Nicholas Financial, Inc. (NASDAQ:NICK) is a Canadian holding company with several wholly-owned United States subsidiaries, including Nicholas Financial, Inc., a Florida corporation. The company is a subprime auto lender that has historically financed primary transportation to and from work for the subprime borrower.

Business Overview

Nicholas Financial has traditionally focused on financing used vehicles for subprime borrowers, providing affordable loan terms that incentivize customers to prioritize their accounts. The company's average loan size and payment amounts are lower than many competitors, as it targets the "need" over the "want" in vehicle financing. This strategy has historically resulted in relatively strong portfolio performance compared to industry peers.

In recent years, however, Nicholas Financial has faced significant headwinds. The company's net loss for the fiscal year ended March 31, 2023 was $20.8 million, on annual revenue of $22.2 million and operating cash flow of $1.8 million. For the nine months ended December 31, 2023, the company reported a net loss of $20.6 million.

Restructuring and Strategic Shift

To address these challenges, Nicholas Financial announced a major restructuring and change in operating strategy in late 2022. As part of this plan, the company has outsourced its servicing, collections, and recovery operations to Westlake Portfolio Management, LLC, an affiliate of Westlake Services, LLC, which is the beneficial owner of approximately 6.8% of Nicholas Financial's common stock.

Additionally, Nicholas Financial has consolidated its operations, closing all of its brick-and-mortar branch locations and retaining only 8 employees as of December 2023. The company has also discontinued originating direct loans and is now primarily focused on servicing its existing contract receivables portfolio.

Loan Portfolio Sale

As previously disclosed, on November 13, 2023, Nicholas Financial entered into a Master Asset Purchase Agreement to sell substantially all of its automobile finance installment contracts and unsecured consumer loan contracts to Westlake Services, LLC dba Westlake Financial. This transaction, which is subject to shareholder approval, is expected to free up capital and allow the company to explore strategic alternatives for the use of the net proceeds.

Financials

For the nine months ended December 31, 2023, Nicholas Financial reported a net loss of $20.6 million, compared to a net loss of $18.3 million in the prior year period. Revenue decreased 48.3% to $18.4 million, driven by a reduction in loan originations as the company implemented its restructuring plan.

Liquidity

The company's liquidity position has improved following the repayment of its outstanding debt under the Westlake credit facility in October 2023. As of December 31, 2023, Nicholas Financial had $7.8 million in cash and cash equivalents and no outstanding debt.

Risks and Challenges

Nicholas Financial's transformation is subject to various risks, including the potential failure to realize the anticipated benefits of the restructuring and outsourcing arrangements, the possibility that actual servicing and financing costs exceed estimates, and the uncertainty surrounding the company's ability to successfully execute on a new business plan. Additionally, the company remains exposed to the inherent risks of the subprime auto lending industry, such as elevated credit losses and the impact of macroeconomic conditions on its customer base.

Outlook

Looking ahead, Nicholas Financial is focused on completing the sale of its loan portfolio to Westlake Financial and exploring strategic alternatives for the use of the net proceeds. The company's near-term priorities include managing the transition of servicing operations to Westlake, further reducing operating expenses, and positioning the business for long-term success. However, the ultimate outcome of the company's transformation remains uncertain, and investors should carefully consider the risks and uncertainties involved.

Conclusion

Nicholas Financial is undergoing a significant transformation as it seeks to address the challenges it has faced in recent years. The company's decision to outsource servicing and collections, consolidate operations, and pursue the sale of its loan portfolio to Westlake Financial represents a major strategic shift. While the potential benefits of this transformation are compelling, the execution risks and the inherent uncertainties of the subprime auto lending industry make Nicholas Financial a high-risk investment at this time. Investors should closely monitor the company's progress and carefully weigh the risks and potential rewards before considering an investment.