Overview of the Company’s Financial Performance

Sichuan Chemical Holdings Inc. is a Nevada holding company that conducts operations through its wholly-owned China-based subsidiaries. The company operates in four business segments: bromine, crude salt, chemical products, and natural gas.

In 2023, the company faced significant challenges that impacted its financial performance. Net revenue declined 54.5% to $30.04 million, driven by a 54.3% drop in bromine revenue and a 57.5% decline in crude salt revenue. Gross profit plummeted 95% to $1.95 million, with gross profit margins falling from 57% to just 7%. The company reported a net loss of $61.80 million, compared to net income of $10.06 million the prior year.

The primary factors behind the company’s poor results were decreased sales volumes and reduced profit margins, particularly in the bromine and crude salt segments. The company also incurred $46.51 million in expenses for a flood prevention project. Additionally, the company faced ongoing challenges from government-mandated production shutdowns and relocation requirements for its chemical facilities.

Bromine and Crude Salt Segment Performance

The bromine and crude salt segments are the company’s core business, accounting for 99.5% of total revenue in 2023. Bromine revenue declined 54.3% to $26.92 million, while crude salt revenue fell 57.5% to $2.97 million. This was driven by a 55% decrease in the average selling price of bromine and a 19% decline in the average selling price of crude salt. Sales volumes also decreased, with bromine volumes up 2% but crude salt volumes down 47%.

Gross profit margins in the bromine segment plummeted from 58% to just 2%, while crude salt margins declined from 49% to 47%. The sharp drop in profitability was primarily attributable to the lower selling prices. The company’s bromine production capacity and utilization remained flat year-over-year at 31,506 tonnes and 25% respectively.

Chemical Products and Natural Gas Segments

The chemical products segment generated no revenue in 2023 or 2022 due to the government-mandated closure and relocation of the company’s chemical facilities. The natural gas segment also reported no revenue, as the company’s natural gas well in Daying County remained in trial production and was temporarily suspended pending required government approvals.

Operational Challenges and Expenses

A major factor impacting the company’s results was the $46.51 million in expenses incurred for a flood prevention project. This involved renovating channels of four major rivers within the company’s mining area to prevent flooding that could harm its bromine and crude salt operations.

The company also continued to face production shutdowns and relocation requirements from the government. In September 2017, the company’s bromine, crude salt, and chemical factories were ordered to halt production for rectification and improvements. While some bromine factories have since resumed operations, the company is still awaiting approvals for two additional bromine factories and its chemical facilities.

These operational disruptions resulted in $9.54 million in direct labor and factory overhead costs during the plant shutdowns, down from $12.00 million the prior year. General and administrative expenses also declined 30% to $4.24 million.

Liquidity and Capital Resources

As of December 31, 2023, the company had $72.22 million in cash and cash equivalents, down from $108.23 million at the end of 2022. Cash used in operating activities was $32.75 million, primarily due to the net loss. No cash was used for investing activities, while $0.27 million was used for financing activities to repay finance lease obligations.

The company believes its available funds and cash flows from operations will be sufficient to meet its anticipated operating needs for the next 12 months. However, the company may face challenges in funding any future expansion or acquisition plans given its recent financial performance.

Outlook and Risks

The company’s outlook remains uncertain given the ongoing operational disruptions and government-mandated changes impacting its core bromine and crude salt businesses. While some bromine factories have resumed production, the company is still awaiting approvals for additional facilities. The relocation of its chemical operations also continues to be delayed.

Key risks facing the company include:

• Continued government-ordered production shutdowns and facility relocations
• Inability to obtain necessary approvals to resume full operations
• Volatile pricing and demand for bromine and crude salt products
• Potential need for further capital investments to comply with new regulations
• Challenges in funding any future growth or expansion plans

Overall, Sichuan Chemical Holdings faces a difficult road ahead as it navigates the operational and financial challenges stemming from the government’s heightened environmental and safety regulations in China. The company’s ability to resume full production, control costs, and restore profitability will be critical to its long-term success.