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. 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 both Houston, Texas and Macaé, Brazil. Leased storage space in Mobile, Alabama houses our carousel systems and other equipment. We classify our leases related to computer equipment as finance leases. The Company elects to apply the short-term lease exception; therefore, the Company will not record a right-of-use (“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.

On November 19, 2025, Koil Energy Brazil began subleasing a portion of its administrative offices for 30 Brazilian reals per month (approximately $5 at current exchange rates). Sublease income recognized during the three and six months ended June 30, 2026, equaled $13 and $30, respectively, and is recognized as storage revenue in the accompanying condensed consolidated statements of operations.

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

The components of our lease expense were as follows:

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

Present value of lease liabilities: