Note 5 - Acquisition

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 5 ACQUISITION

On December 1, 2020, the Company acquired 100% of the outstanding shares of PWI Holdings, Inc. for cash consideration of $24.4 million. The final purchase price was subject to a working capital true-up that was finalized during the first quarter of 2021 of $0.1 million. PWI Holdings, Inc., through its subsidiaries Preferred Warranties, Inc., Superior Warranties, Inc., Preferred Warranties of Florida, Inc., and Preferred Nationwide Reinsurance Company, Ltd. (collectively, "PWI"), markets, sells and administers vehicle service agreements in all fifty states, primarily through a network of automobile dealer partners. As further discussed in Note 18, "Segmented Information," PWI is included in the Extended Warranty segment. This acquisition allows the Company to grow its portfolio of warranty companies and further expand into the vehicle service agreement business.

This acquisition was accounted for as a business combination using the acquisition method of accounting.  The purchase price was provisionally allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and were subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one-year as permitted under U.S. GAAP.   During the third quarter of 2021, the Company finalized its fair value analysis of the assets acquired and liabilities assumed with the assistance of a third-party.

The Company records measurement period adjustments in the period in which the adjustments occur.  During the three months ended September 30, 2021, the Company recorded a cumulative net measurement period adjustment that decreased goodwill by $18.8 million compared to the amount recorded at December 31, 2020. The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, and the working capital true-up, as follows:

• $19.6 million of separately identifiable intangible assets were recognized resulting from acquired customer relationships ($15.0 million) and trade name ($4.6 million);

• A $3.6 million decrease to deferred service fees;

• Deferred income tax liabilities of $4.2 million were recognized, primarily related to the measurement period adjustments for intangible assets and deferred service fees;

• An increase to accrued expenses and other liabilities of $0.1 million; and

• An increase to the final purchase price of $0.1 million related to the working capital true-up.

The measurement period adjustment related to the customer relationships intangible asset also resulted in an increase in amortization expense and accumulated amortization of $1.9 million that was recorded during the three months ended September 30, 2021, of which:

• $0.6 million relates to the three months ended September 30, 2021;

• $0.6 million relates to the three months ended June 30, 2021;

• $0.6 million relates to the three months ended March 31, 2021; and

• $0.1 million relates to the year ended December 31, 2020.

The measurement period adjustment related to deferred service fees also resulted in a decrease service fee and commission revenue of $1.9 million that was recorded during the three months ended September 30, 2021, of which:

• $0.4 million relates to the three months ended September 30, 2021;

• $0.5 million relates to the three months ended June 30, 2021;

• $0.7 million relates to the three months ended March 31, 2021; and

• $0.3 million relates to the year ended December 31, 2020.

The Company notes that had ASU 2021-08 (see Note 4, "Recently Issued Accounting Standards") been applicable to the PWI acquisition, the Company would not have recorded the $3.6 million reduction to deferred service fees and would not have recorded the $1.9 million reduction to service fee and commission revenue during the third quarter of 2021.

Refer toNote 8, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition.  The goodwill of $20.2 million represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company paid to grow its portfolio of warranty companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes.

The following table summarizes the finalized allocation recorded during the third quarter of 2021 of the PWI assets acquired and liabilities assumed at the date of acquisition:

(in thousands)
	December 1, 2020
Cash and cash equivalents	$	90
Restricted cash		21,578
Service fee receivable		1,459
Other receivables		2,748
Income taxes recoverable		60
Property and equipment, net		175
Right-of-use asset		254
Goodwill		20,238
Intangible asset subject to amortization - customer relationships		15,000
Intangible asset subject to amortization - trade name		4,550
Other assets		1,321
Total assets	$	67,473
Accrued expenses and other liabilities	$	8,165
Lease liability		255
Net deferred income tax liabilities		4,229
Deferred service fees		30,400
Total liabilities	$	43,049
Purchase price	$	24,424