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Note 2 - Business Combinations

12 Months Ended

Dec. 31, 2021

Business Combination Disclosure [Text Block]

2.	Business Combinations

On July 20, 2021, the Company completed the acquisition (the “Acquisition”) pursuant to that certain Equity Purchase Agreement (the “First Purchase Agreement”) dated April 20, 2021 with NCTIC, a Florida corporation, NCTG, a Florida limited liability company, Southern Fidelity Insurance Company, a Florida corporation (“SFIC”), Southern Fidelity Managing Agency, LLC, a Florida limited liability company (“SFMA”), and Preferred Managing Agency, LLC, a Florida limited liability company (“PMA” and together with SFIC and SFMA, each, a “Seller” and collectively, the “Sellers”). On such date, pursuant to the First Purchase Agreement, the Company purchased 100% of the stock of NCTIC and 100% of the membership interest in NCTG for $5.463 million, adjusted for a customary post-closing working capital adjustment (the “Purchase Price”). Pursuant to the mechanics in the First Purchase Agreement, the Purchase Price was determined at closing by taking the $5.5 million purchase price originally agreed to under the First Purchase Agreement, subtracting the debt of NCTIC and NCTG, adding payment for $75,000 of the transaction expenses of the Sellers and, adding a closing related working capital adjustment. The Company funded the Purchase Price from cash on hand. Also at closing, the Company and Sellers agreed that the economic benefits and burdens of the ownership of the equity, including for accounting and tax purposes, be transferred as of 12:01 am on July 1, 2021. For all other purposes, the effective time of the transfer remained July 20, 2021.

Pursuant to the Acquisition, the Company effectively purchased (i) 100% of the stock of NCTIC, a Florida title insurer formed in 2017, and (ii) a 100% membership interest in NCTG, which owns a 50% non-controlling membership interest in TAV, and by virtue thereof, owns 50% of the membership interest in Omega, also a Florida based title agency. NCTIC provides title insurance, closing and/or escrow services and similar or related services in the state of Florida in connection with residential real estate transactions. Omega operates 10 title agency locations in Florida providing title agency services for residential and commercial real estate transactions.

On September 1, 2021, the Company entered into a Membership Interests Purchase Agreement (the “Second Purchase Agreement”) with TAV and Fidelis US Holdings, Inc., a Delaware corporation (“Second Agreement Seller”). On such date, pursuant to the Second Purchase Agreement and in an immediate sign-and-close transaction, the Company purchased 50% of the membership interests of TAV from Second Agreement Seller (the “Second Acquisition”) for $2.2 million (the “Second Acquisition Purchase Price”).

Combined with the Acquisition by the Company in July 2021 of a 100% membership interest in NCTG, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV, and by virtue thereof, owns all of the membership interests in Omega. The 50% non-controlling membership interest in TAV was accounted for under the equity method of accounting until the Second Acquisition.

The purchase price allocation for NCTIC and NCTG is as follows (in thousands):

Cash paid for NCTIC	$	4,453
Cash paid for NCTG		1,010
Total consideration paid.	$	5,463

	NCTIC			NCTG
Cash and cash equivalents	$	4,834		$	9
Accounts receivable		40			-
Deferred tax assets		14			-
Investment in TAV		-			593
Other assets		4			418
Total assets acquired		4,892			1,020

Accrued expenses		168			10
Reinsurance payable		41			-
Escrow liability		4			-
Reserve for claims		209			-
Total liabilities assumed		422			10

Net assets acquired	$	4,470		$	1,010
Bargain purchase gain	$	(17	)	$	-

A bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree is less than the fair value of the identifiable net assets acquired. The bargain purchase gain was primarily driven by differences in NCTIC’s statutory surplus and GAAP surplus at the date of acquisition. The Company believes that the Sellers wanted to exit the business relatively quickly and there were a limited number of potential buyers due to factors inherent to the property and casualty market, which resulted in a bargain purchase gain. The bargain purchase gain is recorded in other income on the Consolidated Statement of Operations.

On September 1, 2021, the Company acquired the remaining 50% membership interests of TAV for $2.2 million. This acquisition, combined with the July 2021 Acquisition of a 100% membership interest in NCTG, which owns a 50% membership interest in TAV, made the Company the sole owner of TAV.

The operating results of TAV are included in the Company’s consolidated statements of operations beginning September 1, 2021. TAV’s results are included in the title insurance segment.

The final purchase price allocation for TAV at fair value is as follows (in thousands):

Cash paid for remaining 50% of TAV	$	2,200
Fair value of existing equity interest		3,564
Total consideration	$	5,764

Cash and cash equivalents	$	12,044
Accounts receivable		166
Prepaid expenses		76
Lease assets		447
Fixed assets		216
Total assets acquired		12,949

Accrued expenses		32
Management fee payable		455
Lease liability		447
Escrow liability		9,293
Payable to affiliate		864
Note payable		545
Total liabilities assumed		11,636

Net assets acquired		1,313
Goodwill	$	4,451

The acquisition date fair value of the Company’s previously held equity interest in TAV was $3.6 million with a fair value primarily estimated through an income approach valuation. The Company recorded a gain of $3.3 million on the fair value remeasurement of our previously held equity interest in TAV on the consolidated statements of operations for the year ended December 31, 2021.

The acquisition of the remaining equity interest was accounted for as a step-transaction in accordance with FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). The Second Acquisition Purchase Price has been allocated to TAV's assets acquired and liabilities assumed based on our best estimates of the fair values as of the acquisition date. Due to the close proximity in timing of the Second Acquisition and our filing of this Annual Report on Form 10-K, the fair value of assets acquired and liabilities assumed represent a preliminary allocation as our evaluation of facts and circumstances available as of December 31, 2021 is ongoing. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. Goodwill consists primarily of intangible assets that do not qualify for separate recognition.

Pursuant to Topic 805, the consolidated financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional adjustments as we obtain information not available as of the completion of this preliminary fair value calculation as determined within the measurement period. We will also be required to record, in the same period as the consolidated financial statements, the effects to any income statement captions, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.

The following table presents unaudited pro forma financial information as if NCTIC, NCTG, and TAV had been included in the Company’s financial results as of January 1, 2021 and 2020:

	For the year ended
	December 31,
	2021 (a,b,c)		2020
Revenues	$	7,376	$	6,386
Net income	$	46	$	909

(a)

Pro forma net income for the year ended December 31, 2021 excludes $545,000 extinguishment of debt income recorded in September 2021 due to the SBA’s forgiveness of Omega’s PPP Loan.

(b)

Pro forma net income for the year ended December 31, 2021 excludes $3.3 million of gain on the fair value remeasurement of our previously held equity interest in TAV.

(c)

Pro forma net income for the year ended December 31, 2021 excludes approximately $242,000 of legal and professional fees related to the First and Second Acquisitions.