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 included liabilities assumed estimated to be $2.3 million. The Company has accounted for the acquisition as a business combination applying the acquisition method.

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. At December 31, 2015, the Company’s new estimation of this liability resulted in a $0.8 million reduction in goodwill. A final determination will be made as of the June 30, 2016 measurement date.

Pro Forma Information

The following unaudited pro forma combined statement of income for the three months ended March 31, 2015 is based on our historical consolidated financial statements and gives effect to the acquisition of the Titan Agencies as if it had occurred on January 1, 2014. 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 Income Three Months Ended March 31, 2015	Company Historical			Titan Agencies Historical		Pro Forma Adjustments				Pro Forma Combined
Revenues:
Premiums earned	$	62,615		$	-	$	-			$	62,615
Commission and fee income		11,348			8,125		-				19,473
Investment income		1,145			-		-				1,145
Net realized losses on investments, available-for-sale		(3	)		-		-				(3	)
		75,105			8,125		-				83,230
Costs and expenses:
Losses and loss adjustment expenses		47,934			-		-				47,934
Insurance operating expenses		25,084			7,259		-				32,343
Other operating expenses		323			-		-				323
Litigation settlement		110			-		-				110
Stock-based compensation		19			-		-				19
Depreciation		407			-		25		(a)		432
Amortization of identifiable intangibles assets		-			-		228		(b)		228
Interest expense		424			-		592		(c)		1,016
		74,301			7,259		845				82,405
Income before income taxes		804			866		(845	)			825
Provision for income taxes		318			346		(338	)	(d)		326
Net income	$	486		$	520	$	(507	)		$	499
Net income per share:
Basic	$	0.01								$	0.01
Diluted	$	0.01								$	0.01
Number of shares used to calculate net income per share:
Basic		41,016									41,016
Diluted		41,304									41,304

Pro forma adjustments

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

(a)	Depreciation expense related to acquired tangible asset

(b)	Amortization expense related to acquired identifiable intangible asset

(c)	Interest expense related to acquisition financing

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