Note 3 - Business Combinations and Dispositions

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

3.         Business combinations and dispositions

Frank’s International N.V.

As discussed in Note 1, the Merger of Frank’s with Legacy Expro pursuant to the Merger Agreement was completed on October 1, 2021. U.S. GAAP requires the determination of the accounting acquirer, the acquisition date, the fair value of assets and liabilities of the acquired and the resulting measurement of goodwill. The Merger is accounted for as a reverse merger and Legacy Expro has been identified as the acquirer for accounting purposes. As a result, the Company has in accordance with ASC 805, Business Combinations, applied the acquisition method of accounting to account for Frank’s assets acquired and liabilities assumed. Applying the acquisition method of accounting includes recording the identifiable assets acquired and liabilities assumed at their fair values and recording goodwill for the excess of the consideration transferred over the net aggregate fair value of the identifiable assets acquired and liabilities assumed.

The merger consideration was based on Frank’s closing share price on the Closing Date. In a reverse merger involving only the exchange of equity, the fair value of the equity of the accounting acquiree may be used to measure consideration transferred if the value of the accounting acquiree’s equity interests are more reliably measurable than the value of the accounting acquirer’s equity interest. As Legacy Expro was a private company and Frank’s was a public company with a quoted and reliable market price, the fair value of Frank’s equity interests was deemed to be more reliable. Under the acquisition method of accounting, total consideration exchanged was as follows:

			Per share		Amount
	Shares issued		Price		(in thousands)
Issuance of common stock attributable to Frank’s stockholders		38,066,216	$	18.90	$	719,452
Replacement of Frank’s equity awards						7,830
Cash payment to Mosing Holdings LLC pursuant to the amended and restated tax receivable agreement						15,000
Total Merger Consideration Exchanged					$	742,282

The following table sets forth the allocation of the merger consideration exchanged to the fair value of identifiable tangible and intangible assets acquired and liabilities assumed as of the Closing Date, with the recording of goodwill for the excess of the consideration transferred over the net aggregate fair value of the identifiable assets acquired and liabilities assumed ($ in thousands):

	Initial allocation of the consideration		Measurement period adjustments			Allocation of consideration as of December 31, 2022
Cash and cash equivalents	$	187,178	$	-		$	187,178
Restricted cash		2,561		-			2,561
Accounts receivables, net		112,234		(1,020	)		111,214
Inventories		69,567		(109	)		69,458
Assets held for sale		10,061		-			10,061
Income tax receivables		2,030		-			2,030
Other current assets		23,908		(862	)		23,046
Property, plant and equipment		212,639		(2,479	)		210,160
Goodwill		154,399		41,077			195,476
Intangible assets		104,791		-			104,791
Operating lease right-of-use assets		27,406		-			27,406
Other assets		20,494		(70	)		20,424
Total assets		927,268		36,537			963,805
Accounts payable and accrued liabilities		81,959		3,876			85,835
Operating lease liabilities		8,344		-			8,344
Current income tax liabilities		8,932		9,862			18,794
Other current liabilities		19,918		12,108			32,026
Deferred tax liabilities		5,673		-			5,673
Non-current operating lease liabilities		19,607		-			19,607
Other non-current liabilities		40,553		10,691			51,244
Total Liabilities		184,986		36,537			221,523
Total Merger Consideration Exchanged	$	742,282	$	-		$	742,282

The preliminary valuation of the assets acquired and liabilities assumed, including other current liabilities, in the Merger initially resulted in goodwill of $154.4 million. During the third quarter of 2022, the Company finalized the valuation and recorded measurement period adjustments to its preliminary estimates due to additional information received primarily related to accounts payable and accrued liabilities, other current liabilities (please see Note 18 “Commitments and contingencies” for additional information), other non-current liabilities and income taxes. The measurement period adjustments resulted in an increase in goodwill of $41.1 million, for final total goodwill associated with the Merger of $195.5 million. The fair values of identifiable intangible assets were prepared using an income valuation approach, which requires a forecast of expected future cash flows either through the use of the relief-from-royalty method or the multi-period excess earnings method, which are discounted to approximate their current value. The estimated useful lives are based on management’s historical experience and expectations as to the duration of time that benefits from these assets are expected to be realized. 

The intangible assets will be amortized on a straight-line basis over an estimated 10- to 15-year life. We expect annual amortization to be approximately $7.7 million associated with these intangible assets.

Goodwill will not be amortized but rather subject to an annual impairment test, absent any indicators of impairment. Goodwill is attributable to planned synergies expected to be achieved from the combined operations of Legacy Expro and Frank’s. Goodwill recorded in the Merger is not expected to be deductible for tax purposes. 

Results of Frank’s for the period October 1, 2021 through December 31, 2021
 
The Company’s operating results for the period October 1, 2021 through December 31, 2021 include $112.1 million of revenue and $32.9 million of net loss attributable to Frank’s.
 
Unaudited Pro Forma Financial Information
 
The following unaudited pro forma consolidated results of operations for the year ended December 31, 2021 and 2020 assume the Merger was completed as of January 1, 2020 (in thousands):

	Year Ended December 31,
	2021			2020
Unaudited pro forma revenues	$	1,143,356		$	1,065,384
Unaudited pro forma net loss	$	(121,546	)	$	(491,091	)

Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the Merger been completed on the date indicated or of future operating results.

Merger and integration expense

During the year ended December 31, 2022, 2021 and 2020, the Company incurred $13.6 million, $47.6 million and $1.6 million of merger and integration expense respectively, which consist primarily of legal fees, professional fees, integration, severance and other costs directly attributable to the Merger.

Below is a reconciliation of our liability balance associated with our severance plan initiated during 2021 related to the integration in connection with the Merger, which is included in “Other current liabilities” on the consolidated balance sheets (in thousands):

	NLA			ESSA			MENA			APAC			Central			Total
Balance as of December 31, 2021	$	2,057		$	2,502		$	424		$	617		$	6,615		$	12,215
Expense (reversal) during the period	$	(256	)	$	(808	)	$	34		$	646		$	1,707			1,323
Payments made during the year		(1,675	)		(1,634	)		(458	)		(1,176	)		(7,880	)		(12,823	)
Balance as of December 31, 2022	$	126		$	60		$	-		$	87		$	442		$	715

Sale of assets

On November 13, 2020, Legacy Expro entered into an agreement to transfer, sell and assign all rights, title and interest in and to certain identified tangible and intangible assets and liabilities relating to its pressure-control chokes product line for total cash consideration of $15.5 million and an additional earn-out consideration of up to a maximum of $1.0 million, contingent upon certain criteria being met in the following year. No contingent consideration was recognized during the year ended December 31, 2020. Legacy Expro recognized a gain of $10.1 million for the year ended December 31, 2020 net of the carrying value of the assets transferred of $4.4 million and costs directly attributable to the sale of $1.0 million. As of  December 31, 2021, the conditions upon which the earn-out consideration was contingent were met. As a result, the Company recognized a gain of $1.0 million for the year ended December 31, 2021.