NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1— COMPANY BACKGROUND
We are a diversified mineral company that delivers potassium, magnesium, sulfur, salt, and water products essential for customer success in agriculture, animal feed, and the oil and gas industry. We are the only U.S. producer of muriate of potash (sometimes referred to as potassium chloride or potash), which is applied as an essential nutrient for healthy crop development, utilized in several industrial applications, and used as an ingredient in animal feed. In addition, we produce a specialty fertilizer, Trio®, which delivers three key nutrients, potassium, magnesium, and sulfate, in a single particle. We also provide water, salt, magnesium chloride, brine, and various oilfield products and services.
Our extraction and production operations are conducted entirely in the continental U.S. We produce potash from three solution mining facilities: our HB solution mine in Carlsbad, New Mexico, our solution mine in Moab, Utah, and our brine recovery mine in Wendover, Utah. We also operate the North compaction facility in Carlsbad, New Mexico, which compacts and granulates product from the HB mine. We produce Trio® from our conventional underground East mine in Carlsbad, New Mexico.
We have permitted, licensed, declared, and partially adjudicated water rights in New Mexico that support our mining and industrial operations. Water that is not used to support our mining and industrial operations is primarily sold to support oil and gas development in the Permian Basin in New Mexico near our Carlsbad facilities. We continue to work to expand our water business. See Note 15—Commitments and Contingencies below for further information regarding our water rights.
We also operate certain land, water rights, grazing leases, and other related assets in southeast New Mexico. We refer to these assets and operations as "Intrepid South." Due to the strategic location of Intrepid South, part of our long-term operating strategy is selling small parcels of land, including restricted use agreements of surface or subsurface rights, to customers where such sales provide a solution to such customer's operations in the oil and gas industry.
We have three segments: potash, Trio®, and oilfield solutions. We account for sales of byproducts as revenue in the potash or Trio® segment based on which segment generates the byproduct. Intersegment sales prices are market based and are eliminated.
"Intrepid," "our," "we," or "us" means Intrepid Potash, Inc. and its consolidated subsidiaries.
Note 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation—Our unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of interim financial information, have been included. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023.
Pronouncements Issued But Not Yet Adopted—In December 2023, the Financial Accounting Standards Board (the "FASB") issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"). ASU 2023-09 requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold, certain disclosures of state versus federal income tax expenses and taxes paid. ASC 2023-09 is effective for fiscal years beginning after December 15, 2024. We are currently evaluating the guidance and expect it to only impact disclosures with no impact to results of operations, cash flows and financial condition.
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). This new guidance: (i) introduces a requirement to disclose significant segment expenses regularly provided to the chief operating decision maker ("CODM"), (ii) extends certain annual disclosures to interim periods, (iii) clarifies disclosure requirements for single reportable segment entities, (iv) permits more than one measure of segment profit or loss to be reported under certain conditions, and (v) requires disclosure of the title and position of the CODM. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The guidance applies retrospectively to all periods presented in the financial statements. We are currently evaluating the guidance and expect it to only impact disclosures with
no impact to results of operations, cash flows, and financial condition.
Reclassifications of Prior Period Presentation—Certain prior period amounts have been reclassified in order to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Note 3— EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. For purposes of determining diluted earnings per share, basic weighted-average common shares outstanding is adjusted to include potentially dilutive securities, including restricted stock, stock options, and performance units. The treasury-stock method is used to measure the dilutive impact of potentially dilutive shares. Potentially dilutive shares are excluded from the diluted weighted-average shares outstanding computation in periods in which they have an anti-dilutive effect. The following table shows the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Net (loss) income
$
(1,833)
$
(7,196)
$
(5,796)
$
1,615
Basic weighted-average common shares outstanding
12,908
12,789
12,871
12,750
Add: Dilutive effect of restricted stock
—
—
—
80
Add: Dilutive effect of stock options
—
—
—
46
Diluted weighted-average common shares outstanding
12,908
12,789
12,871
12,876
Basic
$
(0.14)
$
(0.56)
$
(0.45)
$
0.13
Diluted
$
(0.14)
$
(0.56)
$
(0.45)
$
0.13
The following table shows the shares that have an anti-dilutive effect and are excluded from the diluted weighted-average shares outstanding computations (in thousands):
Note 4— CASH, CASH EQUIVALENTS AND RESTRICTED CASH
We consider financial instruments with original maturities of three months or less to be cash equivalents. Total cash, cash equivalents and restricted cash, as shown on the Condensed Consolidated Statements of Cash Flows are included in the following accounts at September 30, 2024, and 2023 (in thousands):
September 30, 2024
September 30, 2023
Cash and cash equivalents
$
38,034
$
2,791
Restricted cash included in other current assets
25
25
Restricted cash included in other long-term assets
562
551
Total cash, cash equivalents, and restricted cash as shown in the statement of cash flows
$
38,621
$
3,367
Restricted cash included in other current and long-term assets on the Condensed Consolidated Balance Sheets represents amounts for which use is restricted by contractual agreements with various entities, principally the Bureau of Land Management or the states of Utah and New Mexico, as security to fund future reclamation obligations at our sites.
Note 5— INVENTORY AND LONG-TERM PARTS INVENTORY
The following summarizes our inventory, recorded at the lower of weighted-average cost or estimated net realizable value, as of September 30, 2024, and December 31, 2023 (in thousands):
September 30, 2024
December 31, 2023
Finished goods product inventory
$
53,734
$
66,033
In-process inventory
35,135
28,044
Total product inventory
88,869
94,077
Current parts inventory, net
20,709
20,175
Total current inventory, net
109,578
114,252
Long-term parts inventory, net
32,385
30,231
Total inventory, net
$
141,963
$
144,483
Parts inventory is shown net of estimated allowances for obsolescence of $0.2 million and $0.9 million as of September 30, 2024, and December 31, 2023, respectively.
Note 6 — PROPERTY, PLANT, EQUIPMENT, AND MINERAL PROPERTIES
Property, plant, equipment, and mineral properties were comprised of the following (in thousands):
September 30, 2024
December 31, 2023
Land
$
24,136
$
24,136
Ponds and land improvements
96,307
91,333
Mineral properties and development costs
161,757
159,775
Buildings and plant
93,477
90,150
Machinery and equipment
318,680
297,494
Vehicles
7,888
7,332
Office equipment and improvements
10,627
10,150
Operating lease ROU assets
4,829
5,274
Breeding stock
264
315
Construction in progress
11,400
23,942
Total property, plant, equipment, and mineral properties, gross
$
729,365
$
709,901
Less: accumulated depreciation, depletion, and amortization
(374,467)
(351,652)
Total property, plant, equipment, and mineral properties, net
$
354,898
$
358,249
During the year ended December 31, 2023, we recorded an impairment related to our Trio® segment assets because the net book value of the assets exceeded the estimated fair value of the assets. The fair value of the Trio® segment assets was primarily determined using the expected proceeds received in an orderly sale of the individual assets. For any Trio® segment capital spending during the nine months ended September 30, 2024, we also estimated the fair value of those assets using the expected proceeds received in an orderly sale of those new assets. As a result, we recorded an additional impairment of $3.1 million in the nine months ended September 30, 2024.
We incurred the following expenses for depreciation, depletion, and amortization, including expenses capitalized into inventory, for the following periods (in thousands):
Cooperative Development Agreement—In December 2023, we entered into the Third Amendment of Cooperative Development Agreement (the "Amendment") with XTO Holdings, LLC ("XTO Holdings") and XTO Delaware Basin LLC, as successors in interest to BOPCO, L.P. ("XTO Delaware Basin," and together with XTO Holdings, "XTO"), with an effective date of January 1, 2024 ("Amendment Date"). The Amendment further amends that certain Cooperative Development Agreement, by and between us, BOPCO, L.P. and the other parties thereto, effective as of February 28, 2011 (as amended, including by the Amendment, the "CDA"), which was executed for the purpose of pursuing the cooperative development of potassium and oil and gas on certain lands. The CDA restricts and limits the rights of Intrepid and XTO, as successors in interest to BOPCO, L.P., to explore and develop their respective interests, including limitations on the locations of wells. Intrepid and XTO entered into the Amendment in an effort to further the cooperation, remove the restrictions and limitations, and allow for the efficient co-development of resources within the Designated Potash Area ("DPA") consistent with the United States Secretary of the Interior Order 3324.
Pursuant to the Amendment, among other things, we agreed to provide support to XTO for development and operation of XTO's oil and gas interests within the DPA. As consideration under the Amendment, XTO agreed to pay us an initial fee of $50.0 million (the "Initial Fee"). We received a partial payment of $5.0 million of the Initial Fee in December 2023, and we received payment of the remaining $45.0 million from XTO in January 2024.
The Amendment further provides that we shall receive an additional one-time payment equal to $50.0 million (the "Access Fee"), which XTO will pay within 90 days upon the earlier occurrence of (i) the approval of the first new or expanded drilling island within a specific area to be used by XTO or (ii) within seven years of the anniversary of the Amendment Date. XTO is also required to pay additional amounts to Intrepid as an "Access Realization Fee," up to a maximum of $100.0 million, (the "Access Realization Fee") in the event of certain additional drilling activities by XTO.
Because the cooperative development support we are providing under the CDA is not an output of our ordinary business activities, ASC Topic 606, Revenue from Contracts with Customers ("ASC 606") does not apply to the CDA. However, we apply the principles in ASC 606 by analogy to determine amounts of other income to recognize.
Under ASC 606, we are required to identify the performance obligations in the CDA and to determine the transaction price. The transaction price may include fixed consideration, variable consideration, or both. Variable consideration may only be included in the transaction price if it is probable that a significant reversal of amounts recognized will not occur (referred to as the variable consideration constraint). The Access Realization Fee is considered variable consideration.
Our performance obligation under the Amendment is to "stand-ready" to provide support to XTO, when and as needed, during the term of the Amendment. We estimate the transaction price to be $100.0 million, which is comprised of the $50.0 million Initial Fee and the $50.0 million Access Fee. We are not including any amounts of the Access Realization Fee in the transaction price because of the variable consideration constraint. Since our performance obligation is a "stand-ready" obligation, we are recognizing the transaction price on a straight-line basis over the term of the Amendment which ends on February 28, 2046.
For the three and nine months ended September 30, 2024, we recorded other operating income of $1.1 million and $3.4 million, respectively, from the Amendment. Because we have not yet been paid the Access Fee included in the transaction price, we recorded a long-term receivable for the amount of the Access Fee that we earned during the nine months ended September 30, 2024 of $1.7 million, which is included in "Other Assets" on the Condensed Consolidated Balance Sheets. For the amount of the Initial Fee we earned during the three and nine months ended September 30, 2024, we reduced the "Deferred other income, long-term" liability recorded on our Condensed Consolidated Balance Sheets.
As of September 30, 2024, we had $2.3 million recorded in "Other current liabilities," and $46.1 million recorded in "Deferred other income, long-term" on the Condensed Consolidated Balance Sheets for the unearned portion of the Initial Fee. As of December 31, 2023, we had $5.0 million recorded in "Other current liabilities," and zero recorded in "Deferred other income, long-term" on the Condensed Consolidated Balance Sheets.
RevolvingCredit Facility—We maintain a $150 million revolving credit facility with a syndicate of lenders with Bank of Montreal as administrative agent. The revolving credit facility has a maturity date to August 4, 2027. As of September 30, 2024, borrowings under the credit facility bear interest at the Secured Overnight Financing Rate ("SOFR") plus an applicable margin of 1.50% to 2.25% per annum, based on our leverage ratio as calculated in accordance with the amended agreement governing the revolving credit facility. Borrowings under the revolving credit facility are secured by substantially all of our current and non-current assets, and the obligations under the credit facility are unconditionally guaranteed by several of our subsidiaries.
We occasionally borrow and repay amounts under the revolving credit facility for near-term working capital needs or other purposes and may do so in the future. During the three months ended September 30, 2024, we made no borrowings and made no repayments under the revolving credit facility. During the nine months ended September 30, 2024, we made no borrowings and made $4.0 million in repayments under the revolving credit facility. During the three months ended September 30, 2023, we made $2.0 million in borrowings and made no repayments under the revolving credit facility. During the nine months ended September 30, 2023, we made $7.0 million in borrowings and made $5.0 million in repayments under the revolving credit facility. As of September 30, 2024, we had no borrowings outstanding and no outstanding letters of credit under this facility. As of December 31, 2023, we had $4.0 million in borrowings outstanding and no outstanding letters of credit under this facility.
As of September 30, 2024, we were in compliance with all applicable covenants under the revolving credit facility.
Interest Expense—Interest expense is recorded net of any capitalized interest associated with investments in capital projects. We incurred gross interest expense of $0.2 million and $0.5 million for the three and nine months ended September 30, 2024, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2023, respectively.
Amounts included in interest expense, net for the three and nine months ended September 30, 2024, and 2023 were as follows (in thousands):
We have water rights, recorded at $19.2 million at September 30, 2024, and December 31, 2023. Our water rights have indefinite lives and are not amortized. We evaluate our water rights at least annually as of October 1 for impairment, or more frequently if circumstances require.
We account for other intangible assets as finite-lived intangible assets and amortize those intangible assets over the period of estimated benefit, using the straight-line method. As of September 30, 2024, the weighted average amortization period for the other intangible assets was approximately 14.8 years. At September 30, 2024, and December 31, 2023, these intangible assets had a net book value of $4.9 million and $4.9 million, respectively, and are included in "Other assets, net" on the Condensed Consolidated Balance Sheets.
Note 10— FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS OF POSSIBLE FUTURE
PUBLIC DEBT
Intrepid Potash, Inc., as the parent company, has no independent assets or operations, and operations are conducted solely through its subsidiaries. Cash generated from operations is held at the parent-company level as cash on hand and cash equivalents and totaled $38.0 million and $4.1 million at September 30, 2024, and December 31, 2023, respectively. If one or more of our wholly-owned operating subsidiaries guarantee public debt securities in the future, those guarantees will be full and unconditional and will constitute the joint and several obligations of the subsidiary guarantors. The assets and liabilities of our other subsidiaries are immaterial. There are no restrictions on our ability to obtain cash dividends or other distributions of funds from the subsidiary guarantors, except those imposed by applicable law.
We recognize an estimated liability for future costs associated with the abandonment and reclamation of our mining properties. A liability for the fair value of an asset retirement obligation and a corresponding increase to the carrying value of the related long-lived asset are recorded as the mining operations occur or the assets are acquired.
Our asset retirement obligation is based on the estimated cost to close and reclaim the mining operations, the economic life of the properties, and federal and state regulatory requirements. The liability is discounted using credit adjusted risk-free rate estimates at the time the liability is incurred or when there are upward revisions to estimated costs. The credit adjusted risk-free rates used to discount our reclamation liabilities range from 6.9% to 12.0%. Revisions to the liability occur due to construction of new or expanded facilities, changes in estimated closure costs or economic lives, or to reflect new federal or state rules, regulations, or requirements regarding the closure or reclamation of mines.
Following is a table of the changes to our asset retirement obligation for the following periods (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Asset retirement obligation, at beginning of period
$
31,603
$
27,934
$
30,359
$
26,864
Accretion of discount
623
535
1,867
1,605
Total asset retirement obligation, at end of period
$
32,226
$
28,469
$
32,226
$
28,469
Less current portion of asset retirement obligation
$
(282)
$
(300)
$
(282)
$
(300)
Long-term portion of asset retirement obligation
$
31,944
$
28,169
$
31,944
$
28,169
The current portion of the asset retirement obligation is included in "Other current liabilities" on the Condensed Consolidated Balance Sheet as of September 30, 2024.
Revenue Recognition—We account for revenue in accordance with ASC 606. Under ASC 606, we recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect in exchange for those goods or services. The timing of revenue recognition, billings, and cash collection may result in contract assets or contract liabilities.
Contract Balances:As of September 30, 2024, and December 31, 2023, we had a total of $2.5 million and $2.3 million of contract liabilities, respectively, of which $1.0 million and $1.0 million were current as of September 30, 2024, and December 31, 2023, respectively, and included in "Other current liabilities" on the Condensed Consolidated Balance Sheets. Customer advances received before we have satisfied our performance obligations are accounted for as a contract liability (sometimes referred to in practice as deferred revenue).
Our deferred revenue activity for the three and nine months ended September 30, 2024, and 2023 is shown below (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Beginning balance
$
2,857
$
2,168
$
2,303
$
2,374
Additions
27
313
1,324
627
Recognized as revenue during period
(419)
(291)
(1,162)
(811)
Ending Balance
$
2,465
$
2,190
$
2,465
$
2,190
Disaggregation of Revenue:The tables below show the disaggregation of revenue by product and reconciles disaggregated revenue to segment revenue for the three and nine months ended September 30, 2024, and 2023. We believe the disaggregation of revenue by products best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic conditions (in thousands):
Equity Incentive Compensation Plan—Our Board of Directors and stockholders adopted a long-term incentive compensation plan called the Intrepid Potash, Inc. Amended and Restated Equity Incentive Plan (the "Plan"). The Plan was most recently amended and restated in May 2022. We have issued common stock, restricted stock, performance units, and non-qualified stock option awards under the Plan. As of September 30, 2024, approximately 1.0 million shares remained available for issuance under the Plan.
During the nine months ended September 30, 2024, the Compensation Committee granted an aggregate of 165,216 shares of restricted stock to executive officers and other key employees. These awards vest over three years, and in some cases, contain a market condition. In May 2024, the Compensation Committee granted an aggregate of 20,739 shares of restricted stock to members of our Board of Directors, which vest over one year. In September 2024, the Compensation Committee granted an aggregate of 6,282 shares of restricted stock to members of our Board of Directors, which will vest on the earlier of the date a member of the Board of Directors resigns, May 25, 2025, or the day before the 2025 Annual Meeting of Stockholders.
During the nine months ended September 30, 2023, the Compensation Committee granted an aggregate of 225,117 restricted shares to executive officers and other key employees. These awards vest over three years, and in some cases, contain a market condition. In May 2023, the Compensation Committee granted an aggregate of 22,226 restricted shares to members of our Board of Directors, which vest over one year.
As of September 30, 2024, the following awards were outstanding under the Plan (in thousands):
Outstanding as of September 30, 2024
Restricted Shares
258
Non-qualified Stock Options
273
Total share-based compensation expenses were $0.2 million and $1.5 million for the three months ended September 30, 2024, and 2023, respectively, and $2.7 million and $5.1 million for the nine months ended September 30, 2024, and 2023, respectively. As of September 30, 2024, we had $4.0 million of total remaining unrecognized compensation expense related to awards that is expected to be recognized over a weighted-average period of 1.4 years.
On September 30, 2024, we entered in a Separation Agreement and General Release (the "Agreement") with the court-appointed guardian of our former principal executive officer, Robert P. Jornayvaz III. Pursuant to the Agreement, we agreed to pay $2.0 million to Mr. Jornayvaz for compensation owed to him, certain benefits, and Mr. Jornayvaz forfeited 118,975 shares of unvested restricted stock. The liability for the payment made to Mr. Jornayvaz in October 2024 is included in "Accrued employee compensation and benefits" on the Condensed Consolidated Balance Sheet at September 30, 2024, and the associated expense is included in "Selling and administrative" expenses on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2024.
Our anticipated annual tax rate is impacted primarily by the amount of taxable income associated with each jurisdiction in which our income is subject to income tax, permanent differences between the financial statement carrying amounts and tax bases of assets and liabilities, and the benefit associated with the estimated effect of the percentage depletion deduction.
A summary of our provision for income taxes is as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Current portion of income tax expense
$
58
$
3
$
93
$
137
Deferred portion of income tax (benefit) expense
(65)
(1,920)
(1,179)
1,756
Total income tax (benefit) expense
$
(7)
$
(1,917)
$
(1,086)
$
1,893
Our effective tax rate for the three months ended September 30, 2024 was 0.4%, while our effective tax rate for the nine months ended September 30, 2024 was 15.8%. Our effective tax rate differed from the statutory rate during these periods primarily from the permanent difference between book and tax income due to the percentage depletion deduction and the officers' compensation deduction. Our effective tax rate for the three and nine months ended September 30, 2023 was 21.0% and 54.0%, respectively. Our effective tax rate differed from the statutory rate during these periods primarily from the estimated permanent difference between book and tax income for the first nine months of 2023 due to the percentage depletion deduction and the officers' compensation deduction.
As of September 30, 2024, we continue to be in a three-year cumulative income position. However, losses incurred in 2023 and through the first nine-months of 2024 have reduced the amount of three-year cumulative income. If weakness in fertilizer pricing, lower production, additional impairments, or additional losses were to continue, it is possible that there may be significant negative evidence to cause us to record a valuation allowance within the next 12 months. The timing and amount of any valuation allowance is subject to significant judgement that is considered with the timing and amounts of actual and future earnings. Recording any valuation allowance would result in increased income tax expense in the period the valuation allowance is recorded which could have a material effect on net income.
Note 15 — COMMITMENTS AND CONTINGENCIES
Reclamation Deposits and Surety Bonds—As of September 30, 2024, and December 31, 2023, we had $27.1 million and $26.8 million, respectively, of security placed principally with the Bureau of Land Management ("BLM") and the states of Utah and New Mexico for eventual reclamation of our various facilities. As of September 30, 2024, $0.5 million consisted of long-term restricted cash deposits and $26.6 million was secured by surety bonds issued by an insurer. As of December 31, 2023, $0.5 million consisted of long-term restricted cash deposits and $26.3 million was secured by surety bonds issued by an insurer. The restricted cash deposits are included in "Other assets, net" on the Condensed Consolidated Balance Sheets and the surety bonds are held in place by an annual fee paid to the issuer.
We may be required to post additional security to fund future reclamation obligations as reclamation plans are updated or as statutory, regulatory, or other agency requirements change.
Legal—We are subject to claims and legal actions in the ordinary course of business. We expense legal costs as they are incurred. While there are uncertainties in predicting the outcome of any claim or legal action, except as noted below, we believe the ultimate resolution of these claims or actions is not reasonably likely to have a material adverse effect on our financial condition, results of operations, or cash flows.
Water Rights and Other Legal Contingencies
On March 17, 2022, following an expedited inter se proceeding, a court entered a subfile order and partial final judgment and decree ("Order") determining the validity of our claim to 20,000 acre feet of Pecos River surface water rights. The Order found that our predecessors in interest had forfeited all but approximately 5,800 acre feet of water per year, and that of the remaining 5,800 acre feet of water that had not been forfeited, all but 150 acre feet of water had been abandoned prior to 2017. The Order limited our right to 150 acre fee per annum of water for industrial-salt processing use. We appealed
the Order to the New Mexico Court of Appeals ("NMCA"), which, on July 7, 2023, affirmed the Order. On November 17, 2023, we filed a request for the New Mexico Supreme Court ("NMSC") to reconsider and review the NMCA's decision to affirm the Order's abandonment determination. The NMSC agreed to review the NMCA's abandonment determination on February 7, 2024, where it is still before the court.
In 2017 and 2018 the New Mexico Office of the State Engineer ("OSE") granted us preliminary and emergency authorizations to sell approximately 5,700 acre-feet of water per year from our Pecos River Water rights. The preliminary and emergency authorizations allowed for water sales to begin immediately, subject to repayment if the underlying water rights were ultimately found to be invalid. If the NMCA's decision is ultimately affirmed, we may have to repay for the water we sold under the preliminary and emergency authorizations. Repayment of this water can be up to two times the amount of water removed from the river. Repayment is customarily made in-kind over a period of time but can take other forms including cash repayment. If we are not able to repay in-kind due to the lack of remaining water rights or logistical constraints, we may need to purchase water to meet this repayment or be subject to a cash repayment. We cannot reasonably estimate the potential volume, timing, or form of repayment, if any, and have not recorded a loss contingency in our Condensed Consolidated Statement of Operations related to this legal matter.
We have estimated contingent liabilities recorded in "Other current liabilities" on the Condensed Consolidated Balance Sheets of $2.3 million as of September 30, 2024, mainly related to the potential underpayment of royalties from 2012 to 2016, and a potential fine related to a violation of one of our air quality permits at our New Mexico facility. As of December 31, 2023, we had $3.4 million in contingent liabilities mainly related to the potential underpayment of royalties from 2012 to 2016 and potential royalties on water revenues in 2019 to 2022. In March 2024 we paid $1.9 million to the New Mexico State Land Office to resolve the matter related to potential royalties on water revenues from 2019 to 2022.
Note 16 — FAIR VALUE
We measure our financial assets and liabilities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs, other than Level 1, that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using estimates and assumptions which reflect those that market participants would use.
The classification of fair value measurement within the hierarchy is based upon the lowest level of input that is significant to the measurement.
Other financial instruments consist primarily of cash equivalents, accounts receivable, refundable income taxes, investment securities, accounts payable, accrued liabilities, and, if any, advances under our credit facility. With the exception of investment securities, we believe cost approximates fair value for our financial instruments because of the short-term nature of these instruments.
Cash Equivalents—As of September 30, 2024, we had cash equivalents of $1.5 million. As of December 31, 2023, we had cash equivalents of $0.5 million.
Held-to-Maturity Debt Investments—As of September 30, 2024, and December 31, 2023, we owned debt investment securities classified as held-to-maturity because we have the intent and ability to hold these investments to maturity. Our held-to-maturity debt investment securities consist of investment grade corporate bonds and U.S. government issued bonds. These debt securities are carried at amortized cost and consist of the following (amounts in thousands):
Our long-term held to maturity investments are recorded in "Long-term investments" on the Condensed Consolidated Balance Sheets. As of September 30, 2024 and December 31, 2023, we had $2.0 million and $3.9 million in held-to-maturity debt investment securities, respectively. As of September 30, 2024, our held-to-maturity investments mature in less than one year.
Investments in Equity Securities—In May 2020, we acquired a non-controlling equity investment in W.D. Von Gonten Laboratories ("WDVGL") for $3.5 million. We initially accounted for this investment as an equity investment without a readily determinable fair value and elected to measure our investment, as permitted by GAAP, at cost plus or minus any adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairment.
In July 2022, WDVGL entered into an agreement (the “Purchase Agreement”) with National Energy Services Reunited Corporation (“NESR”), a British Virgin Islands corporation headquartered in Houston, Texas. Under the terms of the Purchase Agreement, WDVGL was combined with the consulting business owned by W.D. Von Gonten (“Consulting”) to form a new entity, W.D. Von Gonten Engineering, LLC (“Engineering”), and NESR purchased Engineering in a majority stock transaction at an agreed upon selling price. NESR stock received from the sale of Engineering was distributed to investors in WDVGL and Consulting in August 2024.
In February 2023, we received $0.2 million in cash for our investment in WDVGL. Initially, we recorded that cash received as a liability because we were required to return the cash to WDVGL if the sale of Engineering to NESR was not finalized. The sale of Engineering to NESR has since been finalized and the recorded value of our investment in WDVG was reduced to $3.3 million, which is the aggregate cost basis of the 336,773 shares of NESR stock we received in August 2024 related to the sale of WDVGL.
NESR trades on the over-the-counter “Pink Market.” As required by Accounting Standards Codification ("ASC") Topic 321 - Investments-Equity Securities ("ASC 321"), equity securities are valued at fair value in the Condensed Consolidated Balance Sheet at September 30, 2024, and unrealized gains and losses for investments in equity securities are included in the Condensed Consolidated Statement of Operations. At September 30, 2024, the fair value of our investment in NESR equity securities is $3.2 million, and is included in "Long-term investments" on the Condensed Consolidated Balance Sheet at September 30, 2024, and the unrealized loss of $0.1 million is included in "Other income" on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2024.
As of December 31, 2023, our investment in WDVGL was accounted for as an equity investment without a readily determinable fair value and we elected to measure our investment, as permitted by GAAP, at cost plus or minus any adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairment. We had not recorded any adjustments to the carrying value of this investment since the purchase in May 2020. We included this investment in "Long-term investments" on the Condensed Consolidated Balance Sheet as of December 31, 2023.
Equity Method Investments—We are a limited partner with a 16% interest in PEP Ovation, LP ("Ovation") as of September 30, 2024, and December 31, 2023. This investment is accounted for under the equity method whereby we recognize our proportional share of the income or loss from our investment in Ovation on a one-quarter lag. This investment is included in "Long-term investments" on the Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2024, our proportional share of Ovation's net loss was $0.3 million and $0.3 million, respectively. For the three and nine months ended September 30, 2023, our proportional share of Ovation's net loss was $0.1 million and $0.3 million, respectively.
Our operations are organized into three segments: potash, Trio®, and oilfield solutions. We determine reportable segments based on several factors including the types of products and services sold, production processes, markets served and the financial information available for our CODM. We evaluate performance based on the gross margins of the respective business segments and do not allocate corporate selling and administrative expenses, among others, to the respective segments.
Intersegment sales prices are market-based and are eliminated in the "Other" column. Information for each segment is provided in the tables that follow (in thousands).
Three Months Ended September 30, 2024
Potash
Trio®
Oilfield Solutions
Other
Consolidated
Sales
$
28,356
$
18,928
$
10,324
$
(59)
$
57,549
Less: Freight costs
3,217
4,864
—
(59)
8,022
Warehousing and handling costs
1,819
1,239
—
—
3,058
Cost of goods sold
18,783
12,221
7,262
—
38,266
Lower of cost or net realizable value inventory adjustments
471
—
—
—
471
Gross Margin
$
4,066
$
604
$
3,062
$
—
$
7,732
Depreciation, depletion, and amortization incurred1
$
6,670
$
864
$
1,134
$
447
$
9,115
Nine Months Ended September 30, 2024
Potash
Trio®
Oilfield Solutions
Other
Consolidated
Sales
$
95,966
$
81,938
$
21,186
$
(199)
$
198,891
Less: Freight costs
9,976
20,498
—
(199)
30,275
Warehousing and handling costs
4,889
3,844
—
—
8,733
Cost of goods sold
65,823
55,949
13,995
—
135,767
Lower of cost or net realizable value inventory adjustments
2,326
—
—
—
2,326
Gross Margin
$
12,952
$
1,647
$
7,191
$
—
$
21,790
Depreciation, depletion, and amortization incurred1
Lower of cost or net realizable value inventory adjustments
1,083
2,330
—
—
3,413
Gross Margin (Deficit)
$
3,411
$
(4,290)
$
1,370
$
—
$
491
Depreciation, depletion, and amortization incurred1
$
7,272
$
1,754
$
950
$
226
$
10,202
Nine Months Ended September 30, 2023
Potash
Trio®
Oilfield Solutions
Other
Consolidated
Sales
$
127,363
$
81,052
$
14,265
$
(260)
$
222,420
Less: Freight costs
12,237
18,038
—
(260)
30,015
Warehousing and handling costs
4,630
3,635
—
—
8,265
Cost of goods sold
78,697
58,666
11,139
—
148,502
Lower of cost or net realizable value inventory adjustments
1,083
2,330
—
—
3,413
Gross Margin (Deficit)
$
30,716
$
(1,617)
$
3,126
$
—
$
32,225
Depreciation, depletion and amortization incurred1
$
20,753
$
4,365
$
2,772
$
656
$
28,546
1Depreciation, depletion, and amortization incurred for potash and Trio® excludes depreciation, depletion and amortization amounts absorbed in or relieved from inventory.
The following table shows the reconciliation of reportable segment sales to consolidated sales and the reconciliation of segment gross margins to consolidated income before taxes (in thousands):
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Securities Act of 1933, as amended. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Quarterly Report other than statements of historical fact are forward-looking statements. Forward-looking statements include statements about, among other things, our future results of operations and financial position, our business strategy and plans, our expected capital investments and our objectives for future operations. In some cases, you can identify these statements by forward-looking words, such as "estimate," "expect," "anticipate," "project," "plan," "intend," "believe," "forecast," "foresee," "likely," "may," "should," "goal," "target," "might," "will," "could," "predict," and "continue." Forward-looking statements are only predictions based on our current knowledge, expectations, and projections about future events.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the following:
•changes in the price, demand, or supply of our products and services;
•challenges and legal proceedings related to our water rights;
•our ability to successfully identify and implement any opportunities to grow our business whether through expanded sales of water, Trio®, byproducts, and other non-potassium related products or other revenue diversification activities;
•the costs of, and our ability to successfully execute, any strategic projects;
•declines or changes in agricultural production or fertilizer application rates;
•declines in the use of potassium-related products or water by oil and gas companies in their drilling operations;
•our ability to prevail in outstanding legal proceedings against us;
•our ability to comply with the terms of our revolving credit facility, including the underlying covenants;
•further write-downs of the carrying value of assets, including inventories;
•circumstances that disrupt or limit production, including operational difficulties or variances, geological or geotechnical variances, equipment failures, environmental hazards, and other unexpected events or problems;
•changes in reserve estimates;
•currency fluctuations;
•adverse changes in economic conditions or credit markets;
•the impact of governmental regulations, including environmental and mining regulations, the enforcement of those regulations, and governmental policy changes;
•adverse weather events, including events affecting precipitation and evaporation rates at our solar solution mines;
•increased labor costs or difficulties in hiring and retaining qualified employees and contractors, including workers with mining, mineral processing, or construction expertise;
•changes in management and the board of directors, and our reliance on key personnel, including our ability to identify, recruit, and retain key personnel;
•changes in the prices of raw materials, including chemicals, natural gas, and power;
•our ability to obtain and maintain any necessary governmental permits or leases relating to current or future operations;
•interruptions in rail or truck transportation services, or fluctuations in the costs of these services;
•our inability to fund necessary capital investments;
•global inflationary pressures and supply chain challenges;
•the impact of global health issues, and other global disruptions on our business, operations, liquidity, financial condition and results of operations; and
•the other risks, uncertainties, and assumptions described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023, this Quarterly Report and in other reports we file with the SEC.
In addition, new risks emerge from time to time. It is not possible for our management to predict all risks that may cause actual results to differ materially from those contained in any forward-looking statements we may make.
In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements to conform those statements to actual results or to reflect new information or future events.
Throughout this Quarterly Report, we refer to average net realized sales price per ton, which is a non-GAAP financial measure. More information about this measure, including a reconciliation of this measure to the most directly comparable GAAP financial measure, is below under the heading "Non-GAAP Financial Measure."
We are a diversified mineral company that delivers potassium, magnesium, sulfur, salt, and water products essential for customer success in agriculture, animal feed and the oil and gas industry. We are the only U.S. producer of muriate of potash (sometimes referred to as potassium chloride, KCl or potash), which is applied as an essential nutrient for healthy crop development, utilized in several industrial applications, and used as an ingredient in animal feed. In addition, we produce a specialty fertilizer, Trio®, which delivers three key nutrients, potassium, magnesium, and sulfate, in a single particle. We also provide water, magnesium chloride, brine, and various oilfield products and services.
Our extraction and production operations are conducted entirely in the continental U.S. We produce potash from three solution mining facilities: our HB solution mine in Carlsbad, New Mexico, our solution mine in Moab, Utah, and our brine recovery mine in Wendover, Utah. We also operate our North compaction facility in Carlsbad, New Mexico, which compacts and granulates product from the HB mine. We produce Trio® from our conventional underground East mine in Carlsbad, New Mexico.
We have permitted, licensed, declared, and partially adjudicated water rights in New Mexico under which we sell water primarily to support oil and gas development in the Permian Basin near our Carlsbad facilities. In May 2019, we acquired certain land, water rights, grazing leases, and other related assets from Dinwiddie Cattle Company. We refer to these assets and operations as "Intrepid South." Due to the strategic location of Intrepid South, part of our long-term operating strategy is selling small parcels of land, including restricted use agreements of surface or subsurface rights to customers, where such sales provide a solution to customers' operations in the oil and gas industry.
We have three segments: potash, Trio®, and oilfield solutions. We account for the sale of byproducts as revenue in the potash or Trio® segment based on which segment generated the byproduct. Intersegment sales prices are market based and are eliminated.
Recent Developments
On April 16, 2024, our Board granted Robert P. Jornayvaz III, our Executive Chairman of the Board and Chief Executive Officer, a temporary medical leave of absence, as he recovered from a non-work related accident. In connection with Mr. Jornayvaz’s medical leave, the Board temporarily delegated all responsibilities of the Chairman of the Board to Barth Whitham, Lead Director. In addition, the Board appointed Matthew D. Preston, the Company’s Chief Financial Officer, as acting principal executive officer of the Company.The Board also appointed Hugh E. Harvey, our co-founder with Mr. Jornayvaz, to serve as a Class III director on the Board. Subsequently, on July 10, 2024, our Board announced that it was unlikely that Mr. Jornayvaz would return from his extended medical leave of absence and it had initiated a search process to identify a successor to Mr. Jornayvaz in the Chief Executive Officer role. The Board also elected Mr. Whitham, formerly Lead Independent Director, as its Chair.
On September 30, 2024, Mr. Jornayvaz resigned as Chief Executive Officer and as a member of the Board. The search process to identify a successor to Mr. Jornayvaz as Chief Executive Officer continues and Mr. Preston continues as acting principal executive officer of the Company until a permanent Chief Executive Office is appointed by the Board.
Our financial results have been, or are expected to be, impacted by several significant trends and activities, which are described below. We expect that the trends described below may continue to impact our results of operations, cash flows, and financial position.
• Potash pricing and demand. Our potash average net realized sales price per ton(1) decreased to $356 and $387 for the three and nine months ended September 30, 2024, respectively, compared to $433 and $474, respectively, for the same periods in 2023. Sales volume declined 14% in the nine months ended September 30, 2024, compared to the same period in 2023 as we had less inventory to begin the year due to decreased production at our HB and Wendover facilities combined with strong demand during the fall 2023 season. Since the summer-fill program was announced in June 2024, Corn Belt pricing has remained at summer-fill levels due to sufficient inventory and limited buying to test market values.
As a small producer, domestic pricing of our potash is influenced principally by the price established by our competitors. The interaction of global potash supply and demand, ocean, land, and barge freight rates, currency fluctuations, and crop commodity values and outlook, also influence pricing. Our price expectations could be affected by, among other things, weather, planting decisions, rail car availability, commodity price decreases and the price and availability of other potassium products.
Various factors affect potash sales and shipments, which increases the volatility of sales volumes from quarter to quarter and season to season. We experience seasonality in potash demand, with more purchases historically occurring in February through May and September through November when purchasers are looking to have product on hand for the spring and fall application seasons in the U.S. The specific timing of when farmers apply potash remains highly weather dependent and varies across the numerous growing regions within the U.S. The timing of potash sales is also significantly influenced by the marketing programs of potash producers, as well as storage volumes closer to the farm gate.
• Trio® pricing and demand. Our Trio® average net realized sales price per ton(1) increased to $312 and decreased to $305 for the three and nine months ended September 30, 2024, respectively, compared to $298 and $329, respectively, for the same periods in 2023. Sales volumes in the nine months ended September 30, 2024, increased 12% compared to the same period in 2023 on supportive sulfate values and better than expected late season demand into row crop markets during the first half of 2024. In July, we announced a Trio® summer-fill program which reduced the Carlsbad posted price by $25 per ton during a one-week order window for delivery during the third quarter of 2024. After the order window closed, the Carlsbad posted price increased by $15 per ton for spot orders.
We also experience seasonality in domestic Trio® demand, with more purchases coming in the first and second quarters in advance of the spring application season in the U.S. In turn, we generally have increased inventory levels in the third and fourth quarters in anticipation of expected demand for the following year.
• Water sales. In the three and nine months ended September 30, 2024, total water sales were $7.9 million and $12.7 million, respectively, compared to $2.5 million and $9.4 million during the same periods of 2023. Sales increased in the third quarter of 2024 compared to the prior year as we supplied and sourced water for a frac on our South ranch. Year-to-date water sales increased compared to the prior year due to the frac during the third quarter, offset by less water sold from our Caprock water rights as we maximize injection rates at our HB mine. We expect our water sales in the fourth quarter of 2024 will decrease towards the rates seen in the first half of 2024, as we do not forecast any frac demand on our South ranch. We continue to pursue opportunities to supply or source water for additional fracs on our South ranch, although the timing of those opportunities, if any, is uncertain.
See Note 15 of our unaudited Condensed Consolidated Financial Statements included in "Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report on Form 10-Q regarding legal proceedings related to our water rights.
• Byproduct sales. We sell byproducts such as salt, magnesium chloride, brines, and water that are derived from our potash and Trio® operations. Byproduct sales were $6.7 million during the third quarter of 2024, compared to $7.0 million for the same period of 2023. Byproduct sales were $18.1 million during the first nine months of 2024, compared to $21.3 million for the same period of 2023 as increased brine sales were offset by decreased sales of magnesium chloride and water. We expect minimal, if any, byproduct sales of water for the remainder of 2024 as we continue to maximize injection rates at our HB mine.
• Strategic Focus on our Solar Solution Mining Facilities. Key current and future projects include:
–Phase Two of the HB Injection Pipeline Project - The in-line pigging system to clean the new pipeline and remove scaling to help ensure more consistent flow rates was commissioned in the third quarter to all brine injection sites.
We expect our brine injection rates will increase to between 2,000 - 2,500 gallons per minute, the highest rate in company history, which will improve the brine availability and residence time in the HB cavern system.
–We completed the construction of a new primary pond in Wendover in June 2024 and are in the process of filling the pond with brine. Similar to our caverns at the Moab and HB mines, the primary ponds at Wendover serve as the brine storage area, and adding another primary pond will help us meet our goals of maximizing brine availability, increasing brine grade, and improving production. We expect to see the production benefits of the new primary pond beginning in 2025 - 2026 production year.
–HB AMAX Cavern - In the third quarter of 2024, we started the permitting process to drill a sample well into the AMAX Cavern at HB in order to measure the brine chemistry of the existing cavern. AMAX is the largest cavern in the HB system and is expected to serve as an expansion area to the original HB caverns which have been in service for over ten years. We expect to finish the sample well permitting process in the first quarter of 2025 with test well drilling taking place shortly thereafter.
(1) Average net realized sales price per ton is a non-GAAP financial measure. More information about this non-GAAP financial measure is below under the heading "Non-GAAP Financial Measure."
1Sales include sales of byproducts which were $6.7 million and $7.0 million for the three months ended September 30, 2024, and 2023, respectively, and $18.1 million and $21.3 million for the nine months ended September 30, 2024, and 2023, respectively.
2Average net realized sales price per ton is a non-GAAP financial measure. More information about this non-GAAP financial measure is below under the heading "Non-GAAP Financial Measure."
Consolidated Results for the Three Months Ended September 30, 2024, and 2023
Sales
Our total sales for the three months ended September 30, 2024, increased $3.1 million, or 6%, compared to the same period in 2023, as oilfield solutions segment sales increased $5.4 million and potash segment sales increased $0.8 million, partially offset by a decrease of $3.1 million in Trio® segment sales.
Our oilfield solutions segment sales, which includes sales of water, brine water, surface use, and easements, increased $5.4 million, or 111%, in the three months ended September 30, 2024, compared to the same period in 2023, driven by a $6.8 million increase in water sales, partially offset by a $1.4 million decrease in surface use and easement revenues. Our oilfield solutions segment water revenues increased due to the completion of a large frac on Intrepid South during the third quarter of 2024. Surface use and easement revenues fluctuate based on the timing of recognizing revenue from the various performance obligations contained in the underlying agreements.
Our total potash segment sales increased $0.8 million for the three months ended September 30, 2024, compared to the same period in 2023, as potash segment byproduct sales increased $1.0 million, partially offset by a $0.3 million decrease in potash sales. During the three months ended September 30, 2024, potash segment byproduct sales increased, compared to the same period in 2023, due to an increase in brine water sales driven by continued strong demand from oil and gas operators near our facilities in New Mexico. While we sold 17% more tons of potash during the three months ended September 30, 2024, compared to the same period in 2023, our average net realized sales price per ton decreased 18%.
Our Trio® segment sales decreased $3.1 million in the three months ended September 30, 2024, compared to the same period in 2023, as Trio® sales decreased $1.7 million, or 8%, and Trio® segment byproduct water sales decreased $1.4 million. While our Trio® average net realized sales price per ton increased 5% in the three months ended September 30, 2024, compared to the same period in 2023, we sold 13% fewer tons. We sold less Trio® segment byproduct water as we increased the volume of water used for injection at our HB plant and we sold fewer barrels of water from our Caprock water rights.
Our total byproduct sales, which are recorded in either our potash segment or Trio® segment, decreased $0.4 million in the three months ended September 30, 2024, compared to the same period in 2023, due to a decrease in byproduct water sales. We did not sell any byproduct water during the three months ended September 30, 2024, as we increased the volume of water used for injection at our HB plant and we sold fewer barrels of water from our Caprock water rights.
Our total cost of goods sold decreased $1.7 million during the three months ended September 30, 2024, compared to the same period in 2023, as Trio® segment cost of goods sold decreased $5.5 million, partially offset by a $3.7 million increase in our oilfield solutions cost of goods sold and a $0.1 million increase in our potash segment cost of goods sold.
Our Trio® segment cost of goods sold decreased $5.5 million, or 31%, during the three months ended September 30, 2024, compared to the same period in 2023, because we sold 13% fewer tons, and we incurred less production expenses. Our Trio® labor expenses decreased because we stopped operating an additional underground shift at our East mine during the first quarter of 2024, and our depreciation expense incurred decreased as we recorded an impairment of our Trio® segment assets during the fourth quarter of 2023. In addition, we produced 19% more tons of Trio® in the three months ended September 30, 2024, compared to the same period in 2023, which lowered our per ton production costs. A significant portion of our Trio® production costs are fixed and an increase in the number of tons produced decreases our per ton production costs.
Our potash segment cost of goods sold increased $0.1 million, or 1%, during the three months ended September 30, 2024, compared to the same period in 2023. While we sold 17% more tons of potash in the three months ended September 30, 2024, compared to the same period in 2023, our beginning of the third quarter 2024 potash weighted average carrying cost per ton decreased due to lower of cost or net realizable value inventory adjustments recorded during the first six months of 2024. Additionally, we produced 19% more tons of potash during the three months ended September 30, 2024, compared to the same period during 2023, which lowered our per ton production costs. A significant portion of our production costs are fixed and an increase in the number of potash tons produced decreases our per ton production costs.
Our oilfield solutions cost of goods sold increased $3.7 million, or 105%, during the three months ended September 30, 2024, compared to the same period in 2023, as we purchased more third-party water to sell for the large frac job that was completed at Intrepid South during the third quarter of 2024.
Lower of Cost or Net Realizable Value Inventory Adjustments
In the three months ended September 30, 2024, we incurred $0.5 million of lower of cost or net realizable value inventory adjustments in our potash segment, as our weighted average carrying costs for certain potash products exceeded our expected average net realized sales price for those products. We incurred $3.4 million in lower of cost or net realizable value inventory adjustments related to potash and Trio® products in the three months ended September 30, 2023.
Gross Margin
During the three months ended September 30, 2024, we generated gross margin of $7.7 million compared to gross margin of $0.5 million during the same period in 2023. As discussed above, our gross margin increased during the three months ended September 30, 2024, due to improved Trio® segment cost of goods sold and increased sales in our oilfield solutions segment.
Impairment Expense
During the year ended December 31, 2023, we recorded an impairment related to our Trio® segment assets because the net book value exceeded the estimated fair value of the assets. The fair value of the Trio® segment assets was primarily determined using the expected proceeds received in an orderly sale of the individual assets. For any Trio® segment capital spending during the three months ended September 30, 2024, we also estimated the fair value of those assets using the expected proceeds received in an orderly sale of those new assets and recorded an impairment of $0.9 million in the three months ended September 30, 2024. We recorded a $0.5 million impairment related to our non-operating working interest in an oil and gas well during the three months ended September 30, 2023.
Other Operating Income
Other operating income increased $0.8 million during the three months ended September 30, 2024, compared to the same period in 2023 due to other operating income recorded related to the Third Amendment to the Cooperative Development Agreement (the "Amendment") we signed with XTO in December 2023, that became effective as of January 1, 2024. As discussed in further detail in Note 7 - Other Long-term Deferred Income to the Condensed Consolidated Financial Statements, we are recognizing as other operating income the estimated transaction price associated with the Amendment on a straight-line basis over the term of the Amendment.
Income Tax Expense
During the three months ended September 30, 2024, we realized an immaterial amount of income tax benefit compared to income tax benefit of $1.9 million during the same period in 2023, as we generated a smaller net loss during the three months ended September 30, 2024, than during the same period in 2023.
We generated a net loss of $1.8 million during the three months ended September 30, 2024, compared to a net loss of $7.2 million in the same period in 2023, due to the factors discussed above.
Consolidated Results for the Nine Months Ended September 30, 2024, and 2023
Sales
Our total sales for the nine months ended September 30, 2024 decreased $23.5 million, or 11%, compared to the same period in 2023, as potash segment sales decreased $31.4 million, or 25%, partially offset by a $6.9 million, or 49%, increase in oilfield solutions segment sales and a $0.9 million, or 1%, increase in Trio® segment sales.
Our total potash segment sales decreased $31.4 million for the nine months ended September 30, 2024, compared to the same period in 2023, as potash sales decreased $31.9 million partially offset by an increase of $0.6 million in potash segment byproduct revenues. Our average net realized sales price per potash ton decreased 18% and we sold 14% fewer tons. Potash sales prices have been pressured during 2024 by increased global potash inventory levels. Potash tons sold decreased compared to the prior year because we began 2024 with fewer tons of potash available to sell due to decreased potash production from our HB and Wendover facilities in the second half of 2023.
Our Trio® segment sales increased $0.9 million in the nine months ended September 30, 2024, compared to the same period in 2023, as Trio® sales increased $4.7 million, or 6%, partially offset by a $3.9 million decrease in Trio® segment byproduct water sales. We sold 12% more tons of Trio® in the nine months ended September 30, 2024, compared to the same period in 2023, partially offset by a 7% decrease in our Trio® average net realized sales price per ton. Our Trio® tons sold increased during the nine months ended September 30, 2024, compared to the same period in 2023, as we sold more Trio® tons into row crop markets, particularly driven by the sulfate value of Trio®. During the first nine months of 2024, average Trio® prices were negatively affected by the 18% decrease in the average price for potash. However, Trio® prices only declined 7% as customers saw the relative value of the sulfate and low chloride potassium components of Trio®. We sold less Trio® segment byproduct water as we increased the volume of water used for injection at our HB plant and had fewer overall sales of water from our Caprock water rights.
Our oilfield solutions segment sales, which includes sales of water, brine water, and surface use agreements and easements, increased $6.9 million, or 49%, in the nine months ended September 30, 2024, compared to the same period in 2023, driven by a $7.3 million increase in water sales, a $0.4 million increase in brine water sales, partially offset by an $0.8 million decrease in other products and services. Our oilfield solutions segment water revenues increased due to the completion of a large frac on Intrepid South during the third quarter of 2024. Continued robust oil and gas activity near Intrepid South has driven strong demand for products and services offered through our oilfield solutions segment.
Our total byproduct sales, which are recorded in either our potash segment or Trio® segment, decreased $3.3 million in the nine months ended September 30, 2024, compared to the same period in 2023, due mainly to a decrease in byproduct water sales. We did not sell any byproduct water during the nine months ended September 30, 2024, as we increased the volume of water used for injection at our HB plant and had fewer overall sales of water from our Caprock water rights.
Cost of Goods Sold
Our total cost of goods sold decreased $12.7 million during the nine months ended September 30, 2024, compared to the same period in 2023. Our potash segment cost of goods sold decreased $12.9 million, and our Trio® segment cost of goods sold decreased $2.7 million, partially offset by an increase of $2.9 million in our oilfield solutions cost of goods sold.
Our potash segment cost of goods sold decreased $12.9 million, or 16%, mainly due to selling 14% fewer tons in the nine months ended September 30, 2024, compared to the same period in 2023.
Our Trio® segment cost of goods sold decreased $2.7 million, or 5%, during the nine months ended September 30, 2024, compared to the same period in 2023, even though we sold 12% more tons of Trio®. Our Trio® cost of goods sold was positively impacted by decreases in certain production costs, such as production labor and benefits expense, as we stopped operating an additional underground shift in early 2024 at our East facility and restarted our fine langbeinite recovery process in March 2024. In addition, our beginning 2024 weighted average carrying cost per ton of our Trio® finished goods was reduced by the lower of cost or net realizable value inventory adjustment recorded in the fourth quarter of 2023. Finally, we produced 16% more tons of Trio® in the nine months ended September 30, 2024, compared to the same period in 2023, which lowered our per ton production costs. A significant portion of our production costs are fixed and an increase in the number of tons produced decreases our per ton production costs.
Our oilfield solutions cost of goods sold increased $2.9 million, or 26%, during the nine months ended September 30, 2024, compared to the same period in 2023, mainly due to our purchasing more third-party water for resale to meet the demand for a large frac on Intrepid South.
Lower of Cost or Net Realizable Value Inventory Adjustments
In the nine months ended September 30, 2024, we incurred $2.3 million of lower of cost or net realizable value inventory adjustments in our potash segment, as our weighted average carrying costs for certain potash products exceeded our expected average net realized sales price for those products. We incurred $3.4 million in lower of cost or net realizable value inventory adjustments related to potash and Trio® products in the nine months ended September 30, 2023.
Gross Margin
During the nine months ended September 30, 2024, we generated gross margin of $21.8 million compared to gross margin of $32.2 million during the same period in 2023. As discussed above, our gross margin decreased mainly due to the decrease in sales driven by lower average net realized sales price per ton for potash and Trio® products and we sold fewer tons of potash in the nine months September 30, 2024, compared to the same period in 2023.
Impairment Expense
During the year ended December 31, 2023, we recorded an impairment related to our Trio® segment assets because the net book value exceeded the estimated fair value of the assets. The fair value of the Trio® segment assets was primarily determined using the expected proceeds received in an orderly sale of the individual assets. For any Trio® segment capital spending during the nine months ended September 30, 2024, we also estimated the fair value of those assets using the expected proceeds received in an orderly sale of those new assets and recorded an impairment of $3.1 million. We recorded a $0.5 million impairment related to our non-operating working interest in an oil and gas well during the nine months ended September 30, 2023.
Other Operating Income
Other operating income increased $2.8 million in the nine months ended September 30, 2024, compared to the same period in 2023, due to other operating income recognized related to the Third Amendment to the Cooperative Development we signed with XTO in December 2023, that became effective as of January 1, 2024. As discussed in further detail in Note 7 - Other Long-term Deferred Income to the Condensed Consolidated Financial Statements, we are recognizing as other operating income the estimated transaction price associated with the Amendment on a straight-line basis over the term of the Amendment.
Income Tax Expense
During the nine months ended September 30, 2024, we incurred income tax benefit of $1.1 million, compared to income tax expense of $1.9 million during the same period in 2023, as we incurred a loss before income taxes in the nine months ended September 30, 2024, compared to income before taxes in the same period in 2023.
Net Income
We generated a net loss of $5.8 million in the nine months ended September 30, 2024, compared to net income of $1.6 million in the same period in 2023, due to the factors discussed above.
Lower of cost or net realizable value inventory adjustments
471
1,083
2,326
1,083
Gross Margin
$
4,066
$
3,411
$
12,952
$
30,716
Depreciation, depletion, and amortization incurred2
$
6,670
$
7,272
$
19,819
$
20,753
Potash sales volumes (in tons)
54
46
183
213
Potash production volumes (in tons)
51
43
178
145
Average potash net realized sales price per ton3
$
356
$
433
$
387
$
474
1 Sales include sales of byproducts which were $6.7 million and $5.6 million for the three months ended September 30, 2024, and 2023, respectively, and $17.7 million and $17.1 million for the nine months ended September 30, 2024, and 2023, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3Average net realized sales price per ton is a non-GAAP financial measure. More information about this measure is below under the heading "Non-GAAP Financial Measure."
Three Months Ended September 30, 2024, and 2023
Our total sales in the potash segment increased $0.8 million in the three months ended September 30, 2024, compared to the same period in 2023, as potash segment byproduct sales increased $1.0 million, partially offset by a $0.3 million decrease in potash sales. Our potash segment byproduct sales increased due to an increase in brine sales as we sold more barrels of brine at a higher average price during the three months ended September 30, 2024, compared to the same period in 2023, due to continued robust oilfield activity near our mines in New Mexico.
Our potash sales decreased in the three months ended September 30, 2024, compared to the same period in 2023, as our average net realized sales price per ton decreased 18%, partially offset by selling 17% more tons. Potash prices have declined as available global inventory has increased compared to 2023. We sold more tons of potash in the three months ended September 30, 2024, compared to the same period in of 2023, because potash production increased in the second quarter of 2024, compared to the second quarter of 2023, and we had an earlier end to the spring season compared to the prior year, resulting in more tons of potash in inventory to begin the third quarter.
Potash segment freight expense increased 11% in the three months ended September 30, 2024, compared to the same period in 2023, as we sold 17% more tons of potash. Our potash freight expense is further impacted by the geographic distribution of our potash and byproduct sales and by the proportion of customers arranging for and paying their own freight costs.
Our potash segment cost of goods sold increased $0.1 million, or 1%, during the three months ended September 30, 2024, compared to the same period in 2023. While we sold 17% more tons of potash in the three months ended September 30, 2024, compared to the same period in 2023, our beginning of the third quarter 2024 potash weighted average carrying cost per ton decreased due to lower of cost or net realizable value inventory adjustments recorded during the first six months of 2024. Additionally, we produced 19% more tons of potash during the three months ended September 30, 2024, compared to the same period during 2023, which lowered our per ton production costs. A significant portion of our production costs are fixed and an increase in the number of potash tons produced decreases our per ton production costs.
During the three months ended September 30, 2024, we recorded lower of cost or net realizable value inventory adjustments of $0.5 million as our weighted average carrying cost per ton for inventoried potash products at our HB and Wendover facilities was higher than our expected average net realizable sales price per ton for those products. While potash production at our HB and Wendover facilities has improved in 2024, compared to 2023, potash production at these facilities remained below historical production levels which increased our weighted average carrying costs. A significant portion of our potash production costs are fixed and a decrease in the number of potash tons produced increases our potash production costs
per ton. We recorded $1.1 million in lower of cost or net realized value inventory adjustments in the potash segment in the third quarter of 2023.
Our potash segment gross margin increased $0.7 million in the three months ended September 30, 2024, compared to the same period in 2023, due to the factors discussed above.
Nine Months Ended September 30, 2024, and 2023
Our total sales in the potash segment decreased $31.4 million in the nine months ended September 30, 2024, compared to the same period in 2023, as potash sales recorded in the potash segment decreased $31.9 million, or 29%, partially offset by a $0.6 million increase in potash segment byproduct sales. Our potash sales decreased in the nine months ended September 30, 2024, compared to the same period in 2023, as our average net realized sales price per ton decreased 18%, and we sold 14% fewer tons. We sold fewer tons of potash in the nine months ended September 30, 2024, compared to the same period in 2023, as we began 2024 with less inventory of potash to sell due to lower potash production from our HB and Wendover facilities during the second half of 2023. While potash production has improved at our HB and Wendover facilities during the nine months ended September 30, 2024, compared to the same period in 2023, production levels at these facilities remain below historical production levels. Our average net realized sales price per potash ton decreased during the nine months ended September 30, 2024, compared to the same period in 2023, as the available supply of potash has increased.
Byproduct sales recorded in our potash segment during the nine months ended September 30, 2024, compared to the same period in 2023, increased $0.6 million as brine sales increased $1.9 million, partially offset by a $1.4 million decrease in magnesium chloride sales. Brine sales increased during the nine months ended September 30, 2024, as we sold more barrels of brine at a higher average price compared to the prior year period due to continued oilfield activity near our mines. Magnesium chloride sales declined during the nine months ended September 30, 2024, due to mild winter weather which decreased demand for our deicing product in the first quarter of 2024, and we saw less demand from the dedust market impacting sales in the second and third quarters of 2024.
Potash segment freight expense decreased 18% in the nine months ended September 30, 2024, compared to the same period in 2023, as we sold 14% fewer tons of potash. Our potash freight expense is further impacted by the geographic distribution of our potash and byproduct sales and by the proportion of customers arranging for and paying their own freight costs.
Our potash segment cost of goods sold decreased 16% in the first nine months of 2024, compared to the same period in 2023, mainly due to selling 14% fewer tons of potash.
During the first nine months of 2024, we recorded lower of cost or net realizable value inventory adjustments of $2.3 million as our weighted average carrying cost per ton for certain inventoried potash products at our HB and Wendover facilities was higher than our expected average net realized sales price per ton for those products. Because potash production at our HB and Wendover facilities was below historical production levels during the second half of 2023 and the first nine months of 2024, our weighted average production costs at those facilities increased. As mentioned, a significant portion of our potash production costs are fixed and a decrease in the number of potash tons produced increases our potash production costs per ton. We recorded $1.1 million in lower of cost or net realized value inventory adjustments in the first nine months of 2023.
Our potash segment gross margin decreased $17.8 million in the first nine months of 2024, compared to the first nine months of 2023, due to the factors discussed above.
Additional Information Relating to Potash
The table below shows our potash sales mix for the three and nine months ended September 30, 2024, and 2023:
Lower of cost or net realizable value inventory adjustments
—
2,330
—
2,330
Gross Margin (Deficit)
$
604
$
(4,290)
$
1,647
$
(1,617)
Depreciation, depletion, and amortization incurred2
$
864
$
1,754
$
2,599
$
4,365
Sales volumes (in tons)
45
52
200
179
Production volumes (in tons)
62
52
184
159
Average Trio® net realized sales price per ton3
$
312
$
298
$
305
$
329
1 Sales include sales of byproducts which were $0.0 million and $1.4 million for the three months ended September 30, 2024, and 2023, respectively, and $0.4 million and $4.2 million for the nine months ended September 30, 2024, and 2023, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3Average net realized sales price per ton is a non-GAAP financial measure. More information about this measure is below under the heading "Non-GAAP Financial Measure."
Three Months Ended September 30, 2024, and 2023
Trio® segment sales decreased 14% during the three months ended September 30, 2024, compared to the same period in 2023. Trio® sales decreased $1.7 million, and our Trio® segment byproduct sales decreased $1.4 million. Trio® sales decreased primarily due to a 13% decrease in tons sold, partially offset by a 5% increase in our average net realized sales price per ton. Our average net realized sales price per ton increased during the three months ended September 30, 2024, compared to the same period in 2023, as Trio® prices for the 2024 summer fill program were $15 per ton higher than the 2023 summer fill program prices. Also, we sold fewer tons internationally during the three months ended September 30, 2024, compared to the same period in 2023. Generally, we incur more freight expense on international sales compared to domestic sales, which decreases our average net realized sales price per ton.
Our Trio® segment byproduct sales decreased $1.4 million in the three months ended September 30, 2024, compared to the same period in 2023, due to a decrease in Trio® segment byproduct water sales. During the three months ended September 30, 2024, we did not sell any byproduct water as we increased the volume of water used for injection at our HB plant.
Trio® freight costs decreased 4% in the third quarter of 2024, compared to the third quarter of 2023, as we sold fewer tons. Our Trio® freight expense is impacted by the geographic distribution of our Trio® sales and by the proportion of customers arranging for and paying their own freight costs.
Our Trio® cost of goods sold decreased 31% in the three months ended September 30, 2024, compared to the same period in 2023, as we sold 13% fewer tons. In addition, our cost of goods sold was positively impacted by decreases in certain production costs, such as production labor and benefits expense, as we moved to a reduced operating schedule at our East facility and restarted our fine langbeinite recovery process in March 2024. Finally, we produced more tons of Trio® in the three months ended September 30, 2024, compared to the same period in 2023, which lowered our per ton production costs. A significant portion of our production costs is fixed and an increase in the number of tons produced decreases our per ton production costs.
Our Trio® segment generated gross margin of $0.6 million in the three months ended September 30, 2024, compared to gross deficit of $4.3 million in the three months ended September 30, 2023, mainly due to the decrease in Trio® cost of goods sold.
During the year ended December 31, 2023, we recorded an impairment related to our Trio® segment assets because the net book value exceeded the estimated fair value of the assets. The fair value of the Trio® segment assets was primarily determined using the expected proceeds received in an orderly sale of the individual assets. For any new Trio® segment capital spending during the three months ended September 30, 2024, we also estimated the fair value of those assets using the expected proceeds received in an orderly sale of those new assets, and we recorded an additional impairment of $0.9 million. Although we have reduced capital spending at our East facility compared to prior years, we expect to incur additional capital expenditures in future periods for our Trio® segment assets that we will likely have to impair.
Nine Months Ended September 30, 2024, and 2023
Trio® segment sales increased 1% during the nine months ended September 30, 2024, compared to the same period in 2023. Trio® sales increased $4.7 million, partially offset by a decrease of $3.8 million in our Trio® segment byproduct sales. Trio® sales increased primarily due to a 12% increase in Trio® tons sold, partially offset by a 7% decrease in our average net realized sales price per ton. Sales volumes increased during the nine months ended September 30, 2024, compared to the same period in 2023, as we sold more Trio® tons into row crop markets, particularly driven by the sulfate value of Trio®. Similar to potash prices discussed above, our Trio® average net realized sales price per ton has decreased as potassium fertilizer supplies improved.
Our Trio® segment byproduct sales decreased $3.8 million in the nine months ended September 30, 2024, compared to the same period in 2023, due mainly to a decrease in Trio® segment byproduct water sales. We sold less byproduct water as we increased the volume of water used for injection at our HB plant and we had fewer overall sales of water from our Caprock water rights.
Trio® freight costs increased 14%, as we sold 12% more Trio® tons in the nine months ended September 30, 2024, compared to the same period in 2023. Our Trio® freight expense is impacted by the geographic distribution of our Trio® sales and by the proportion of customers arranging for and paying their own freight costs.
Our Trio® cost of goods sold decreased 5% in the nine months ended September 30, 2024, compared to the same period in 2023. While we sold 12% more tons of Trio®, our weighted average carrying cost per ton sold decreased due to decreases in certain production costs, such as production labor and benefits expense, as we moved to a reduced operating schedule at our East facility and restarted our fine langbeinite recovery process in March 2024. In addition, the beginning 2024 weighted average carrying cost per ton of our finished goods was reduced by the lower of cost or net realizable value inventory adjustment recorded in the fourth quarter of 2023. Finally, we produced more tons of Trio® in the nine months ended September 30, 2024, compared to the same period in 2023, which lowered our per ton production costs. A significant portion of our production costs are fixed and an increase in the number of tons produced decreases our per ton production costs.
Our Trio® segment recorded gross margin of $1.6 million in the nine months ended September 30, 2024, compared to gross deficit of $1.6 million in the same period in 2023, mainly due to the decrease Trio® cost of goods sold.
During the year ended December 31, 2023, we recorded an impairment related to our Trio® segment assets because the net book value exceeded the estimated fair value of the assets. The fair value of the Trio® segment assets was primarily determined using the expected proceeds received in an orderly sale of the individual assets. For any new Trio® segment capital spending during the nine months ended September 30, 2024, we also estimated the fair value of those assets using the expected proceeds received in an orderly sale of those new assets, and we recorded an additional impairment of $3.1 million. Although we have reduced capital spending at our East facility compared to prior years, we expect to incur additional capital expenditures in future periods for our Trio® segment assets that we will likely have to impair.
Additional Information Relating to Trio®
The table below shows the percentage of Trio® tons sold into the domestic and export markets during the three and nine months ended September 30, 2024, and 2023.
United States
Export
For the Three Months Ended September 30, 2024
84%
16%
For the Nine Months Ended September 30, 2024
88%
12%
For the Three Months Ended September 30, 2023
81%
19%
For the Nine Months Ended September 30, 2023
87%
13%
Oilfield Solutions Segment
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Sales
$
10,324
$
4,904
$
21,186
$
14,265
Cost of goods sold
7,262
3,534
13,995
11,139
Gross Margin
$
3,062
$
1,370
$
7,191
$
3,126
Depreciation, depletion, and amortization incurred
$
1,134
$
950
$
3,400
$
2,772
Three Months Ended September 30, 2024, and 2023
Our oilfield solutions segment sales increased $5.4 million in the three months ended September 30, 2024, compared to the same period in 2023, due to a $6.8 million increase in water sales, partially offset by a $1.3 million decrease in sales of other oilfield solution products and services. Our water sales increased during the three months ended September 30, 2024, compared to the same period in 2023, due to the completion of a large frac at Intrepid South. Our sales of other oilfield solution products and services decreased during the three months ended September 30, 2024, compared to the same period in 2023, as we recognized less revenues from surface use and easement agreements. Surface use and easement revenues fluctuate based on the timing of recognizing revenue from the various performance obligations contained in the underlying agreements.
Our cost of goods sold increased $3.7 million, or 105%, in the three months ended September 30, 2024, compared to the same period in 2023, as we purchased more third-party water for resale to meet the demand for a large frac on Intrepid South.
Gross margin for the three months ended September 30, 2024, increased $1.7 million compared to the same period in 2023, due to the factors discussed above.
Nine Months Ended September 30, 2024, and 2023
Our oilfield solutions segment sales increased $6.9 million in the nine months ended September 30, 2024, compared to the same period in 2023, due to a $7.3 million increase in water sales and a $0.4 million increase in brine water sales, partially offset by a $0.8 million decrease in other oilfield solution products and services. Our oilfield solutions segment water sales increased during the nine months ended September 30, 2024, compared to the same period in 2023, due to the completion of a large frac at Intrepid South during the third quarter of 2024. Our brine water sales increased due to continued strong demand from oil and gas operators in the Permian Basin near Intrepid South. Our sales of other oilfield solution products and services decreased during the nine months ended September 30, 2024, compared to the same period in 2023, as we recognized less revenues from surface use and easement agreements. Surface use and easement revenues fluctuate based on the timing of recognizing revenue from the various performance obligations contained in the underlying agreements.
Our cost of goods sold increased $2.9 million, or 26%, in the nine months ended September 30, 2024, compared to the same period in 2023, as we purchased more third-party water for resale to meet the demand for a large frac on Intrepid South during the third quarter of 2024.
Gross margin for the nine months ended September 30, 2024, increased $4.1 million compared to the same period in 2023, due to the factors discussed above.
Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash, Trio®, water, salt, magnesium chloride, brine water, and various other products and services offered to oil and gas producers. Total sales are determined by the quantities of products we sell and the sales prices we realize. For potash, Trio®,and salt, we quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. We incur freight costs on most of our potash, Trio® and salt sales, but some customers arrange and pay for their own freight directly. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. When we calculate our potash and Trio® average net realized sales price per ton, we deduct any freight costs included in sales before dividing by the number of tons sold. We believe the deduction of freight costs provides a more representative measure of our performance in the market due to variations caused by ongoing changes in the proportion of customers paying for their own freight, the geographic distribution of our products, and freight rates. Freight rates have been increasing, and if we are unable to pass the increased freight costs on to the customer, our average net realized sales price per ton is negatively affected. We manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price per ton we can by evaluating the product needs of our customers and associated logistics and then determining which of our production facilities can best satisfy these needs.
The volume of products we sell is determined by demand for our products and by our production capabilities. We operate our potash and Trio® facilities at production levels that approximate expected demand and consider current inventory levels and expect to continue to do so for the foreseeable future.
Our water sales and other products and services offered through our oilfield solutions segment are driven by demand from oil and gas exploration companies drilling in the Permian Basin. As such, demand for our water is generally stronger during a cyclical expansion of oil and gas drilling. Likewise, a cyclical contraction of oil and gas drilling may decrease demand for our water and the other products and services offered through our oilfield solutions segment.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our products. Many of our production costs are largely fixed and, consequently, our cost of sales per ton on a facility-by-facility basis tends to move inversely with the number of tons we produce, within the context of normal production levels. Our principal production costs include labor and employee benefits, maintenance materials, contract labor, and materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, and leasing costs. Certain elements of our cost structure associated with contract labor, consumable operating supplies, reagents, and royalties are variable, but these variable elements make up a smaller component of our total cost structure. Our costs often vary from period to period based on the fluctuation of inventory, sales, and production levels at our facilities.
Our production costs per ton are also impacted when our production levels change, due to factors such as changes in the grade of ore delivered to the plant, levels of mine development, plant operating performance, and downtime. Because all of our potash is produced from solution mining, weather has a significant impact on our potash production. We expect that our labor and contract labor costs in Carlsbad, New Mexico, will continue to be influenced most directly by the demand for labor in the local region where we compete for labor with another fertilizer company, companies in the oil and gas industry, and a nuclear waste processing and storage facility.
We pay royalties to federal, state, and private lessors under our mineral leases. These payments typically equal a percentage of sales (less freight) of minerals extracted and sold under the applicable lease. In some cases, federal royalties for potash are paid on a sliding scale that varies with the grade of ore extracted. For the three and nine months ended September 30, 2024, our average royalty rate was 5.2% and 4.9%, respectively. For the three and nine months ended September 30, 2023, our average royalty rate was 4.8% and 4.9%, respectively.
Income Taxes
We are subject to federal and state income taxes on our taxable income. Our effective tax rate for the nine months ended September 30, 2024, was 15.8%. Our effective tax rate differed from the statutory rate during this period primarily from the permanent difference between book and tax income for the percentage depletion deduction and the officers' compensation
deduction. Our effective tax rate for the nine months ended September 30, 2023, was 54.0% which differed from the statutory rate primarily from the estimated permanent difference between book and tax income for the percentage depletion deduction and the officers' compensation deduction.
Our federal and state income tax returns are subject to examination by federal and state tax authorities.
For the nine months ended September 30, 2024, we incurred approximately $1.2 million of deferred income tax benefit and $0.1 million of current income tax expense. For the nine months ended September 30, 2023, we incurred income tax expense of $1.9 million.
We evaluate our deferred tax assets and liabilities each reporting period using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. The estimated statutory income tax rates that are applied to our current and deferred income tax calculations are impacted most significantly by the states in which we conduct business. Changing business conditions for normal business transactions and operations, as well as changes to state tax rates and apportionment laws, potentially alter our apportionment of income among the states for income tax purposes. These changes in apportionment laws result in changes in the calculation of our current and deferred income taxes, including the valuation of our deferred tax assets and liabilities. The effects of any such changes are recorded in the period of the adjustment. These adjustments can increase or decrease the net deferred tax asset on our Condensed Consolidated Balance Sheets, and thus increase or decrease the deferred tax benefit or deferred income tax expense on the income statement.
As of September 30, 2024, we continue to be in a three-year cumulative income position. However, losses incurred in 2023 and through the first nine-months of 2024 have reduced the amount of three-year cumulative income. If weakness in fertilizer pricing, lower production, additional impairments, or additional losses were to continue, it is possible that there may be significant negative evidence to cause us to record a valuation allowance within the next 12 months. The timing and amount of any valuation allowance is subject to significant judgement that is considered with the timing and amounts of actual and future earnings. Recording any valuation allowance would result in increased income tax expense in the period the valuation allowance is recorded which could have a material effect on net income.
During the three and nine months ended September 30, 2024, cash paid for property, plant, equipment, mineral properties, intangible and other assets was $9.6 million and $32.6 million, respectively.
We expect to make capital investments in 2024 of $37 million to $40 million. We anticipate spending approximately $20 million on sustaining capital in 2024 with the remainder of our estimated spending on opportunity projects, which include the completion of phase two of our new HB injection pipeline project, a new extraction well at our HB mine, and a new primary pond at our Wendover facility. We may adjust our investment plans as our expectations for 2024 change. We anticipate our 2024 operating plans and capital programs will be funded out of operating cash flows and existing cash. We may also use our revolving credit facility, to the extent available, to fund capital investments.
Liquidity and Capital Resources
As of September 30, 2024, we had cash and cash equivalents of $38.0 million, compared to $4.1 million at December 31, 2023. The increase in our cash balance during the nine months ended September 30, 2024, was due primarily to the $45 million cash payment received in January 2024 under the cooperative development agreement and Amendment with XTO, which is included in our cash flows provided by operating activities.
Our operations have primarily been funded from cash on hand, cash generated by operations, borrowings under our revolving credit facility, and proceeds from debt and equity offerings. We continue to monitor our future sources and uses of cash and anticipate that we may adjust our capital allocation strategies when, and as determined by our Board of Directors. We may, at any time we deem conditions favorable, attempt to improve our liquidity position by accessing debt or equity markets in accordance with our existing debt agreements. We also may attempt to raise capital in the future through the issuance of additional equity or debt securities, subject to prevailing market conditions. However, there is no assurance that we will be able to successfully raise additional capital on acceptable terms or at all. With our current cash on hand, the remaining availability under our credit facility, and the expected cash generated from operations, we believe we have sufficient liquidity to meet our obligations for the next twelve months.
The following summarizes our cash flow activity for the nine months ended September 30, 2024, and 2023 (in thousands):
Nine Months Ended September 30,
2024
2023
Cash flows provided by operating activities
$
64,936
$
38,625
Cash flows used in investing activities
$
(25,511)
$
(54,606)
Cash flows (used in) provided by financing activities
$
(5,455)
$
264
Operating Activities
Net cash provided by operating activities through September 30, 2024, was $64.9 million, an increase of $26.3 million compared with the nine months of 2023, mainly due to a $45 million cash payment received in January 2024 under the cooperative development agreement and Amendment with XTO, partially offset by the decrease in sales during the first nine months of 2024, compared to the first nine months of 2023.
Investing Activities
Net cash used in investing activities decreased by $29.1 million in the first nine months of 2024, compared with the same period in 2023, due to a decrease in capital spending and proceeds received for the sale of water recycling equipment.
RevolvingCredit Facility—We maintain a $150 million revolving credit facility with a syndicate of lenders with Bank of Montreal as administrative agent. The revolving credit facility has a maturity date to August 4, 2027. As of September 30, 2024, borrowings under the credit facility bear interest at the SOFR plus an applicable margin of 1.50% to 2.25% per annum, based on our leverage ratio as calculated in accordance with the amended agreement governing the revolving credit facility. Borrowings under the revolving credit facility are secured by substantially all of our current and non-current assets, and the obligations under the credit facility are unconditionally guaranteed by several of our subsidiaries.
We occasionally borrow and repay amounts under the revolving credit facility for near-term working capital needs or other purposes and may do so in the future. During the three months ended September 30, 2024, we made no borrowings and made no repayments under the revolving credit facility. During the nine months ended September 30, 2024, we made no borrowings and made $4.0 million in repayments under the revolving credit facility. During the three months ended September 30, 2023, we made $2.0 million in borrowings and made no repayments under the revolving credit facility. During the nine months ended September 30, 2023, we made $7.0 million in borrowings and made $5.0 million in repayments under the revolving credit facility. As of September 30, 2024, we had no borrowings outstanding and no outstanding letters of credit under this facility. As of December 31, 2023, we had $4.0 million in borrowings outstanding and no outstanding letters of credit under this facility.
As of September 30, 2024, we were in compliance with all applicable covenants under the revolving credit facility.
As of October 31, 2024, we had approximately $34.9 million in cash and cash equivalents and no borrowings under the revolving credit facility. We have $150.0 million of remaining availability under the revolving credit facility as of October 31, 2024.
Share Repurchase Program—In February 2022, our Board of Directors approved a $35 million share repurchase program. Under the share repurchase program, we may repurchase shares from time to time in the open market or in privately negotiated transactions. The timing, volume and nature of share repurchases, if any, will be at our sole discretion and will be dependent on market conditions, liquidity, applicable securities laws, and other factors. We may suspend or discontinue the share repurchase program at any time. We repurchased 608,657 shares totaling $22.0 million from August 2022 through December 2022, with approximately $13 million remaining available under the repurchase program authorization. For the nine months ended September 30, 2024, we did not repurchase any shares under the share repurchase program.
Critical Accounting Policies and Estimates
Our Annual Report on Form 10-K for the year ended December 31, 2023,describes the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We have not made any significant changes to our critical accounting policies since December 31, 2023.
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, from time to time we use "average net realized sales price per ton," which is a non-GAAP financial measure. This non-GAAP financial measure should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. In addition, because the presentation of this non-GAAP financial measure varies among companies, our presentation of this non-GAAP financial measure may not be comparable to similarly titled measures used by other companies.
We believe average net realized sales price per ton, when used in conjunction with GAAP financial measures, provides useful information to investors for analysis of our business and operating results, enhances the overall understanding of past financial performance and future prospects, and allows for greater transparency with respect to the key metric we use in our financial and operational decision making. We use this non-GAAP financial measure as one of our tools in comparing period-over-period performance on a consistent basis and when planning, forecasting, and analyzing future periods. We believe this non-GAAP financial measure is used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the potash mining industry. Many investors use the published research reports of these professional research analysts and others in making investment decisions.
We calculate average net realized sales price per ton for each of potash and Trio®. Average net realized sales price per ton for potash is calculated as potash segment sales less potash segment byproduct sales and potash freight costs and then dividing that difference by the number of tons of potash sold in the period. Likewise, average net realized sales price per ton for Trio® is calculated as Trio® segment sales less Trio® segment byproduct sales and Trio® freight costs and then dividing that difference by Trio® tons sold. We consider average net realized sales price per ton to be useful, and believe it to be useful for investors, because it shows our potash and Trio® average per-ton pricing without the effect of certain transportation and delivery costs. When we arrange transportation and delivery for a customer, we include in revenue and in freight costs the costs associated with transportation and delivery. However, some of our customers arrange for and pay their own transportation and delivery costs, in which case these costs are not included in our revenue and freight costs. We use average net realized sales price per ton as a key performance indicator to analyze potash and Trio® sales and price trends.
Below is a reconciliation of average net realized sales price per ton to segment sales, the most directly comparable GAAP financial measure for the three and nine months ended September 30, 2024, and 2023:
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Part II, Item 7A., "Quantitative and Qualitative Disclosure About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2023, describes our exposure to market risk. There have been no material changes to our market risk exposure since December 31, 2023.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms. Our disclosure controls and procedures are also designed to ensure that this information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of management, including our principal financial officer and acting principal executive officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2024. Based on this evaluation, our principal financial officer and acting principal executive officer concluded that our disclosure controls and procedures were effective as of September 30, 2024, at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal financial officer and acting principal executive officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Intrepid have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
For information regarding litigation, other disputes and regulatory proceedings see Part I - Item1. Financial Statements, Note 15 - Commitments and Contingencies.
Our future performance is subject to a variety of risks and uncertainties that could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock. These risks and uncertainties are described in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023. Except as set forth below, there have been no material changes to these risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2023.
We rely on our management personnel (including our directors) for the development and execution of our business strategy, and the loss of one or more members of our management team could harm our business.
Our management personnel have significant relevant industry and company-specific experience. Our senior management team has developed and implemented first-of-their-kind processes and other innovative ideas that are important to our business. Our success depends, in part, upon the performance and continued services of our senior leadership team, including our directors. We do not currently maintain "key person" life insurance on any of our management personnel.
On April 16, 2024, our Board granted Robert P. Jornayvaz III, our Executive Chairman of the Board and Chief Executive Officer, a temporary medical leave of absence, as he recovered from a non-work related accident. In connection with Mr. Jornayvaz’s medical leave, the Board temporarily delegated all responsibilities of the Chairman of the Board to Barth Whitham, Lead Director. In addition, the Board appointed Matthew D. Preston, the Company’s Chief Financial Officer, as acting principal executive officer of the Company.The Board also appointed Hugh E. Harvey, our co-founder with Mr. Jornayvaz, to serve as a Class III director on the Board. Subsequently, on July 10, 2024, our Board announced that it was unlikely that Mr. Jornayvaz would return from his extended medical leave of absence and it had initiated a search process to identify a successor to Mr. Jornayvaz in the Chief Executive Officer role. The Board also elected Mr. Whitham, formerly Lead Independent Director, as its Chair.
On September 30, 2024, Mr. Jornayvaz resigned as Chief Executive Officer and as a member of the Board. The search process to identify a successor to Mr. Jornayvaz as Chief Executive Officer continues and Mr. Preston continues as acting principal executive officer of the Company until a permanent Chief Executive Office is appointed by the Board.
Disruption to our organization as a result of leadership changes could have a material adverse effect on our business, financial condition and results of operations. If our leadership team fails to perform effectively or if we fail to attract or retain key executives, senior management or other key employees, our business, financial condition or results of operations could be harmed. The loss or inability to retain these individuals could disrupt our operations, and we may be unable to achieve our business strategies and grow effectively. To execute our business plans and strategies, we must also continue to attract and retain highly qualified personnel and we may incur significant costs, including stock-based compensation expense, to do so.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
We are committed to providing a safe and healthy work environment. The objectives of our safety programs are to eliminate workplace accidents and incidents, preserve employee health, and comply with all safety- and health-based regulations. We seek to achieve these objectives by training employees in safe work practices; establishing, following, and improving safety standards; involving employees in safety processes; openly communicating with employees about safety matters; and recording, reporting, and investigating accidents, incidents, and losses to avoid recurrence. As part of our ongoing safety programs, we collaborate with the Mine Safety and Health Administration (“MSHA”) and the New Mexico Bureau of Mine Safety to identify and implement accident prevention techniques and practices.
Our East, West, and North facilities in New Mexico are subject to regulation under the Federal Mine Safety and Health Act of 1977 and the New Mexico Bureau of Mine Safety. MSHA inspects these facilities on a regular basis and issues various citations and orders when it believes a violation has occurred under federal law. Exhibit 95.1 to this Quarterly Report on Form 10-Q provides the information concerning mine safety violations and other regulatory matters required by SEC rules. Our Utah and HB facilities are subject to regulation by the Occupational Health and Safety Administration and, therefore, are not required to be included in the information provided in Exhibit 95.1.
ITEM 5.OTHER INFORMATION
During the three months September 30, 2024, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
Second Amended and Restated Bylaws of Intrepid Potash, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 16, 2024).
Separation Agreement and General Release, dated as of September 30, 2024, by and between Intrepid Potash, Inc. and Louisa Craft Jornayvaz as Guardian and Conservator for and on behalf of Robert P. Jornayvaz III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 4, 2024).
Certification of Principal Financial Officer and Acting Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
Inline XBRL Instance Document (Note that the instance document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document).*
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTREPID POTASH, INC. (Registrant)
Dated: November 5, 2024
/s/ Matthew D. Preston
Matthew D. Preston - Chief Financial Officer and Acting Principal Executive Officer (Principal Executive Officer and Principal Financial Officer)
