account, the account is immediately charged-off. Upon notification of a Chapter 7 bankruptcy, an account is monitored for collectability. In the event the debtors’ balance is reduced by the bankruptcy court, the Company records a loss equal to the amount of principal

balance reduction. The remaining balance is reduced as payments are received. In the event an account is dismissed from bankruptcy, the Company will decide whether to begin repossession proceedings or to allow the customer to make regularly scheduled payments.

Prior to adoption of ASU 2016-13 the Company was periodically evaluating the composition of the portfolio, current economic conditions, the estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and the adequacy of the allowance for credit losses. Management utilized significant judgment in determining probable incurred losses and in identifying and evaluating qualitative factors. This approach aligned with the Company’s lending policies and underwriting standards. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio.

The Company used a trailing twelve-month net charge-off as a percentage of average finance receivables, and applied this percentage to ending finance receivables to estimate probable credit losses. This approach reflected the current trends of incurred losses within the portfolio and closely aligns the allowance for credit losses with the portfolio’s performance indicators. Estimating the allowance for credit losses using the trailing twelve-month charge-off analysis reflected portfolio performance adjusted for seasonality. Management evaluated qualitative factors to support its allowance for credit losses. The Company examined the impact of macro-economic factors, such as year-over-year inflation, as well as portfolio performance characteristics, such as changes in the value of underlying collateral, level of nonperforming accounts, delinquency trends, and accounts with extended terms.

As of November 1, 2023, concurrent with the decision to sell the portfolio, the Company reclassified its finance receivables to held for sale, which are carried at the lower of amortized cost or fair value. As a result of this reclassification, the Company eliminated the allowance for credit losses established under ASC 326 which resulted in a reversal of previously recorded provisions for credit losses for the period from April 1, 2023 through October 31, 2023. The Company compared the fair value and amortized cost of finance receivables held for sale and recorded a held for sale valuation allowance of $17.3 million through earnings to reduce the amortized cost basis to fair value as of March 31, 2024.

The following presents the activity in our allowance for credit losses:

For the year ended March 31, 2024

(In thousands)

Indirect Direct Total

Balance at end of year $ — $ — $ —

(1)Provision for credit losses and reversal of allowance for credit losses is presented net as "Provision for credit losses" in the Consolidated Statements of Operations.

(2)Amounts shown represents charge-offs and recoveries through October 31, 2023. Since November 1, 2023 charge-offs and recoveries are included in "Fair value and other adjustment, net" in the Consolidated Statements of Operations.

For the year ended March 31, 2023

(In thousands)

Indirect Direct Total

The following table presents gross charge-offs and recoveries by receivable origination year for total portfolio:

(In thousands)

Gross Charge-offs Gross Recoveries Net Charge-offs

The following table presents gross charge-offs and recoveries by receivable origination year for Contract segment of portfolio:

(In thousands)

Gross Charge-offs Gross Recoveries Net Charge-offs

The following table presents gross charge-offs and recoveries by receivable origination year for Direct segment of portfolio:

(In thousands)

Gross Charge-offs Gross Recoveries Net Charge-offs

A performing account is defined as an account that is less than 60 days past due. The Company defines an automobile contract as delinquent when more than 25% of payments contractually due by a certain date has not been paid by the immediately following due date, which date may have been extended within limits specified in the servicing agreements or as a result of a deferral. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable.

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

A non-performing account is defined as an account that is contractually delinquent for 60 days or more or is a Chapter 13 bankruptcy account, and the accrual of interest income is suspended. The Company’s charge-off policy for contractually delinquent is 121 days. The Company’s charge-off policy aligns with practices within the subprime auto financing segment.

In the event an account is dismissed from bankruptcy, the Company will decide, based on several factors, to begin repossession proceedings or to allow the customer to begin making regularly scheduled payments.

The following table is an assessment of the credit quality by creditworthiness as of March 31:

(In thousands)

Contracts DirectLoans Total Contracts DirectLoans Total

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

(In thousands)

4. Property and Equipment

Property and equipment as of March 31, 2024 and 2023 is summarized as follows. Depreciation expense was $81 thousand compared to $390 thousand for fiscal years end March 31, 2024 and 2023 respectively.

(In thousands)

Cost AccumulatedDepreciation Net CarryingValue

Furniture and fixtures 6 6 -

Leasehold improvements 2 - 2

Furniture and fixtures 9 6 3

Leasehold improvements 2 - 2

5. Credit Facility

Westlake Credit Facility

On January 18, 2023, NFI and NDS (collectively, the “Borrowers”), two wholly-owned subsidiaries of Nicholas Financial Parent, entered into a Loan and Security Agreement (the "Loan Agreement") for a new senior secured revolving credit facility (the “Credit Facility”) with Westlake Capital Finance, LLC (the “Lender”), who is an affiliate of Westlake, the servicer of substantially all of the Company's receivables, pursuant to which the Lender is providing the Borrowers with a senior secured revolving credit facility in the principal amount of up to $50 million. The Company fully paid the outstanding indebtedness under the Credit Facility as of October 27, 2023.

The availability of funds under the Credit Facility was generally limited to an advance rate of between 70% and 85% of the value of the Borrowers’ eligible receivables. Outstanding advances under the Credit Facility accrued interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. Unused availability under the Credit Facility accrued interest at a rate of 0.25%. The commitment period for advances under the Credit Facility was two years. We refer to the expiration of that time period as the “Maturity Date.”

The Loan Agreement contained customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, and sales of assets. The Loan Agreement also required 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 for their obligations under the Credit Facility. If an event of default occurred, the Lender could have increased borrowing costs, restricted the Borrowers’ ability to obtain additional advances under the Credit Facility, accelerated all amounts outstanding under the Credit Facility, enforced their interest against collateral pledged under the Loan Agreement or enforced such other rights and remedies as they had under the loan documents or applicable law as secured lenders.

If the Borrowers prepaid the loan and terminated the Credit Facility prior to the Maturity Date, then the Borrowers would have been obligated to pay the Lender a termination fee 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 receivable to a third-party prior to the Maturity Date, then the Borrowers would have been obligated to pay the Lender a fee in an amount equal to a specified percentage of the proceeds of such sale.

On January 26, 2024 the Company terminated the Credit Facility. The Company did not incur any termination fees or penalties in connection with the termination of the Credit Facility.

Wells Fargo Credit Facility

On November 5, 2021, NFI and NDS entered into a senior secured credit facility (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 facility (the "Ares Credit Facility") pursuant to a credit agreement among the Company’s subsidiary NF Funding I, Ares Agent Services, L.P. and the lenders party thereto was paid off 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 for the year ended March 31, 2022.

Pursuant to the Credit Agreement, the lenders agreed to extend to the Borrowers a line of credit of up to $175 million. The availability of funds under the Wells Fargo Credit Facility was generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the Wells Fargo Credit Facility accrued interest at a rate equal to the SOFR plus 2.25%. The commitment period for advances under the Wells Fargo Credit Facility was three years.

Pursuant to the Credit Agreement, the Borrowers granted a security interest in substantially all of the Company's assets as collateral for 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 customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets. If an event of default occurred, the lenders could have increased borrowing costs, restricted the Borrowers’ ability to obtain additional advances under the Wells Fargo Credit Facility, accelerated all amounts outstanding under the Wells Fargo Credit Facility, enforced their interest against collateral pledged under the Wells Fargo Credit Facility or enforced such other rights and remedies as they had under the loan documents or applicable law as secured lenders.

As previously announced on Form 8-K filed on October 27, 2022, the Company received a letter from the agent of its lenders, notifying the Company that it was in default and instituting the default rate of interest effective as of August 31, 2022. In the letter, the lenders expressly reserved all rights and remedies available under the credit agreement. Among those rights and remedies was the ability of the lenders to accelerate all of the Company’s obligations under the loan. The Company subsequently announced on Form 8-K filed 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 default and the default rate of interest ceased being applicable as of December 6, 2022.

The amendment furthermore reduced the maximum amount available under the Wells Fargo Credit Facility from $175 million to $60 million, and also reduced the availability of funds under the credit facility from an advance rate of between 80% and 85% of the value of eligible receivables to an advance rate of 50% of the value of eligible receivables, and changed the maturity date of the Wells Fargo Credit Facility from November 5, 2024 to May 31, 2023. The Company incurred overall costs associated with the restructuring in the amount of $0.3 million.

As of March 31, 2024, the Company had no aggregate outstanding indebtedness under the Wells Fargo Credit Facility compared to $29.1 million outstanding amount as of March 31, 2023.

6. Fair Value Disclosures

The Company’s financial instruments consist of cash and cash equivalents, the Term loan advance to Amplex, finance receivables, and the WL Credit Facility. Finance receivables held for sale are measured at the lower of amortized cost or fair value. When the fair value of the finance receivables is less than the amortized cost basis, the Company records a valuation allowance which is a non-recurring fair value measurement. Repossessed assets are measured at the lower of carrying value or fair value less cost to sell. When the fair value less cost to sell of the repossessed assets is less than the carrying value, the Company records a valuation allowance which is a non-recurring fair value measurement.

The Company estimates the fair value of repossessed assets held for sale utilizing auction recoveries statistics, resulting in a classification within Level 3 of the valuation hierarchy, as further described below.

The Company estimates the fair value of finance receivables held for sale utilizing a discounted cash flow approach, which includes an evaluation of the underlying loan characteristics, as well as assumptions to determine the discount rate, credit mark, and prepayment forecasts. In determining the appropriate discount rate, prepayment and credit assumptions, the Company utilized its historical defaults and auction recoveries statistics, as well as publicly reported data for selected peers. Given the unobservable nature of these key inputs, these loans are therefore classified within Level 3 of the valuation hierarchy, as further described below. Significant increases (decreases) in the discount rate, in isolation, could result in a significantly lower (higher) fair value measurement.

Fair value is defined in FASB ASC Topic 820-10-20 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value also assumes that the reporting entity would sell the asset or transfer the liability in the principal or most advantageous

market. Market participants are defined as buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: 1) an unrelated party; 2) knowledgeable (having a reasonable understanding about the asset or liability and the transaction based on all available information, including information that might be obtained through due diligence efforts that are usual or customary); 3) able to transact; and 4) willing to transact (motivated but not forced or otherwise compelled to do so).

The FASB states that “valuation techniques that are appropriate in the circumstances and for which sufficient data are available shall be used to measure fair value.” The valuation techniques for measuring fair value are consistent with the three traditional approaches to value: the market approach, the income approach, and the cost or asset approach. The application of valuation techniques requires the use of common sense, informed judgment, and reasonableness based on the relevant facts and circumstances surrounding the analysis. There are relevant inputs (both observable and unobservable) that can be used in valuation based on the facts and circumstances. The FASB has defined a fair value hierarchy for these inputs which prioritizes the inputs into three broad levels:

•Level 1 inputs are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities.

•Level 2 inputs are defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•Level 3 inputs are defined as unobservable inputs for the asset or liability.

Unobservable inputs should be used only to the extent that relevant observable inputs are not available; this allows for situations where there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs should reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

The fair value of the Credit Facility as of March 31, 2024 was zero. The fair value of the Credit Facility, which was entered late in the prior year, was estimated to be equal to the book value at March 31, 2023 as the interest rate was a variable rate based on SOFR pricing options. The carrying value of cash and cash equivalents approximates fair value.

Fair Value Measurement Using(In thousands) Fair Carrying

Description Level 1 Level 2 Level 3 Value Value

Cash:

Cash equivalents:

March 31, 2023 $ — $ — $ — $ — $ —

Term loan advance to Amplex:

March 31, 2023 $ — $ — $ — $ — $ —

Finance receivables:

Repossessed assets:

Credit facility:

March 31, 2024 $ — $ — $ — $ — $ —

Non-recurring fair value

7. Income Taxes

Income tax expense consists of the following for the years ended March 31:

(In thousands)

Current:

Federal $ - $ 22

Total current - 32

Deferred:

Total deferred - 1,385

Income tax expense $ - $ 1,417

The net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes are reflected in deferred income taxes. Significant components of the Company’s deferred tax assets consist of the following as of March 31:

(In thousands)

Unrealized fair value adjustment 4,162 -

Share-based compensation 30 20

Federal and state net operating loss carryforwards 9,816 4,812

Right of use liability 15 43

Total deferred tax assets 26 43

Deferred tax liabilities

Right of use asset 15 43

Other items 11 -

Total deferred tax liabilities 26 43

Deferred income taxes $ - $ -

Income tax expense reflects an effective U.S. tax rate, which differs from the corporate tax rate for the following reasons:

(In thousands)

Income tax benefit at Federal statutory rate $ (4,355 ) $ (6,838 )

Increase (decrease) resulting from:

Change in valuation allowance 4,590 9,457

State income taxes, net of Federal benefit (770 ) (1,207 )

Income tax expense $ - $ 1,417

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of negative evidence evaluated was the cumulative pre-tax loss over the three-year period ended March 31, 2024. As of March 31, 2024, a full valuation allowance was recorded against the Company’s net deferred tax asset. The federal net operating loss ("NOL") generated for the year ended March 31, 2024 will carryforward indefinitely. Generally, state NOLs begin to expire March 31, 2039.

The Company considers the earnings of the Company’s U.S. subsidiaries to be indefinitely invested outside Canada on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not recorded a deferred tax liability related to the Canadian income taxes and U.S. withholding taxes on approximately $100.4 million of undistributed earnings of the U.S. subsidiaries indefinitely invested outside Canada. When the Company repatriates the U.S. earnings, it would need to adjust its income tax provision as the earnings will no longer be indefinitely invested outside of Canada. If the Company decided to repatriate the U.S. earnings, it would need to adjust its income tax provision in the period the Company determined that the earnings will no longer be indefinitely invested outside of Canada.

8. Leases

The Company leases its corporate headquarters, which is located in Clearwater, Florida. The current lease relating to this space was entered into effective February 1, 2023 and expires on January 31, 2026. The Company previously leased its central business operations hub, which was located in Rock Hill, South Carolina. The lease relating to this space was entered into effective March 20, 2023 and was terminated effective January 31, 2024. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease payments are dependent on a rate or index that may change after the commencement date, other than the passage of time.

As of March 31, 2023, the Company has closed each of its 47 branch offices located in Alabama, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Missouri, Nevada, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and Wisconsin.

The Company’s lease liability was $0.1 million as of March 31, 2024 and $0.2 million as of March 31, 2023. The lease liability was included in accrued expenses, and other liabilities in the Consolidated Balance Sheet for each reporting fiscal year. The liability is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate. The right of use asset was $0.1 million as of March 31, 2024 and $0.2 million as of March 31, 2023. The right of use asset was included in prepaid expenses and other assets in the Consolidated Balance Sheet for each reporting fiscal year.

The Company combines lease and non-lease components for its real estate leases in calculating the present value of the fixed payments. Future minimum lease payments under non-cancellable operating leases in effect as of March 31, 2024, are as follows:

in thousands

Total future minimum lease payments 68

Present value adjustment (3 )

Operating lease liability $ 65

The following table reports information about the Company’s lease cost for the twelve months ended March 31:

(In thousands)

Lease cost:

Operating lease cost $ 57 $ 1,425

Variable lease cost 2 297

The following table reports other information about the Company’s leases for the twelve months ended March 31:

(In thousands)

Other Lease Information

Operating Lease - Operating Cash Flows (Fixed Payments) $ 46 $ 1,663

Operating Lease - Operating Cash Flows (Liability Reduction) $ 111 $ 1,763

The following table reports other information about the Company’s leases as of March 31:

Weighted Average Lease Term - Operating Leases 2.0 years 3.0 years

Weighted Average Discount Rate - Operating Leases 6.50 % 6.50 %

Rent expense for the fiscal years ended March 31, 2024 and 2023 was approximately $0.1 million and $1.8 million, respectively. For any new or modified lease, the Company, at the inception of the contract, determines whether a contract is or contains a lease. The Company records right-of-use ("ROU") assets and lease obligations for its operating leases, which are initially recognized based on the discounted future lease payments over the term of the lease. The Company uses its effective annual interest rate as the discount rate when evaluating leases under Topic 842.

Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Further, the Company has elected to not separate lease from non-lease components. Variable lease costs include expenses such as common area maintenance, utilities, and repairs and maintenance.

9. Share-Based Payments

The Company has share awards outstanding under two share-based compensation plans (the “Equity Plans”). The Company believes that such awards generally align the interests of its employees with those of its shareholders. Under the shareholder-approved 2006 Equity Incentive Plan (the “2006 Plan”) the Board of Directors was authorized to grant option awards for up to approximately 1.1 million common shares. On August 13, 2015, the Company’s shareholders approved the Nicholas Financial, Inc. Omnibus Incentive Plan (the “2015 Plan”) for

employees and non-employee directors. Under the 2015 Plan, the Board of Directors is authorized to grant total share awards for up to 750,000 common shares. Awards under the 2006 Plan will continue to be governed by the terms of that plan. The 2015 Plan replaced the 2006 Plan; accordingly, no additional option awards may be granted under the 2006 Plan. In addition to option awards, the 2015 Plan provides for restricted stock, restricted stock units, performance shares, performance units, and other equity-based compensation.

Option awards previously granted to employees and directors under the 2006 Plan generally vested ratably based on service over a five- and three-year period, respectively, and generally have a contractual term of ten years. Vesting and contractual terms for option awards under the 2015 Plan are essentially the same as those of the 2006 Plan. Restricted stock awards generally cliff vest over a three-year period based on service conditions. Vesting of performance units generally does not commence until the attainment of Company-wide performance goals including annual revenue growth and operating income targets. There are no post-vesting restrictions for share awards.

The Company funds share awards from authorized but unissued shares and does not purchase shares to fulfill its obligations under the Equity Plans. Cash dividends, if any, are not paid on unvested performance units or unexercised options but are paid on unvested restricted stock awards.

A summary of option activity under the Equity Plans as of March 31, 2024, and changes during the year, is presented below.

(Shares and Aggregate Intrinsic Value in thousands)

Granted — —

Exercised — —

Granted — —

Exercised — —

As of March 31, 2024, the Company had no unrecognized compensation related to options grants. For the fiscal years ended March 31, 2024 and 2023, there was no compensation cost expense related to stock options.

A summary of the status of the Company’s non-vested, service based, restricted shares under the Equity Plan is presented below

(Shares and Aggregate Intrinsic Value in thousands)

Granted - -

Forfeited - -

As of March 31, 2024, the Company had $2 thousand of unrecognized compensation related to restricted shares.

For the fiscal years ended March 31, 2024 and 2023, there was $44 thousand and $(69) thousand, respectively, of unrecognized compensation cost related to non-vested restricted share awards granted under the Equity Plans.

10. Employee Benefit Plan

The Company has a 401(k)-retirement plan under which all employees are eligible to participate. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company made a discretionary matching employee contribution for $35 thousand and $88 thousand for the year ended March 31, 2024 and 2023, respectively.

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 effect on the Company’s financial condition or results of operations.

Specifically, the Company has been sued together with several other defendants, in a lawsuit styled: Nicholas Financial, Inc. v. Jeremiah Gross, No. 21CY-CV02148-01, 7th Judicial Circuit, Clay County, Missouri. On March 9, 2021, the Company filed suit against Jeremiah Gross for a deficiency balance owed to the Company following the 2018 surrender and sale of his motor vehicle which secured a loan from the Company. On April 22, 2021, a default judgment for $7,984.18 was entered against Mr. Gross. On December 22, 2021, Mr. Gross filed a motion to set aside the default 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 deficient 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 deficient notices from the Company regarding the sale of their recovered vehicles and the calculation of the deficiency owed the Company. The Company filed its answer to the counterclaim on May 13, 2022. On September 9, 2022, the Company filed a motion for summary judgment as to all counts of the counterclaim and the Company's claim against Mr. Gross. The motion was argued on February 16, 2023. On March 27, 2023, the Court entered an order granting the motion in part and denying the motion in part. The Court found in favor of the Company as to the counterclaim regarding presale notices and prejudgment interest, and in Mr. Gross’s favor for the counterclaim as to post-sale notices. The Court denied the Company’s motion for summary judgment as to its claim for a deficiency against Mr. Gross. The remaining claim related to post-sale notices sent to Missouri customers. The parties, including the Company’s insurer Gemini, settled the case and the order and judgment approving final settlement were entered during a hearing on May 15, 2024.

After the hearing on May 15, 2024, Mr. Gross filed a crossclaim within the same case against several of the Company’s insurers (Zurich American Ins. Co., American Guarantee and Liability Insurance Co., and American Zurich Insurance Co. (collectively, the “Zurich Insurers”)), which had intervened in the case. On June 14, 2024, the Zurich Insurers filed a motion to amend the judgment and then removed the case to federal court. They purport to have removed only part of the case to federal court but the Company is unaware of any authority for a partial removal. The Zurich Insurers have subsequently filed a declaratory judgment action against the Company and Mr. Gross in the United States District Court for the Middle District of Florida pursuant to which they seek a declaration that their policies provided no coverage to the Company, they had no duty to defend the Company, and they did not wrongfully deny coverage to the Company. On June 24, 2024, the Zurich Insurers filed a notice of appeal of the judgment that they previously moved to amend in state court.

12. Restructuring Activities

On July 18, 2022, the Company announced its plan to close eleven branches and a consolidate its workforce, impacting approximately 44 employees.

The Company then announced on a Form 8-K filed on November 3, 2022 a change in its operating strategy and restructuring plan with the goal of reducing operating expenses and freeing up capital. As part of this plan, the Company shifted from a decentralized business model to a regionalized business model and entered into a loan servicing agreement with Westlake Portfolio Management, LLC ("WPM").

While the Company intended to continue Contract purchase and origination activities, albeit on a much smaller scale, its servicing, collections and recovery operations were outsourced to WPM. As of March 31, 2024, the Company has ceased originations of Direct Loans and Contract purchases.

As part of this restructuring plan, the Company announced the closure of its branches and planned to continue operating from its corporate headquarters in Clearwater, Florida. Consistent with this significant reduction in footprint, the Company reduced its workforce to approximately 7 employees as of March 31, 2024.

The Company anticipates that execution of its evolving restructuring plan will free up capital and permit the Company to allocate excess capital to increase shareholder returns, whether by acquiring loan portfolios or businesses or by investing outside of the Company’s traditional business.

On November 13, 2023, the Company and Nicholas Financial, Inc., a Florida corporation (“Nicholas”) and an indirect wholly-owned subsidiary of the Company, entered into a Master Asset Purchase Agreement (the “Purchase Agreement”) with Westlake Services, LLC dba Westlake Financial, a California limited liability company (“Westlake Financial”), pursuant to which the Company and Nicholas agreed to sell, and Westlake Financial agreed to purchase from the Company and Nicholas, substantially all of the Company’s and Nicholas’ assets, consisting of Nicholas’ motor vehicle retail installment sale contracts and unsecured consumer loan contracts (collectively, the “Contracts”) and the accounts receivable related to such Contracts (collectively, the “Receivables”).

Westlake is an affiliate of Westlake Portfolio Management, LLC, a California limited liability company (“WPM”), and Nicholas entered into a Loan Servicing Agreement (the “Servicing Agreement”) with WPM on November 3, 2022, pursuant to which WPM commenced servicing of the Receivables under the Contracts in December 2022 and has continued such servicing to date. In connection with entering into the Purchase Agreement, the Company has ceased new loans originations, and WPM is expected to continue to service such Receivables for Nicholas until the closing of the transaction contemplated by the Purchase Agreement. In addition to other customary closing conditions, the closing under the Purchase Agreement has been subject to the approval of the shareholders of the Company. The Company received shareholder approval for the closing of the transaction contemplated by the Purchase Agreement on April 15, 2024.

Following the closing of the transaction contemplated by the Purchase Agreement, the Company intends to explore strategic alternatives for the use of the net proceeds of the asset sale and to seek to maximize the value of deferred tax assets available to the Company.

Costs related to the restructuring plan are summarized as follows:

(In thousands)

13. Stock Plans

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

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

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

The table below summarizes treasury share transactions under the Company’s stock repurchase program.

Twelve months ended March 31,(In thousands)

Number of Shares Amount Number of Shares Amount

Treasury shares purchased - - 241 (2,389 )

14. Subsequent Events

Redomestication

On April 18, 2024, the Company completed its continuation and domestication from British Columbia to the State of Delaware by filing its Certificate of Corporate Domestication and Certificate of Incorporation in the State of Delaware. The Company has estimated a potential tax liability due to Canada ranging between $1.7 million and $2.6 million. In June 2024, the Company made an estimated payment of $1.7 million to Canada and the Company expects to file a stub period created from the domestication in October 2024.

Disposition of Assets to Westlake Financial

On November 13, 2023, the Company and Nicholas entered into the Purchase Agreement with Westlake Financial, pursuant to which the Company and Nicholas agreed to sell, and Westlake agreed to purchase substantially all of the Company’s and Nicholas’ assets, consisting of Nicholas’ motor vehicle retail installment sale contracts and unsecured consumer loan contracts (collectively, the “Contracts”) and the accounts receivable related to such Contracts (collectively, the “Receivables”).

As discussed in Note 12, Westlake Financial is an affiliate of WPM, and Nicholas entered into the Servicing Agreement with WPM on November 3, 2022, pursuant to which WPM commenced servicing of the Receivables under the Contracts in December 2022. In connection with entering into the Purchase Agreement, the Company ceased new originations, and WPM continued to service the Receivables for Nicholas until the closing of the transactions contemplated by the Purchase Agreement.

On April 26, 2024, the transactions contemplated by the Purchase Agreement closed with an aggregate purchase price of $65.6 million. After adjustments to the gross aggregate purchase price, the Company received net cash proceeds of $40.6 million and retained $25.9 million in principal and interest cash payments collected by the Company prior to the closing that otherwise would have been paid to Westlake.

The following unaudited pro forma consolidated balance sheet as of March 31, 2024, presents the Company’s consolidated balance sheet as if the sale of substantially all finance receivables and repossessed assets occurred on March 31, 2024.

March 31, Transaction Accounting Pro Forma Ending

2024 Adjustments Note Balance

Assets

Prepaid expenses and other assets 438 - 438

Income taxes receivable 902 - 902

Property and equipment, net 75 75

Liabilities and shareholders’ equity

Contingent liability $ - $ 2,620 C $ 2,620

Accounts payable, accrued expenses, and other liabilities 996 - 996

Commitments and contingencies (see Note 11)

Shareholders’ equity:

Preferred stock - - -

Notes to the Unaudited Pro Forma Financial Information

This adjustment represents the receipt of cash consideration at the closing of the transaction.

These adjustments reflect the elimination of the finance receivables and repossessed assets sold to Westlake.

This adjustment represents the disputed amount of contingent payments that were previously paid from Westlake to the Company that may be required to be repaid to Westlake. The negotiations on this dispute have not yet been finalized.

This adjustment reflects the estimated loss of $1.3 million arising from the sale of net assets to Westlake, as if the sale occurred on March 31, 2024.

Acquisition of Amplex Electric, Inc.

On June 15, 2024, the Company closed the Share Purchase Agreement to acquire Amplex Electric, Inc., an Ohio corporation (“Amplex”), from the sellers (the “Sellers”), pursuant to which the Sellers have agreed to sell, and the Company has agreed to purchase 51% of the issued and outstanding common shares, no par value per share, of Amplex and the Company has agreed to make payment to holders of options for Amplex’s common shares in consideration of cancellation of such options for preliminary purchase consideration of $11.6 million, which was paid in cash on the date of closing. The acquisition will be accounted for using the acquisition method and the results of the acquired business will be included in the Company’s results of operations from the acquisition date. Based on the timing of the

acquisition and lack of available information, the Company determined it was impractical to disclose a preliminary purchase price allocation at this time. The Company is currently in the process of completing the accounting for the transaction and expects to have preliminary allocations of the purchase consideration to the assets acquired and liabilities assumed in the first quarter of the current fiscal year.

In conjunction with the closing of the Share Purchase Agreement, the Company purchased an additional 1,674 shares of Amplex common stock at the share purchase price of $1,792.55 per share for an aggregate purchase price of $3 million.

OLD MARKET CAPITAL Corp OMCC US Equity

OMCC · 10-K · period ended 2024-03-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Item 8. Financial Statements and Supplementary Data

OLD MARKET CAPITAL Corp OMCC US Equity☆

OMCC · 10-K · period ended 2024-03-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Item 8. Financial Statements and Supplementary Data

OLD MARKET CAPITAL Corp OMCC US Equity