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 September 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 nine months ended September 30, 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 statement does not necessarily reflect what the combined results of operations would have been had the acquisition occurred on the date indicated. It 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 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	—		92,594
Other operating expenses	881	—	—		881
Litigation settlement	3,645	—	—		3,645
Stock-based compensation	109	—	—		109
Depreciation	1,224	—	50	(a)	1,274
Amortization of identifiable intangibles assets	261	—	455	(b)	716
Interest expense	1,924	—	1,190	(c)	3,114
	246,387	14,555	1,695		262,637
Loss before income taxes	(3,030)	(8)	(1,695)		(4,733)
Benefit for income taxes	(813)	(3)	(678)	(d)	(1,494)
Net loss	$ (2,217)	$ (5)	$ (1,017)		$ (3,239)
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 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%