Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission File Number:
001-41732
 
 
Kodiak Gas Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
 
83-3013440
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
15320 Highway 105 W, Suite 210
Montgomery, Texas
 
77356
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including
area
code: (936)
539-3300
 
 
Securities
registered
pursuant
to Section 12(b) of the Act:
 
Title of
each
class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common stock, par value $0.01 per share
 
KGS
 
New York Stock Exchange
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    
No  
Indicate by check mark whether the registrant h
as
 submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated
filer
     Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
As of August
10
, 2023, the registrant had 77,400,000 shares of common stock, par value $0.01 per share, outstanding.
 
 


Table of Contents

Table of Contents

 

         Page  

Cautionary Note Regarding Forward-Looking Statements

  

PART I.

 

FINANCIAL INFORMATION

     1  

Item 1.

 

Financial Statements (Unaudited)

     1  
 

Condensed Consolidated Balance Sheets

     1  
 

Condensed Consolidated Statements of Operations

     2  
 

Condensed Consolidated Statements of Stockholders’ Equity

     3  
 

Condensed Consolidated Statements of Cash Flows

     4  
 

Notes to Unaudited Condensed Consolidated Financial Statements

     5  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     39  

Item 4.

 

Controls and Procedures

     39  

PART II.

 

OTHER INFORMATION

     40  

Item 1.

 

Legal Proceedings

     40  

Item 1A.

 

Risk Factors

     40  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     41  

Item 3.

 

Defaults Upon Senior Securities

     41  

Item 4.

 

Mine Safety Disclosures

     41  

Item 5.

 

Other Information

     41  

Item 6.

 

Exhibits

     42  

Signatures

     43  


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding:

 

   

Expected operating results, such as revenue growth and earnings;

 

   

Anticipated levels of capital expenditures and uses of capital;

 

   

Current or future volatility in the credit markets and future market conditions;

 

   

Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings;

 

   

Production and capacity forecasts for the natural gas and oil industry;

 

   

Strategy for customer retention, growth, fleet maintenance, market position, financial results; and

 

   

The amount and timing of future dividend payments;

 

   

Our interest rate hedges; and

 

   

Strategy for risk management.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

   

A reduction in the demand for natural gas and oil;

 

   

The loss of, or the deterioration of the financial condition of, any of our key customers;

 

   

Nonpayment and nonperformance by our customers, suppliers or vendors;

 

   

Competitive pressures that may cause us to lose market share;

 

   

The structure of our Compression Operations contracts and the failure of our customers to continue to contract for services after expiration of the primary term;

 

   

Our ability to make acquisitions on economically acceptable terms;

 

   

Our ability to fund purchases of additional compression equipment;

 

   

A downturn in the economic environment, as well as inflationary pressures;

 

   

Tax legislation and administrative initiatives or challenges to our tax positions;

 

   

The loss of key management, operational personnel or qualified technical personnel;

 

   

Our dependence on a limited number of suppliers;

 

   

The cost of compliance with existing governmental regulations and proposed governmental regulations, including climate change legislation and regulatory initiatives and stakeholder pressures, including ESG scrutiny;

 

   

The inherent risks associated with our operations, such as equipment defects and malfunctions;

 

   

Our reliance on third-party components for use in our IT systems;

 

   

Legal and reputational risks and expenses relating to the privacy, use and security of employee and client information;

 

   

Threats of cyber-attacks or terrorism;

 

   

Our credit agreement contains features that may limit our ability to operate our business and fund future growth and also increases our exposure to risk during adverse economic conditions;

 


Table of Contents
   

Volatility in interest rates;

 

   

Our ability to access the capital and credit markets or borrow on affordable terms to obtain additional capital that we may require;

 

   

The effectiveness of our disclosure controls and procedures; and

 

   

Such other factors as discussed throughout the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our final prospectus filed with the U.S Securities and Exchange Commission (the “SEC”) on June 30, 2023 pursuant to Rule 424(b)(4) and the “throughout Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of such prospectus and and Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023.

Any forward-looking statement made by us in this Report is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by applicable law, we undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future developments or otherwise.


Table of Contents
PART I—FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
  
As of June 30,

2023
 
  
As of December 31,

2022
 
Assets
  
  
Current assets:
                 
Cash and cash equivalents
   $ 41,371      $ 20,431  
Accounts receivable, net
     119,254        97,551  
Inventories, net
     76,813        72,155  
Fair value of derivative instruments
     —          823  
Contract assets
     4,513        3,555  
Prepaid expenses and other current assets
     20,201        9,520  
    
 
 
    
 
 
 
Total current assets
     262,152        204,035  
Property, plant and equipment, net
     2,486,846        2,488,682  
Operating lease
right-of-use
assets, net
     34,799        9,827  
Goodwill
     305,553        305,553  
Identifiable intangible assets, net
     127,625        132,362  
Fair value of derivative instruments
     43,811        64,517  
Other assets
     577        564  
    
 
 
    
 
 
 
Total assets
   $ 3,261,363      $ 3,205,540  
    
 
 
    
 
 
 
Liabilities and Stockholders’ Equity
                 
Current liabilities:
                 
Accounts payable
   $ 35,100      $ 37,992  
Accrued liabilities
     88,440        93,873  
Contract liabilities
     86,258        57,109  
    
 
 
    
 
 
 
Total current liabilities
     209,798        188,974  
Long-term debt, net of unamortized debt issuance cost
     2,769,355        2,720,019  
Operating lease liabilities
     29,970        6,754  
Deferred tax liabilities
     57,916        57,155  
Other liabilities
     1,449        3,545  
    
 
 
    
 
 
 
Total liabilities
     3,068,488        2,976,447  
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Note 13)
             
Stockholders’ Equity:
                 
Common stock, par value $0.01 per share; 750,000,000 shares of common stock authorized, 59,000,000
shares
 
of common stock issued and outstanding as of June 30, 2023 and December 31, 2022
     590        590  
Additional
paid-in
capital
     —          33,189  
Retained earnings
     192,285        195,314  
    
 
 
    
 
 
 
Total stockholders’ equity
     192,875        229,093  
    
 
 
    
 
 
 
Total liabilities and stockholders’ equity
   $         3,261,363      $ 3,205,540  
    
 
 
    
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
1


Table of Contents
KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
 
    
For the Three Months

Ended June 30,
   
For the Six Months

Ended June 30,
 
    
2023
   
2022
   
2023
   
2022
 
Revenues:
        
Compression
O
perations
   $ 181,619     $ 162,808     $ 359,316     $ 320,303  
Other
S
ervices
     21,687       14,343       34,102       25,189  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     203,306       177,151       393,418       345,492  
Operating expenses:
        
Cost of operations (exclusive of depreciation and amortization shown below):
        
Compression
O
perations
     65,017       58,336       127,787       111,273  
Other
S
ervices
     18,099       11,774       27,087       20,601  
Depreciation and amortization
     45,430       43,397       90,327       85,802  
Selling, general and administrative expenses
     13,438       11,740       26,523       21,570  
Gain on sale of fixed assets
     (738     —         (721     (7
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     141,246       125,247       271,003       239,239  
  
 
 
   
 
 
   
 
 
   
 
 
 
Income from operations
     62,060       51,904       122,415    
106,253  
Other income (expenses):
        
Interest expense, net
     (60,964     (36,829     (119,687     (62,469
Realized gain on derivatives
     25,835       —         25,835       —    
Unrealized (loss) gain on derivatives
     (3,595     (3,386 )     (21,529     32,822  
Other income (expense)
     32       (7     1       9  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other expenses
     (38,692     (40,222     (115,380  
(29,638
  
 
 
   
 
 
   
 
 
   
 
 
 
Income before income taxes
     23,368       11,682       7,035       76,615  
Income tax expense
     5,851       2,781       1,861       18,159  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income
   $ 17,517     $ 8,901     $ 5,174     $ 58,456  
  
 
 
   
 
 
   
 
 
   
 
 
 
Earnings per share:
        
Basic and diluted earnings per share
   $ 0.30     $ 0.15     $ 0.09     $ 0.99  
Weighted-average shares outstanding - basic and diluted
     59,000,000       59,000,000       59,000,000       59,000,000  
See accompanying notes to the unaudited condensed consolidated financial statements.
 
2


Table of Contents
KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share data)
 
 
  
Common Stock
 
  
 
 
 
 
 
 
 
 
 
  
Shares
 
  
Amount
 
  
Additional Paid-In

Capital
 
 
Retained
Earnings
 
 
Total
Stockholders’
Equity
 
Balance, January 1, 2022
     59,000,000      $ 590      $ 871,403     $ 88,078     $ 960,071  
Equity compensation
      —               (136     619       483  
Net income, as restated
      —                —       49,555       49,555  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, March 31, 202
2, as restated
     59,000,000      $ 590      $ 871,267     $ 138,252     $ 1,010,109  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Distribution to parent
     —         —         (838,000           (838,000
Net income
     —         —          —       8,901       8,901  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, June 30, 2022
     59,000,000      $ 590      $ 33,267     $ 147,153     $ 181,010  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, January 1, 2023
     59,000,000      $ 590      $ 33,189     $ 195,314     $ 229,093  
Equity compensation
                   (193     879       686  
Net loss
                    —       (12,343     (12,343
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, March 31, 2023
     59,000,000      $ 590      $ 32,996     $ 183,850     $ 217,436  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Distribution to parent
                      (33,189     (9,111     (42,300
Equity compensation
             —        193       29       222  
Net income
             —         —       17,517       17,517  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, June 30, 2023
     59,000,000      $ 590      $ —       $ 192,285     $ 192,875  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
3


Table of Contents
KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
  
For the Six Months

Ended June 30,
 
 
  
2023
 
 
2022
 
Cash flows from operating activities:
  
 
Net income
   $ 5,174     $ 58,456  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization expense
     90,327       85,802  
Stock-based compensation expense
     908       619  
Amortization of debt issuance costs
     11,071       5,212  
Non-cash
lease expense
     1,786       1,365  
Provision for credit losses
     2       85  
Inventory reserve
     250       250  
Gain on sale of fixed assets
     (721     (7
Unrealized loss (gain) on derivatives
     21,529       (32,822
Deferred tax provision
     761       14,974  
Changes in operating assets and liabilities:
                
Accounts receivable, net
     (21,705     (11,367
Inventories
     (4,907     (5,302
Contract assets
     (958     (3,051
Prepaid expenses and other current assets
     (10,681     (314
Accounts payable
     10,954       6,436  
Accrued and other liabilities
     (14,971     854  
Contract liabilities
     29,149       6,457  
    
 
 
   
 
 
 
Net cash provided by operating activities
     117,968       127,647  
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Purchase of capital assets
     (94,034     (145,952
Proceeds from sale of capital assets
     1,055       13  
Investment in fund
     (24     (24
Other
     10       13  
    
 
 
   
 
 
 
Net cash used in investing activities
     (92,993     (145,950
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Borrowings on debt instruments
     499,279       1,221,161  
Payments on debt instruments
     (428,812     (345,465
Payment of debt issuance cost
     (32,202     (27,561
Distributions to parent
     (42,300     (838,000
    
 
 
   
 
 
 
Net cash (used in) provided by financing activities
     (4,035     10,135  
    
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     20,940       (8,168
Cash and cash equivalents - beginning of period
     20,431       28,795  
    
 
 
   
 
 
 
Cash and cash equivalents - end of period
  
$

41,371    
$

20,627  
    
 
 
   
 
 
 
Supplemental cash disclosures:
                
Cash paid for interest
  
$

116,370    
$
52,204  
Cash paid for taxes
  
$

5,726    
$
1,836  
Supplemental disclosure of
non-cash
investing activities:
                
Change in accrued capital expenditures
  
$

9,946    
$

1,931  
See accompanying notes to the unaudited condensed consolidated financial statements.
 
4


Table of Contents
KODIAK GAS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Description of Business
Kodiak Gas Services, Inc. (together with its subsidiaries, referred to as “Kodiak” or the “Company”) began its operations in 2011. On February 8, 2019, Kodiak was acquired by entities affiliated with EQT AB Group. On October 24, 2019, the Company acquired Pegasus Optimization Managers, LLC, a provider of natural gas compression operations.
The Company is an operator of contract compression infrastructure in the U.S, primarily in the Permian Basin and Eagle Ford Shale with additional operations in the Powder River Basin,
Mid-Continent
Region, DJ Basin, Appalachian Basin, Barnett Shale / East Texas Region and Black Warrior Basin. The Company operates its compression units under stable, fixed-revenue contracts with upstream and midstream customers. The Company manages its business through two operating segments: Compression Operations and Other Services. Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for its customers to enable the production, gathering and transportation of natural gas and oil. Other Services consists of station construction, maintenance and overhaul, and other ancillary time and material-based offerings. See Note 18 (“Segments”).
Stock Split
On June 20, 2023, Kodiak’s board of directors approved a
590,000-for-1
split (the “Stock Split”)
of the Company’s
 
common stock. Prior to the consummation of the initial public offering of the Company’s common stock (the “IPO”), the Company was 100% owned by its Parent, Frontier TopCo Partnership, L.P. (“Kodiak Holdings”). The Stock Split became effective upon filing of the Company’s Amended and Restated Certificate of Incorporation on June 28, 2023 in connection with the IPO. The par value of the Company’s common stock was not adjusted as a result of the Stock Split, however, the number of shares that the Company is authorized to issue increase
d to
750,000,000
. As a result of the Stock Split, 
59,000,000
shares of common stock were outstanding. All share and per share data shown in the accompanying condensed consolidated financial statements and related notes has been retroactively revised to give effect to the Stock Split for all periods presented.
IPO
On June 28, 2023, Kodiak’s Registration Statement on Form
S-1
relating to the IPO was declared effective by the U.S. Securities and Exchange Commission (“SEC”) and the shares of its common stock began trading on the New York Stock Exchange on June 29, 2023. On July 3, 2023, Kodiak
issued and sold 16,000,000 shares of common stock at a price to the public of $16.00 per share. Kodiak received net proceeds of approximately $231.4 million,
after deducting expenses and underwriting discounts and commissions payable by the Company.
2. Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on the accrual basis using accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in Kodiak’s latest annual financial statements included in Kodiak’s final prospectus filed with the SEC on June 30, 2023 pursuant to Rule 424(b)(4) (the "IPO Prospectus"), which contain a more comprehensive summary of the Company’s accounting policies. The interim results reported herein are not necessarily indicative of results for a full year.
These unaudited condensed consolidated financial statements include the accounts of Kodiak and its wholly
owned
subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
Restatement of Previously Issued Financial Statements
During the preparation and review of the unaudited interim condensed consolidated financial statements for the three and six month periods ended June 30, 2023 and 2022, the Company identified a previously corrected adjusting entry that should have been recorded in the three months ended March 31, 2022. This entry was specific to the unrealized (loss) gain on derivatives and does not impact the six month period ended June 30, 2022 financial statements and does not impact the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2022. See Note 10—Derivative Instruments.
The
foregoing error had no effect on the Company’s revenue and financial covenants. The error does not impact the Company’s cash or liquidity. Similarly, the error did not have an impact on the Company’s operations or business fundamentals.
The Company assessed the materiality of the error in its historical unaudited interim condensed consolidated financial statements in accordance with Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, and concluded that the previously issued unaudited condensed consolidated financial statements for the three months ended March 31, 2022 should be restated. The Company corrected for the error by restating amounts previously presented and disclosed in the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022. A summary of the effect of the restatements on the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 is as follows (
in thousands, except per share data
):
Unaudited Condensed Consolidated Statement of Operations
 
For the three months ended March 31, 2022
  
As Previously
Reported
 
  
Restatement
Adjustments
 
  
As Restated
 
Unrealized gain on derivatives
  
$
7,838
 
  
$
28,370
 
  
$
36,208
 
Income Tax Expense
  
 
8,624
 
  
 
6,754
 
  
 
15,378
 
  
 
 
 
  
 
 
 
  
 
 
 
Net Income
  
 
27,939
 
  
 
21,616
 
  
 
49,555
 
  
 
 
 
  
 
 
 
  
 
 
 
Basic and diluted earnings per share
  
$
   279,390
 
  
$
216,160
 
  
$
   495,550
 
  
 
 
 
  
 
 
 
  
 
 
 
Unaudited Condensed Consolidated Statement of Shareholders’ Equity
 
As of March 31, 2022
  
As Previously
Reported
 
  
Restatement
Adjustments
 
  
As Restated
 
Retained Earnings
  
$
116,636
 
  
$
21,616
 
  
$
138,252
 
  
 
 
 
  
 
 
 
  
 
 
 
Total stockholder’s equity
  
$
   988,493
 
  
$
     21,616
 
  
$
1,010,109
 
  
 
 
 
  
 
 
 
  
 
 
 
Unaudited Condensed Consolidated Statement of Cash Flows
 
For the three months ended March 31, 2022
 
As Previously
Reported
 
 
Restatement
Adjustments
 
 
As Restated
 
Net income
 
$
27,939
 
 
$
21,616
 
 
$
49,555
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Unrealized loss (gain) on derivatives
 
 
(7,838
 
 
(28,370
 
 
(36,208
Deferred tax provision
 
 
7,104
 
 
 
6,754
 
 
 
13,858
 
Changes in Operating assets and liabilities
 
 
 
Prepaid Expenses and other current assets
 
 
1,032
 
 
 
(14,185
 
 
(13,153
Accrued and other liabilities
 
 
(6,713
 
 
14,185
 
 
 
7,472
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
54,796
 
 
$
  
 
 
$
54,796
 
 

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Table of Contents
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13,
Financial Instruments—Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments
which changes the impairment model for financial assets measured at amortized cost and certain other instruments, including trade and other receivables,
held-to-maturity
debt securities and loans, and requires entities to use a new current expected credit loss model that will result in earlier recognition of allowance for losses. The Company adopted this Topic 326 on January 1, 2023. The adoption of this amendment did not have a material impact on the Company’s con
solid
ated financial statements.
3. Revenue Recognition
The following table disaggregates the Company’s revenue by type and timing of provision of services or transfer of goods
(in thousands)
:
 
    
Three Months Ended June 30,
 
    
2023
    
2022
 
Services provided over time:
                 
Compression
O
perations
   $ 179,740      $ 159,788  
Other
S
ervices
     18,357        13,422  
    
 
 
    
 
 
 
Total services provided over time
     198,097        173,210  
    
 
 
    
 
 
 
Services provided or goods transferred at a point in time:
                 
Compression
O
perations
     1,879        3,020  
Other
S
ervices
     3,330        921  
    
 
 
    
 
 
 
Total services provided or goods transferred at a point in time
     5,209        3,941  
    
 
 
    
 
 
 
Total revenue
   $ 203,306      $ 177,151  
    
 
 
    
 
 
 
 
    
Six Months Ended June 30,
 
    
2023
    
2022
 
Services provided over time:
                 
Compression
O
perations
   $ 354,616      $ 315,361  
Other
S
ervices
     28,275        22,770  
    
 
 
    
 
 
 
Total services provided over time
     382,891        338,131  
    
 
 
    
 
 
 
Services provided or goods transferred at a point in time:
                 
Compression
O
perations
     4,700        4,942  
Other
S
ervices
     5,827        2,419  
    
 
 
    
 
 
 
Total services provided or goods transferred at a point in time
     10,527        7,361  
    
 
 
    
 
 
 
Total revenue
   $ 393,418      $ 345,492  
    
 
 
    
 
 
 
The Company derives its revenue from contracts with customers, which comprise the following revenue streams:
Compression Operations
Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for the Company’s customers, pursuant to fixed-revenue contracts enabling the production, gathering and transportation of natural gas and oil.
Compression Operations for Company-owned, as well as customer-owned, compressors are generally satisfied over time as services are rendered at selected customer locations on a monthly basis and based upon specific performance criteria identified in the applicable contract. Terms are typically one to seven years and at the end of the term, transition to a
month-to-month
contract if not cancelled by either party. The monthly service for each location is substantially the same service month-to-month over the service contract term. The progress and performance of the service are measured consistently using a straight-line, time-based method as each month passes, because the performance obligations are satisfied evenly over the contract term as the customer simultaneously receives and consumes the benefits provided by the service.
 
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If variable consideration exists, it is allocated to the distinct monthly service within the series to which such variable consideration relates. The Company has elected to apply the invoicing practical expedient to recognize revenue for such variable consideration, as the invoice corresponds to the value transferred to the customer based on the Company’s performance completed to date.
Service revenue earned primarily on freight and crane charges that are directly reimbursable by the Company’s customers is recognized at the point in time the service is provided and control is transferred to the customer. At such time, the customer has the ability to direct the use of the benefits of such service after the performance obligation is satisfied. The amount of consideration the Company receives and revenue the Company recognizes is based upon the invoice amount.
There are typically no material obligations for returns, refunds, or warranties. The Company’s standard contracts do not usually include
non-cash
consideration.
Other Services
This revenue stream primarily relates to compressor station construction services provided to certain customers and services provided based on time, parts and/or materials with customers.
For most of the Company’s construction contracts, the Company integrates a significant set of tasks and components into a single contract for its customers. Hence, the entire contract is accounted for as one performance obligation. The Company recognizes revenue over time as the Company performance creates or enhances an asset that the customer controls.
For construction services, revenue is recognized using an input method. Measure of the progress towards satisfaction of the performance obligation is based on the actual amount of labor and material costs incurred. The amount of the transaction price recognized as revenue is determined by multiplying the transaction price by the ratio of actual costs incurred to total estimated costs expected for the construction services. Judgment is involved in the estimation of the progress toward completion. Any adjustments to the measure of the progress toward completion is accounted for on a prospective basis. Changes to the scope of service are recognized as an adjustment to the transaction price in the period in which the change occurs.
Services provided based on time spent, parts and/or materials is generally short-term in nature and labor rates and parts pricing is agreed upon prior to commencing the service. As revenue is recognized when time passes, this revenue is recognized at the point and time when the service is rendered.
Contract Assets and Liabilities
The Company recognizes a contract asset when the Company has the right to consideration in exchange for goods or services transferred to a customer. Contract assets are transferred to trade receivables when the rights become unconditional. The Company had contract assets of $
4.5
 
million, $1.1 million and $
3.6 
million as of June 30, 2023, March 31, 2023 and December 31, 2022
, respectively.
The Company records contract liabilities when cash payments are received or due in advance of performance. The Company’s contract liabilities w
ere
 $
86.3 million and $57.1 
million, as of June 30, 2023 and December 31, 2022, respectively. As of January 1, 2023 and 2022, the beginning balance
s
for contract
liabilities were
$57.1 million and $51.2
 million, respectively, all of which was recognized as revenue in the six months ended June 30, 2023 and 2022, respectively. 
Performance Obligations
As of June 30, 2023, the aggregate amount of transaction price allocated to unsatisfied
p
erformance obligations related to the Company’s revenue for the Compression Operations segment is $1.1 billion. The Company expects to recognize these remaining performance obligations as follows
(in thousands)
:
 
    
Remainder of

2023
    
2024
    
2025
    
2026
    
2027 and

thereafter
    
Total
 
Remaining performance obligations
   $ 312,116      $ 461,662      $ 221,345      $ 94,796      $ 50,984      $ 1,140,903  
 
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4. Accounts Receivable, net
Accounts receivable, net consist of the following (
in thousands
):
 

 
  
As of June 30,
 
  
 As of December 31, 
 
 
  
2023
 
  
2022
 
Accounts receivable
   $ 120,203      $ 98,500  
Allowance for credit losses
     949        949  
    
 
 
    
 
 
 
Accounts receivable, net
   $               119,254      $ 97,551  
    
 
 
    
 
 
 
5. Inventories
Inventories consist of the following (
in thousands
):
 

 
  
As of June 30,
 
  
 As of December 31, 
 
 
  
2023
 
  
2022
 
Non-serialized
parts
  $ 66,252     $ 61,082  
Serialized parts
    10,561       11,073  
   
 
 
   
 
 
 
Total inventories
  $                 76,813     $ 72,155  
   
 
 
   
 
 
 
6. Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following (
in thousands
):
 

 
  
As of June 30,
 
 
 
 
 
As of December 31,
 
 
  
2023
 
 
 
 
 
2022
 
Compression equipment
   $ 3,049,309     
 
 
 
 
$ 2,973,599  
Trailers and vehicles
     8,341     
 
 
 
 
  7,193  
Field equipment
     17,919     
 
 
 
 
  15,501  
Technology hardware and software
     9,736     
 
 
 
 
  6,698  
Leasehold improvements
     2,646     
 
 
 
 
  1,947  
Shipping containers
     3,267     
 
 
 
 
  3,137  
Furniture and fixtures
     1,564     
 
 
 
 
  1,519  
Capital lease
     683     
 
 
 
 
  981  
 
 
 
 
 
 
 
 
 
 
 
 
 
Total property and equipment, gross
     3,093,465     
 
 
 
 
  3,010,575  
Less: accumulated depreciation
     (606,619   
 
 
 
 
  (521,893
 
 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
   $            2,486,846     
 
 
 
 
$ 2,488,682  
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation expense was $43.0 million and $85.6 million for the three and six months ended June 30, 2023, respectively, and is recorded within depreciation and amortization on the accompanying condensed consolidated statements of operations. Depreciation expense was $41.0 million and $81.1 million for the three and six months ended June 30, 2022, respectively.
7. Goodwill and Identifiable Intangible Assets, Net
There were no changes in the carrying amount of goodwill during the six months ended June 30, 2023. All of the goodwill was allocated to the Company’s Compression Operations reporting unit.
 
8


The Company’s identifiable intangible assets consist of the following as of June 30, 2023 and December 31, 2022 (
in thousands
):
 
    
As of June 30, 2023
 
    
Original Cost
    
Accumulated

Amortization
    
Net Amount
    
Remaining Weighted

Average Amortization

Period (years)
 
Trade name
  
$

13,000     
$
(2,856   
$
10,144        15.6  
Customer relationships
     150,000        (32,519      117,481        13.3  
    
 
 
    
 
 
    
 
 
          
Total identifiable intangible assets
  
$

163,000     
$

(35,375   
$

127,625           
    
 
 
    
 
 
    
 
 
          
 
    
As of December 31, 2022
 
    
Original Cost
    
Accumulated

Amortization
    
Net Amount
    
Remaining Weighted

Average Amortization

Period (years)
 
Trade name
   $ 13,000      $ (2,531    $ 10,469        16.1  
Customer relationships
     150,000        (28,107      121,893        13.8  
    
 
 
    
 
 
    
 
 
          
Total identifiable intangible assets
   $ 163,000      $ (30,638    $ 132,362           
    
 
 
    
 
 
    
 
 
          
Amortization expense was $2.4 million and $4.7 million for each of the three and six months ended June 30, 2023 and 2022 and is recorded within depreciation and amortization on the condensed consolidated statements of operations.
At June 30, 2023, the following is a summary of future minimum amortization expense for identified in
t
angible assets (
in thousands
):
 
    
Amount
 
Years ending December 31,
        
Remainder of 2023
   $ 4,737  
2024
     9,474  
2025
     9,474  
2026
     9,474  
2027
     9,474  
Thereafter
     84,992  
    
 
 
 
Total
   $ 127,625  
    
 
 
 
8. Long-Lived and Other Asset Impairment
Long-lived assets, including property, plant, and equipment, and other finite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances, including the removal of compressors from the active fleet, indicate that the carrying amount of an asset may not be recoverable. Such events and changes may include significant changes in performance relative to expected operating results, significant changes in asset use, significant negative industry or economic trends, and changes in the Company’s business strategy, among others. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to estimated future undiscounted net cash flows expected to be generated by the asset. Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its estimated future discounted net cash flows. No impairment was recorded for the six months ended June 30, 2023 and 2022. For the six months ended June 30, 2023 and 2022, no triggering event for any long-lived assets was identified.
 
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Table of Contents
9. Debt and Credit Facilities
Debt consists of the following
(in thousands)
:
 

 
  
As of June 30,
 
  
As of December 31,
 
 
  
2023
 
  
2022
 
ABL Facility
   $ 1,824,691      $ 1,754,224  
Term loan
     1,000,000        1,000,000  
    
 
 
    
 
 
 
Total debt outstanding
     2,824,691        2,754,224  
Less: unamortized debt issuance cost
     (55,336      (34,205
    
 
 
    
 
 
 
Long-term debt, net of unamortized debt issuance cost
   $         2,769,355      $ 2,720,019  
    
 
 
    
 
 
 
ABL Facility
As of January 1, 2022, a wholly-owned subsidiary of Kodiak had a revolving-asset backed loan credit facility (the “ABL Facility”) with unaffiliated secured lenders and JPMorgan Chase Bank, N.A., as administrative agent.
On May 19, 2022, wholly-owned subsidiaries of Kodiak entered into the Third Amendment to the Third Amended and Restated Credit Agreement which mainly served to amend the applicable rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”) and allow for the return of capital to the stockholders of Kodiak 
in the amount of $838 million by increasing borrowings on the ABL Facility by $225 million, increasing the Term Loan by $600 million and utilizing $13 million of cash on hand. In addition
, the ABL Facility size was increased
from $1.875 billion to $2.050 billion to increase available liquidity under the facility. New lender fees and costs totaling $13.2 
million were incurred as a result of the amendment and will be amortized over the life of the loans to interest expense. 
On March 22, 2023, wholly-owned subsidiaries of Kodiak entered into the Fourth Amended and Restated Credit Agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (as amended or restated from time to time, the “ABL Credit Agreement”) which mainly served to extend the maturity date from June 2024 to March 2028. The total facility size was increased
from $2.050 billion to $2.200 billion to increase available liquidity under the facility. New lender fees and costs totaling $31.8 million were incurred and will be amortized over the life of the loans to interest expense. An additional $4.2 million in accrued interest related to exiting lenders was expensed and paid in the period. The remaining unamortized deferred financing costs of $1.2 million associated with the exiting lenders was
written-off
in the period.
Pursuant to the ABL Credit Agreement, the Company must comply with certain restrictive covenants, including a minimum fixed charge coverage ratio of 1.1x and a maximum
Leverage Ratio
. The maximum
Leverage Ratio
(calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the ABL Credit Agreement) is 7.25x through the first quarter of 2023; 7.00x thereafter through the third quarter of 2023; 6.75x thereafter through the first quarter of 2024; and 6.50
x in the second quarter of 2024 and thereafter. All loan amounts are collateralized by essentially all the assets of the Company. The Company was in compliance with all covenants as of June 30, 2023 and December 31, 2022.
The ABL Credit Agreement also restricts the Company’s ability to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem equity interests; prepay, redeem or repurchase certain debt; issue certain preferred units or similar equity securities; make loans and investments; sell, transfer or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting the Company’s restricted subsidiaries’ ability to pay dividends; enter into certain swap agreements; amend certain organizational documents; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of the Company’s assets.
The applicable interest rates as of June 30, 2023 were 10.25% (prime rate
 plus 2.00%
) and 8.34% (Term SOFR rate plus 0.10% plus 3.00%). The applicable interest rates as of December 31, 2022 were 9.50% (prime rate
 plus 2.00%
) and 7.60% (Term SOFR rate plus 0.10% plus 3.00%).
 
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Table of Contents
The ABL Facility is a “revolving credit facility” that includes a lock box arrangement whereby, under certain events, remittances from customers are forwarded to a bank account controlled by the administrative agent and are applied to reduce borrowings under the facility. One such event includes “Cash Dominion” and occurs when availability under the agreement falls below a specified threshold (i.e., the greater of $200.0 million or 10% of the aggregate commitments at such time of event). As of June 30, 2023 and December 31, 2022, availability under the agreement was in excess of the specified threshold and as such the entire balance was classified as long-term in accordance with its maturity.
Term Loan
As of January 1, 2022, a wholly-owned subsidiary of Kodiak had a term loan (the “Term Loan”) pursuant to a credit agreement with unaffiliated unsecured lenders and Wells Fargo Bank, N.A., as administrative agent. In May 2022, the Company completed a recapitalization and return of
capital of $838 million to stockholders of Kodiak primarily by increasing the borrowings from the ABL Facility by $225 million and the Term Loan by $600 million per the Amended and Restated Term Loan Credit Agreement entered into by the Company on May 19, 2022 (as amended from time to time, the “Term Loan Credit
Agreement”) and utilizing $13 million of cash on hand.
New lender fees and costs totaling $14.6 million were incurred for this amendment and will be amortized over the life of the loans to interest expense.
On March 31, 2023, the Company’s wholly-owned subsidiary entered into the First Amendment to the Amended and Restated Term Loan Credit Agreement pursuant to which the maturity date was extended to September 22, 2028. Lender fees and costs totaling $0.75 million were incurred for this amendment and will be amortized over the life of the loans to interest expense.
Pursuant to the First Amendment to the Amended and Restated Term Loan Credit Agreement, the Company must comply with certain restrictive covenants, including a maximum
Leverage Ratio
. The maximum
Leverage Ratio
 (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the Term Loan Credit Agreement) was 7.50x through the first quarter of 2023; 7.25x thereafter through the third quarter of 2023; 7.00x thereafter through the first quarter of 2024; 6.75x thereafter through the first quarter of 2025; 6.50x thereafter through the first quarter of 2026; 6.25x thereafter through the fourth quarter of 2026; and 6.00x in the first quarter of 2027 and thereafter. The Company was in compliance with all financial covenants as of June 30, 2023 and December 31, 2022.
Borrowings under the Term Loan
bear
 
the following applicable rates: interest rates
are
based on 6.00% plus an alternate base rate and 7.00% plus an adjusted eurocurrency rate for alternate base rate loans and eurocurrency loans, respectively.
The applicable interest rates were 
12.16% and 10.67% as of June 30, 2023 and December 31, 2022, respectively.
Commencing with the fiscal year ending December 31, 2023, an excess cash flow payment that would reduce the principal balance of the Term Loan would have potentially been due 120
 days following the end of each fiscal year. This excess cash flow payment was based on the Leverage Ratio (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the Term Loan Credit Agreement) at year end. Based on the calculated ratio, a payment percentage would have been applied to the excess cash flow to determine the amount, if any, due. 
The Term Loan Credit Agreement
restricts
certain of Kodiak’s wholly-owned subsidiaries’ ability to
:
incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem equity interests; prepay, redeem or repurchase certain debt; issue certain preferred units or similar equity securities; make loans and investments; sell, transfer or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting such restricted subsidiaries’ ability to pay dividends; enter into certain swap agreements; amend certain organizational documents; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of such subsidiaries’ assets.
 
1
1

As of June 30, 2023, the scheduled maturities, without consideration of potential mandatory prepayments, of the long-term debt were as follows (
in thousands
):
 
    
Amount
 
Years ended December 31,
        
Remainder of 2023
   $     
2024
         
2025
         
2026
         
2027
         
Thereafter
     2,824,691  
    
 
 
 
Total
   $ 2,824,691  
    
 
 
 
On July 3, 2023, in connection with the IPO, a subsidiary of Kodiak entered into a Novation, Assignment, and Assumption Agreement with Kodiak Holdings, pursuant to which all of the Company’s remaining obligations under the Term Loan were assumed by Kodiak Holdings, and the Company’s obligations thereunder were terminated effective July 3, 2023. The Company is no longer a borrower or guarantor under, nor otherwise obligated with respect to the debt outstanding under the Term Loan. See Note 19 (“Subsequent Events”) for further details.
Deferred Financing Costs
There were unamortized debt issuance costs of $55.3 million and $34.2 million at June 30, 2023 and December 31, 2022, respectively, which are being amortized over the terms of the ABL Facility and Term Loan. Amortization expense related to these costs of $5.6 million and $11.1 million for the three and six months ended June 30, 2023, are included in interest expense in the accompanying condensed consolidated statements of operations. Amortization expense was $3.4 million and $5.2 million for the three and six months ended June 30, 2022.
10. Derivative Instruments
The Company has entered into interest rate swaps exchanging variable interest rates for fixed interest rates and interest rate collars that fix interest rates within a range through the simultaneous purchase of an interest rate cap and sale of an interest rate floor. The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative or trading purposes. The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in the Company making a payment to or receiving a payment from the counterparty. Cash flows from all derivative activity for the periods presented appear in the operating section on the condensed consolidated statements of cash flows.
As a result of the increase to the ABL Facility and Term Loan during the year ended 2022, the Company entered into an additional $975.0 million notional amounts of interest rate swaps to comply with hedging requirements set forth in the credit agreements.
On June 29, 2023, the Company terminated all interest rate swaps and collars attributable to the Term Loan and recognized a realized gain of $25.8 million during the period ended June 30, 2023 (the “Term Loan Derivative Settlement”).
 
1
2

The table below summarizes information related to the notional amount and maturity dates for interest rate swaps at June 30, 2023:
 
Notional Amount
  
Maturities
 
$125,000,000
     12/4/2024  
$225,000,000
     12/5/2024  
$200,000,000
     6/14/2025  
$125,000,000
     12/6/2025  
$175,000,000
     6/14/2026  
$125,000,000
     6/22/2026  
$125,000,000
     12/6/2026  
$75,000,000
     5/18/2027  
$100,000,000
     5/19/2027  
$200,000,000
     5/19/2027  
$125,000,000
     12/6/2027  
Of the total notional amount of $1.6 
b
i
l
l
i
o
n
, $0.4 
b
i
llion
 is related to forward dated interest rate swaps with an effective date after June 30, 2023.
The following tables set forth the Company’s assets that were measured at fair value on a recurring basis during the period, by level, within the fair value hierarchy and classification of the Company’s derivative instruments not designated as hedging instruments on the accompanying condensed consolidated balance sheets (
in thousands
):
 
    
As on June 30, 2023
 
    
Level 1
    
Level 2
    
Level 3
    
Total
 
Current assets:
                                   
Interest rate swaps
   $ —        $ —        $ —        $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total current assets
   $ —        $ —        $ —        $ —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Non-current
assets:
                                   
Interest rate swaps
   $ —        $ 43,811      $ —        $ 43,811  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
non-current
assets
   $ —        $ 43,811      $ —        $ 43,811  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ —        $ 43,811      $ —        $ 43,811  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
    
As of December 31, 2022
 
    
Level 1
    
Level 2
    
Level 3
    
Total
 
Current assets:
                                   
Interest rate swaps
   $ —        $ 823      $ —        $ 823  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total current assets
   $ —        $ 823      $ —        $ 823  
    
 
 
    
 
 
    
 
 
    
 
 
 
Non-current
assets:
                                   
Interest rate swaps
   $ —        $ 48,955      $ —        $ 48,955  
Interest rate collars
     —          15,562        —          15,562  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
non-current
assets
   $ —        $ 64,517      $ —        $ 64,517  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ —        $ 65,340      $ —        $ 65,340  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
1
3

The following table summarizes the effects of the Company’s derivative instruments in the condensed consolidated statements of operations (
in thousands
):
 

Derivative Instruments Not
Designated as
Hedging Instrument
 
Location of Gain (Loss) Recognized
  
 
Three Months Ended June 30,
 
  
2023
 
  
2022
 
Interest rate swaps
  Unrealized (loss) gain on derivatives    $ 8,863      $ (7,459 )
Interest rate collars
  Unrealized (loss) gain on derivatives      (12,458      4,073  
 
 
 
 
 
 
 
 
 
 
 
Total unrealized loss on derivative
         (3,595 )      (3,386
)

 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
  Realized gain on derivatives      13,350        —    
Interest rate collars
  Realized gain on derivatives      12,485         —  
        
 
 
    
 
 
 
Total realized gain on derivatives
         25,835        —    
 
 
 
 
 
 
 
 
 
 
 
Total
       $ 22,240      $ (3,386 )
        
 
 
    
 
 
 
 
Derivative Instruments Not
Designated as
Hedging Instrument
 
Location of Gain (Loss) Recognized
  
 
Six Months Ended June 30,
 
  
2023
 
  
2022
 
Interest rate swaps
  Unrealized (loss) gain on derivatives    $ (5,967    $ 16,413  
Interest rate collars
  Unrealized (loss) gain on derivatives      (15,562      16,409  
 
 
 
 
 
 
 
 
 
 
 
Total unrealized (loss) gain on derivative
         (21,529      32,822  
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
  Realized gain on derivatives      13,350         
Interest rate collars
  Realized gain on derivatives      12,485         
 
 
 
 
 
 
 
 
 
 
 
Total realized gain on derivatives
         25,835        —    
 
 
 
 
 
 
 
 
 
 
 
        
 
 
    
 
 
 
Total
       $ 4,306      $ 32,822  
        
 
 
    
 
 
 
The following table summarizes the effects of correcting the restatement in the condensed consolidated statement of operations for the period ended March 31, 2022, as disclosed in Note 2 – Basis of Presentation and Consolidation:
 
Derivative Instruments Not
Designated as
Hedging Instrument
  
Location of Gain Recognized
 
  
 
Three Months Ended March 31,
 
  
As Previously
Reported
 
  
Restatement
Adjustments
 
  
As Restated
 
Interest rate swaps
  
 
Unrealized gain on derivatives
 
  
$
4,371
 
  
$
19,501
 
  
$
23,872
 
Interest rate collars
  
 
Unrealized gain on derivatives
 
  
 
3,467
 
  
 
8,869
 
  
 
12,336
 
  
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
  
$
  7,838
 
  
$
28,370
 
  
$
36,208
 
  
  
 
 
 
  
 
 
 
  
 
 
 
11. Fair Value Measurements
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative instruments and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accrued liabilities, and accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The fair value of debt and contingent consideration are considered Level 3 measurements. These fair value measurements are based on unobservable inputs. The fair value of variable rate long-term debt is based upon the current market rates for debt with similar credit risk and maturity which approximates fair value. Debt includes the ABL Facility and the Term Loan and is shown net of unamortized debt issuance cost in the tables below. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. The fair value estimate reflects the contractual terms of the purchase agreement (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving future cash flows generally represents the only significant unobservable input. There was
no change in the fair value of contingent consideration during the three and six months ended June 30, 2023. See fair value tables below (in thousands):
 

 
  
As on June 30, 2023
 
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
  
Total
 
Debt
   $ —        $ —        $ 2,769,355      $ 2,769,355  
Contingent Consideration
     —          —          3,700        3,700  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ —        $ —        $ 2,773,055      $ 2,773,055  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
  
As of December 31, 2022
 
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
  
Total
 
Debt
   $ —        $ —        $ 2,720,019      $ 2,720,019  
Contingent Consideration
     —          —          3,700        3,700  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ —        $ —        $ 2,723,719      $ 2,723,719  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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12. Stockholders’ Equity
Holders
of the Company’s common stock are entitled to one vote for each share. As of June 30, 2023 and December 31, 2022, there were
 
59,000,000
shares of common stock issued and outstanding. Holders of common stock are entitled to receive, in the event of a liquidation, dissolution or winding up, ratably the assets available for distribution to the stockholders after payment of all liabilities.
As stated in Note 19 (“Subsequent Events”), on July 3, 2023, 16,000,000 shares of common stock were issued and sold as part of the closing of the IPO and on July 13, 2023, the underwriters exercised in full their option to purchase an additional 2,400,000 shares of common stock. After giving effect to these transactions, Kodiak had 77,400,000 shares of common stock issued and outstanding.
Class B and C Profits Interests
Prior to the IPO, Kodiak Holdings issued incentive awards to certain employees of Kodiak Gas Services, LLC (a wholly-owned subsidiary of the Company) in the form of Class B incentive units (“Class B Units”). The Company records a stock-based compensation expense associated with the Class B Units because of the employment relationship of the grantees with Kodiak Gas Services, LLC.
On March 6, 2019, 61,098.4 Class B Units were authorized under the Kodiak Holdings 2019 Class B Unit Incentive Plan for grants to certain employees and
non-employee
board members. These Class B Units are intended to constitute “profits interests” for federal income tax purposes, but constitute a substantive class of equity under GAAP. As of June 30, 2023 and December 31, 2022, there were 61,068.0 authorized Class B Units and 60,363.4 outstanding Class B Units, respectively. There were no Class B Units granted in the six months ended June 30, 2023 or 2022. Twenty-five percent
(25
%) of the Class B Units are subject to time vesting (the “Time-Vesting Units”) and the remaining 75% of the Class B Units are subject to performance-vesting (the “Performance-Vesting Units”). Time-Vesting Units vest in equal annual installments on each of the first five anniversaries of the applicable vesting commencement date, subject to the Class B Unit holder’s continuous service through the applicable vesting date. Performance-Vesting Units vest based on the achievement of certain investor return metrics, subject to the Class B Unit holder’s continuous service through the applicable vesting date. Holders of Class B Units are entitled to distributions on vested awards in accordance with the Kodiak Holdings distribution waterfall. Class B Units are not subject to any conversion rights other than an automatic conversion to Class C incentive units (“Class C Units”) in connection with certain terminations of employment. Each Class C Unit is eligible to receive distributions up to an amount equal to the fair market value of the corresponding converted Class B Unit on the date of conversion. As of June 30, 2023 no material conversions had occurred.
There are no performance hurdles associated with the Time-Vesting Units. The fair value of each incentive award was estimated on its applicable grant date using an option pricing model.
Stock compensation expense is recognized ratably over the vesting period of the awards. During the six months ended June 30, 2023 and 2022, approximately $0.9 million and $0.6 million, respectively, in stock compensation expense was recognized in selling, general and administrative expenses. As of June 30, 2023, there were 3,170.7 unvested Time-Vesting Units, representing $1.3 million in unrecognized stock compensation expense.
2023 Omnibus Incentive Plan
On June 20, 2023, Kodiak’s board of directors authorized and adopted the Kodiak Gas Services, Inc. Omnibus Incentive Plan (the “Omnibus Plan”) for employees, consultants and directors. The Omnibus Plan enables Kodiak’s board of directors (or a committee authorized by Kodiak’s board of directors) to award incentive and
non-qualified
stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards and substitute awards intended to align the interests of service providers, including the Company’s named executive officers, with those of the Company’s stockholders. A total of 6,375,000 shares of common stock have been reserved for issuance pursuant to awards under the Omnibus Plan.
 
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On June 29, 2023, Kodiak granted 1,297,188 shares of common stock to certain employees, including Kodiak’s named executive officers, pursuant to awards under the Omnibus Plan. 985,313 of the shares were granted pursuant to awards of time-based restricted stock units (“RSUs”) that vest ratably over a three-year period, subject to continuous service through each vesting date. 311,875 of the shares were granted pursuant to awards of performance stock units (“PSUs”) that cliff vest at the end of a three-year performance period, with the ultimate number of shares earned and issued ranging from
0-190%
of the number of shares subject to the PSU award, subject to continuous service through the end of the performance period.
The following table summarizes award activity under the Omnibus Plan for the
six-month
period ending June 30, 2023:
 
    
RSUs
    
PSUs
 
    
Number of

RSUs
    
Weighted-

Average Price
    
Number of

PSUs
    
Weighted-

Average Price
 
Outstanding at December 31, 2022
                                       
Granted
     985,313      $ 16.00        311,875      $ 16.00  
Vested or exercised
                                       
Forfeited
                                       
    
 
 
    
 
 
    
 
 
    
 
 
 
Outstanding at June 30, 2023
     985,313      $ 16.00        311,875      $ 16.00  
    
 
 
    
 
 
    
 
 
    
 
 
 
Restricted stock awards expected to vest
     985,313      $ 16.00        311,875      $ 16.00  
    
 
 
    
 
 
    
 
 
    
 
 
 
As of June 30, 2023, the total future compensation cost related to unvested equity awards was approximately $20.8 million assuming the performance-based restricted stock units vest at 100% per the terms of the applicable award.
13. Commitments and Contingencies
Purchase Commitments
Purchase commitments of $129.2 million primarily consist of commitments to purchase compression units
that
are expected to be settled within the next twelve months.
Contingent Consideration
The Company agreed to pay, as contingent consideration, up to $3.7 million of certain past due accounts receivable acquired in connection with a prior acquisition, to the seller if collected. The Company records contingent consideration at the acquisition and end of reporting periods at fair value in accrued liabilities. As of June 30, 2023 and December 31, 2022, none of the outstanding receivables had been collected.
Sales Tax Contingency
Between October 2019 and April 2023, the Company received notices from the Texas Comptroller’s office in regards to audits for periods ranging from December 2015 through December 2022. The audits pertain to whether the Company may owe sales tax on certain of its compression equipment that it had purchased during that time period. As of December 31, 2022, the Company had accrued a total amount of $27.8 million for this contingent liability. During the six months ended June 30, 2023, based on current information the Company accrued an additional $0.6 million and as of June 30, 2023, the Company had accrued a total of $28.4 million for this contingent liability.
Legal Matters
From time to time, the Company may become involved in various legal matters. Management believes that there are no legal matters as of June 30, 2023 whose resolution could have a material adverse effect on the unaudited condensed consolidated financial statements.
 
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Table of Contents
14. Prepaid Expenses and Other Current Assets
The prepaid expenses and other current assets consis
t
 of the following (
in thousands
):
 
    
As of

June 30, 2023
    
As of

December 31,

2022
 
Prepaid insurance
   $ 6,047      $ 3,997  
Prepaid rent
     799        589  
Deferred IPO issuance costs
     8,462        3,047  
Other
     4,893        1,887  
    
 
 
    
 
 
 
Total prepaid expenses and other current assets
   $ 20,201      $ 9,520  
    
 
 
    
 
 
 
15. Accrued Liabilities
Accrued liabilities consist of the following (
in thousands
):
 
    
As of

June 30, 2023
    
As of

December 31,

2022
 
Sales tax liability
   $ 28,406      $ 27,820  
Accrued interest
     7,678        16,347  
Accrued bonus
     9,034        7,764  
Accrued taxes
     10,534        9,667  
Accrued payroll
     2,674        2,744  
Accrued legal fee
     4,183        1,906  
Lease liabilities - current portion
     4,853        3,090  
Contingent consideration
     3,673        3,673  
Accrued accounts payable
     13,549        14,080  
Accrued insurance
     710        2,231  
Other
     3,146        4,551  
    
 
 
    
 
 
 
Total accrued liabilities
   $ 88,440      $ 93,873  
    
 
 
    
 
 
 
16. Income Taxes
For the three and six months ended June 30, 2023, the Company recorded income tax expense of $5.9 million and $1.9 million, respectively. Income tax expense for the three and six months ended June 30, 2022 was $2.8
 
million and $18.2 million, respectively. The effective tax rate was approximately 25.0% and 26.5% for the three and six months ended June 30, 2023, compared to 23.8% and 23.7% for the three and six months ended June 30, 2022. The difference between the Company’s effective tax rates for the three and six months ended June&#