11. 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 was subject to change based on the actual amount of returned commissions and the Company’s final estimation of this liability resulted in a $0.8 million reduction in goodwill through June 30, 2016.

The Company considers this acquisition to be a separate reporting unit for goodwill impairment analysis purposes. At June 30, 2016, the Company concluded that there was no indication of impairment and that a quantitative analysis was not necessary as of this date. The date of the Company’s annual impairment analysis is each October 1.

Pro Forma Information

The following unaudited pro forma combined statement of income for the three and six months ended June 30, 2015 are 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 June 30, 2015	Company Historical	Titan Agencies Historical	Pro Forma Adjustments		Pro Forma Combined
Revenues:
Premiums earned	$ 67,300	$ —	$ —		$ 67,300
Commission and fee income	11,929	6,422	—		18,351
Investment income	1,406	—	—		1,406
Net realized losses on investments, available-for-sale	(4)	—	—		(4)
	80,631	6,422	—		87,053
Costs and expenses:
Losses and loss adjustment expenses	55,003	—	—		55,003
Insurance operating expenses	23,645	7,296	—		30,941
Other operating expenses	263	—	—		263
Litigation settlement	129	—	—		129
Stock-based compensation	53	—	—		53
Depreciation	392	—	25	(a)	417
Amortization of identifiable intangibles assets	7	—	228	(b)	235
Interest expense	449	—	598	(c)	1,047
	79,941	7,296	851		88,088
Income (loss) before income taxes	690	(874)	(851)		(1,035)
Provision (benefit) for income taxes	375	(350)	(340)	(d)	(315)
Net income (loss)	$ 315	$ (524)	$ (511)		$ (720)
Net income (loss) per share:
Basic	$ 0.01				$ (0.02)
Diluted	$ 0.01				$ (0.02)
Number of shares used to calculate net income (loss) per share:
Basic	41,020				41,020
Diluted	41,384				41,384

Pro Forma Statement of Income Six Months Ended June 30, 2015	Company Historical	Titan Agencies Historical	Pro Forma Adjustments		Pro Forma Combined
Revenues:
Premiums earned	$ 129,915	$ —	$ —		$ 129,915
Commission and fee income	23,278	14,547	—		37,825
Investment income	2,551	—	—		2,551
Net realized gains on investments, available-for-sale	(7)	—	—		(7)
	155,737	14,547	—		170,284
Costs and expenses:
Losses and loss adjustment expenses	102,937	—	—		102,937
Insurance operating expenses	48,730	14,555	—		63,285
Other operating expenses	586	—	—		586
Litigation settlement	239	—	—		239
Stock-based compensation	72	—	—		72
Depreciation	800	—	50	(a)	850
Amortization of identifiable intangibles assets	7	—	455	(b)	462
Interest expense	872	—	1,190	(c)	2,062
	154,243	14,555	1,695		170,493
Income (loss) before income taxes	1,494	(8)	(1,695)		(209)
Provision (benefit) for income taxes	693	(3)	(678)	(d)	12
Net income (loss)	$ 801	$ (5)	$ (1,017)		$ (221)
Net income (loss) per share:
Basic	$ 0.02				$ (0.01)
Diluted	$ 0.02				$ (0.01)
Number of shares used to calculate net income (loss) per share:
Basic	41,018				41,018
Diluted	41,347				41,347

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%