Bri Chem : Q1 2024 MDA

Q1 2024 Management

Discussion & Analysis

March 31, 2024 (Expressed in Canadian Dollars)

This Management's Discussion and Analysis ("MD&A") of Bri-Chem Corp. ("Bri-Chem" or the "Company") was prepared as at May 9, 2024 for the quarter ended March 31, 2024 and should be read in conjunction with the Company's December 31, 2023 audited annual consolidated financial statements. The Company's consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") and include the results of Bri-Chem Corp. and its subsidiaries, Bri-Chem Supply Ltd., Sodium Solutions Inc., Solution Blend Service Ltd., Bri-Corp USA, Inc., including its three subsidiaries Bri- Chem Supply Corp, LLC, Sun Coast Materials, LLC and Bri-Chem Logistics, LLC. All amounts presented in this MD&A are in Canadian dollars, except as otherwise noted. Readers are encouraged to review the "Cautionary Statement Regarding Forward-LookingInformation and Statements" and "Non-IFRSMeasures" at the end of this document.

BUSINESS OF BRI-CHEM

Bri-Chem, headquartered in Edmonton, Alberta, Canada, has established itself, through a combination of strategic acquisitions and organic growth, as a North American industry leader for the distribution and blending of oilfield drilling, completion, stimulation and production chemical fluids. We sell, blend, package and distribute a full range of drilling fluid products from 25 strategically located warehouses throughout Canada and the United States. Bri-Chem has been operating in Canada since 1985 and we expanded into the United States in 2011 where we have successfully established 14 warehouse locations that are strategically located in major drilling regions throughout the USA. Bri-Chem's main business activity is to provide 24/7 coverage of oilfield chemicals in a wide variety of weights and clays, loss circulation materials and oil mud products to mud engineering companies who sell directly to drilling firms engaged by the oil and gas companies. Much of Bri-Chem's competitive advantage is attributed to its comprehensive network of 25 strategically placed and fully stocked warehouses throughout North America as mud engineering companies and drilling companies prefer to use one supplier of drilling fluids for all their widely dispersed drilling rig locations. Additional information about Bri-Chem is available at www.sedar.com or at Bri-Chem's website at www.brichem.com.

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A summary of the Company's distribution network is as follows:

Seasonality of Operations

Weather conditions can affect the sale of the Company's products and services. The ability to move heavy equipment in the Canadian oil and natural gas fields is dependent on weather conditions. As a result, there are three cycles of drilling activity in the Western Canada: Winter drilling season from November to mid- March is the period when most of the drilling activity takes place as much of the ground is frozen allowing equipment to move into hard to reach regions during colder periods. Spring break up traditionally occurs between mid-March to mid-May and is the period when drilling activity is at its lowest as regions thaw and have road bans making heavy equipment difficult to move. Summer and fall drilling season operates from mid-May to end of October which focuses on areas not accessible during the winter drilling season. Spring break-up has a direct impact on the Company's activity levels. The timing of freeze-up and spring break-up affects the ability to move equipment in and out of these areas. As a result, late March through May is traditionally the Company's slowest period in Canada.

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FINANCIAL AND OPERATING INFORMATION HIGHLIGHTS

		Three months ended
				March 31		Change
(in '000s except per share amounts)		2024		2023		$	%
Financial performance	$	21,371
Sales	$	27,201	$	(5,830)	(21%)
Adjusted EBITDA(1)		(443)		1,615		(2,059)	(127%)
As a % of revenue		-2%		6%
Operating earnings		(144)		1,296		(1,441)	(111%)
Adjusted net (loss) / earnings (1)		(1,767)		391		(2,158)	(552%)
Net (loss) / earnings	$	(1,506)	$	265	$	(1,771)	(668%)
Per diluted share
Adjusted EBITDA (1)	$	(0.02)	$	0.06	$	(0.08)	(132%)
Adjusted net (loss) / earnings (1)	$	(0.07)	$	0.01	$	(0.08)	(544%)
Net (loss) / earnings	$	(0.06)	$	0.01	$	(0.07)	(701%)
Financial position	$	66,224
Total assets	$	75,651	$	(9,427)	(12%)
Working capital		14,666		15,927		(1,262)	(8%)
Long-term debt		6,668		6,869		(201)	(3%)
Shareholders equity	$	21,809	$	22,610	$	(802)	(4%)

(1) Refer to the "Non-IFRS Measures" section for a definition of non-GAAP terms as well as reconciliations for Adjusted EBITDA and Adjusted Net Earnings).

Key Q1 2024 highlights include:

• Consolidated sales for the three months ended March 31, 2024 were $21.4 million, which is a 21% decrease from the prior year. The decrease is directly related to the 19% decrease in Q1 US drilling activity, driven by a lower average rig count and corresponding cementing activities.
• Consolidated gross margin for the three months ended March 31, 2024 decreased by $715 thousand compared to the same period last year. The gross margin dollar decrease is primarily related to the 21% decrease in consolidated sales.
• Adjusted EBITDA for the first quarter 2024 decreased by $2.1 million when compared to the same period in the prior year and operating earnings decreased by $1.4 million for the three months ended March 31, 2024 compared to the prior year.
• Adjusted net loss per diluted share for the three months ended March 31, 2024 was $0.07 per share compared to adjusted net earnings of $0.01 per diluted share for same period last year.
• Working capital, as at March 31, 2024, was $14.7 million compared to $15.9 million at March 31, 2023, a decrease of 8%. The decrease relates to significant decreases in accounts receivable and which was partially offset by increased bank indebtedness and accounts payable.
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Summary for the three months ended March 31, 2024:

Consolidated sales for the three months ended March 31, 2024 were $21.4 million compared to $27.2 million for the same period in 2023, representing a $5.8 million decrease over the comparable period. The decrease is due to decreased US drilling activities, driven by a lower average rig count and cementing activities.

Bri-Chem's Canadian drilling fluids distribution division generated sales of $2.8 million for the three months ended March 31, 2024 compared to $3.6 million in the comparable prior period. The decrease in sales relates to the slowing of sales of select commodity items. The number of active operating land rigs in Q1 2024 averaged 209, compared to 223 in the same period last year (Source: Baker Hughes). Bri-Chem's United States drilling fluids distribution division generated sales of $12.6 million for the three months ended March 31, 2024 compared to sales of $16.8 million for the comparable period in 2023, representing a quarterly decrease of 25%. This decrease mainly relates to a decrease in the US rig count as the number of active operating land rigs in Q1 2024 averaged 605, compared to a Q1 2023 average of 743 (Source: Baker Hughes).

Bri-Chem's Canadian blending and packaging division generated sales of $4.6 million for the three months ended March 31, 2024 compared to Q1 2023 sales of $4.3 million, representing a quarterly increase of $277 thousand. The modest increase in sales relates to higher cementing and stimulation activities in Western Canada. US blending and packaging sales for the three months ended March 31, 2024 were $1.4 million compared to $2.5 million in the prior year. The $1.1 million decrease relates to the loss of commodity sales due to customers initiating self supply initiatives.

Operating loss for the three months ended March 31, 2024 was $144 thousand which is a decrease from the operating earnings of $1.3 million from the same period in the prior year. Adjusted EBITDA was negative $443 thousand for Q1 2024 compared to $1.6 million for Q1 2023, the decrease is primarily driven by decreased margin due to lost sales, in tandem with a foreign exchange loss for the quarter. Adjusted EBITDA as a percentage of sales was negative 2% for the quarter, which is a decrease from the 6% in Q1 2023. The Adjusted EBITDA as a percentage of sales decrease is primarily attributable to foreign exchange loss in the quarter.

During Q1 2024, Bri-Chem finalized an amending agreement with the Canadian Imperial Bank of Commerce ("CIBC") relating to its senior lending facility in response to a covenant breach realized in the first quarter. The amended agreement acknowledges the breach of the fixed charge coverage ratio covenant, and the Company is pleased to confirm that the renegotiated structure has been agreed to as a cumulative budgeted EBITDA covenant, tested monthly. The facility amendments also increase the availability block to $3.5 million.

OUTLOOK

North American drilling activity levels were considerably lower in Q1 2024, when compared to Q1 2023. U.S. oil and gas rig counts have decreased 19% quarter over quarter as gas prices dropped significantly in February 2024 which has put a significant strain on U.S. gas drilling activity. Canadian market outlook remains positive with the completion of the Trans Mountain pipeline expansion expected in mid-2024 which will help increase capacity and access to global markets for Canadian oil and gas companies. The LNG pipeline is expected to be in operation by mid 2025 and will serve as a further catalyst for the Canadian oil market. Bri- Chem expects oilfield activity in the United States to remain relatively flat for the balance of the year or until natural gas pricing becomes more favorable for producers to expand drilling in gas regions. Bri-Chem's management team has begun to initiate expense management strategies and deploy an inventory reduction

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program to re-align the business with current market conditions. New business development and organic growth will become an increasing focus of management in subsequent periods.

DISCUSSION OF Q1 OPERATING RESULTS

Divisional sales

	Three months ended
		March 31	Change
(in 000's)	2024	2023	$	%

Fluids Distribution
Canada	$	2,767	$	3,611	$	(844)	(23%)
US		12,597		16,754		(4,157)	(25%)
Fluids Blending & Packaging		15,364		20,365		(5,001)	(25%)
Canada		4,570		4,293		277	6%
US		1,437		2,544		(1,107)	(44%)
		6,007		6,836		(830)	(12%)
Consolidated sales	$	21,371	$	27,201	$	(5,830)	(21%)
Geographic region
Canada	$	7,337	$	7,903		(566)	(7%)
US	$	14,034	$	19,298		(5,264)	(27%)
Consolidated sales	$	21,371	$	27,201		(5,830)	(21%)

Consolidated sales for the three months ended March 31, 2024 were $21.4 million compared to $27.2 million for the same period in 2023, representing an $5.8 million decrease. The decrease was primarily due to the lower average rig count in Canada and the US during the Q1 2024 period.

Fluids Distribution Divisions

Canadian sales decreased in Q1 2024 when compared to the prior year, incurring a decrease of 23%. Year over year sales decreased by $844 thousand. The average number of rigs operating in the first quarter of 2024 was 209 compared to 223 in the first quarter of 2023. (Source: Baker Hughes). The decrease relates to the lower average rig count in Canada.

The US Fluids Distribution division generated sales of $12.6 million which was $4.2 million lower than the same period in 2023 representing a 25% decrease. The average number of rigs operating in the first quarter of 2024 was 605 compared to 743 in the first quarter of 2023. (Source: Baker Hughes). The significant decrease in US average rig count led to lower sales in Q1 2024.

Fluids Blending & Packaging Division

The Canadian Fluids Blending and Packaging division recorded sales of $4.6 million for the three months ended March 31, 2024 compared to sales of $4.3 million for the comparable quarter in 2023. The modest increase was due to the increased cementing and stimulation work undertaken in Q1 2024.

US Fluids Blending and Packaging sales for the three months ended March 31, 2024 were $1.4 million compared to $2.5 million for the same comparable period in 2023, a decrease of $1.1 million. The decrease is the result of lower commodity sales due a customer commencing self supply initiatives.

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Divisional Gross Margin

			Three months ended
					March 31		Change
(in 000's)		2024	%(1)		2023	%(1)		$	%
Fluids distribution
Canada	$	226	8.2%	$	752	20.8%	$	(526)	(70%)
US		2,232	17.7%		2,504	14.9%		(271)	(11%)
Fluids blending & packaging		2,459	16.0%		3,256	16.0%		(797)	(24%)
Canada		1,091	23.9%		769	17.9%		322	42%
US		276	19.2%		515	20.3%		(240)	(47%)
		1,367	22.8%		1,285	18.8%		82	6%
Consolidated gross margin	$	3,825	17.9%	$	4,541	16.7%	$	(715)	(16%)
Geographic region
Canada		1,317	18.0%		1,522	19.3%		(204)	(13%)
US		2,508	17.9%		3,019	15.6%		(511)	(17%)
Consolidated gross margin	$	3,825	17.9%	$	4,541	16.7%	$	(715)	(16%)

(1) Expressed as a percentage of divisional sales

Consolidated gross margins for the three months ended March 31, 2024 decreased by $715 thousand compared to the same period last year. The gross margin dollar decrease is primarily related to the decrease in sales from the same quarter in the prior year.

Fluids Distribution Division

Canadian Fluids Distribution gross margin averaged 8% for the first quarter ended March 31, 2024 compared to 21% for the same period last year. The decrease relates to an unfavourable change in shipping and handling expenses and pricing concessions on select commodity items.

US Fluids Distribution gross margin for the three months ended March 31, 2024 was 18%, which is an increase from the 15% in Q1 2023. The increase primarily relates to the prior year's unfavourable margin on specific commodity driven products, which has improved in the current year.

Fluids Blending & Packaging Division

Canadian Fluids Blending & Packaging division gross margin was 24% during the three months ended March 31, 2024, which is an increase from the prior year margin of 18%. The increase relates to pricing concessions realized on several inputs of manufacturing.

The US Fluids Blending & Packaging division gross margins were 19% for the first quarter of 2024 compared to 20% the same period in 2023.

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Salaries and Benefits

	Three months ended
		March 31		Change
(in 000's)	2024	2023		$	%
Salaries and benefits	$ 1,867	$ 1,682	$	185	11%

Salaries and benefits increased $185 thousand for the three months ended March 31, 2024 compared to the prior year quarter as the Company adjusted its employee renumeration and headcount to meet current market activity levels and inflationary pressures. The Company employed 63 (35 Canada and 28 US) employees at March 31, 2024 compared to 66 (36 Canada and 30 US) at March 31, 2023. Prior year wages were lower due to an employee tax retention credit realized in Q1 2023.

Selling, General, and Administration

		Three months ended
			March 31		Change
(in 000's)		2024		2023		$	%
Selling	$	101	$	98	$	3	3%
Professional and consulting		135		148		(13)	(9%)
General and administrative		1,149		510		639	125%
Rent, utilities, and occupancy costs		386		489		(104)	(21%)
Total selling, general and administration	$	1,770	$	1,246	$	525	42%

Selling expenses are related to meals and entertainment, transportation, and travel incurred by Bri-Chem's sales team. Selling expenses for the three months ended March 31, 2024 were consistent with the same period in 2023.

Professional and consulting fees experienced a minor decrease in Q1 2024 when compared to Q1 2023. Professional fees slightly decreased due to lower legal fees related to business activities.

General and administrative expenses increased by $639 thousand for the three months ended March 31, 2024 compared to the same period last year. The increase in expense relates to an increase in bad debts provision in Q1 2024.

Depreciation on Property and Equipment

		Three months ended
			March 31		Change
(in 000's)		2024		2023		$	%
Depreciation on right of use	$	147	$	101	$	47	46%
Depreciation on property and equipment		185		216		(31)	(14%)
Total depreciation	$	332	$	317	$	15	5%

Depreciation has been relatively consistent between periods due to management's discipline on capital spending initiatives. The minor year over year increase to depreciation was the result of a new property and equipment assets acquired between comparative periods.

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Financing Costs

		Three months ended
				March 31		Change
(in 000's)		2024		2023		$	%
Interest on short-term operating debt	$	839	$	666	$	173	26%
Interest on long-term debt		101		209		(108)	(52%)
Interest on lease liabilities		28		35		(8)	100%
Cash interest paid		968		911		57	6%
Add non-cash interest expense:
Amortization of deferred financing costs		17		11		6	58%
Total interest expense	$	985	$	922		63	7%

Interest on short-term operating debt increased by $173 thousand compared to the same period last year as the Company incurred a higher interest expense due to the increased prime rate compared when compared to the same period in the prior year. Interest on long term debt decreased due to the change in financing that arose with the CWB loan. Interest on lease liabilities did not materially change as leaseholds remained relatively unchanged in the quarter.

Foreign Exchange Loss

	Three months ended
			March 31		Change
(in 000's)		2024		2023		$	%
Foreign exchange loss / (gain)	$	631	$	(3)	$	634	(23725%)

The Canadian dollar declined compared to the US dollar for the first quarter of 2024 which resulted in a foreign exchange loss for the quarter. This decrease in the Canadian dollar exchange rate caused the Company to have a unfavourable position on certain net advances denominated in USD, which resulted in a foreign exchange loss in the quarter.

Income Tax Expense (Recovery)

		Three months ended
				March 31		Change
(in 000's)		2024		2023		$	%
Current	$	7	$	(14)	$	21	(149%)
Deferred		(261)		125		(386)	(308%)
Total income tax (recovery) / expense	$	(254)	$	112	$	(366)	(328%)

The provision for income taxes for the three months ended March 31, 2024 is $7 thousand as the Company leveraged loss carry forward balances from past years to reduce its tax expense. Deferred tax recovery was $261 thousand as the Company realized income in the quarter which reduced temporary differences between the tax and accounting base of US operations. Given current economic conditions and activity levels in the region, the Company has determined the utilization of deferred tax assets is more probable than not. Bri-Chem's effective income tax rate was 23% in 2024 (2023 - 23%).

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Adjusted EBITDA and Net (Loss) Earnings

		Three months ended
				March 31
(in 000's)		2024		2023
Net (loss) / earnings	$	(1,506)	$	265
Less:
Deferred tax (credit) / expense		(261)		125
Adjusted net (loss) / earnings		(1,767)		391
Add:
Financing costs		985		922
Income tax expense / (recovery)		7		(14)
Depreciation and amortization		332		317
Adjusted EBITDA	$	(443)	$	1,615

Adjusted EBITDA was negative $443 thousand for the three months ended March 31, 2024 compared to $1.6 million in the same period last year. The adjusted EBITDA decrease is primarily due to a foreign exchange loss paired with a lower sales in Q1 2024. First quarter adjusted EBITDA as a percentage of sales was negative 2% which is a decrease over the prior year. Adjusted net loss was $1.5 million for the three months ended March 31, 2024 compared to adjusted net earnings of $265 thousand in Q1 2023.

SUMMARY OF QUARTERLY DATA

Bri-Chem's quarterly results are materially impacted by seasonality factors, particularly in its Canadian operations. Typically, the first quarter of the calendar year is very active, followed by a much slower second quarter due to spring breakup where provincial and county road bans restrict movement of heavy equipment which negatively impacts demand for the Company's drilling fluid products in Canada. The following is a summary of selected financial information for the last eight quarters:

		2024		2023		2023		2023		2023		2022		2022		2022
(in 000's)		Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2
Sales	$	21,371	$	26,775	$	26,830	$	25,229	$	27,201	$	26,522	$	28,986	$	25,469
Gross margin ($)		3,825		4,268		4,894		5,027		4,541		4,678		5,336		5,189
Gross margin (%)		17.9%		15.9%		18.2%		19.9%		16.7%		17.6%		18.4%		20.4%
Adjusted EBITDA(1)		(443)		1,938		1,051		1,972		1,615		1,432		1,716		1,782
Net earnings / (loss)	$	(1,506)	$	468	$	(376)	$	553	$	265	$	30	$	500	$	341
Basic and diluted earnings per share	$	(0.06)	$	0.02	$	(0.01)	$	0.02	$	0.01	$	-	$	0.02	$	0.01

(1) Refer to the "Non-IFRS Measures" section for a definition of non-GAAP terms as well as reconciliations for EBITDA and adjusted net earnings.

Quarterly results generally reflect the seasonality factors discussed above. Q1 2024 margin dollars decreased due to a significant decrease in sales, driven by a decreased US rig count. Q1 2024 margin percentage increased to a level consistent with prior quarters after a slight dip in Q4 2023.

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