9. Business Combination

Acquisition of the Titan Agencies

On July 1, 2015, in order to expand its geographic presence, the Company completed the acquisition of certain assets of Titan Insurance Services, Inc. and Titan Auto Insurance of New Mexico, Inc. (the “Titan Agencies”). These agencies sell private passenger non-standard automobile insurance and complimentary products, principally in California, but also in Texas, Arizona, Florida, Nevada and New Mexico. The Titan Agencies were previously owned and operated by Nationwide. Pursuant to the Asset Purchase Agreement (the “APA”), the Company acquired the assets of 83 retail stores for total consideration of $36.0 million, which includes liabilities assumed of $2.3 million. The Company has accounted for the acquisition as a business combination applying the acquisition method.

In connection with this acquisition, the Company also entered into an insurance agency contract with the parent company of the sellers under which it anticipates writing some of the business produced through these retail locations. In addition, the Company entered into a transaction services agreement with the parent company through December 31, 2015 to assist in the transition of the acquired operations.

Financing the Acquisition

To finance this acquisition, on June 29, 2015, the Company borrowed the full amount under a $30 million Loan Agreement (the “Loan Agreement”) with Diamond Family Investments, LP, an affiliate of Gerald J. Ford, the Company’s controlling stockholder. The Loan Agreement provided a $30 million interest-only senior term loan facility, maturing in full on June 29, 2025. Commencing June 29, 2016, the Company has the right to prepay the loan in whole or in part, in cash, without premium or penalty, upon written notice to the lender. Amounts prepaid under the Loan Agreement may not be reborrowed. The term loan outstanding under the Loan Agreement bears interest at a rate of 8% per annum. The Loan Agreement contains certain representations, warranties and covenants. The Loan Agreement also contains customary events of default, including but not limited to: nonpayment; material inaccuracy of representations and warranties; violations of covenants; cross-default to material indebtedness; certain material judgments; certain bankruptcies and liquidations; invalidity of the loan documents and related events; and a change of control (as defined in the Loan Agreement). The loan is presented in the accompanying financial statements net of unamortized loan issuance costs of $0.3 million.

Purchase Price Allocation

The following table summarizes the estimated fair value of the assets acquired at the date of acquisition:

Tangible assets	$	1,847
Identifiable intangible asset		4,000
Goodwill		30,200
Total assets acquired		36,047
Less: liabilities assumed		(2,277	)
Total cash paid	$	33,770

The identifiable intangible asset represents policy renewal rights and customer relationships. The fair value was determined using an “excess earnings” method that relied on projected future net cash flows including key assumptions for the customer retention and renewal rates. Accordingly, amortization will be recorded over 7.5 years on an accelerated basis and will decline in subsequent years in proportion to projected policy expirations. For the three months ended September 30, 2015, $0.2 million relating to the identifiable intangible asset was amortized against income. Goodwill and the identifiable intangible asset from this acquisition will be deductible for tax purposes.

Liabilities assumed included a $2.0 million estimate of the expected liability for returned commissions as of the closing date. This liability is subject to change based on the actual amount of returned commissions. This, or any other change in the fair value determinations, would result in an adjustment to goodwill.

The results of the acquired retail locations have been included in the Company’s consolidated financial statements from the July 1,2015 acquisition date. During the three and nine months ended September 30, 2015, the Company’ insurance operating expenses included acquisition costs of $0.0 million and $0.2 million, respectively, and integration costs of $0.7 million and $0.8 million, respectively. Revenues and income before tax benefit of the acquired retail locations included in the Company’s results for the three months ended September 30, 2015 were $6.9 million and $0.4 million (excluding acquisition and integration-related costs), respectively.

In the future, the Company will be required to perform periodic impairment tests of the goodwill and the identifiable intangible asset which may result in impairment charges to these assets should any impairment indicators arise.

Pro Forma Information

The following unaudited pro forma combined statement of loss for the nine months ended September 30, 2015 and statements of income for the three and nine months ended September 30, 2014 are based on our historical consolidated financial statements and give effect to the acquisition of the Titan Agencies as if it had occurred on January 1, 2014. The Company’s historical results for the nine months ended September 30, 2015 includes the results of the former Titan Agencies for the three months since the July 1, 2015 acquisition date.

The pro forma adjustments, including interest expense on the debt incurred to finance the acquisition, reflect the combined results as if the acquisition occurred on January 1, 2014. There are no adjustments for the effect of any future synergies that could be achieved as a result of the acquisition.

The pro forma combined financial statements do not necessarily reflect what the combined results of operations would have been had the acquisition occurred on the date indicated. They also may not be useful in predicting the future combined results of operations. The actual combined results of operations may differ significantly from the combined pro forma amounts reflected herein due to a variety of factors.

Pro Forma Statement of Loss Nine Months Ended September 30, 2015	Company Historical			Titan Agencies Historical Six Months Ended June 30, 2015			Pro Forma Adjustments				Pro Forma Combined
Revenues:
Premiums earned	$	197,423		$	-		$	-			$	197,423
Commission and fee income		42,252			14,547			-				56,799
Investment income		3,695			-			-				3,695
Net realized losses on investments, available-for-sale		(13	)		-			-				(13	)
		243,357			14,547			-				257,904
Costs and expenses:
Losses and loss adjustment expenses		160,304			-			-				160,304
Insurance operating expenses		78,039			14,555			(180	)	(a)		92,414
Other operating expenses		881			-			-				881
Litigation settlement		3,645			-			-				3,645
Stock-based compensation		109			-			-				109
Depreciation		1,224			-			50		(b)		1,274
Amortization of identifiable intangibles assets		261			-			387		(c)		648
Interest expense		1,924			-			1,193		(d)		3,117
		246,387			14,555			1,450				262,392
Loss before income taxes		(3,030	)		(8	)		(1,450	)			(4,488	)
Income tax benefit		(813	)		(3	)		(580	)	(e)		(1,396	)
Net loss per share:	$	(2,217	)	$	(5	)	$	(870	)		$	(3,092	)
Net loss per share:
Basic	$	(0.05	)								$	(0.08	)
Diluted	$	(0.05	)								$	(0.08	)
Number of shares used to calculate net loss per share:
Basic		41,026										41,026
Diluted		41,026										41,026

Pro Forma Statement of Income Three Months Ended September 30, 2014	Company Historical			Titan Agencies Historical		Pro Forma Adjustments				Pro Forma Combined
Revenues:
Premiums earned	$	54,369		$	-	$	-			$	54,369
Commission and fee income		10,097			7,223		-				17,320
Investment income		1,142			-		-				1,142
Net realized losses on investments, available-for-sale		(4	)		-		-				(4	)
		65,604			7,223		-				72,827
Costs and expenses:
Losses and loss adjustment expenses		41,440			-		-				41,440
Insurance operating expenses		20,624			6,377		-				27,001
Other operating expenses		244			-		-				244
Litigation settlement		30			-		-				30
Stock-based compensation		39			-		-				39
Depreciation		423			-		25		(b)		448
Amortization of identifiable intangibles assets		-			-		228		(c)		228
Interest expense		427			-		613		(d)		1,040
		63,227			6,377		866				70,470
Income before income taxes		2,377			846		(866	)			2,357
Provision for income taxes		257			338		(346	)	(e)		249
Net income	$	2,120		$	508	$	(520	)		$	2,108
Net income per share:
Basic	$	0.05								$	0.05
Diluted	$	0.05								$	0.05
Number of shares used to calculate net income per share:
Basic		40,995									40,995
Diluted		41,297									41,297

Pro Forma Statement of Income Nine Months Ended September 30, 2014	Company Historical		Titan Agencies Historical		Pro Forma Adjustments				Pro Forma Combined
Revenues:
Premiums earned	$	161,971	$	-	$	-			$	161,971
Commission and fee income		29,323		21,926		-				51,249
Investment income		3,936		-		-				3,936
Net realized gains on investments, available-for-sale		36		-		-				36
		195,266		21,926		-				217,192
Costs and expenses:
Losses and loss adjustment expenses		119,323		-		-				119,323
Insurance operating expenses		65,739		21,073		-				86,812
Other operating expenses		722		-		-				722
Litigation settlement		106		-		-				106
Stock-based compensation		151		-		-				151
Depreciation		1,303		-		75		(b)		1,378
Amortization of identifiable intangibles assets		-		-		715		(c)		715
Interest expense		1,275		-		1,820		(d)		3,095
		188,619		21,073		2,610				212,302
Income before income taxes		6,647		853		(2,610	)			4,890
Provision (benefit) for income taxes		547		341		(1,044	)	(e)		(156	)
Net income	$	6,100	$	512	$	(1,566	)		$	5,046
Net income per share:
Basic	$	0.15							$	0.12
Diluted	$	0.15							$	0.12
Number of shares used to calculate net income per share:
Basic		40,981								40,981
Diluted		41,285								41,285

Pro forma adjustments

The following adjustments have been reflected in the unaudited pro forma combined financial information.

(a)	Elimination of acquisition costs incurred

(b)	Depreciation expense related to acquired tangible asset

(c)	Amortization expense related to acquired identifiable intangible asset

(d)	Interest expense related to acquisition financing

(e)	Calculated income tax effect of pro forma adjustments at the estimated combined federal and state statutory rate of 40%