LEASES

6 Months Ended

Jun. 30, 2024

Leases

LEASES

NOTE 2: LEASES

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and will initially be measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.

ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling, general and administrative expenses. The accounting for some leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options and impairment.

At the inception of a lease, Koil Energy evaluates the agreement to determine whether the lease will be accounted for as an operating or finance lease. The term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured, and if the contract contains a substantial penalty for failure to renew or extend the lease, it could lead the Company to conclude it has a significant economic incentive to extend the lease beyond the base rental period.

The Company leases land, buildings, and certain equipment under non-cancellable operating leases. We lease office, indoor manufacturing, warehouse, and operating space in Houston, Texas and lease storage space in Mobile, Alabama to house our 3,400 metric ton and 3,500 metric ton carousel systems. We classify our leases related to certain office furniture and computer equipment as finance leases. The Company elects to apply the short-term lease exception; therefore, the Company will not record an ROU asset or corresponding lease liability for leases with an initial term of twelve months or less that are not reasonably certain of being renewed and instead will recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease components and instead account for both as a single lease component for all asset classes.

Most leases include one or more options to renew, with renewal terms that can extend the lease term on a monthly, annual or longer basis. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements is limited by the expected lease term unless there is a transfer of title or purchase option that is reasonably certain of being exercised.

The Company elects to not capitalize any lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization threshold. A lease would need to qualify for the low value exception based on various criteria.

As of June 30, 2024, the Company does not have any subleases.

The following tables present information about our operating and finance leases: 

	Classification	June 30, 2024		December 31, 2023
Assets
Operating	Right-of-use operating lease assets	$	5,624	$	5,856
Finance	Right-of-use finance lease assets		60		103
Total lease assets		$	5,684	$	5,959
Liabilities
Current
Operating	Current operating lease liabilities	$	509	$	480
Finance	Current finance lease liabilities		37		74
Non-current
Operating	Operating lease liability, long-term		5,873		6,136
Finance	Finance lease liability, long-term		24		24
Total lease liabilities		$	6,443	$	6,714

The components of our lease expense were as follows: 

		Three Months Ended June 30,				Six Months Ended June 30,
	Classification	2024		2023		2024		2023
Finance lease costs
Amortization of ROU assets	Selling, general and administrative	$	22	$	82	$	44	$	164
Interest on lease liabilities	Other (income) expense, net		1		3		3		8
Operating lease expense	Cost of sales		189		182		378		365
Operating lease expense	Selling, general and administrative		55		55		109		110
Short term lease expense	Cost of sales		84		76		158		144
Total lease expense		$	351	$	398	$	645	$	619

The lease term and discount rate for our operating and finance leases were as follows: 

	June 30, 2024		December 31, 2023
Weighted-average remaining lease terms (years)
Operating leases		8.23		8.73
Finance leases		1.86		1.72
Weighted-average discount rates
Operating leases		7.97%		7.97%
Finance leases		6.94%		7.44%

Present value of lease liabilities: 

	Operating Leases			Finance Leases
July 1, 2024 - June 30, 2025	$	1,000		$	39
July 1, 2025 - June 30, 2026		1,012			13
July 1, 2026 - June 30, 2027		1,031			13
July 1, 2027 - June 30, 2028		1,051			–
Thereafter		4,703			–
Total lease payments	$	8,797		$	65
Less: Interest		(2,415	)		(4	)
Present value of lease liabilities	$	6,382		$	61