PROSPECTUS $175,000, ,666,667 Common Shares. Price: $10.50 per Common Share

Transcription

1 No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus constitutes a public offering of securities only in those jurisdictions where such securities may be lawfully offered for sale and therein only by persons permitted to sell such securities. The securities offered hereunder have not been and will not be registered under the United States Securities Act of 1933, as amended (the U.S. Securities Act ), or the securities laws of any state of the United States and, subject to certain exceptions, may not be offered or sold within the United States except in transactions exempt from registration under the U.S. Securities Act and under the securities laws of all applicable states. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby within the United States. See Plan of Distribution. Initial Public Offering PROSPECTUS April 6, 2017 $175,000,004 16,666,667 Common Shares This prospectus qualifies the distribution (the Offering ) of 16,666,667 common shares (the Common Shares ) of Source Energy Services Ltd. (the Company ) at a price of $10.50 per Common Share (the Offering Price ). The Company will use the net proceeds from the Offering as described in this prospectus. See Use of Proceeds. The Offering is being underwritten by Scotia Capital Inc. ( Scotia ), Morgan Stanley Canada Limited ( Morgan Stanley ) and BMO Nesbitt Burns Inc. ( BMO ), as co-lead underwriters (the Lead Underwriters ), and CIBC World Markets Inc., Goldman Sachs Canada Inc., Raymond James Ltd., RBC Dominion Securities Inc., Canaccord Genuity Corp., AltaCorp Capital Inc., Cowen and Company, LLC, GMP Securities L.P. and Peters & Co. Limited (collectively with the Lead Underwriters, the Underwriters ). The Toronto Stock Exchange ( TSX ) has conditionally approved the listing of the Common Shares under the symbol SHLE. Listing is subject to the Company fulfilling all of the requirements of the TSX on or before June 13, See Plan of Distribution. Price: $10.50 per Common Share Price to the Public Underwriters Commission (1)(3) Net Proceeds to the Company (2)(3) Per Common Share... $10.50 $ $ Total... $175,000,004 $9,625,000 $165,375,004 Notes: (1) The Company has agreed to pay to the Underwriters a commission equal to 5.5% of the gross proceeds of the Offering (the Underwriters Commission ) and will reimburse the Underwriters for their reasonable expenses in connection with the Offering. See Plan of Distribution. (2) Before deducting expenses of the Offering, estimated to be approximately $3,500,000, which together with the Underwriters Commission will be paid from the proceeds of the Offering. See Plan of Distribution. (3) The Company has granted the Underwriters an option (the Over-Allotment Option ), exercisable at the Underwriters discretion, to purchase from the Company up to an additional 2,500,000 Common Shares (representing approximately 15% of the number of Common Shares sold in the Offering) at a price equal to the Offering Price, to cover over-allocations, if any, and for market stabilization purposes. The Over-Allotment Option is exercisable, in whole or in part, at any time on or before the date that is 30 days following the date of closing of the Offering. If the Underwriters exercise the Over-Allotment Option in full, the total Price to the Public, Underwriters Commission and Net Proceeds to the Company will be $201,250,004, $11,068,750, and $190,181,254, respectively. This prospectus qualifies the grant of the Over-Allotment Option and the distribution of any Common Shares issued or sold pursuant to the exercise of the Over-Allotment Option. A purchaser who acquires Common Shares forming part of the Underwriters over-allocation position acquires such Common Shares under this prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. See Plan of Distribution. (continued on next page)

2 (continued from cover) The following table sets forth the number of additional Common Shares that may be sold to the Underwriters under the Over-Allotment Option: Underwriters Position Over-Allotment Option Maximum Size or Number of Securities Available Exercise Period Exercise Price Option to acquire up to 2,500,000 Common Shares Exercisable until the date that is 30 days following the closing of the Offering Equal to the Offering Price The Underwriters, as principals, conditionally offer the Common Shares, subject to prior sale, if, as and when issued and sold by the Company and delivered to and accepted by the Underwriters in accordance with the conditions contained in the Underwriting Agreement (as defined herein) referred to under Plan of Distribution, subject to approval of certain legal matters relating to the Offering on behalf of the Company by Stikeman Elliott LLP as to matters of Canadian law and on behalf of the Underwriters by Blake, Cassels & Graydon LLP as to matters of Canadian law. In connection with the Offering, the Underwriters may effect transactions which stabilize or maintain the market price of the Common Shares at levels other than those which otherwise might prevail on the open market. See Plan of Distribution Price Stabilization, Short Positions and Passive Market Making. Subscriptions for Common Shares will be received subject to rejection or allotment, in whole or in part. Closing of the Offering is expected to occur on or about April 13, 2017 or such later date as the Company and the Underwriters may agree (the Closing Date ), but in any event not later than May 11, The Common Shares (other than any Common Shares issuable or to be sold on exercise of the Over-Allotment Option) are to be taken up by the Underwriters, if at all, on or before a date not later than 42 days after the date of the receipt for the final prospectus. The Underwriters may offer the Common Shares at a lower price than stated above. See Plan of Distribution. Cowen and Company, LLC is not registered to sell securities in any Canadian jurisdiction and, accordingly, will only sell Common Shares outside of Canada. Except in certain limited circumstances, no certificates representing Common Shares will be issued to purchasers in the Offering. Instead, on the Closing Date, the purchasers of Common Shares will have their securities registered in the name of CDS Clearing and Depository Services Inc. ( CDS ) or its nominee and electronically deposited with CDS. Purchasers of the Common Shares will receive only a customer confirmation from the Underwriter or other registered dealer who is a CDS participant and from or through whom a beneficial interest in the Common Shares is acquired. BMO is an affiliate of Bank of Montreal, which is the sole Lender (as defined herein) to Source Canada LP (as defined herein) under the Credit Agreement (as defined herein) and to which Source Canada LP is currently indebted. Scotia is an affiliate of The Bank of Nova Scotia which is expected to become a Lender following the Offering in connection with the planned increase of the Revolver Limit (as defined herein). Consequently, the Company may be considered to be a connected issuer of BMO and Scotia for the purposes of securities regulations in certain provinces and territories. See Relationship Among the Company and Certain Underwriters and Consolidated Capitalization. There is currently no market through which the Common Shares may be sold and purchasers may not be able to resell Common Shares purchased under this prospectus. This may affect the pricing of the Common Shares in the secondary market, the transparency and availability of trading prices, the liquidity of the Common Shares and the extent of issuer regulation. See Risk Factors. An investment in the Common Shares is speculative and involves a high degree of risk that should be considered by potential purchasers. The Company s business is subject to the risks normally encountered in the frac sand industry and the Company s business of mining, processing and transporting of frac sand. An investment in the Common Shares is suitable only for those purchasers who are willing to risk a loss of some or all of their investment and who can afford to lose some or all of their investment. See Risk Factors.

3 TABLE OF CONTENTS GENERAL ADVISORY... iii CONVENTIONS... iii EXCHANGE RATE INFORMATION... iv FORWARD-LOOKING STATEMENTS... v MARKET SHARE, INDUSTRY AND OTHER STATISTICAL INFORMATION... x SCIENTIFIC AND TECHNICAL INFORMATION... x IFRS AND NON-IFRS MEASURES... xii MARKETING MATERIALS... xii GLOSSARY... xiv PROSPECTUS SUMMARY... 1 THE OFFERING... 5 CORPORATE STRUCTURE... 9 INDUSTRY OVERVIEW BUSINESS SELECTED HISTORICAL FINANCIAL INFORMATION MANAGEMENT S DISCUSSION AND ANALYSIS DESCRIPTION OF SHARE CAPITAL DESCRIPTION OF INDEBTEDNESS DIVIDEND POLICY CONSOLIDATED CAPITALIZATION OPTIONS TO PURCHASE SECURITIES PRIOR SALES ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER PRINCIPAL SHAREHOLDERS USE OF PROCEEDS DIRECTORS AND OFFICERS EXECUTIVE COMPENSATION DIRECTOR COMPENSATION INDEBTEDNESS OF DIRECTORS AND OFFICERS AUDIT COMMITTEE STATEMENT OF CORPORATE GOVERNANCE PRACTICES ELIGIBILITY FOR INVESTMENT PLAN OF DISTRIBUTION RELATIONSHIP AMONG THE COMPANY AND CERTAIN UNDERWRITERS MARKET FOR SECURITIES RISK FACTORS LEGAL PROCEEDINGS AND REGULATORY ACTIONS EXEMPTION INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS i

4 AUDITORS, TRANSFER AGENT AND REGISTRAR MATERIAL CONTRACTS EXPERTS PURCHASERS STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION APPENDIX FS FINANCIAL STATEMENTS AND MANAGEMENT S DISCUSSION AND ANALYSIS... FS-1 APPENDIX A DESCRIPTIONS OF THE MINERAL PROPERTIES... A-1 APPENDIX B MANDATE OF THE BOARD OF DIRECTORS... B-1 APPENDIX C AUDIT COMMITTEE MANDATE... C-1 CERTIFICATE OF THE COMPANY... CC-1 CERTIFICATE OF THE UNDERWRITERS... CU-1 ii

5 GENERAL ADVISORY An investor should read this entire prospectus and consult its own professional advisors to assess the income tax, legal, risk factors and other aspects of its investment in the Common Shares. An investor should rely only on the information contained in this prospectus. The Company and the Underwriters have not authorized anyone to provide investors with additional or different information. If anyone provides an investor with additional or different or inconsistent information, including statements in media articles about the Company, the investor should not rely on it. The Company and the Underwriters are not offering to sell the Common Shares in any jurisdictions where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Common Shares. The Company s business, financial condition, results of operations and prospects may have changed since the date of this prospectus. For investors outside Canada, none of the Company or any of the Underwriters has done anything that would permit the Offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in Canada. Investors are required to inform themselves about and to observe any restrictions relating to the Offering and the distribution of this prospectus. Investors are urged to read the information under the headings Risk Factors, Forward-Looking Statements and IFRS and Non-IFRS Measures appearing elsewhere in this prospectus. CONVENTIONS Unless otherwise noted or the context indicates otherwise, Source refers to the Company and its subsidiaries, collectively (or prior to the closing of the Reorganization (as defined herein), to Source Canada LP (as defined herein) and Source US LP (as defined herein), their respective general partners and each of their respective subsidiaries and Berthold (as defined herein), an affiliated entity, on a combined basis). See Corporate Structure. Prior to and concurrently with the Closing, the Company will undergo a reorganization (the Reorganization ) pursuant to which the Company will acquire, directly or indirectly, all of the limited partnership interests of Source Canada LP other than the Remaining Source Canada LP Units (as defined herein), all of the limited partnership interests of Source US LP and all of the shares of Source Canada LP GP (as defined herein), of Source US LP GP (as defined herein) and of Berthold, such that those entities will become subsidiaries of the Company. Unless otherwise noted, all information in this prospectus gives effect to the Reorganization but does not give effect to the exercise of the Over-Allotment Option. Unless otherwise noted or the context indicates otherwise, on a basic basis refers to the total amount of issued and outstanding Common Shares as of the noted date and on a fully-diluted basis refers to the total amount of issued and outstanding Common Shares as of the noted date assuming all in-the-money Options are exercised and all Exchangeable LP Securities (as defined herein) with the concurrent surrender of the Class B Shares (as defined herein) have been redeemed for Common Shares. Words importing the singular number include the plural and vice versa, and words importing any gender include all genders, unless the context requires otherwise. Unless otherwise indicated, all references to $, dollars or Canadian dollars refer to Canadian dollars and all references to US$ or U.S. dollars refer to United States dollars. All financial information in this prospectus has been presented in accordance with IFRS (as defined herein). iii

6 EXCHANGE RATE INFORMATION The following table lists, for each period presented, the high and low exchange rate, the average exchange rate and the exchange rate at the end of the period, in each case, for one Canadian dollar, expressed in U.S. dollars, based on the noon spot exchange rate of the Bank of Canada: Year ended December High for the period $ $ $ Low for the period $ $ $ End of the period $ $ $ Average for the period (1) $ $ $ Note: (1) Calculated as an average of the daily Bank of Canada Noon Rates for each day during the respective period. The exchange rate for one Canadian dollar, expressed in U.S. dollars on April 4, 2017, based on the noon spot exchange rate of the Bank of Canada, was $1.00 = US$ iv

7 FORWARD-LOOKING STATEMENTS Certain statements contained in this prospectus constitute forward-looking statements or forward-looking information within the meaning of Applicable Securities Laws (as defined herein) (collectively, forward-looking statements ). These statements relate to the expectations of Management (as defined herein) about future events, results of operations and Source s future performance (both operational and financial) and business prospects. All statements other than statements of historical fact are forward-looking statements. The use of any of the words anticipate, plan, contemplate, continue, estimate, expect, intend, propose, might, may, will, shall, project, should, could, would, believe, predict, forecast, pursue, potential, objective and capable and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this prospectus should not be unduly relied upon. These statements speak only as of the date of this prospectus. In addition, this prospectus may contain forward-looking statements and forward-looking information attributed to third-party industry sources. In particular, this prospectus contains forward-looking statements pertaining to the following: the Offering Price, the completion, size, expenses and timing of the Offering and the number of Common Shares offered pursuant to the Offering; the exercise of the Over-Allotment Option; the share capital of the Company following closing of the Offering and after giving effect to the Over-Allotment Option; the gross and net proceeds of the Offering and the use of the net proceeds from the Offering; the timing for receipt of regulatory and stock exchange approvals and the execution of ancillary agreements in connection with the Offering; the completion of the Reorganization and the Blair Facility Acquisition (as defined herein), and the timing thereof; the anticipated benefits of the Blair Facility Acquisition; the characteristics of the assets and properties being acquired in connection with the Blair Facility Acquisition; the terms of the Blair Facility Acquisition; the transaction costs associated with the Blair Facility Acquisition; the pro forma operations and capital expenditures of Source after completion of the Blair Facility Acquisition; changes to laws and regulations affecting Source s business; expectations regarding the price of proppants and sensitivity to changes in such prices; future debt levels, financial capacity, liquidity and capital resources; outlook for operations; future capital expenditures of customers and potential customers; future well count and associated sand demand and sales volumes; expectations respecting future competitive conditions; industry activity levels; cost and efficiency of rail fleet; anticipated future sources of funds to meet working capital requirements; future capital expenditures and contractual commitments; that Source will add additional unit train capable locations to its network; v

8 expectations respecting future financial results; expectations regarding benefits of certain transactions and capital investments Source s objectives, strategies and competitive strengths; timing and development of Source s capital projects; future development activities; potential acquisitions and dispositions of assets; Source s growth strategy; Source s targets for future growth; expectations with respect to future opportunities and stability; expectations with respect to Source s financial position; Source s capital expenditure programs and future capital requirements; expectations regarding contractual obligations and commitments and their expected timing of funding; Source s current 2017/2018 capital budget and production expectations; future costs; the use of risk-management techniques, including hedging; expectations as to the remaining interest in the Company of the Major Shareholders following closing of the Offering and after giving effect to the Over-Allotment Option; Source s estimates of future interest and foreign exchange rates; Source s dividend policy, should one be adopted, including the sustainability of dividend payments and the amount, timing and taxation of dividend payments; expectations that Source s competitive advantages will yield successful execution of its business strategy; capital resources and the Company s ability to raise capital; industry conditions pertaining to the frac sand industry; Source s treatment under governmental regulatory regimes and tax laws; Source s consultation with government and other stakeholders in respect of regulatory matters; Management; the economic interest of Management in the Company s equity and the benefits thereof; Source s future general and administrative expenses; and compensation arrangements. With respect to forward-looking statements contained in this prospectus, assumptions have been made regarding, among other things: proppant market prices; future oil, natural gas and natural gas liquids prices; future global economic and financial conditions; future commodity prices, demand for oil and gas and the product mix of such demand and levels of activity in the oil and gas industry in the areas in which Source operates; the timing for receipt of regulatory and stock exchange approvals and the execution of ancillary agreements in connection with the Offering; vi

9 Source s ability to successfully complete and integrate the Blair Facility; the continued availability of timely and safe transportation for Source s products, including without limitation, rail accessibility; the maintenance of Source s key customers and the financial strength of its key customers, the maintenance of Source s significant contracts or their replacement with new contracts on substantially similar terms and that that contractual counterparties will comply with current contractual terms; operating costs; that the regulatory environment in which Source operates will be maintained in the manner currently anticipated by Source; future exchange and interest rates; geological and engineering estimates in respect of Source s resources; the recoverability of Source s resources; the accuracy and veracity of information and projections sourced from third parties respecting, among other things, future industry conditions and product demand; the geology of the areas in which Source is conducting its mining activities; demand for horizontal drilling and hydraulic fracturing and the maintenance of current techniques and procedures, particularly with respect to the use of proppants; Source s ability to obtain qualified staff and equipment in a timely and cost-efficient manner; the regulatory framework governing royalties, taxes and environmental matters in the jurisdictions in which Source conducts its business and any other jurisdictions in which Source may conduct its business in the future; future capital expenditures to be made by Source; future sources of funding for Source s capital program; production estimates at the Sumner Facility, the Weyerhaeuser Facility and, if acquired, the Blair Facility; Source s future debt levels; the intentions of the Board (as defined herein) with respect to the executive compensation plans and corporate governance programs described herein; the impact of competition on Source; and Source s ability to obtain financing on acceptable terms. Actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and included elsewhere in this prospectus, including: volatility in market prices and demand for oil, natural gas and natural gas liquids and the effect of this volatility on the demand for frac sand; demand for frac sand during drilling and completion of oil and natural gas wells; effects of competition and pricing pressures; risks inherent in key customer dependence; effects of fluctuations in the price of proppants; possible failure to realize the anticipated benefits of the Blair Facility Acquisition; inability to complete the Blair Facility Acquisition on the terms specified or at all; potential undisclosed liabilities associated with the Blair Facility Acquisition; vii

10 risks related to indebtedness and liquidity, including Source s leverage, restrictive covenants in the Credit Agreement (as defined herein), the Note Indenture (as described herein) and Source s capital requirements; potential non-renewal of the Credit Facilities under the Credit Agreement; risks related to interest rate fluctuations and foreign exchange rate fluctuations; changes in general economic, financial, market and business conditions in the markets in which Source operates; changes in the technologies used to produce oil and natural gas; Source s ability to obtain, maintain and renew required permits, licenses and approvals from regulatory authorities; the stringent requirements of and potential changes to applicable legislation, regulations and standards; Source s inability to comply and unexpected costs of complying with government regulations; liabilities resulting from Source s operations; the results of litigation or regulatory proceedings that may be brought against Source; Source s ability to successfully bid on new contracts and the loss of significant contracts; uninsured and underinsured losses; risks related to the transportation of Source s products, including potential rail line interruptions or a reduction in rail car availability; Source s geographic and customer concentration; Source s ability to retain and attract qualified management and staff in the markets in which it operates; labour disputes and work stoppages and risks related to employee health and safety; risks associated with the oil and natural gas industry, loss of markets, consumer and business spending and borrowing trends; competition in the mining industry for properties and qualified personnel; limited, unfavourable or a lack of access to capital markets; uncertainties inherent in estimating quantities of mineral resources; uncertainties relating to the interpretation of drill results and the geology, grade and continuity of our mineral resources; sand processing problems; the realization of mineral resource estimates; the economic viability of the Sumner Facility, Weyerhaeuser Facility and, if acquired, the Blair Facility; the inherent risk in the mining business; uncertainties related to title to Source s mineral properties and surface rights; the use and suitability of Source s accounting estimates and judgments; variance of Source s actual capital costs, operating costs and economic returns from those anticipated; negative public perception of hydraulic fracturing and fossil fuels; actions by governmental authorities, including changes in government regulation, royalties and taxation; management of Source s growth; the ability to successfully identify and make attractive acquisitions, joint ventures or investments, or successfully integrate future acquisitions or businesses; viii

11 the absence or loss of key employees; operating hazards and uninsured risks; execution of Source s business plan; limited intellectual property protection for operating practices and dependence on employees and contractors; third-party claims regarding Source s right to use technology and equipment; failure to realize the anticipated benefits of acquisitions or dispositions; changes in the interpretation and enforcement of applicable laws and regulations; environmental, health and safety requirements; adoption or modification of climate change legislation by governments; potential conflicts of interests; actual results differing materially from Management estimates and assumptions; seasonality of the Canadian oilfield services industry; alternatives to and changing demand for petroleum products; extensive competition in Source s industry; changes in Source s credit ratings; dependence upon a limited number of customers; lower oil, natural gas and natural gas liquids prices and higher costs; commodity price hedging instruments; terrorist attack or armed conflict; loss of information and computer systems; inability to dispose of non-strategic assets on attractive terms; reassessment by taxing authorities of Source s prior transactions and filings; variations in foreign exchange rates and interest rates; third-party credit risk including risk associated with counterparties in risk management activities related to commodity prices and foreign exchange rates; sufficiency of insurance policies; litigation; variation in future calculations of non-ifrs measures; sufficiency of internal controls; third-party breach of confidentiality agreements; impact of expansion into new activities on risk exposure; inability of Source to respond quickly to competitive pressures; risks related to the Offering, including the potential absence of a liquid public market; the volatility in the price of Common Shares; the discretion in the use of proceeds; the risk of no return on an investment in Common Shares; the possible future dilution of the Common Shares; the effect of future sales of Common Shares by Shareholders on the market price of the Common Shares; the limited ability of residents of the United States to enforce civil remedies; the absence of any immediate plans to pay dividends; changes to the Company s dividend policy; and the potential inaccuracy of forward-looking statements contained in this prospectus; and the other factors discussed under Risk Factors. ix

12 Readers are cautioned that the foregoing list of risk factors should not be construed as exhaustive. Statements relating to Mineral Resources are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the Mineral Resources described exist in the quantities predicted or estimated and that the Mineral Resources described might be able to be profitably produced in the future. The forward-looking statements included in this prospectus are expressly qualified by this cautionary statement and are made as of the date of this prospectus. The Company does not undertake any obligation to publicly update or revise any forward-looking statements except as required by Applicable Securities Laws. MARKET SHARE, INDUSTRY AND OTHER STATISTICAL INFORMATION This prospectus includes market share, industry and other statistical information that Source has obtained from independent industry publications, government publications, market research reports and other published independent sources. Such publications and reports generally state that the information contained therein has been obtained from sources believed to be reliable. Although Source believes these publications and reports to be reliable, it has not independently verified any of the data or other statistical information contained therein, nor has it ascertained or validated the underlying economic or other assumptions relied upon by these sources. Source has no intention and undertakes no obligation to update or revise any such information or data, whether as a result of new information, future events or otherwise, except as required by Applicable Securities Laws. Source has obtained the consent of each of the Well Completions & Frac Database, geoscout, DrillingInfo and Wood Mackenzie Limited ( Wood Mackenzie ) to disclose certain information obtained from such databases and services. All information obtained from the Well Completions & Frac Database is as of January 18, 2017; all information from geoscout is as of January 25, 2017; all information from Wood Mackenzie is as of February 7, 2017; and all information from DrillingInfo is as of the noted dates. SCIENTIFIC AND TECHNICAL INFORMATION The scientific and technical information in this prospectus that relates to the Sumner Facility (as defined herein) and the Blair Facility (as defined herein) was estimated as of December 16, 2015 and as of February 12, 2017, respectively, and has been approved by D. Roy Eccles, M. Sc P. Geol and Steven Nicholls, BA.Sc, MAIG, each full time employees of APEX (as defined herein) and independent QPs (as defined herein), as set out in the Sumner APEX Report (as defined herein) and the Blair APEX Report (as defined herein). Reference should be made to the full text of the Sumner APEX Report and the Blair APEX Report, which are available under the Company s profile at The scientific and technical information in this prospectus has been updated with current information, where applicable. Unless otherwise indicated, all Mineral Resource estimates contained in such scientific and technical information have been prepared in accordance with NI (as defined herein) and the Canadian Institute of Mining, Metallurgy and Petroleum Classification System ( CIM ) Estimation of Mineral Resources and Mineral Reserves Best Practice Guidelines dated November 23, 2003 and CIM amended and adopted Definition Standards for Mineral Resources and Mineral Reserves dated May 20, 2014 (the CIM Definition Standards ). Without limiting the foregoing, such scientific and technical information uses terms that comply with reporting standards in Canada and certain estimates are made in accordance with NI NI is a rule developed by the Canadian Securities Administrators that establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. x

13 CIM Definition Standards The Mineral Resources for the properties discussed herein (including as used in the Sumner APEX Report and the Blair APEX Report) have been estimated in accordance with the CIM Definition Standards. The following definitions are reproduced from the CIM Definition Standards: Indicated Mineral Resource means that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics are estimated with sufficient confidence to allow the application of Modifying Factors (as defined herein) as described below in sufficient detail to support mine planning and evaluation of the economic viability of the deposit. Geological evidence is derived from adequately detailed and reliable exploration, sampling and testing and is sufficient to assume geological and grade or quality continuity between points of observation. An Indicated Mineral Resource has a lower level of confidence than that applying to a Measured Mineral Resource (as defined herein) and may only be converted to a Probable Mineral Reserve (as defined herein). Inferred Mineral Resource means that part of a Mineral Resource for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply but not verify geological and grade or quality continuity. An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource (as defined herein) and must not be converted to a Mineral Reserve. It is reasonably expected that the majority of Inferred Mineral Resources could be upgraded to Indicated Mineral Resources with continued exploration. Measured Mineral Resource means that part of a Mineral Resource for which quantity, grade or quality, densities, shape, and physical characteristics are estimated with confidence sufficient to allow the application of Modifying Factors to support detailed mine planning and final evaluation of the economic viability of the deposit. Geological evidence is derived from detailed and reliable exploration, sampling and testing and is sufficient to confirm geological and grade or quality continuity between points of observation. A Measured Mineral Resource has a higher level of confidence than that applying to either an Indicated Mineral Resource or an Inferred Mineral Resource. It may be converted to a Proven Mineral Reserve (as defined herein) or to a Probable Mineral Reserve. Mineral Resource means a concentration or occurrence of solid material of economic interest in or on the Earth s crust in such form, grade or quality and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade or quality, continuity and other geological characteristics of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge, including sampling. Mineral Reserve means the economically mineable part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined or extracted and is defined by studies at pre-feasibility or feasibility level as appropriate that include application of Modifying Factors. Such studies demonstrate that, at the time of reporting, extraction could reasonably be justified. The reference point at which Mineral Reserves are defined, usually the point where the ore is delivered to the processing plant, must be stated. It is important that, in all situations where the reference point is different, such as for a saleable product, a clarifying statement is included to ensure that the reader is fully informed as to what is being reported. The public disclosure of a Mineral Reserve must be demonstrated by a pre-feasibility study or feasibility study. Probable Mineral Reserve means the economically mineable part of an Indicated Mineral Resource, and in some circumstances, a Measured Mineral Resource. The confidence in the Modifying Factors applying to a Probable Mineral Reserve is lower than that applying to a Proven Mineral Reserve. Proven Mineral Reserve means the economically mineable part of a Measured Mineral Resource. A Proven Mineral Reserve implies a high degree of confidence in the Modifying Factors. For the purposes of the CIM Definition Standards, Modifying Factors are considerations used to convert Mineral Resources to Mineral Reserves. These include, but are not restricted to, mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental factors. Source has not based its production decisions and ongoing mine production on Mineral Reserve estimates, preliminary economic assessments, pre-feasibility studies or feasibility studies. As a result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery and historically projects without any Mineral Reserves have increased uncertainty and risk of failure. Mineral xi

14 Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the Mineral Resources described in this prospectus will be converted into a Mineral Reserve. The estimate of Mineral Resources may be materially affected by the considerations mentioned directly above. IFRS AND NON-IFRS MEASURES This prospectus refers to certain financial measures that are not determined in accordance with IFRS. These financial measures do not have standardized meanings prescribed by IFRS and Source s method of calculating these measures may differ from the method used by other entities and, accordingly, they may not be comparable to similar measures presented by other companies. These financial measures should not be considered as an alternative to, or more meaningful than, net income (loss), gross margin and other measures of financial performance as determined in accordance with IFRS as an indicator of performance, but Source believes these measures are useful to both Management and investors in providing relative performance and measuring changes in respect of Source as well as measuring Source s financial performance in the context of the capital spending necessary to maintain and grow its assets. Adjusted EBITDA represents, for the period presented, EBITDA as adjusted to add back or deduct, as applicable, the following expenses, costs, charges or benefits incurred in such period which in Management s view are not indicative of the underlying business performance: (a) finance expense excluding interest expense; (b) Management Fee; (c) fair value adjustment of the SES Shareholder Loan; (d) loss (gain) on asset disposal; (e) loss (gain) on impairment; (f) transaction and professional fees; (g) loss (gain) on derivative liability; and (h) gain on settlement of deferred revenue. EBITDA represents, for the period presented, net income (loss) plus: (a) income taxes; (b) interest expense; (c) cost of sales depreciation; (d) depreciation; and (e) amortization, in each case to the extent deducted from net income in such period determined on a combined basis in accordance with IFRS. Adjusted Gross Margin represents, for the period presented, gross margin plus costs of sales depreciation. This prospectus makes reference to these non-ifrs measures. These non-ifrs measures and other financial estimates of Management are based upon variable components. There can be no assurance that these components and future calculations of non-ifrs measures will not vary. EBITDA and Adjusted EBITDA are used by Management to evaluate the operating performance of the business, excluding the impacts of its capital structure, tax structure and financing structure as its operating staff do not have control over those elements of the business. The use of EBITDA and Adjusted EBITDA also provide this insight to investors. Management uses Adjusted Gross Margin as a measure of profitability in monitoring its business. Investors are cautioned not to consider these non-ifrs measures in isolation or place undue reliance on ratios or percentages calculated using these non-ifrs measures. These non-ifrs measures should be read in conjunction with Source s audited and unaudited financial statements and the accompanying notes included in this prospectus under Appendix FS Financial Statements and Management s Discussion and Analysis. See Selected Historical Financial Information and Source s management s discussion and analysis for a reconciliation of such financial measures at the noted periods. MARKETING MATERIALS A template version of the following marketing materials (as such terms are defined under Applicable Securities Laws) for the Offering filed with the securities commission or similar regulatory authority in each of the provinces and territories of Canada are specifically incorporated into this prospectus: 1. the revised investor presentation filed on SEDAR on April 6, 2017 (the April 6 Investor Presentation ); and 2. the revised term sheet filed on SEDAR on April 6, 2017 (the April 6 Term Sheet ). The term sheets and investor presentations referred to in this section are available under the Company s profile on SEDAR at xii

15 The April 6 Investor Presentation and the April 6 Term Sheet revised the investor presentation filed on SEDAR on March 3, 2017 (The March 3 Investor Presentation ) and the term sheet filed on SEDAR on March 3, 2017 (The March 3 Term Sheet ), respectively, to, among other things, reflect the Offering Price of $10.50, reflect the number of Common Shares issued pursuant to the Offering of 16,666,667 and update the size and the apportionment of the Offering and the Over-Allotment Option. These revisions are all reflected in this prospectus. Pursuant to subsection 13.7(7) of NI , the April 6 Investor Presentation and the April 6 Term Sheet, as well as blacklines to the March 3 Investor Presentation and the March 3 Term Sheet, are available under the Company s profile on SEDAR at In addition, any template version of any other marketing materials that are utilized by the Underwriters in connection with the Offering are not part of this prospectus to the extent that the contents of the template version of the marketing materials have been modified or superseded by a statement contained in this prospectus. Any template version of any marketing materials that has been, or will be, filed under the Company s profile at before the termination of the distribution under the Offering (including any amendments to, or an amended version of, any template version of any marketing materials) is deemed to be incorporated into this prospectus. xiii

16 GLOSSARY Please see IFRS and Non-IFRS Measures for definitions of certain non-ifrs measures and Scientific and Technical Information for definitions of certain scientific technical terms used in this prospectus. In this prospectus, unless otherwise indicated or the context otherwise requires, the following terms have the meaning set forth below: 20/40 mesh frac sand means sand that passes through a sieve with 20 holes per linear inch and is retained by a sieve with 40 holes per linear inch. 30/50 mesh frac sand means sand that passes through a sieve with 30 holes per linear inch and is retained by a sieve with 50 holes per linear inch. 40/70 mesh frac sand means sand that passes through a sieve with 40 holes per linear inch and is retained by a sieve with 70 holes per linear inch. 50/140 mesh frac sand means sand that passes through a sieve with 50 holes per linear inch and is retained by a sieve with 140 holes per linear inch. 70/140 mesh frac sand means sand that passes through a sieve with 70 holes per linear inch and is retained by a sieve with 140 holes per linear inch. APEX means Apex Geoscience Ltd. API means the American Petroleum Institute. ABCA means the Business Corporations Act (Alberta), R.S.A. 2000, c. B-9, as amended, including the regulations promulgated thereunder. Applicable Securities Laws means all applicable securities laws, the respective regulations, rules and orders made thereunder, and all applicable policies and notices issued by the securities regulatory authorities in Canada. ASC means the Alberta Securities Commission. Audit Committee means the Audit Committee of the Board. Bank Agent means Bank of Montreal acting as administrative agent on behalf of the Lenders under the Credit Agreement. Basket has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Indemnification. Berthold means Berthold Transload Inc., a Delaware corporation currently owned by certain members of Management and their affiliates, the MFT 2 Family Trust, SES Canada LP and SES US LP. Blair APEX Report means the technical report in respect of the Blair Facility prepared by APEX titled Technical Report, Geological Introduction to Source Energy Services Silica (Frac) Sand Properties in Trempealeau County, Wisconsin, United States, and a Maiden Inferred Resource Estimate for the Highway 53 Property dated February 12, Blair Facility means SPC s Northern White frac sand mine and related closed-loop wet processing plant (including three washing circuits), dry processing plant and unit train capable loadout facility located in or around Blair, Wisconsin and all related or associated assets and real property. Blair Facility Acquisition has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement. Blair Facility Acquisition Closing Date has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement. Blair Option Exercise has the meaning ascribed to such term under Business Blair Facility Acquisition Information Concerning the Blair Facility Acquisition Ancillary Properties. Blair Purchase Agreement has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement. BMO means BMO Nesbitt Burns Inc. xiv

17 Board or Board of Directors means the board of directors of the Company. Breach has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Termination. BTU means British Thermal Unit. CAA means the United States Clean Air Act. Cash RTR Payment has the meaning ascribed to such term under Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. CDS means CDS Clearing and Depository Services Inc. CEO means the Chief Executive Officer of the Company. CFO means the Chief Financial Officer of the Company. CIM means Canadian Institute of Mining Metallurgy and Petroleum. CIM Definition Standards means the CIM amended and adopted Definition Standards for Mineral Resources and Mineral Reserves dated May 20, Class B Family Trust has the meaning ascribed to such term under Corporate Structure Source. Class B Founder has the meaning ascribed to such term under Corporate Structure Source. Class B Payment has the meaning ascribed to such term under Corporate Structure Reorganization. Class B Shares means the class B shares in the capital of the Company as constituted on the date hereof. Closing means the closing of the Offering, which is expected to occur on or about April 13, Closing Date means the date on which Closing occurs. CMSA has the meaning ascribed to such term under Legal Proceedings and Regulatory Actions. CMSA Customer has the meaning ascribed to such term under Legal Proceedings and Regulatory Actions. CN or CN Railway means Canadian National Railway Company. Common Shares means the common shares in the capital of the Company as constituted on the date hereof. Common Shares RTR Payment has the meaning ascribed to such term under Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. Company means Source Energy Services Ltd. Compensation and Corporate Governance Committee means the Compensation and Corporate Governance Committee of the Board. Cowen means Cowen and Company, LLC. Credit Agreement means the second amended and restated credit agreement with the Lenders and the Bank Agent as administrative agent on behalf of the Lenders providing for the Credit Facilities, made as of December 8, Credit Facilities means the two facilities in an aggregate principal amount of $41,650,000 (U.S. dollar denominated facility represented at $1.33/US$1.00). Such facilities include (a) a revolving credit facility (the Revolver Commitment ), with availability thereunder subject to the limit of the lesser of: (i) $35,000,000 (which includes a swingline with a sublimit of $5,000,000) (the Revolver Limit ); and (ii) the borrowing base, to be used to finance day to day operations of Source Canada LP and its subsidiaries and for general working capital requirements, including financing receivables, inventory and capital expenditures that have been approved by the Lenders, and (b) a US$5,000,000 standby letter of credit facility (the SBLC Facility ) to be used to issue one or more standby letters of credit. Credit Facilities Guarantors has the meaning ascribed to such term under Description of Indebtedness Indebtedness outstanding following the Offering Credit Facilities. D95 Properties means two additional land leases located near the Blair Facility. xv

18 D95 North Property means the northerly land lease forming part of the D95 Properties. Deep Basin means the region of the WCSB, generally extending northwest from west Central Alberta, from where oil and natural gas can be produced from deep and multiple zones using unconventional well designs and completions. Deferred Plans means trusts governed by an RRSP, RRIF, TFSA (as such terms are defined herein), registered education savings plan, registered disability savings plan or deferred profit sharing plan (as such terms are defined in the Tax Act), and Deferred Plan means any one of them. Defect has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Purchase Price. Demand Distribution has the meaning ascribed to such term under Principal Shareholders Distribution and Nomination Rights Distribution Rights Agreement. Demanding Shareholder has the meaning ascribed to such term under Principal Shareholders Distribution and Nomination Rights Distribution Rights Agreement. Distribution Rights Agreement means the distribution rights agreement to be entered among the Company, TriWest IV, Jim McMahon, Brad Thomson, Derren Newell, Scott Melbourn and Joe Jackson. Distribution Rights Shareholders means, collectively, TriWest IV, Jim McMahon, Brad Thomson, Derren Newell, Scott Melbourn and Joe Jackson. dry processing plant means an industrial site where washed sand product is fed through a dryer and screening system to be dried and screened in varying gradations. The finished product that emerges from the dry plant is then stored before being transported to customers. Duvernay means the Duvernay formation, a stratigraphic zone in the WCSB. DSU means a deferred share unit granted under the LTIP. Earnest Money has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Purchase Price. EPA means the United States Environmental Protection Agency. Exchangeable LP Securities means the units of SES US LP held by TriWest IV US Fund LP following the closing of the Reorganization. frac sand means naturally-occurring sand utilized as proppant in the process of fracturing oil and natural formations as part of the well completion process. GHG means greenhouse gases. hydraulic fracturing means the process of pumping fluids, mixed with granular proppants, into a geological formation at pressures sufficient to create fractures in the hydrocarbon-bearing rock. Health, Safety and Environment Committee means the Health, Safety and Environment Committee of the Board. IFRS means International Financial Reporting Standards as issued by the International Accounting Standards Board and implemented in Canada through the Accounting Recommendations in the Chartered Professional Accountants of Canada Handbook. Indemnity Cap has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Indemnification. IPO Amount has the meaning ascribed to such term under Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. ISO means the International Organization for Standardization, a developer and publisher of international standards. Lead Underwriters means, collectively, Scotia, Morgan Stanley and BMO. Lenders means the syndicate of lenders party from time to time to the Credit Agreement. xvi

19 LTIP means the long term incentive plan of the Company to be adopted in connection with the Reorganization. Lock-Up Agreements means the lock-up agreements to be dated as of the Closing Date between the Company, the Underwriters and the Locked-Up Shareholders. Locked-Up Shareholders means each of the Shareholders immediately after the completion of the Reorganization but before the closing of the Offering (the Relevant Time ), including each of the holders at the Relevant Time of any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company (and any Common Shares that may be acquired on the redemption of Exchangeable LP Securities), as well as each of the Company s directors, officers and senior management (together with their respective associates and affiliates). Major Shareholders means, collectively, Triwest IV and its affiliates and Jim McMahon and his affiliates (including the MFT 2 Family Trust, Alberta LP and Alberta LP). Management means the management of Source. Management Fee has the meaning ascribed to such term under Corporate Structure Source. Market Price means, in respect of Options only, (a) on and after the date of this prospectus and up to and including the Closing Date, the Offering Price; and (b) for any particular day following the Closing Date, the volume weighted average trading price of the Common Shares on the TSX, or such other exchange on which the Common Shares are listed and posted for trading and on which the majority of the trading volume and value of the Common Shares occurs, for the five trading days immediately preceding the date on which the Option is granted. In the event that the Common Shares are not traded on an exchange following the Closing Date, then the Market Price shall be the fair market value of the Common Shares as determined by the Board in its sole discretion, acting reasonably and in good faith. McMahon Nomination Agreement means the nomination agreement to be entered between the Company and Jim McMahon. metric tonne or MT means one metric tonne or 1,000 kilograms (equivalent to approximately short tons or approximately 2,205 pounds). mmbbl/d means one million barrels per day. monocrystalline means consisting of a single crystal rather than multiple crystals bonded together (polycrystalline). Monocrystalline frac sand typically exhibits higher crush strength than polycrystalline sand, as these structures are more prone to breaking down under high pressures than a single crystal. Montney means the Montney formation, a stratigraphic zone in the WCSB. Morgan Stanley means Morgan Stanley Canada Limited. MSHA means the United States Mining Safety and Health Administration. Named Executive Officers or NEOs means the CEO, the CFO, and each of the Company s three other most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and CFO, who served as executive officers in the most recently completed financial year and whose total salary and bonus exceeded $150,000. NI means National Instrument General Prospectus Requirements. NI means National Instrument Standards of Disclosure for Mineral Projects. NI means National Instrument Audit Committees. NI means National Instrument Disclosure of Corporate Governance Practices. Non-TriWest Holding Corporations has the meaning ascribed to such term under Corporate Structure Source. Notes means the $130 million aggregate principal amount of 10.5% Senior Secured First Lien Notes due December 15, 2021 issued by the Note Issuers. Note Indenture means the trust indenture dated December 8, 2016, between the Note Issuers and Computershare Trust Company of Canada, as trustee and collateral agent. xvii

20 Note Issuers means Source Canada LP and Source Canada Holdings. Note Offering means the offering of the Notes which was completed on December 8, Notes Optional Redemption has the meaning ascribed to such term under Description of Indebtedness outstanding following the Offering Notes General. Offering means the public offering of Common Shares by the Company pursuant to this prospectus. Offering Price means $ OPEC means Organization of the Petroleum Exporting Countries. Option means an option to purchase a Common Share granted under the Option Plan. Option Plan means the stock option plan of the Company to be adopted in connection with the Reorganization. Over-Allotment Option means the option granted by the Company to the Underwriters to purchase from the Company, at the Offering Price, up to an additional 2,500,000 Common Shares (representing approximately 15% of the Offering), all as more particularly described herein under the heading Plan of Distribution. Participating Shareholder has the meaning ascribed to such term under Principal Shareholders Distribution and Nomination Rights Distribution Rights Agreement. Piggyback Distribution has the meaning ascribed to such term under Principal Shareholders Distribution and Nomination Rights Distribution Rights Agreement. Prepayment Note has the meaning ascribed to such term under Legal Proceedings and Regulatory Actions. Previous Credit Facility means the senior secured credit facility with Bank of Montreal, as agent, pursuant to an amended and restated credit agreement dated as of December 21, 2015, which was repaid in full in connection with the Note Offering and the credit agreement governing the Previous Credit Facility was amended and restated, creating the Credit Agreement. Prior EEPP Unit means an irrevocable right to acquire one-tenth of a class C unit in the capital of Source Canada LP granted under the Prior Employee Equity Participation Plan to certain employees of Source Canada LP. Prior EEPP Unit Holders Payment has the meaning ascribed to such term under Corporate Structure Reorganization. Prior Employee Equity Participation Plan means the employee equity participation plan of Source Canada LP dated October 16, 2013, under which, following Closing, no further awards will be granted. proppant means a sized particle mixed with fracturing fluid to hold fractures open after a hydraulic fracturing treatment. PSU means a performance share unit granted under the LTIP. QP means Qualified Person within the meaning of NI Relief has the meaning ascribed to such term under Exemption. Remaining Source Canada LP Units means the Source Canada LP limited partnership units retained by SES US Corp. following the closing of the Reorganization. Reorganization has the meaning ascribed to such term under Conventions. Restricted Group means, collectively, Source Canada LP, Source US LP, Source Energy Services Canadian Logistics LP GP Ltd., Source Energy Services Canadian Chemical LP GP Ltd., Source Energy Services US GP Ltd., Source Energy Services US Chemical GP, Inc. and Berthold with each of their respective and existing subsidiaries. RRIF means a registered retirement income fund as defined in the Tax Act. RRSP means a registered retirement savings plan as defined in the Tax Act. xviii

21 RSU means a restricted share unit granted under the LTIP. Sahara means Source s proprietary wellsite mobile proppant storage and handling system. Sand Products means Sand Products Wisconsin, LLC. Sand Royalty Loan has the meaning ascribed to such term under Description of Indebtedness Indebtedness to be repaid in connection with the Offering Sand Royalty Loan. Scotia means Scotia Capital Inc. Seller means West Michigan Sand Holdings LLC. Seller Indemnification Parties means, collectively, the Seller, SPC and VPC. Seller Indemnified Losses has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Indemnification. Seller Indemnified Parties has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Indemnification. SES Canada LP means SES Sand Holdings (Canada) LP. SES Canada 2 LP means SES Sand Holdings 2 (Canada) LP. SES Canada 3 LP means SES Sand Holdings 3 (Canada) LP. SES Canada Corp. means SES Sand Holdings (Canada) Inc. SES II Shareholder Loan has the meaning ascribed to such term under Description of Indebtedness Indebtedness to be repaid in connection with the Offering Shareholder Loans. SES III Shareholder Loans has the meaning ascribed to such term under Description of Indebtedness Indebtedness to be repaid in connection with the Offering Shareholder Loans. SES IV Shareholder Loans has the meaning ascribed to such term under Description of Indebtedness Indebtedness to be repaid in connection with the Offering Shareholder Loans. SES Shareholder Loan has the meaning ascribed to such term under Description of Indebtedness Indebtedness to be repaid in connection with the Offering Shareholder Loans. SES US Corp. means SES Sand Investments (US) Ltd. SES US LP means SES Sand Holdings (US) LP. Shareholder Loans means, collectively, the SES Shareholder Loan, the SES II Shareholder Loan, the SES III Shareholder Loans and the SES IV Shareholder Loans. Shareholders means the holders of Common Shares from time to time. Source has the meaning ascribed to such term under Conventions. Source Canada Exchange Agreement has the meaning ascribed to such term under Corporate Structure Reorganization. Source Canada Holdings means Source Energy Services Canada Holdings Ltd. Source Canada LP means Source Energy Services Canada LP. Source Canada LP Class B Units means the class B non-voting units in the capital of Source Canada LP, which are entitled to following preferred distributions: (a) 5.92% per annum up to June 30, 2016; (b) 6.82% per annum from July 1, 2016 to June 30, 2017; (c) 7.7% per annum from July 1, 2017 to June 30, 2018; and (d) 8.59% per annum from July 1, 2018 and thereafter. Source Canada LP GP means Source Energy Services Canada LP GP Ltd. Source GP Holding Company means SES Sand Holdings GP Ltd. xix

22 Source Indemnified Losses has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Indemnification. Source Indemnified Parties has the meaning ascribed to such term under Business Blair Facility Acquisition Blair Purchase Agreement Indemnification. Source US LP means Source Energy Services US LP. Source US LP GP means Source Energy Services US II LP GP Ltd. SPC means Sand Products Corporation. sphericity means a measure of how well an object is formed in a shape where all points are equidistant from the center. The more spherical a proppant, the less likely it will be to restrict the flow of hydrocarbons. spring breakup means the spring thaw that makes the ground less stable and less capable of supporting heavy weighted equipment. Sumner APEX Report means the technical report in respect of the Sumner Facility prepared by APEX titled Technical Report, Indicated and Inferred Resource Estimate for Source Energy Services Silica (Frac) Sand Deposit in Wisconsin, United States dated December 16, Sumner Facility has the meaning ascribed to such term under Prospectus Summary Business. Tax Act means the Income Tax Act (Canada), R.S.C. 1985, c-1 (5 th Supp.), as amended, including the regulations promulgated thereunder. Tax Proposals has the meaning ascribed to such term under Eligibility for Investment. TFSA means a tax-free savings account as defined in the Tax Act. TriWest Capital means TriWest Capital Partners IV (2011) Inc. TriWest IV means, collectively, TriWest IV Canada Fund LP, TriWest IV US Fund LP, SES Canada LP, SES Canada 2 LP and SES Canada 3 LP. TriWest IV Canada Fund LP means TriWest Capital Partners IV, L.P. TriWest IV US Fund LP means TriWest Capital Partners IV (US), L.P. TriWest Nomination Agreement means the nomination agreement to be entered between the Company and TriWest IV. TSX means the Toronto Stock Exchange. U.S. orunited States means the United States of America, its territories and possessions, any state of the United States and the District of Columbia. U. S. Securities Act means the United States Securities Act of 1933, as amended. U. S. Tax Code means the United States Internal Revenue Code of 1986, as amended. Underwriters means, collectively, the Lead Underwriters, CIBC World Markets Inc., Goldman Sachs Canada Inc., Raymond James Ltd., RBC Dominion Securities Inc., Canaccord Genuity Corp., AltaCorp Capital Inc., Cowen and Company, LLC, GMP Securities L.P. and Peters & Co. Limited. Underwriting Agreement means the underwriting agreement dated April 6, 2017 between the Company and the Underwriters. Underwriters Commission means the cash commission to be received by the Underwriters, equal to 5.5% of the gross proceeds of the Offering and payable to the Underwriters pursuant to the Underwriting Agreement. VPC means Verplank Dock Co. xx

23 WCSB means the Western Canadian Sedimentary Basin. Wembley Terminal means Source s unit train capable terminal located in Wembley, Alberta. Weyerhaeuser Facility has the meaning ascribed to such term under Prospectus Summary Business. Wood Mackenzie has the meaning ascribed to such term under Market Share, Industry and Other Statistical Information. xxi

24 PROSPECTUS SUMMARY The following is a summary of the principal features of the Offering and is qualified by and should be read together with the more detailed information, resources and financial data and statements contained elsewhere in this prospectus. Capitalized terms used herein shall have the meaning ascribed thereto under the heading Glossary. Business Source is a fully integrated producer, supplier and distributor of high-quality Northern White frac sand, which is a preferred proppant used to enhance hydrocarbon recovery in the hydraulic fracturing of oil and natural gas wells. Source sells frac sand, primarily to customers operating in the WCSB through its strategically located terminal network, which Source believes is the largest of its kind in the WCSB. Source s fully integrated logistics platform enables it to transport high volumes of frac sand from its facilities in Wisconsin to its customers in the WCSB such that during 2016, Source sold substantially all of its product in-basin and over 50% of its product directly at its customers wellsites. Source believes that its terminal network, along with its focus on logistics and ability to efficiently deliver sand directly to the wellsite, attractively position Source as a leading player in the WCSB with the ability to reliably deliver high volumes of frac sand to its customers in a cost-effective manner. Source owns and operates seven strategically located transload terminals in the WCSB with total storage capacity of over 90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned expansions in 2017 and 2018) and annual throughput capacity of over 3.3 million metric tonnes per year (which Source expects will increase to over 4.7 million metric tonnes following planned expansions in 2017 and 2018), all of which are serviced by CN, which is the only Class I railway that effectively services the Montney, Duvernay and Deep Basin, which are three of the most active oil and natural gas development regions in the WCSB. Source believes that having a network of terminals in close proximity to key producing regions is a critical element of its customer service strategy, which allows it to rapidly respond to customer demand and helps to ensure reliable and timely delivery of product. Source owns and operates a Northern White frac sand mine and related closed-loop wet processing plant, which includes three washing circuits, located in east-central Barron County near the town of Sumner, Wisconsin (the Sumner Facility ) and a dry processing plant, storage and loadout facility located in Weyerhaeuser, Wisconsin (the Weyerhaeuser Facility ). In addition, Source expects to complete the Blair Facility Acquisition in connection with or immediately following Closing, which includes a Northern White frac sand mine with associated processing and unit train capable rail loading facilities. In the event the Blair Facility Acquisition is completed, Source would have an expected total annual production capacity of over three million metric tonnes. Both the Weyerhaeuser Facility and the Blair Facility are capable of loading and shipping unit trains, allowing for significantly more efficient transportation of frac sand to Source s terminals in the WCSB. In addition to its transload terminal network, Source has developed Sahara, a proprietary wellsite mobile sand storage and handling system. Sahara offers significant competitive advantages over many traditional wellsite storage systems, such as decreased unloading times for trucks delivering proppant to the wellsite, reduced physical footprint, reduced proppant damage and increased ability to store multiple types of proppant. Despite Sahara s small physical footprint, the system offers a storage capacity of approximately 1,800 metric tonnes, which Management believes is greater than that of many competitor systems, and can be loaded significantly faster than pneumatic systems. See Business. Competitive Strengths Source believes that the following competitive strengths help it to execute its business strategies: Fully Integrated Network Positioned to Capture Value Throughout the Proppant Supply Chain. Source believes it is a leading fully integrated supplier and distributer of frac sand in the WCSB providing an end-to-end solution through its processing facilities, rail assets, leading terminal network and last mile logistics capabilities. Source s full service approach allows customers to rely on its logistics capabilities to increase the reliability and timeliness of delivery of frac sand as part of their well completion programs. -1-

25 Intrinsic Logistics Advantages Created Through First Mover Advantage. Source s seven Canadian terminals, strategically located within key producing regions in the WCSB, provide a competitive and first mover advantage through extensive coverage and throughput capacity, enabling cost-effective delivery of frac sand directly to customers wellsites. With more than 90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned expansions in 2017 and 2018) of storage capacity, which Source believes represents approximately four times the amount of its largest competitor, Source is able to meet demand peaks from its customer base and manage supply backlog associated with well completion delays. Direct Access to High-Quality Northern White Sand Supply through Strategically Located Mining and Processing Facilities. The Sumner Facility and the Blair Facility are each situated on the CN and provide direct rail access to the WCSB, including full unit train loading capability at the Weyerhaeuser Facility. With all of Source s mining and processing capacity situated on the CN, Source is able to create optimal origin-destination pairs with its expansive WCSB terminal network, which is also situated on the CN. Trusted and Embedded Partner with Its Customers. Source is a trusted partner of, and has developed significant relationships with, leading exploration and production companies and pressure pumpers in Canada. Source believes customers value Source s substantial scale, extensive logistics network and wellsite solutions to meet their frac sand demand for their well completion programs. Strong Balance Sheet and Ability to Capitalize on Opportunities to Reinforce Leading Position in the WCSB. Source believes that, following the Offering, Source will have a strong balance sheet and ample liquidity to pursue organic and external growth initiatives to build on its leading position in the WCSB. Experienced Management Team with a Track Record of Delivering Results. Source s experienced Management has over 75 years of collective relevant experience, extensive industry knowledge and a proven track record of operational success. See Business Competitive Strengths. Business Strategies Source s principal business objective is to be a highly efficient and reliable supplier of delivered frac sand in the WCSB. Key elements of Source s strategy include: Capitalize on Trends in Increased Frac Sand Intensity. Source believes that its leading terminal network, which Source believes is the largest of its kind in the WCSB, along with its focus on logistics and ability to efficiently deliver sand directly to the wellsite, attractively position Source to capitalize on trends in increased frac sand intensity. Exploration and production companies continue to increase well completion proppant intensities such that in the Montney and Duvernay, for instance, proppant used per well has increased by approximately 91% and 86%, respectively, from 2013 to the first quarter of 2016 according to the Well Completions & Frac Database. Increase Leading Market Share Position in Growing WCSB Market. Source intends to continue to position itself as the leading producer, supplier and distributor of high-quality Northern White frac sand into the WCSB. Source intends to grow its WCSB position by identifying and executing on organic and external growth opportunities. Focus on Offering Superior Logistics and Terminal Flexibility. Source believes it offers a superior logistics solution to customers by providing substantially all of its product in-basin and over 50% of product at the wellsite. Logistical capabilities have become an important differentiating factor for frac sand customers, who increasingly seek convenient in-basin and/or at-the-wellsite proppant delivery capability from suppliers. Build-Out In-Basin Terminal Network. Source intends to continue to invest in terminals, storage, and rail infrastructure to meet the growing proppant demand needs of customers. When evaluating new terminal locations, Source carefully considers their proximity to exploration and production companies drilling and completion activities, as well as the anticipated frac sand intensity used in the development of these oil and natural gas resources. Recently, Source has identified and entered into agreements to secure three additional locations that are suitable for developing into unit train capable terminals. The development of these terminals will allow Source to increase the amount of sand sold to customers operating in the Montney and Duvernay. -2-

26 Expand Sahara Fleet and Increase Source s Wellsite Presence. Source believes that its mine-to-wellsite delivery service and proprietary wellsite mobile sand storage and handling system, Sahara, offers an attractive value proposition to upstream customers. The increasing intensity of proppant completion designs and the remote locations of WCSB wellsites has increased the need for proppant inventory management and wellsite solutions to meet customer demand needs. Match Production Capacity with Demand to Control Supply Chain. Source believes that reliable and timely deliverability of product is a key competitive advantage. Source is able to ensure reliable and timely deliverability via a fully vertically-integrated proppant supply chain. Maintain Financial Strength and Flexibility. Source plans to pursue a disciplined financial policy to maintain financial strength and flexibility to enable the Company to actively evaluate new growth opportunities as they arise. Source believes that, following the Offering, its cash on hand, borrowing base capacity and ability to access debt and equity capital markets will provide the financial flexibility necessary to achieve its growth objectives while maintaining a strong balance sheet. See Business Business Strategies. Proppant Market Trends Demand for frac sand and other proppants is primarily driven by the use of hydraulic fracturing when completing oil and natural gas wells. In particular, well completion technologies, which employ horizontal drilling and multi-stage fracturing (where multiple delivery points are utilized to increase the fractures created within a single wellbore), have significantly increased the demand for proppant in recent years. These completion techniques have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. As a result, according to Baker Hughes Incorporated North American Rig Count, the percentage of active Canadian drilling rigs used to drill horizontal wells, which require significantly greater volumes of proppant than vertical wells, increased from 71% in 2011 to 83% in 2014, and year-to-date in 2017, 85% of active rigs were drilling horizontal wells on average. Within the WCSB, the majority of recent drilling activity has focused on developing and producing hydrocarbons from the Montney and Duvernay formations as well as various formations within the Deep Basin, such as the Wilrich and Falher. Development of these formations has been driven by technological advancements in horizontal drilling, fracturing and stimulation, including increased length of horizontal wellbores and well completion intensity (additional fracturing per well and increased proppant usage per stage). These liquids-rich or wet gas plays are some of North America s most prolific and are anticipated to continue to see significant development and production growth. Source estimates, based on data from geoscout and the Well Completions & Frac Database, that the WCSB proppant market amounted to approximately 2.4 million metric tonnes in Market demand is estimated to have dropped by approximately 24% in 2016 compared to 2015 due to the downturn in commodity prices since late 2014, which led to a corresponding decline in oil and natural gas drilling and completion activity. Based on estimated wells drilled and 2016 proppant intensity per horizontal well, proppant demand in 2017 is expected to increase relative to See Industry Overview Proppant Market Trends. -3-

27 Selected Historical Financial Information The majority of Source s revenue is derived from mining, processing and providing a full frac sand delivery solution to customers in-basin or at the wellsite. In addition, Source generates revenue from related services including terminal services, which involve transloading services, and wellsite solutions, which include wellsite storage and logistics coordination at the wellsite. Source commenced material frac sand sales after completion of the Weyerhaeuser Facility in June 2014, increasing sales volumes to approximately 280,000 metric tonnes in the fourth quarter of 2014 and achieving an Adjusted Gross Margin of $78 per metric tonne in the same period. As indicated below under Operating Data, Source maintained its frac sand sales volumes through the recent downturn in commodity prices on an annual basis and has been experiencing the effects of a recovery of frac sand sales in the fourth quarter of Activity levels continue to be strong in the early part of In the first quarter of 2017, Source sold approximately 419,000 metric tonnes of frac sand compared to approximately 260,000 metric tonnes for the same period in The following table sets out selected historical financial information as at and for the periods indicated. The selected historical financial information below other than Adjusted Gross Margin and Adjusted EBITDA is extracted or derived from Source s audited financial statements. Investors should read the selected historical financial information below in conjunction with Source s management s discussion and analysis, Source s audited financial statements and the accompanying notes included in this prospectus under Appendix FS Financial Statements and Management s Discussion and Analysis. (in $ thousands unless otherwise indicated) Year Ended December 31, Sales: Sand revenue $ 112,962 $ 139,574 $ 118,755 Wellsite solutions revenue $ 21,261 $ 6,208 $ 11,782 Terminal services revenue $ 4,976 $ 7,353 $ 15,969 $ 139,199 $ 153,135 $ 146,506 Gross Margin $ 7,903 $ 29,638 $ 46,391 Adjusted Gross Margin $ 15,942 $ 36,771 $ 51,002 Net Income (Loss) ($ 43,402) ($ 9,766) $ 17,035 Adjusted EBITDA ($ 7,526) $ 22,385 $ 32,802 Statements of Cash Flow Data Cash provided by operating activities ($ 9,453) $ 23,624 ($ 7,882) Cash used in investing activities ($ 10,470) ($ 35,461) ($ 37,621) Cash provided by financing activities $ 20,122 $ 10,970 $ 46,167 Other Financial Data Capital expenditures $ 6,405 $ 38,901 $ 45,390 Long term debt (including current portion) (1) $ 124,351 $ 83,114 $ 63,797 Total assets (1) $ 219,406 $ 231,112 $ 194,788 Operating Data Sand sales volumes (metric tonnes) 832, , ,213 Sand Revenue / metric tonne ($/MT) $ 136 $ 170 $ 163 Gross Margin / metric tonne ($/MT) $ 10 $ 36 $ 64 Adjusted Gross Margin / metric tonne ($/MT) $ 19 $ 45 $ 70 Notes: (1) At year end. See Selected Historical Financial Information for additional information and for a reconciliation of EBITDA and Adjusted EBITDA to Net Income (loss) and of Adjusted Gross Margin to Gross Margin. -4-

28 Issuer: Offering: Offering Price: Shares Offered: THE OFFERING Source Energy Services Ltd. 16,666,667 Common Shares. See Description of Share Capital for more information regarding the Common Shares. $10.50 per Common Share. 16,666,667 Common Shares will be distributed under the Offering. If the Over- Allotment Option is exercised in full, the Company will sell an additional 2,500,000 Common Shares (representing approximately 15% of the Offering). See Plan of Distribution. Gross Proceeds: $175,000,004 from the Offering (or $201,250,004 from the Offering if the Over-Allotment Option is exercised in full). See Plan of Distribution. Common Shares Outstanding: Prior to Completion of the Offering After Completion of the Offering (1) After Completion of the Offering and the Over-Allotment Option (1) Common Shares (fully-diluted basis) 25,145,772 51,616,869 54,116,869 Retained Interest: Note: (1) Assumes the issuance of 1,005,831 Common Shares pursuant to the Common Shares RTR Payments (assuming no applicable withholdings) to satisfy the aggregate Cash RTR Payments that will become owing under the Note Indenture at Closing, 3,691,942 Common Shares to the Class B Founder and 1,520,139 Common Shares to the Class B Family Trust each concurrently with Closing in connection with the Reorganization and 3,586,518 Common Shares to the holders of the Shareholder Loans concurrently with Closing to repay such loans. See Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. The following table sets out the shareholdings of the Major Shareholders and those Shareholders that, to the knowledge of Source, beneficially own, directly or indirectly, or exercise control or direction over, any class of voting securities carrying in aggregate 10% or more of the votes attached to such issued and outstanding voting securities, both before and after giving effect to the Offering: Shareholder Number and Percentage of Common Shares Upon the Reorganization (1) Number and Percentage of Common Shares After Giving Effect to the Offering (1)(2) Number and Percentage of Common Shares After Giving Effect to the Offering and the Over- Allotment Option (1)(2)(3) TriWest IV 13,326,978 (43.88%) 16,677,346 (32.30%) 16,677,346 (30.81%) Jim McMahon (4) 8,007,759 (26.37%) 8,240,504 (15.96%) 8,240,504 (15.22%) Brad Thomson (5) 3,249,901 (10.70%) 3,251,604 (6.30%) 3,251,604 (6.01%) Notes: (1) On a fully-diluted basis, at the applicable date. (2) Assumes the issuance of 1,005,831 Common Shares pursuant to the Common Shares RTR Payments (assuming no applicable withholdings) to satisfy the aggregate Cash RTR Payments that will become owing under the Note Indenture at Closing, 3,691,942 Common Shares to the Class B Founder and 1,520,139 Common Shares to the Class B Family Trust each concurrently with Closing in connection with the Reorganization and 3,586,518 Common Shares to the holders of the Shareholder Loans concurrently with Closing to repay such loans. See Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. (3) Assumes exercise of the Over-Allotment Option in full. (4) Includes Common Shares held by Alberta LP and Alberta LP. (5) Includes Common Shares held by Sand Ventures LP, Alberta LP and by Alberta LP, a limited partnership owned by Mr. Thomson s spouse. -5-

29 Closing: Use of Proceeds: Lock-Up Arrangements: On or about April 13, 2017, subject to postponement as the Underwriters and the Company may agree, but not later than May 11, See Plan of Distribution. The Company expects to receive net proceeds from the Offering of approximately $161,875,004 after deducting the Underwriters Commission applicable to the Offering and the expenses of the Offering, estimated to be approximately $3,500,000. The Company will receive aggregate net proceeds from the Offering of $186,681,254 if the Over-Allotment option is exercised in full. The Company intends to use the net proceeds from the Offering to pay for the purchase price related to the Blair Facility Acquisition and associated transaction costs, exercise and pay for the Blair Option Exercise, repay the Sand Royalty Loan, exercise and pay for the Notes Optional Redemption, pay the Class B Payment, pay the Prior EEPP Unit Holders Payment, fund Source s ongoing capital expenditure program and for general corporate purposes. See Use of Proceeds. The Company has agreed that it will not, directly or indirectly, without the prior written consent of the Lead Underwriters, on behalf of all of the Underwriters, such consent not to be unreasonably withheld, sell, offer to sell, file in any jurisdiction any prospectus or registration statement, issue, grant any option, warrant or other right for the sale or issuance of, or otherwise lend, transfer, assign or dispose of, in a public offering or by way of private placement or otherwise (or agree to any of the foregoing or publicly announce any intention to do so), any Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, for a period commencing on the date of filing of this prospectus and ending 180 days following the Closing, subject to certain exceptions. In addition, each of the Locked-Up Shareholders will enter into Lock-Up Agreements under which they will agree not to, directly or indirectly, for a period commencing on the date of filing of this prospectus and ending on the date that is 180 days following Closing, subject to certain exceptions, without the prior written consent of the Lead Underwriters, on behalf of the Underwriters, such consent not to be unreasonably withheld, (a) file in any jurisdiction any prospectus or registration statement, or exercise any demand or registration rights, with respect to the Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company; (b) sell, offer to sell, grant any option, right or warrant for the sale of, or otherwise lend, transfer or dispose of any Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, owned by such holder, (c) make any short sale, engage in any hedging transaction, or enter into any swap, monetization, securitization or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of the Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, owned by such holder, (d) secure or pledge any Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, or (e) agree to or announce any intention to do any of the foregoing. -6-

30 Dividends: Eligibility for Investment: Risk Factors: Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common Shares RTR Payment will be deemed to have entered into a lock-up agreement the terms of which are substantially similar to those of the Lock-Up Agreements. See Escrowed Securities and Securities Subject to Contractual Restriction on Transfer and Plan of Distribution Lock-Up Arrangements. The Company does not currently anticipate paying any dividends on the Common Shares. The Company currently intends to use its future earnings and other cash resources for the operation and development of its business, but may declare and pay dividends in the future as operational circumstances permit. See Dividend Policy. On the Closing Date, provided that the Common Shares are listed on a designated stock exchange (which includes the TSX), and subject to the more detailed discussion under Eligibility for Investment, the Common Shares will on that date be a qualified investment under the Tax Act for Deferred Plans. An investment in the Common Shares is speculative and involves a high degree of risk that should be considered by potential investors. Source s business is subject to the risks normally encountered in the frac sand industry. These risks include: changes in the price and availability of transportation; inability to obtain necessary production equipment or replacement parts; inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change; unanticipated ground, grade or water conditions; inability to acquire or maintain necessary permits or mining or water rights; late delivery of supplies; changes in the price and availability of natural gas or electricity that Source uses as fuel sources for its frac sand plants and equipment; technical difficulties or failures; cave-ins or similar pit wall failures; environmental hazards, such as unauthorized spills, releases and discharges of wastes, tank ruptures and emissions of unpermitted levels of pollutants; industrial accidents; changes in laws and regulations (or the interpretation thereof) related to the mining and oil and natural gas industries, silica dust exposure or the environment; inability of Source s customers or distribution partners to take delivery; reduction in the amount of water available for processing; fires, explosions or other accidents; and facility shutdowns in response to environmental regulatory actions. Risks related to the Blair Facility Acquisition include: the possible failure to realize anticipated benefits; possible failure to complete the Blair Facility Acquisition; potential undisclosed liabilities; and potential significant transaction and related costs. -7-

31 Risks related to the Offering include: the potential absence of a liquid public market; the volatility in the price of Common Shares; the discretion in the use of proceeds; the risk of no return on an investment in Common Shares; the possible future dilution of the Common Shares; the effect of future sales of Common Shares by Shareholders on the market price of the Common Shares; the limited ability of residents of the United States to enforce civil remedies; the absence of plans to pay dividends; changes to the Company s dividend policy; and the potential inaccuracy of forwardlooking statements contained in this prospectus. These risk factors and those discussed in greater detail in the section entitled Risk Factors are not an exhaustive list of all risks associated with an investment in the Common Shares and should be read in conjunction with the information set forth elsewhere in this prospectus. See Market for Securities and Risk Factors. -8-

32 CORPORATE STRUCTURE Incorporation and Office The Company was formed on February 7, 2017 by articles of incorporation under the ABCA. The head office of the Company is located at 100, th Avenue SE, Calgary, Alberta, T2G 0Y4 and the registered and records office of the Company is located at 4300 Bankers Hall West, rd Street S.W., Calgary, Alberta T2P 5C5. Source Source Canada LP and Source US LP are each privately owned limited partnerships organized under the laws of the Province of Alberta and governed by limited partnership agreements each dated October 7, Source Canada LP GP is the general partner of Source Canada LP, and Source US LP GP is the general partner of Source US LP. Source Canada LP GP and Source US LP GP are both owned by Source GP Holding Company which is indirectly owned and controlled by senior principals of TriWest Capital. The limited partnership units of Source Canada LP are owned (other than as to a nominal interest held by Source Canada LP GP as general partner) by: (a) SES Canada LP, SES Canada 2 LP, SES Canada 3 LP and SES US Corp.; (b) investment vehicles owned, directly and indirectly, by certain members of Management (by way of Alberta LP, Alberta LP and Sand Ventures LP with respect to Brad Thomson and by way of Alberta LP and Source Energy Services New Partners Investment LP in respect of Derren Newell, Scott Melbourn and Joe Jackson) and Jim McMahon (by way of Alberta LP, Alberta LP and MFT 2 Family Trust), a current director and unitholder of Source (being Alberta incorporated special purpose vehicle corporations, the Non-TriWest Holding Corporations ); (c) a founding owner of Source (the Class B Founder ); and (d) a family trust (the Class B Family Trust ). The limited partnership units of Source US LP are owned (other than as to a nominal interest held by Source US LP GP as general partner) by: (a) SES US LP and SES Canada Corp.; (b) the Non-TriWest Holding Corporations; (c) the MFT 2 Family Trust; and (d) the Class B Family Trust. The limited partnership agreements of Source Canada LP and Source US LP governed the formation of such limited partnerships, the relationships between their respective partners, the authorized and issued capital of the limited partnerships, the rights to allocations and distributions of income and cash among the classes of units, the issuance of units, the restrictions on transfer of units, and generally the rights, obligations and transactions among the applicable general partner and its limited partners and also included provisions with respect to the composition of the board of directors of Source Canada LP GP and Source US LP GP, respectively, including that each such board of directors would be comprised of two nominees of TriWest IV, the Chief Executive Officer of Source Canada LP GP or Source US LP GP, as the case may be, and Jim McMahon (for so long as he holds units of the applicable limited partnership). These limited partnership agreements will be amended in connection with the Reorganization. See Corporate Structure Reorganization. Source Canada LP and Source US LP are each parties to a management assistance agreement with TriWest Capital and Jim McMahon dated October 15, 2013, providing for the provision of management and advisory services. Pursuant to such agreements, Source Canada LP and Source US LP, as the case may be, are required to pay a quarterly fee equal to 0.5% of the invested capital managed by the counterparties (the Management Fee ). The management assistance agreements and corresponding Management Fee will be terminated in connection with the Reorganization. See Corporate Structure Reorganization. Reorganization The purpose of the Reorganization is to transfer to the Company the business that has been conducted by Source prior to the Reorganization. Subject to the exceptions described below, the persons who directly or indirectly held equity interests in Source immediately prior to the Reorganization will become Shareholders upon the closing of the Reorganization. The Reorganization will initially result in SES US Corp. (an entity not owned by the Company or its wholly-owned subsidiaries) holding a minor interest in Source Canada LP, the entity that holds most of Source s Canadian business. That interest will be acquired by Source following the Closing, as and when determined by TriWest IV US Fund LP pursuant to the Source Canada Exchange Agreement described below. See paragraphs (i)(ii) for a description of the manner in which distributions to SES US Corp. will be restricted pending the acquisition of those interests by the Company. -9-

33 The principal steps of the Reorganization will be effected prior to and concurrently with the Closing and will include the following: (a) the shareholders of the Non-TriWest Holding Corporations will each enter into exchange agreements with the Company to transfer their respective shares in the Non-TriWest Holding Corporations to the Company in exchange for Common Shares; (b) SES Canada LP will enter into an exchange agreement with the Company to transfer its units in Source Canada LP, its shares of SES Canada Corp. and its shares of Berthold to the Company in exchange for Common Shares; (c) SES Canada 2 LP and SES Canada 3 LP will each enter into an exchange agreement with the Company to transfer their respective units in Source Canada LP to the Company in exchange for Common Shares; (d) the Class B Founder and the Class B Family Trust will each enter into exchange agreements with the Company to transfer their respective limited partnership units in Source Canada LP to the Company in exchange for an aggregate of 5,212,081 Common Shares and an aggregate cash payment in the amount of approximately $17,250,000 (the Class B Payment ), which payment will include certain outstanding preferred distributions on the Source Canada LP Class B Units; (e) Source GP Holding Company will sell its shares in Source Canada LP GP and Source US LP GP to the Company in exchange for nominal cash consideration; (f) SES US LP will sell its units in Source US LP and its shares of Berthold to the Company for Common Shares which will subsequently be distributed to TriWest IV US Fund LP; (g) the MFT 2 Family Trust and the Class B Family Trust will each enter into an exchange agreement with the Company to transfer their respective units in Source US LP to the Company in exchange for Common Shares; (h) TriWest IV US Fund LP will subscribe for nominal consideration for Class B Shares corresponding to the number of Common Shares it will receive on the redemption of its Exchangeable LP Securities pursuant to the Source Canada Exchange Agreement described below; (i) Source Canada LP, the Company, TriWest IV US Fund LP, SES Sand Holdings (US) GP LLC (the general partner of SES US LP), Source Canada LP GP, SES US LP and SES US Corp. will enter into an exchange agreement (the Source Canada Exchange Agreement ) to provide: (i) for the redemption of the units of SES US LP for, through a series of steps, Common Shares, and the concurrent surrender of a corresponding number of Class B Shares, as and when determined by TriWest IV US Fund LP; and (ii) that any cash distributed by Source Canada LP to SES US Corp. will be directed to the Company as a non-interest bearing loan (which may only be repaid after all units of SES US LP have been exchanged for Common Shares and SES US Corp. has thereby become an indirect wholly-owned subsidiary of the Company) except to the extent of (A) any cash taxes payable by SES US Corp. in connection with income allocated by Source Canada LP to SES US Corp. or (B) any distributions that TriWest IV US Fund LP would have received from the Company had TriWest IV US Fund LP exchanged its units of SES US LP for Common Shares prior to such distribution by the Company; (j) the Company will subscribe for one unit of SES US LP; (k) the remaining shareholders of Berthold will sell their shares in Berthold to the Company for Common Shares; (l) the limited partnership agreement of Source Canada LP will be amended to remove the provisions related to the composition of the board of directors of Source Canada LP GP and Source US LP GP and certain other administrative amendments; and (m) the limited partnership agreement of Source US LP will be amended to remove the provisions related to the composition of the board of directors of Source Canada LP GP and Source US LP GP and certain other administrative amendments. -10-

34 Following the Closing, it is expected that the Non-TriWest Holding Corporations will be wound-up and dissolved resulting in the Company owning all of the Source Canada LP units and Source US LP units currently owned by the Non-TriWest Holding Corporations. The summary of certain provisions of the Source Canada Exchange Agreement provided above does not purport to be complete and is qualified in its entirety by reference to the provisions of the Source Canada Exchange Agreement, a copy of which will be provided under the Company s profile at The Reorganization may be considered a Change of Control pursuant to the Prior Employee Equity Participation Plan resulting in the Prior EEPP Units becoming exercisable. Accordingly, the Company, Source Canada LP and each holder of Prior EEPP Units are anticipated to enter into an agreement under which each holder of Prior EEPP Units will surrender his or her Prior EEPP Units to Source Canada LP in connection with the Reorganization for a combination of cash (being an aggregate of $409,894) (the Prior EEPP Unit Holders Payment ) and Common Shares (being an aggregate of 52,772 Common Shares). In consideration for a commensurate amount of class C units in the capital of Source Canada LP being issued to the Company, the Company will pay the Prior EEPP Unit Holders Payment and issue such Common Shares to the holders of Prior EEPP Units to satisfy the aforementioned exercise of the Prior EEPP Units in connection with the Reorganization. Following the Reorganization, no Prior EEPP Units are expected to be outstanding. See Use of Proceeds and Executive Compensation Share-based Compensation Arrangements Prior Employee Equity Participation Plan. The Company will attempt to sell Berthold or its assets following the Closing. Further, in connection with the Reorganization, the management assistance agreements and corresponding obligations of Source to pay Management Fees will be terminated, and the Company will enter into the Distribution Rights Agreement, the TriWest Nomination Agreement and the McMahon Nomination Agreement. See Principal Shareholders. -11-

35 The following organizational chart sets out Source s organizational structure after giving effect to the Reorganization, the Offering and the Blair Facility Acquisition. The only material difference in such organizational chart from the corporate structure of Source prior to the Reorganization is the inclusion of the Company as the ultimate parent company. Shareholders including the Public TriWest IV US Fund LP (Alberta) Class B Shares LP Source Energy Services Ltd. (Alberta) SES US LP (Alberta) LP LP SES US Corp (Alberta) Source Canada LP GP (Alberta) Source US LP GP (Alberta) LP Berthold (Delaware) LP (1) GP GP Source Canada LP (Alberta) Source US LP (Alberta) CSP Property Holdings LLC (Wisconsin) Sand Products (Michigan) Limited Partnerships Corporations Note: (1) SES US Corp., an entity not owned by the Company or its wholly-owned subsidiaries, holds a minor interest. See Reorganization steps (i)(ii) and (j) above for additional detail. (2) The entities forming part of the Restricted Group and the entities whose activities are included in Source s combined financial statements in Appendix FS Financial statements and Management s, Discussion and Analysis which are not depicted above have not been depicted as these entities are not material subsidiaries of Source. -12-

36 INDUSTRY OVERVIEW The oil and natural gas proppant industry is comprised of businesses involved in the mining or manufacturing, distribution and sale of the propping agents used in hydraulic fracturing, the most widely used method for stimulating increased production from lower permeability oil and natural gas reservoirs. The process consists of pumping fluids, mixed with granular proppants, into geologic formations at pressures sufficient to create fractures in the hydrocarbonbearing rock. Proppant-filled fractures create conductive channels through which the hydrocarbons can flow more freely from the formation into the wellbore and then to the surface. Types of Proppant The term proppant, as used in the oil and natural gas industry, encompasses several different types of sand and sand-like materials. The materials used as proppant in hydraulic fracturing processes come in a variety of shapes and sizes, each with varying attributes that are measured to standards set by the API. Proppant is comprised of either naturally-occurring sands, resin-coated natural sands, or manufactured artificial sands (ceramics). Naturally-occurring silica frac sand is typically sourced from sandstone deposits and once washed, screened, and dried, it is sold by graded sizes. Resin-coated sand is made from silica sand that has been coated with resin. Ceramic proppants are manufactured proppants made from polymeric beads; this type of proppant is technologically advanced relative to naturally-occurring sands, but is generally much more expensive. The key features that determine a proppant s quality are: (a) crush resistance; (b) sphericity (roundness); and (c) resistance to acids. These properties enable proppants to keep fractures open and allow hydrocarbons to flow more easily through the largest possible space in harsh environments that exist at reservoir depths. Where a proppant possesses these three qualities, the proppant facilitates the flow of hydrocarbons to the well bore. This is referred to as conductivity and proppants with higher conductivity typically yield higher production rates. Proppants that feature higher levels of crush resistance, sphericity, and conductivity command superior pricing. Generally speaking, frac sand is the low cost form of proppant. Resin-coated sand and ceramic proppants may cost significantly more and as a result the North American proppant market continues to be dominated by naturally-occurring frac sand. Frac sand is generally mined from the surface or underground, and then cleaned and sorted into consistent sizes or grades referred to as mesh sizes. Frac sand can generally be delineated into three main naturally-occurring types: (a) Northern White frac sand; (b) Brady Brown frac sand; and (c) Canadian domestic frac sand. Northern White frac sand is a specific type of white sand mined primarily in Wisconsin and generally considered to be of higher quality than Brady Brown and Canadian domestic frac sand for use as a proppant due to its crush strength, sphericity and monocrystalline grain structure. Brady Brown frac sand has lower crush strength due to its polycrystalline structure, and Canadian domestic frac sand has further reduced crush strength due to its angularity and polycrystalline structure. The API has identified thresholds that various physical characteristics of proppants should pass, and Northern White frac sand consistently meets these thresholds. The superior physical characteristics of Northern White frac sand and the limited availability of Canadian domestic frac sand that meets the API specifications for use as a proppant, make Northern White frac sand a preferred proppant for wells at greater depths, higher pressures or higher production levels, such as the wells in the Montney, Duvernay and Deep Basin. Source believes that the demand for natural frac sand will increase with the overall activity in the WCSB as well as from the increase in well completion intensity (i.e., longer horizontal wells, increased number of stages per horizontal well and increased proppant load per stage). Frac Sand Extraction, Processing and Distribution Frac sand is a naturally-occurring mineral that is mined and processed. While the specific extraction method utilized depends primarily on the geologic setting, most frac sand is mined using conventional open-pit bench extraction methods. The composition, depth and chemical purity of the sand also dictate the processing method and equipment utilized. After extraction, the frac sand is washed with water to remove fine impurities such as clay and other organic particles. The final steps in the production process involve the drying and sorting of the frac sand according to mesh sizes required to meet API specifications. Frac sand is typically sold at the processing facility, in-basin at a terminal or directly at a wellsite. For sand sold at the processing facility, the purchaser is responsible for the transportation of the frac sand. For in-basin sales of frac -13-

37 sand, the supplier is typically responsible for transporting the sand to either the terminal or the wellsite, which requires an efficient and integrated logistics network for low cost delivery. For high volumes of frac sand, transportation costs often represent a significant portion of the customer s overall cost, which highlights the importance of efficient bulk shipping. Source believes that the majority of the delivered cost of Northern White frac sand delivered in-basin in the WCSB from Wisconsin is related to logistics and transportation with a less significant portion being attributed to the mining and processing of the sand. As a result, efficient and integrated logistics capabilities, including direct rail access from the processing facility, unit train capable facilities, scale and location of in-basin terminals and efficiency of logistics operations are critical to a supplier s ability to deliver sand at a competitive cost to its customers and capture margins. Cost of Northern White Frac Sand Delivered to the WCSB has Many Components Rail is the predominant method of delivery of Northern White frac sand into the WCSB. For this reason, direct access to Class I rail lines, and particularly the CN network, is an important differentiator in the industry. Rail shipment can occur via manifest trains or unit trains. Manifest trains, also called mixed-freight trains, are considered less efficient because these trains switch cars at various intermediate junctions in transit and routinely encounter delays. By contrast, unit trains, which typically consist of 100 or more cars of one product, travel directly from origin to destination at a higher speed than manifest traffic. The ability to ship via unit train, which can transport more than 10,000 MTs of frac sand, and simultaneously manage multiple unit trains at the production facility, facilitates reliable and cost-effective delivery of high volumes of sand to in-basin terminals, and ultimately the wellsite. From the in-basin terminals, frac sand is typically delivered to the wellsite via trucking where it is then delivered to a wellsite storage unit. In-basin terminals and wellsite delivery and storage of frac sand are becoming increasingly important to meet the needs of customers such as inventory management and quick response times, particularly as customers shift activity towards pad developments which require greater volumes of frac sand on the wellsite. In addition, the ability to deliver directly to the customers wellsite locations increases efficiency and provides a lower cost logistics solution to customers. -14-

38 Proppant Market Trends Recently Improving Macro Conditions Demand for proppant is predominantly influenced by the level of drilling and completions spending by oil and natural gas exploration and production companies, which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. In 2015 and 2016, relatively low oil and natural gas prices resulted in reduced capital spending on drilling and completions activity leading to an 80% decline in the United States land rig count from recent peak levels in November 2014 to the low in May 2016 according to Baker Hughes Incorporated s North American Rig Count. Production declines resulting from reductions in capital expenditures, in North America and globally, and recent agreements by OPEC members to reduce oil production quotas have provided upward momentum for oil prices. West Texas Intermediate benchmark pricing has nearly doubled to US$50.60 per barrel as of March 31, 2017 from lows of US$26.19 per barrel in February In response to the improved returns generated by these increases in hydrocarbon prices, oil and natural gas exploration and production companies have increased their capital spending on drilling and completion activities since the second half of 2016, and the demand for oilfield activities has increased. According to Baker Hughes Incorporated s North American Rig Count, the number of active total land drilling rigs in the United States has increased from a low of 380 rigs as reported on May 27, 2016 to 802 active drilling rigs as reported on March 31, 2017, while the number of active Canadian land drilling rigs has increased 235% to 154 rigs year-over-year as of March 31, Source believes North American onshore shale resources will continue to capture an increasing share of global capital spending on oil and gas resources as a result of their competitive positioning on the global cost curve, short cycle times and the relatively low level of reservoir, political and legal risk as compared to other regions. Therefore, if hydrocarbon prices stabilize at current levels or rise further, Source expects to see further increased drilling and completion activity and improved pricing for oilfield services and proppant. Frac Sand Demand Trends Demand for frac sand and other proppants is primarily driven by the use of hydraulic fracturing when completing oil and natural gas wells. In particular, well completion technologies, which employ horizontal drilling and multi-stage fracturing (where multiple delivery points are utilized to increase the fractures created within a single wellbore), have significantly increased the demand for proppant in recent years. These completion techniques have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. As a result, according to Baker Hughes Incorporated North American Rig Count, the percentage of active Canadian drilling rigs used to drill horizontal wells, which require significantly greater volumes of proppant than vertical wells, increased from 71% in 2011 to 83% in 2014, and year-to-date in 2017, 85% of active rigs were drilling horizontal wells on average. In addition to the increase in the number of horizontal wells drilled, Source believes that growth in demand for frac sand will be further supported by the following factors, each of which has contributed to improving performance of typical wells drilled using horizontal drilling and multi-stage fracturing: the increase in length of the typical horizontal wellbore; the increase in the number of fracturing stages in the typical completed horizontal wellbore; and the increase in typical amount of proppant use in each fracturing stage. Recent growth in demand for natural frac sand has outpaced growth in demand for other proppants. In addition, as completion costs have increased as a proportion of total well costs, exploration and production companies have increasingly looked for ways to improve well economics by lowering costs without sacrificing well production performance. The oil and natural gas industry is shifting away from the use of higher-cost proppants, such as ceramics, towards more cost-effective natural frac sand such as the Northern White frac sand which Source supplies. Within the WCSB, the majority of recent drilling activity has focused on developing and producing hydrocarbons from the Montney and Duvernay formations as well as various formations within the Deep Basin, such as the Wilrich and Falher. Development of these formations has been driven by technological advancements in horizontal drilling, -15-

39 fracturing and stimulation, including increased length of horizontal wellbores and well completion intensity (additional fracturing per well and increased proppant usage per stage). These liquids-rich or wet gas plays are some of North America s most prolific and are anticipated to continue to see significant development and production growth. Activity in these three regions is expected to continue due to their relatively high economic returns, which is the result of various factors including: (a) well performance; (b) composition of the production between crude oil, natural gas and natural gas liquids; (c) Alberta s Modernized Royalty Framework, which incentivizes exploration and production companies to place higher amounts of proppants into the formation; and (d) increasing drilling efficiencies and completion intensities. Specifically, the figure below compares the internal rate of return ( IRR ) for a single well in leading North American plays. North American Play Ranking by IRR (1)(2)(3) 80% 70% 70% Source Play Exposure Other North American Plays 60% 50% 40% 30% 20% 59% 55% 54% 52% 41% 38% 35% 33% 32% 23% 10% 0% Permian (Midland Wolfcamp) Duvernay Eagle Ford US Bakken Montney Permian (Delaware Wolfcamp) SCOOP/STACK Marcellus Utica Permian (Delaware Bone Spring) Deep Basin Notes: (1) The figure reflects estimates of internal rate of return for a single well in each respective play. (2) Data provided via Wood Mackenzie Global Economic Model (GEM) as accessed on February 7, Pre-tax IRR using the Wood Mackenzie BASE price scenario (as described in Note (3) below) based on the following sub-plays: (a) Permian (Midland Wolfcamp) indicates the Wood Mackenzie defined sub-play ZS_Type Well MID Wolfcamp Deep Basin Hz SHO TX State; (b) Duvernay indicates the Wood Mackenzie defined sub-play ZS_Type Well Duvernay Kaybob AB; (c) Eagle Ford indicates the Wood Mackenzie defined sub-play ZS_Type Well GFC Eagle Ford Karnes Trough SHG TX Fee; (d) US Bakken indicates the Wood Mackenzie defined sub-play ZS_Type Well WLN Bakken Fort Berthold Hz SHO ND Fee; (e) Montney indicates the Wood Mackenzie defined sub-play ZS_Type Well Montney Karr Resthaven AB; (f) Permian (Delaware Wolfcamp) indicates the Wood Mackenzie defined sub-play ZS_Type Well DEL Wolfcamp Reeves Core Hz SHO TX Fee; (g) SCOOP/STACK indicates the Wood Mackenzie defined sub-play ZS_Type Well ADK STACK Oil Mississippian Hz SHO OK Fee; (h) Marcellus indicates the Wood Mackenzie defined sub-play ZS_Type Well APP Marcellus Susquehanna Core Hz SHG PA Fee; (i) Utica indicates the Wood Mackenzie defined sub-play ZS_Type Well APP Utica Lean Gas Core Choked Hz SHG OH Fee; (j) Permian (Delaware Bone Spring) indicates the Wood Mackenzie defined sub-play ZS_Type Well DEL Bone Spring Western Fairway Hz SHO NM Fee; and (k) Deep Basin indicates the Wood Mackenzie defined sub-play ZS_Type Well Deep Basin Glauconite AB. -16-

40 (3) The Wood Mackenzie BASE price scenario assumed the following price and forecasts: (a) WTI (US$/bbl): $49.00, $51.00, $61.48, $71.98 for 2017, 2018, 2019, and 2020, grown at 2% annually thereafter; and (b) Henry Hub (US$/mcf): $3.19, $3.08, $3.36, $3.62 for 2017, 2018, 2019, and 2020, respectively, grown at 2% annually thereafter. In particular, within the Montney and Duvernay, a material portion of the production consists of a low-density, high-api gravity liquid hydrocarbon commonly referred to as condensate or C5+. Condensate is used as a diluent in connection with Western Canadian oil sands bitumen production and has historically received a premium price relative to crude oil in Canada, which enhances well economics. Alberta Diluent Supply & Demand (Left) and Crude Oil and Bitumen Production (Right) (1)(2)(3) Diluent Supply / Demand (mmbbl/d) Canada is net short diluent resulting in premium pricing Oil & Bitumen (mmbbl/d) Crude Oil Bitumen Oil sands require diluent (C5+) for blending in order to ship to market AB Diluent Supply (C5+) 2016 AB Diluent Demand Notes: (1) Alberta Energy Regulator ST : Alberta s Energy Reserves 2015 and Supply/Demand Outlook ; as of January 25, (2) C5+ satisfies the majority of diluent demand in Alberta. (3) Increased production of bitumen generally results in increased demand for domestic diluent (or condensate), which in turn generally results in increased demand for proppant. For this reason, trends in crude oil and bitumen production, and in Alberta diluent supply and demand, are relevant to investors. More specifically, a key economic differentiator of oil and gas shale assets in Canada, which are the Company s end markets, relative to those in the United States, is the premium price for condensate that is paid in Canada relative to the Edmonton Par light oil benchmark. Condensate is the primary diluent used to blend with bitumen from the oil sands to facilitate shipment to market. Strong demand for diluent in Canada from the oil sands and lack of domestic diluent supply is what causes condensate to trade at this premium and results in significant Canadian imports (as indicated in the figure) and attractive economics for the Company s customers, which the Company believes is a positive indicator for continued proppant demand. -17-

41 As a result of attractive economics, Source expects capital spending and horizontal well count to increase, leading to continued drilling and production growth in key plays as shown below, including the Montney, Duvernay and Deep Basin. While the total number of horizontal wells drilled in 2016 in the WCSB was approximately 3,450 based on data provided by geoscout, which exceeds the figure on the chart below, Source is focused on the higher intensity Montney, Duvernay and Deep Basin plays. Number of Horizontal Wells Rig Released by Higher Frac Intensity Play (1)(2)(3) Canadian Production by Key Play (4) (thousand barrels of oil equivalent per day) 3,000 Montney 1,200 Montney Duvernay Duvernay 2,500 Deep Basin 1,000 Deep Basin 2,000 2, ,754 1,500 1,501 1,442 1, , E 2018E Notes: (1) Historical number of horizontal wells drilled by play to date is based on data provided by geoscout. (2) The number of wells forecast to be drilled in each of the Montney, Deep Basin and Duvernay plays identified above for 2017E and 2018E (the Higher Frac Intensity Well Count Forecast for each such play) is calculated as the product of (A) the estimated average annual capital expenditures by the Higher Frac Intensity Companies (as defined below), expressed as a percentage of average annual capital expenditures by the Higher Frac Intensity Companies in the previous year, as estimated by Bloomberg using the consensus median capital expenditures estimate, multiplied by (B) the number of wells drilled in that play in the previous year. This forecast is based on the assumption that an increase in producers overall capital expenditures will yield a proportional increase in the number of wells drilled. However, the actual increase in wells drilled could differ from the increase in capital expenditures in the event of a relatively greater increase in non-drilling capital expenditures, such as facility construction or maintenance. Higher Frac Intensity Companies means Advantage Oil & Gas Ltd., ARC Resources Ltd., Bellatrix Exploration Ltd., Birchcliff Energy Ltd., Bonavista Energy Corporation, Crew Energy Inc., Encana Corporation, Kelt Exploration Ltd., NuVista Energy Ltd., Painted Pony Petroleum Ltd., Paramount Resources Ltd., Peyto Exploration and Development Corp., Seven Generations Energy Ltd., Tourmaline Oil Corp. and Trilogy Energy Corp. In classifying companies as Higher Frac Intensity Companies, the Company first considered each of the TSX-listed oil and gas companies whose primary operational focus is on oil and gas plays in the WCSB that generally require well fracturing and which have an enterprise value greater than approximately $750 million as of January 31, The Company believes this population captures companies that would have a meaningful impact on, and therefore act as an appropriate indicator of, capital spending in the WCSB. Of these companies, the Higher Frac Intensity Companies were those having significant exposure to the higher frac intensity plays (the Montney, Duvernay and Deep Basin plays) based on the majority of their assets, as per each company s corporate presentations. (3) Although Source believes the above assumptions and forecasts to be reasonable, there can be no assurance that these assumptions and forecasts are accurate, and, as such, undue reliance should not be placed thereon. See Forward-Looking Statements and Risk Factors. (4) Production history by play is based on data provided by geoscout. -18-

42 An additional trend across North America, and the WCSB, is increasing well completion intensities leading to increased proppant demand by exploration and production companies. For example, stages per well in the WCSB have increased by over 40% on average from 2013 to the first quarter of 2016, while in the Montney and Duvernay, proppant used per well has increased by approximately 91% and 86%, respectively, during the same period according to the Well Completions & Frac Database. Certain companies have performed significantly larger fracture stimulations than basin averages as indicated in the figure below. Proppant Intensity per Well by Play (1)(2) 5,000 - Indicates Source is a leading proppant provider to this market Permian 4,000 Duvernay Eagle Ford Montney (Avg. of Top 25%) Metric Tonnes 3,000 2,000 Montney 1,000 Deep Basin Notes: (1) Proppant intensity per well in Canadian plays defined as the average amount of proppant pumped per well, by play, in the indicated year based on data provided by the Well Completions & Frac Database with the exception of 2016 which uses data for the first quarter of 2016 to calculate proppant intensity due to more complete data. Proppant intensity per well in U.S. plays defined as the average amount of proppant pumped per well, by play, in the indicated year based on data provided from DrillingInfo. Eagle Ford data is as of December 28, 2016 and Permian data is as of January 18, (2) The Avg. of Top 25% shows the large subset of Montney wells that are fractured using significantly more proppant than the average Montney well. The Company believes this represents the trend in the market toward higher intensity fracking. -19-

43 Source estimates, based on data from geoscout and the Well Completions & Frac Database, that the WCSB proppant market amounted to approximately 2.4 million metric tonnes in Market demand is estimated to have dropped by approximately 24% in 2016 compared to 2015 due to the downturn in commodity prices since late 2014, which led to a corresponding decline in oil and natural gas drilling and completion activity. Based on the assumptions referred to in the table below, Management believes that there is potential for proppant demand in 2017 to increase relative to Estimated Canadian Proppant Demand by Play (1)(2)(3)(4) Historical Completion Intensity Modern Completion Intensity 90 th Percentile Proppant Intensity (Q Data) 6.0 Million Metric Tonnes Flat Proppant Intensity (Q Data) Higher Frac Intensity Montney Duvernay Deep Basin Lower Frac Intensity E 2018E Viking Cardium Bakken/Torquay Midale/Shaunavon Notes: (1) The number of wells forecast to be drilled in each of the Lower Frac Intensity plays identified above for 2017E and 2018E (the Lower Frac Intensity Well Count Forecast for each such play) is calculated as the product of (a) the estimated average annual capital expenditures by the Lower Frac Intensity Companies (defined below), expressed as a percentage of annual capital expenditures by the Lower Frac Intensity Companies in the previous year, as estimated by Bloomberg using the consensus median estimate, multiplied by (b) the number of wells drilled in that play in the previous year. The Lower Frac Intensity Companies means Bonterra Energy Corp., Cardinal Energy Ltd., Crescent Point Energy Corp., Penn West Petroleum Ltd., Raging River Exploration Inc., Surge Energy Inc., Tamarack Valley Energy Ltd., TORC Oil & Gas Ltd., Vermilion Resources Ltd. and Whitecap Resources Inc. In classifying companies as Lower Frac Intensity Companies, the Company first considered each of the TSX-listed oil and gas companies whose primary operational focus is on oil and gas plays in the WCSB that generally require well fracturing and which have an enterprise value greater than approximately $750 million as of January 31, The Company believes this population captures companies that would have a meaningful impact on, and therefore act as an appropriate indicator of, capital spending in the WCSB. Of these companies, the Higher Frac Intensity Companies were those having significant exposure to the higher frac intensity plays (the Montney, Duvernay and Deep Basin plays) based on the majority of their assets, as per each company s corporate presentations. The remaining companies were the Lower Frac Intensity Companies, being those companies whose primary operational focus is on oil and gas plays that generally require well fracturing but not in the high frac intensity plays. (2) The demand for proppant from 2013 to 2016 is estimated by multiplying the historical number of wells drilled based on data provided by geoscout in each play by the average amount of proppant pumped per well, by play, in the indicated year with the exception of 2016 which uses data for the first quarter of 2016 to calculate proppant intensity due to more complete data (based on data provided by the Well Completions & Frac Database). (3) The potential range of aggregate demand for proppant in the Higher Frac Intensity plays and Lower Frac Intensity plays identified above for 2017E and 2018E is calculated as the sum, for each such play, of the product of (A) the relevant Higher Frac Intensity Well Count Forecast or Lower Frac Intensity Well Count Forecast, as applicable, for the relevant play multiplied by (B) Historical Completion Intensity for such play (as defined below) (shown as Flat Proppant Intensity in the chart above) and by Modern Completion Intensity for such play (as defined below) (shown as 90 th Percentile Proppant Intensity in the chart above). Proppant per well forecast by play assuming Historical Completion Intensity means the amount of frac sand utilized as proppant pumped per well that is equal to the level for an average well in the first quarter of 2016 for the indicated play; and proppant per well forecast by play assuming Modern Completion Intensity means the amount of frac sand utilized as proppant pumped per well that is equal to the level for a well in the 90th percentile in the first quarter of 2016 for the indicated play, -20-

44 in each case based on data provided by the Well Completions & Frac Database. This forecast is based on the assumption that an increase in producers overall capital expenditures will yield a proportional increase in the number of wells drilled. However, the actual increase in wells drilled could differ from the increase in capital expenditures in the event of a relatively greater increase in non-drilling capital expenditures, such as facility construction or maintenance. (4) Although Source believes the above assumptions and forecasts to be reasonable, there can be no assurance that these assumptions and forecasts are accurate, and, as such, undue reliance should not be placed thereon. See Forward- Looking Statements and Risk Factors. -21-

45 BUSINESS Source is a fully integrated producer, supplier and distributor of high-quality Northern White frac sand, which is a preferred proppant used to enhance hydrocarbon recovery in the hydraulic fracturing of oil and natural gas wells. Source sells frac sand, primarily to customers operating in the WCSB through its strategically located terminal network, which Source believes is the largest of its kind in the WCSB. Source currently has the capability to produce over two million metric tonnes per annum of Northern White frac sand at its Sumner and Weyerhaeuser facilities and, in the event the Blair Facility Acquisition is completed, Source expects its production capacity of Northern White frac sand to increase to over three million metric tonnes per annum. Source s fully integrated logistics platform enables it to transport high volumes of frac sand from its facilities in Wisconsin to its customers in the WCSB such that during 2016, Source sold substantially all of its product in-basin and over 50% of its product directly at its customers wellsites. Source believes that its terminal network, along with its focus on logistics and ability to efficiently deliver sand directly to the wellsite, attractively position Source as a leading player in the WCSB with the ability to reliably deliver high volumes of frac sand to its customers in a cost-effective manner. Source owns and operates seven strategically located transload terminals in the WCSB with total storage capacity of over 90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned expansions in 2017 and 2018) and annual throughput capacity of over 3.3 million metric tonnes per year (which Source expects will increase to over 4.7 million metric tonnes following planned expansions in 2017 and 2018), all of which are serviced by CN, which is the only Class I railway that effectively services the Montney, Duvernay and Deep Basin, which are three of the most active oil and natural gas development regions in the WCSB. Furthermore, Source estimates that its terminals accounted for more than half of the total throughput capacity of all terminals located in the proppant-intensive Montney, Duvernay and Deep Basin plays. Source believes that having a network of terminals in close proximity to key producing regions is a critical element of its customer service strategy, which allows it to rapidly respond to customer demand and helps to ensure reliable and timely delivery of product. Source believes that the in-basin storage capacity of its terminal network is approximately four times the size of Source s largest competitor in the WCSB. Source owns and operates the Sumner Facility and the Weyerhaeuser Facility. In addition, Source expects to complete the Blair Facility Acquisition in connection with or immediately following Closing, which includes a Northern White frac sand mine with associated processing and unit train capable rail loading facilities. In the event the Blair Facility Acquisition is completed, Source would, have an expected total annual production capacity of over three million metric tonnes. Both the Weyerhaeuser Facility and the Blair Facility, with on-site rail infrastructure, have direct access to the CN, enabling Source to process and cost-effectively deliver frac sand to customers through its integrated logistics network. Both the Weyerhaeuser Facility and the Blair Facility are capable of loading and shipping unit trains, allowing for significantly more efficient transportation of frac sand to Source s terminals in the WCSB. In addition to its transload terminal network, Source has developed Sahara, a proprietary wellsite mobile sand storage and handling system. Sahara offers significant competitive advantages over many traditional wellsite storage systems, such as decreased unloading times for trucks delivering proppant to the wellsite, reduced physical footprint, reduced proppant damage and increased ability to store multiple types of proppant. Despite Sahara s small physical footprint, the system offers a storage capacity of approximately 1,800 metric tonnes, which Management believes is greater than that of many competitor systems, and can be loaded significantly faster than pneumatic systems. Additionally, the system is recognized for its ability to reduce silica dust (a significant health concern), reduce noise and reduce truck traffic at the wellsite (a significant safety concern). Source has received positive customer feedback on Sahara and intends to continue to build out its fleet over the coming years to meet anticipated demand. Source has applied for a number of patents in respect of the Sahara. Logistics capabilities have become an important differentiating factor for frac sand customers, who increasingly seek convenient and reliable in-basin or at-the-wellsite proppant delivery capabilities. Source sells its products primarily to oil and natural gas exploration and production companies, such as Encana Corporation, Chevron Canada Resources Ltd. and Seven Generations Energy Ltd., and oilfield service companies, such as Canyon Services Group Inc. and Trican Well Services Ltd., under a combination of contracts and spot sales in the open market. Source believes that security of supply for exploration and production companies is enhanced by its integrated logistics capabilities. -22-

46 Overview of Operations Source has developed an integrated supply chain for the delivery of frac sand into the WCSB. Source believes that this integrated supply chain allows it to provide its customers with the highest levels of reliable service and access to products. Source s integrated supply chain is made up of the following components: sand resources, mining and wet processing, dry processing plant and rail load out, rail fleet, terminal network and Sahara wellsite solutions. -23-

47 Source is a fully integrated proppant logistics company, delivering Northern White frac sand from fully owned and operated Wisconsin mining and processing operations to wellsites in the WCSB. Terminalling & Direct to Wellsite Solutions Challenges for Canadian Proppant Delivery Over 1,700 miles from mine to wellsite Limited rail line access Seasonal weather challenges Remote locations Rail Transport & Transloading Wellsite Storage Frac Sand Mining & Processing Source Terminals Source Mines (1) CN Rail Network Duvernay Montney Other Shale Plays Notes: (1) Assumes completion of the Blair Facility Acquisition. (2) Berthold, North Dakota terminal serviced by BNSF Railway Company. Sand Resources Source owns and operates the Sumner Facility. According to the Sumner APEX Report, Source had approximately 21.5 million metric tonnes of Indicated Mineral Resources and 94.1 million metric tonnes of Inferred Mineral Resources on over 1,000 contiguous acres of land, as of December 16, The Sumner Facility and the Weyerhaeuser Facility have a combined annual processing capacity of approximately two million metric tonnes. See Scientific and Technical Information and Business Descriptions of the Mineral Properties. Mining and Wet Processing The sand resources at the Sumner Facility are mined via digging or ripping, sometimes after blasting, if required. If parts of the deposit are highly consolidated into sandstone, the sandstone is then crushed into its monocrystalline sand components for further processing. Frac sand is then fed into Source s mine-site-located washing and sorting plant which removes any remaining impurities and sorts the material by size. The washing and sorting plant is enclosed and heated, making it capable of operating year round, including through the winter months. This is different than most other producers of frac sand that will generally not wash sand during the colder seasons. Winter operations at the Sumner Facility are an important facet of Source s business, as the WCSB is seasonally busiest in the winter months. Following the washing and sorting process, frac sand is stored on site before being transported by truck to the nearby Weyerhaeuser Facility. Dry Processing Plant and Rail Load Out The Weyerhaeuser Facility receives washed and sorted raw material from the Sumner Facility. At the Weyerhaeuser Facility, the washed frac sand is dried and screened into API specified mesh sizes. Source s fully processed Northern White frac sand is then stored at the dry processing plant prior to being loaded into rail cars for transportation to its in-basin terminal network. Source s 45,000 metric tonnes of finished product storage at its Weyerhaeuser Facility allows Source to rapidly load unit trains in less than 24 hours. Source s rail load out facility has -24-

48 approximately five miles of track that is directly connected to a railway serviced by CN, which is the only Class I railway that effectively services the Montney, Duvernay and Deep Basin. Source has contracts with CN that establish a set rate for delivery to the Wembley Terminal for five years beginning 2014 with annual escalator rates each year. For other lanes, Source pays the annual rates published by CN at the beginning of every calendar year. All freight is paid on a car load rate with a fuel surcharge. Source currently ships a substantial portion of its sand volumes in unit train shipments, which minimizes its rail transportation cost and maximizes its rail car utilization. Source s Rail Fleet Source operates a fleet of over 900 two pocket covered hopper cars that it uses to transport its product from Wisconsin to its network of terminals in the WCSB. Source does not manage customers railcars. To support anticipated volumes, Source expects its rail car fleet will increase to approximately 1,200 cars in early 2017 and to approximately 1,600 cars by All of Source s rail cars are leased for varying terms. Source believes that it has one of the most efficient and lowest cost fleets in the industry. Source s Terminal Network Source owns and operates seven frac sand terminals strategically located throughout the WCSB. Source believes that its WCSB terminals are well positioned to capture growing demand for frac sand in the Montney, Duvernay and Deep Basin. Nearly all of Source s existing terminals have on-site storage that enables the Company to manage in-basin inventory and respond to customer demand. All of Source s terminals are serviced by the CN network. BRITISH COLUMBIA Fort Nelson Source Rail Terminals (Existing) Source Rail Terminals (Expansion) Horn River Liard Basin Montney Duvernay Deep Basin CN Rail Network Taylor Wembley Grande Prairie ALBERTA Fox Creek Edson Edmonton Red Deer Calgary Vancouver The Wembley Terminal, near Grande Prairie, Alberta, is Source s highest volume terminal, with an estimated throughput capacity of 1.6 million metric tonnes per annum and over 40,000 metric tonnes of storage capacity to service high levels of activity in the Montney, Duvernay and Deep Basin. Source believes that this capacity will allow it to meet peak demand through the combination of inventory and rapid material handling. The Wembley Terminal is capable of unloading a dedicated unit train with 100 rail cars of frac sand in under 24 hours, which Source believes makes it the highest throughput sand terminal in Canada. Together with Source s other terminals, strategically located near key producing regions in the WCSB, Source has over 90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned expansions in 2017 and 2018; see Business Capital Budget ) of -25-

49 in-basin storage capacity, which Source believes represents approximately four times the amount of its largest competitor. Source also believes that its terminal network provides a distinct competitive advantage over its competitors by providing industry leading coverage, significant reach for supply to all key plays, and rapid loadout facilities. Source s terminal network is fully integrated with its sand supply from Wisconsin and its last-mile delivery capabilities, enabling the Company to ensure seamless deliveries of proppant. Source has identified, and either secured or entered into agreements to secure, three additional locations suitable for developing unit train capable terminals. Once developed, these additional terminals will allow Source to increase the amount of sand sold to customers operating in the Montney and Duvernay. Source believes that finding unit train capable locations that intersect both the CN Railway and highway infrastructure to be difficult and having such locations serves as a competitive advantage. Terminal (1)(2) Year Constructed Rail Road Storage (MT) (3) Throughput Capacity / Yr (MT) (3) Wembley, AB 2014 CN 44,000 1,587,000 Grande Prairie, AB 1999 CN 16, ,000 Edson, AB 2011 CN 14, ,000 Fox Creek, AB 2015 CN 3,000 66,000 Red Deer, AB 1998 CP / CN 9, ,000 Lampman, SK 2009 CN 6, ,000 Fort Nelson, BC 2008 CN 3, , Year End 95,000 3,308,000 Fox Creek, AB (Expansion) 2017/18 CN 30, ,000 Taylor, BC 2017/18 CN 0 265,000 Edson II, AB 2017/18 CN 30, , / 2018 Capacity Expansions 60,000 1,465,000 Total Including Currently Planned Expansions 155,000 4,773,000 Notes: (1) See Business Capital Budget. (2) Although Source believes the above assumptions and forecasts to be reasonable, there can be no assurance that these assumptions and forecasts are accurate, and, as such, undue reliance should not be placed thereon. See Forward-Looking Statements and Risk Factors. (3) Approximate values. Logistics Services Source s logistics team works with third party trucking companies to efficiently coordinate deliveries of frac sand from Source s terminals to the wellsite. Source provides active dispatch monitoring which minimizes loading times and pre-loading trailers. Source s logistics service links Source s terminals to the wellsite, increasing efficiency through the proppant supply chain, and allows Source to capture additional value. -26-

50 Sahara Source s Frac Sand Handling and Wellsite Storage Solution Source has developed a proprietary mobile wellsite sand storage and handling system called the Sahara, which is used to facilitate frac sand storage and handling at the wellsite. To date, Source has manufactured two Sahara units. Each Sahara has a small physical footprint but has storage capacity of approximately 1,800 metric tonnes. Additionally, Sahara can unload trucks delivering frac sand to the wellsite significantly faster than traditional pneumatic systems. Sahara features a gravity-assisted handling system that eliminates frac sand damage typically caused by pneumatic handling systems used by Source s competitors. The Sahara s 12 separate storage towers allow it to store up to 12 different sizes and types of proppant simultaneously. The Sahara solution is well suited to service the increase in pad-focused development activity which requires more sand on location to efficiently execute completion programs. Source believes that the system is recognized for its ability to reduce silica dust (a significant health concern), reduce noise, and reduce truck traffic at the wellsite (a significant safety concern). Source has applied for a number of patents in respect of Sahara in the United States, Canada and Mexico.. Other Services Source also provides other services at a select number of terminals to generate additional revenue from its terminal network. Currently Source provides transloading services for hydrochloric acid at Source s Grande Prairie and Red Deer terminals. Source also provides transloading services for resin coated proppants at a number of its terminals. -27-

51 Source s Business Model Relative to its Peers Source has a differentiated business model relative to its peers enabling it to sell substantially all product in-basin or at the wellsite. Source believes that selling more product in-basin rather than at the mine allows it to capture additional value throughout the proppant supply chain. The figure below depicts how much of Source s products are sold in-basin relative to certain of its peers. Percentage of Frac Sand Sold In-Basin (1)(2) 100% Q Q Source sells substantially all product in-basin whereas others sell at mine 80% 60% 40% 20% 0% Peer A Peer B Peer C Peer D Source Notes: (1) Peers include Emerge Energy Services LP, Fairmount Santrol Holdings Inc., Hi-Crush Partners LP and U.S. Silica Holdings Inc. (2) In-basin sales and percentages derived from the related issuers public filings available from the Electronic Data Gathering, Analysis and Retrieval system maintained by the United States Securities and Exchange Commission and the Fairmount Santrol Holdings Inc. Investor Presentation dated December Competitive Strengths Source believes that the following competitive strengths help it to execute its business strategies of: Fully Integrated Network Positioned to Capture Value Throughout the Proppant Supply Chain. Source believes it is a leading fully integrated supplier and distributer of frac sand in the WCSB providing an end-to-end solution through its processing facilities, rail assets, leading terminal network and last mile logistics capabilities. Source s full service approach allows customers to rely on its logistics capabilities to increase the reliability and timeliness of delivery of frac sand as part of their well completion programs. Source s integrated network enabled it to sell substantially all of its product in-basin and nearly 50% of its product at its customers wellsites in Intrinsic Logistics Advantages Created Through First Mover Advantage. Source s seven Canadian terminals, strategically located within key producing regions in the WCSB, provide a competitive and first mover advantage through extensive coverage and throughput capacity, enabling cost-effective delivery of frac sand directly to customers wellsites. In northern Alberta and British Columbia, the number of potential terminal locations is limited by the remoteness of the geography and challenging topography. Source has secured locations that it believes are advantaged, where the CN and highway infrastructure intersect. With more than 90,000 metric tonnes (which Source expects will increase to over 150,000 metric tonnes following planned expansions in 2017 and 2018; see Business Capital Budget ) of storage capacity, which Source believes -28-

52 represents approximately four times the amount of its largest competitor, Source is able to meet demand peaks from its customer base and manage supply backlog associated with well completion delays. Direct Access to High-Quality Northern White Sand Supply through Strategically Located Mining and Processing Facilities. The Sumner Facility and the Blair Facility are each situated on the CN and provide direct rail access to the WCSB, including full unit train loading capability at the Weyerhaeuser Facility. With all of Source s mining and processing capacity situated on the CN, Source is able to create optimal origin-destination pairs with its expansive WCSB terminal network, which is also situated on the CN. Trusted and Embedded Partner with Its Customers. Source is a trusted partner of, and has developed significant relationships with, leading exploration and production companies and pressure pumpers in Canada. Source believes that it has contributed to its reputation for dependability and high-quality products and services through a long track record of timely delivery of frac sand to the wellsites according to customer specifications. Source believes customers value Source s substantial scale, extensive logistics network and wellsite solutions to meet their frac sand demand for their well completion programs. Strong Balance Sheet and Ability to Capitalize on Opportunities to Reinforce Leading Position in the WCSB. Source believes that, following the Offering, Source will have a strong balance sheet and ample liquidity to pursue organic and external growth initiatives to build on its leading position in the WCSB. Source has a demonstrated track record of pursuing external growth to expand throughout the proppant supply chain. Source intends to continue this strategy, which will reinforce and expand Source s leading market position in the WCSB. Experienced Management Team with a Track Record of Delivering Results. Source s experienced Management has over 75 years of collective relevant experience, extensive industry knowledge and a proven track record of operational success. Source s Management has built Source into a leading fully integrated frac sand supplier in Canada through mine development, capacity expansions and investments in logistics infrastructure. Business Strategies Source s principal business objective is to be a highly efficient and reliable supplier of delivered frac sand in the WCSB. Key elements of Source s strategy include: Capitalize on Trends in Increased Frac Sand Intensity. Source believes that its leading terminal network, which Source believes is the largest of its kind in the WCSB, along with its focus on logistics and ability to efficiently deliver sand directly to the wellsite, attractively position Source to capitalize on trends in increased frac sand intensity. Exploration and production companies continue to increase well completion proppant intensities such that in the Montney and Duvernay, for instance, proppant used per well has increased by approximately 91% and 86%, respectively, from 2013 to the first quarter of 2016 according to the Well Completions & Frac Database. As customers demand more proppant for well completions, Source believes that, over time, customers will prefer to consolidate their purchases of frac sand to fully integrated suppliers with robust logistics capabilities such as Source. Increase Leading Market Share Position in Growing WCSB Market. Source intends to continue to position itself as the leading producer, supplier and distributor of high-quality Northern White frac sand into the WCSB. Source intends to grow its WCSB position by identifying and executing on organic and external growth opportunities. Source will continue to evaluate economically attractive proppant supply chain enhancement opportunities, including additional terminals, Sahara units, mines and sand processing capacity. Focus on Offering Superior Logistics and Terminal Flexibility. Source believes it offers a superior logistics solution to customers by providing substantially all of its product in-basin and over 50% of product at the wellsite. Logistical capabilities have become an important differentiating factor for frac sand customers, who increasingly seek convenient in-basin and/or at-the-wellsite proppant delivery capability from suppliers. Source believes that its dedicated focus on offering a superior logistical solution directly caters to the needs of exploration and production companies and oilfield service providers. Build-Out In-Basin Terminal Network. Source intends to continue to invest in terminals, storage, and rail infrastructure to meet the growing proppant demand needs of customers. When evaluating new terminal -29-

53 locations, Source carefully considers their proximity to exploration and production companies drilling and completion activities, as well as the anticipated frac sand intensity used in the development of these oil and natural gas resources. Recently, Source has identified and entered into agreements to secure three additional locations that are suitable for developing into unit train capable terminals. The development of these terminals will allow Source to increase the amount of sand sold to customers operating in the Montney and Duvernay. These additional terminals are expected to be placed into service in 2017 and Source believes these terminals are well positioned to serve and meet the needs of customers. Expand Sahara Fleet and Increase Source s Wellsite Presence. Source believes that its mine-to-wellsite delivery service and proprietary wellsite mobile sand storage and handling system, Sahara, offers an attractive value proposition to upstream customers. The increasing intensity of proppant completion designs and the remote locations of WCSB wellsites has increased the need for proppant inventory management and wellsite solutions to meet customer demand needs. Sahara addresses these challenges and Source intends to continue to build out its Sahara fleet to meet the anticipated current and future demand. Match Production Capacity with Demand to Control Supply Chain. Source believes that reliable and timely deliverability of product is a key competitive advantage. Source is able to ensure reliable and timely deliverability via a fully vertically-integrated proppant supply chain. As demand for frac sand grows, Source will actively evaluate additional sand resources and processing capacity to maintain its leading WCSB footprint and market share. Maintain Financial Strength and Flexibility. Source plans to pursue a disciplined financial policy to maintain financial strength and flexibility to enable the Company to actively evaluate new growth opportunities as they arise. Source believes that, following the Offering, its cash on hand, borrowing base capacity and ability to access debt and equity capital markets will provide the financial flexibility necessary to achieve its growth objectives while maintaining a strong balance sheet. Source s Customers, Sales, Market Share and Competition The level of activity in the oil and natural gas industry in the WCSB is influenced by seasonal weather patterns. Spring breakup makes the ground unstable and less capable of supporting heavy weights. Consequently, municipalities and transportation departments enforce road bans that restrict the movement of heavy equipment, thereby reducing drilling and well servicing activity levels. Normally spring breakup begins in late March and restricts activity through May. The length of spring breakup will depend on the moisture received in March through May. -30-

54 In late 2014, Source completed the construction of its mine and processing facilities and sold its first shipment of sand to customers. During the year ended December 31, 2016, total sand sales were approximately 832,400 metric tonnes, as compared to approximately 821,500 metric tonnes for the same period in 2015 and as compared to approximately 727,200 metric tonnes for the same period in As indicated in the table below, Source s sales volumes represented estimated market share of the total frac sand market in the WCSB of 34%, 26%, and 20% in 2016, 2015, and 2014, respectively. Source s latest quarterly sales figures of approximately 419,000 metric tonnes in the first quarter of 2017 compare to approximately 260,000 metric tonnes for the same period in Source believes that its estimated terminal throughput capacity representing over half of the total throughput capacity of all terminals located in the proppant-intensive Montney, Duvernay and Deep Basin plays provides the capacity for Source to maintain and potentially increase its market share of frac sand in the WCSB. 50% Estimated Source Market Share of Frac Sand in the WCSB (1)(2) 40% 34% 30% 26% 20% 20% 10% 0% 0% Notes: (1) Estimated market share of the total frac sand market in the WCSB is based on Source s historical sand sales volumes in metric tonnes divided by the total market for sand estimated as follows: historical well count by play, based on data provided by geoscout and the Well Completions & Frac Database, multiplied by the average amount of proppant pumped per well, by play, in the indicated year based on data provided by the Well Completions & Frac Database with the exception of 2016, which uses data for the first quarter of 2016 to calculate proppant intensity due to more complete data. (2) Although Source believes the above assumptions to be reasonable, there can be no assurance that these assumptions and forecasts are accurate, and, as such, undue reliance should not be placed thereon. See Forward-Looking Statements and Risk Factors. Source s Customers Source s customers include exploration and production companies (such as Encana Corporation, Chevron Canada Resources Ltd. and Seven Generations Energy Ltd.) and pressure pumping customers (such as Canyon Services Group, Schlumberger Limited, Trican Well Services Ltd., Halliburton Company and Baker Hughes Incorporated) operating in the WCSB. Each of Source s pressure pumping customers in turn serves a number of exploration and production companies, including specifically those with substantial operations in the Montney, Duvernay and Deep Basin, providing Source with direct or indirect exposure to many of the key producers in those plays. Source s goal is to create long-term, partnership-oriented relationships with its customers. Accordingly, Source strives to solve its customers frac sand supply, logistics, transportation and handling problems which Source believes has strengthened its customer relationships. -31-

55 Source is a party to fixed-term contracts with numerous customers. Source s customers are primarily exploration and development companies and pressure pumping companies operating in the WCSB. Source s goal is to create longterm relationships with its customers. Source s fixed-term contracts with customers outline volume commitments and in some cases fixed pricing, the terms of which vary from one to three years (provided that such contracts may be suspended or terminated early by the customer). This mitigates the impact of any nonpayment or non-performance by, or significant reduction in purchases by, any of these contracted customers. A significant number of Source s customers are serviced on a spot basis where volume thresholds are not set and orders are serviced on an as-available basis at prevailing market prices. Source s Competition The frac sand industry is highly competitive with numerous participants. Source competes directly with both producers of Northern White frac sand and Canadian domestic frac sand. These competitors provide varying levels of service and product type. Source is a leading Northern White frac sand provider in the WCSB who offers a fully integrated logistics service resulting in in-basin sales, which Source believes provides it with a distinct competitive advantage over its competitors. Source does not currently compete with Brady Brown frac sand as it is uneconomic to transport such sand to Canada for use in the WCSB. Capital Budget In addition to the Blair Facility Acquisition, Source intends to make approximately $22 million and US$5 million of capital expenditures in For 2018, Source anticipates a capital expenditure budget of approximately $20 million. The actual amount of capital expenditures may vary based on, among other things, market conditions, successful financing activity and oil and gas activity in the WCSB. As a result, actual capital expenditures may differ materially from those budgeted amounts. Source plans to direct most of its capital investment to the expansion of its logistics and transportation infrastructure. Source also plans to direct certain of its capital investment to make improvements to the Blair Facility to increase its operational efficiency by adding certain features to the existing infrastructure. The timing and amount of capital expenditures are largely discretionary and within Source s control. Details of the budget are included in the table below: Category: 2017 Budgeted amount ($000s) 2018 Budgeted amount ($000s) Production Expansion 2,000 Terminal Expansion/Improvements 15,000 10,000 Wellsite Solutions 5,000 10,000 Blair Facility Improvements 6,708 (1) Total 28,708 20,000 Note: (1) By applying the noon rate of exchange for Canadian dollars in terms of United States dollars, as quoted by the Bank of Canada on April 4, Three-Year History 2016 On December 8, 2016, Source, by way of the Note Issuers, completed the Note Offering. The net proceeds of the Note Offering, which amounted to approximately $125 million were used to repay the Previous Credit Facility in full, to resolve certain other financings and for general corporate purposes. Concurrently with the Note Offering, Source, by way of Source Canada LP, entered into the Credit Agreement providing for the Credit Facilities. In early 2016, commodity prices remained low, causing most exploration and production companies to curtail their capital budgets resulting in continued downward pressure on sand pricing for the period. In the third quarter of 2016, commodity prices began to improve which resulted in increased activity and improved sales volumes in the fourth quarter of 2016, especially in the WCSB. Exploration and production companies continued to increase their sand intensity per well to complete wells in the WCSB, which led to record quarterly Canadian sales volumes for Source in the fourth quarter of In 2015, Source executed upon its renewed focus of selling sand directly to its upstream customers through its processing facilities and terminal network. This however coincided with the dramatic downturn in the oil and gas -32-

56 industry which resulted in Source extending certain price concessions to customers in order to maintain its market share. Source also implemented a general and administrative costs reduction program to withstand the economic conditions affecting the oil and gas industry and that of its customers. In 2015, Source also completed its Eckville, Alberta terminal In January 2014, Source made its first sand sales and during the balance of 2014, it completed the construction of the Sumner Facility and the Weyerhaeuser Facility (increasing total production capacity to approximately two million tonnes per year), accumulated its leased rail car fleet and completed the Wembley Terminal. In the fourth quarter of 2014, Source was able to deliver sand to its customers at total capacity of its processing facilities and the logistics network it had constructed. In 2014, Source also changed its business focus to its customers by moving away from transloading sand for third parties and began focusing on direct sales to its customers through its newly completed terminal network. Historical Source began operations in 1998, as a proppant transloading business. From 1998 to 2007, Source further developed its geographic footprint by adding terminals in key oil and gas basins in Canada and the United States. In 2007, Source commenced developing mine and sand processing facilities at Chippewa Falls, Wisconsin, which it subsequently sold to EOG Resources, Inc. before completion. In 2010, Source began developing the Sumner Facility and Weyerhaeuser Facility. In October 2013, Source commercially launched the Sahara. Also in October 2013, TriWest IV invested in the Source business and collectively became its majority unitholder. TriWest IV s investment facilitated the completion of the Sumner Facility, the Weyerhaeuser Facility and the Wembley Terminal. Recent Developments Industry Activity Subsequent to September 30, 2016, Source has seen a significant increase in drilling and completion activity from Source s customers and across the WCSB. For the quarter ending December 31, 2016, Source sold 281,472 metric tonnes of frac sand, compared to 171,624 metric tonnes in the quarter ending December 31, 2015 and 157,210 metric tonnes in the quarter ending September 30, In the fourth quarter of 2016, Source set new volumetric records for its own daily, monthly, and quarterly Canadian sales volumes. After seasonally slowing down near the end of the fourth quarter of 2016, activity level has increased again in the first quarter of 2017 compared to the fourth quarter of The heightened level of sales is primarily driven by increased activity levels in the Montney and Duvernay basins and increased frac sand intensity in the well completion programs of Source s customers. Source believes that this increased activity is well served by its Wembley, Edson, Grande Prairie and Fox Creek terminals. The changes in sand sales noted above are not indicative of future performance. See Forward-Looking Statements and Risk Factors. Activity levels continue to be strong in the early part of In the first quarter of 2017, Source sold approximately 419,000 metric tonnes of frac sand compared to approximately 260,000 metric tonnes for the same period in Source believes that this increase in industry activity together with the addition of the Blair Facility (in the event the Blair Facility Acquisition is completed) and Source s plans to expand its logistical network will lead to increased production and volumes in 2017 compared to Blair Facility Acquisition On February 9, 2017, Source US LP entered into the Blair Purchase Agreement which Source expects will significantly expand its Northern White frac sand processing capability by acquiring the newly constructed and fullypermitted Blair Facility, as well as the D95 Properties and certain option agreements to acquire adjacent properties. The Blair Facility consists of a Northern White frac sand mine and related wet processing plant, dry processing plant and unit train capable loadout facility located on the CN Railway in or around Blair, Wisconsin. The Blair Facility was constructed on or around October 1, 2015 and has never been commercially operated. The Blair Facility Acquisition provides a unique opportunity for Source to acquire newly constructed, unused high quality assets that can be integrated into Source s leading transportation and logistics network. Further, the Blair -33-

57 Facility Acquisition will allow Source to expand its Mineral Resources and correspondingly its processing capacity which will allow Source to reduce instances in which it has to purchase sand at spot prices in order to meet contractual obligations for specific mesh sizes. Information Concerning the Blair Facility Acquisition Sand Resources According to the Blair APEX Report, the Blair Facility has approximately 25 million metric tonnes of Inferred Mineral Resources, on over 750 acres of land, as of February 12, See Scientific and Technical Information and Business Descriptions of the Sumner Facility and the Blair Facility. Mining and Wet Processing The sand resources at the Blair Facility will be mined via digging or ripping, sometimes after blasting, if required. The sand will then be mechanically processed prior to entering the washing and sorting plant, which features a dewatering cycle which minimizes water consumption, eliminates the need for settling or tailings ponds, and enhances operational efficiency. The current capacity of the wet processing plant is 450 metric tonnes per hour which exceeds the capacity of the Blair Facility s dry processing plant to allow for enough washed inventory to be created during the warmer months in Wisconsin such that the dry processing plant can be operated at its maximum capacity all year round. The first step in processing the mined sand is a mechanical processing at the front end of the wet processing plant. In the event parts of the deposit are highly consolidated into sandstone, the sandstone is crushed into its monocrystalline sand components for further processing. This includes crushing of raw material and the rough mechanical sorting of crushed material to remove impurities. This processed material is then fed into the wet processing facility, also located at the mine site, where any remaining impurities are removed and the process material is sorted by size. Following this washing and sorting process, frac sand is stored on site before being transported to the dry processing facility, located on the east side of the property. Dry Processing Plant and Rail Load Out The dry processing plant will receive the washed and sorted process material and completely remove all moisture from the material before sorting it into API specified mesh sizes. Once the material has been screened at the dry processing plant, it will be transferred via conveyor to silos where it will be stored prior to being transferred to rail cars for shipment. The Blair Facility has storage of approximately 9,000 metric tonnes of finished frac sand. The Blair Facility rail load out has approximately five miles of track that is directly connected to a railway serviced by the CN Railway, which is the only Class I railway that effectively services the Montney, Duvernay, and Deep Basin. This rail load out has both manifest and unit train service with the CN, which will allow Source to integrate this facility with its already established logistics and transportation network. Ancillary Properties Pursuant to the Blair Facility Acquisition, in addition to acquiring the Blair Facility, Source will also acquire an additional land lease with a mining and extraction permit located approximately eight miles away from the Blair Facility and option agreements to acquire adjacent lands next to the Blair Facility owned by two private owners. Source expects to exercise the option to acquire such properties within six months of the Blair Facility Acquisition Closing Date at a cost of approximately US$2.5 million (the Blair Option Exercise ). See Use of Proceeds. Blair Purchase Agreement On February 9, 2017, Source US LP entered into the a purchase and sale agreement (the Blair Purchase Agreement ) with the Seller, Sand Products Wisconsin, LLC, SPC, VPC and Brown Gibbons Lang & Company Securities Inc. to acquire all of the issued and outstanding membership interests of Sand Products which, through its subsidiaries (Spartan Sand LLC and Sand Products Rail LLC), holds the assets forming the Blair Facility (the Blair Facility Acquisition ). The Blair Purchase Agreement establishes that the closing of the Blair Facility Acquisition will occur within five days of the satisfaction of the conditions to closing described in the Blair Purchase Agreement being satisfied or such earlier date as the parties may agree (the Blair Facility Acquisition Closing Date ). -34-

58 The summary of certain provisions of the Blair Purchase Agreement provided below does not purport to be complete and is qualified in its entirety by reference to the provisions of the Blair Purchase Agreement, which has been filed under the Company s profile at Purchase Price The aggregate consideration under the Blair Facility Acquisition is US$45 million subject to adjustments upon Source US LP s discovery of any structural, mechanical or other condition that would have a significant adverse effect on the value of the Blair Facility or which would adversely affect the normal life of the Blair Facility (a Defect ) provided such Defects must in the aggregate total at least US$100,000 and the total cumulative total of all adjustments may not exceed US$2 million. Source US LP provided a deposit of US$100,000 (the Earnest Money ) upon execution of the Blair Purchase Agreement which will be credited to the purchase price at the time of the closing of the Blair Facility Acquisition or returned to Source US LP in certain circumstances if the Blair Facility Acquisition is not completed. The cash required to close the Blair Facility Acquisition will be funded from the net proceeds of the Offering. See Use of Proceeds. Representations and Warranties The Blair Purchase Agreement includes customary representations and warranties from each of the parties for a transaction of this nature in relation to, among other things, corporate existence, corporate authorization, no conflicts and various representations and warranties specific to the assets of Sand Products or the Blair Facility, as applicable. Closing Conditions Completion of the Blair Facility Acquisition is subject to closing conditions as set forth in the Blair Purchase Agreement. The following closing conditions are in favor of Source US LP: the accuracy of representations and warranties, the delivery of appropriate corporate resolutions approving the Blair Facility Acquisition and all related matters from the Seller, all necessary documents needed to comply with any and all requirement imposed by applicable laws, rules or ordinances necessary to authorize and validate the Blair Facility Acquisition, compliance, in all material respects, with all agreements and conditions required by the Blair Purchase Agreement, a title commitment for the real property comprising the Blair Facility, the Offering has been completed, no permits, license of contracts of Sand Products have been revoked, suspended or amended, all instruments of conveyance and warrant termination documentation have been entered into in form and substance satisfactory to Source US LP and the Seller Indemnification Parties have entered into a non-competition and non-solicitation agreement in the form attached to the Blair Purchase Agreement. The following closing conditions are in favor of the Seller: the accuracy of representations and warranties, the delivery of appropriate corporate resolutions approving the Blair Facility Acquisition and all related matters from Source US LP, all necessary documents needed to comply with any and all requirement imposed by applicable laws, rules or ordinances necessary to authorize and validate the Blair Facility Acquisition, Source US LP having posted letters of credit for the Blair Facility and the D95 North Property, and Source US LP paying the purchase price. Termination by: The Blair Purchase Agreement may be terminated at any time prior to the Blair Facility Acquisition Closing Date (a) (b) mutual written consent of Source US LP and the Seller; by Source US LP in the event it discovers a Defect which exceeds US$2 million and the Seller and Source US LP have not entered into a corresponding reduction to the purchase price satisfactory to Source US LP; (c) by Source US LP if it is not satisfied with the results of its due diligence investigation prior to February 15, 2017; (d) by Source US LP or the Seller if any of their respective conditions precedent become incapable of fulfillment other than as a result of a breach of the Blair Purchase Agreement by such party seeking termination pursuant to this clause; or -35-

59 (e) by Source US LP or the Seller if there has been a material violation or breach (a Breach ) of any covenant, representation or warranty which has caused or would cause, any of their respective condition precedents not to be satisfied and any such violation or Breach is incapable of being cured by the breaching party within 15 days after written notice thereof. In the event of Seller s refusal to close the Blair Facility Acquisition on or after February 12, 2017, so long as Source US LP has not committed a Breach and such Breach has not been cured by Source US LP within 10 days after written notice thereof, Source US LP will have the following remedies available to it, which will be cumulative and not exclusive: (a) the Earnest Money will be returned to Source US LP; (b) the Seller will pay to Source US LP a breakup fee of US$10 million; (c) the Seller will pay to Source US LP the additional sum of US$10 million as liquidated damages for the consequential damages resulting from the impact Seller s default will have on the Offering, Source US LP, and the Company s and Source US LP s related business operations; and (d) Source US LP may specifically enforce the Blair Purchase Agreement, provided that such action is commenced within six months after such right arises. Indemnification The Seller Indemnification Parties, jointly and severally, agreed to indemnify and hold Source US LP, and its partners, officers, directors and unitholders (the Source Indemnified Parties ) harmless against and in respect of the following (the Source Indemnified Losses ): (a) all obligations and liabilities of the Seller, other than permitted encumbrances, whether accrued, absolute, fixed, contingent, or otherwise, as of the closing of the Blair Facility Acquisition not expressly assumed by Source US LP pursuant to the Blair Purchase Agreement; (b) any claim, liability, or damage incurred or sustained by Source US LP as a result of any inaccuracy of or breach by the Seller or Sand Products in any respect of any of its representations, warranties or obligations, or any breach of or failure by the Seller to perform in any respect any of its covenants contained in the Blair Purchase Agreement, or in certificates, or other documents delivered thereunder or pursuant thereto; (c) any claim by a third party arising from the use of the Blair Facility or the operation of the Blair Facility prior to the closing of the Blair Facility Acquisition; (d) any liability arising out of any employment benefit plan applicable to employees of Sand Products in existence prior to the closing of the Blair Facility Acquisition, including any associated liability for funding, withdrawal, excise taxes, or penalties; (e) any and all claims, demands or liabilities whatsoever, whether known or unknown or suspected to exist, arising under federal, state, and local statutory or common law, which employees of Sand Products ever had or may now have against Sand Products arising out of the employee s employment with Sand Products prior to the closing of the Blair Facility Acquisition; and (f) all reasonable costs and expenses (including reasonable attorneys fees) incurred by Source US LP in connection with any third party action, suit, proceeding, demand, claim, assessment or judgment incident to any of the matters indemnified against. Notwithstanding the foregoing, the total obligation of the Seller Indemnification Parties for indemnification of Source Indemnified Parties is limited to Source Indemnified Losses that exceed US$200,000 (the Basket ) and then only to the extent of the amount in excess of the Basket. The Source Indemnified Parties may not recover more than an aggregate of US$1 million (the Indemnity Cap ) collectively from the Seller Indemnification Parties for indemnification under the Blair Purchase Agreement. Source US LP agreed to indemnify and hold the Seller, and its members, officers, directors and shareholders (the Seller Indemnified Parties ) harmless against and in respect of the following (the Seller Indemnified Losses ): (a) all obligations and liabilities of the Seller expressly assumed by Source US LP pursuant to the Blair Purchase Agreement; (b) any claim, liability or damage incurred or sustained by the Seller as a result of any inaccuracy of or breach by Source US LP in any material respect of any of its representations and warranties, or any breach of or failure by Source US LP to perform in any material respect any of its covenants contained in the Blair Purchase Agreement, or in certificates, or other documents delivered thereunder or pursuant thereto; and (c) all reasonable costs and expenses (including reasonable attorneys fees) incurred by the Seller in connection with any third party action, suit, proceeding, demand, claim, assessment or judgment incident to any of the matters indemnified against. Notwithstanding the foregoing, Source US LP shall be obligated to indemnify the Seller Indemnified Parties only to the extent that the aggregate amount of the Seller Indemnified Losses exceeds the Basket, and then only to the extent of the amount in excess of the Basket. The Seller Indemnified Parties may not recover more than an aggregate of the Indemnity Cap collectively from Source US LP for indemnification under the Blair Purchase Agreement. The Source Indemnified Parties and the Seller Indemnified Parties right to seek indemnification under the Blair Purchase Agreement will extend for a period of 12 months following the Blair Facility Acquisition Closing Date. -36-

60 Descriptions of the Sumner Facility and the Blair Facility A description of the characteristics of the Sumner Facility and the Blair Facility are included in this prospectus in Appendix A Descriptions of the Mineral Properties. Other Business Information Employees Source employed over 220 employees as at December 31, 2016 in both Canada and the United States. None of its employees are unionized or subject to collective bargaining agreements. Source considers all employee relations to be in good standing. Source further expects that if the Blair Facility Acquisition is completed, Source will need to hire approximately 75 additional employees in Wisconsin to operate the Blair Facility. Foreign Operations The Sumner Facility, the Weyerhaeuser Facility and the Blair Facility are each located in Wisconsin, United States. As such, Source s business is exposed to various degrees of political, economic, regulatory, legal and other risks and uncertainties. See Risk Factors Risks Related to Source. Regulation Source s operations are subject to various federal, provincial, state and local laws affecting the mining and mineral processing industry across Canada and the United States. These laws include those relating to employee health and safety, environmental permitting and licensing, air and water emissions, wetlands, water pollution, waste management, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, hazardous materials, and natural resources in the jurisdictions where Source operates. Source and its customers are required to adhere to these regulations and non-compliance can result in significant costs and liabilities. While Source believes that its operations are in substantial compliance with these laws and regulations, and that continued compliance with current requirements would not have a material adverse effect on Source, there is no assurance that this degree of compliance will continue into the future. See Risk Factors Risks Related to the Company and Risks Related to Environmental, Mining and Other Regulation. Source does not believe that compliance with federal, provincial, state or local laws and regulations will have a material adverse effect on its business, financial position, or results of operations or cash flows. However, there can be no assurance that future events, such as changes in existing laws or enforcement policies, the promulgation of new laws or regulations, or the development or discovery of new facts or conditions adverse to its operations will not cause it to incur significant costs. Source s customers are subject to extensive controls and regulations imposed by various levels of government. These governments may regulate or intervene with respect to price, taxes, royalties, and exportation of oil and natural gas. Such regulations may be changed from time to time in response to economic and political conditions and could potentially have an adverse effect on Source s customers and thus an effect on Source s operations. Insurance Source believes that its insurance coverage is customary for the industries in which it operates and is adequate for its business. As is customary in the frac sand and fuel processing and distribution industries, Source reviews its safety equipment and procedures and carries insurance against most, but not all, risks of its business. Losses and liabilities not covered by insurance would increase Source s costs. To address the hazards inherent in Source s business, Source maintains insurance coverage that includes physical damage coverage, third-party general liability insurance, employer s liability, environmental and pollution and other coverage, although coverage for environmental and pollution-related losses is subject to significant limitations. -37-

61 SELECTED HISTORICAL FINANCIAL INFORMATION The majority of Source s revenue is derived from mining, processing and providing a full frac sand delivery solution to customers in-basin or at the wellsite. In addition, Source generates revenue from related services including terminal services, which involve transloading services, and wellsite solutions, which include wellsite storage and logistics coordination at the wellsite. Source commenced material frac sand sales after completion of the Weyerhaeuser Facility in June 2014, increasing sales volumes to approximately 280,000 metric tonnes in the fourth quarter of 2014 and achieving an Adjusted Gross Margin of $78 per metric tonne in the same period. As indicated below under Operating Data, Source maintained its frac sand sales volumes through the recent downturn in commodity prices on an annual basis and has been experiencing the effects of a recovery of frac sand sales in the fourth quarter of Activity levels continue to be strong in the early part of In the first quarter of 2017, Source sold approximately 419,000 metric tonnes of frac sand compared to approximately 260,000 metric tonnes for the same period in The following table sets out selected historical financial information as at and for the periods indicated. The selected historical financial information below other than Adjusted Gross Margin and Adjusted EBITDA is extracted or derived from Source s audited financial statements. Investors should read the selected historical financial information below in conjunction with Source s management s discussion and analysis, Source s audited financial statements and the accompanying notes included in this prospectus under Appendix FS Financial Statements and Management s Discussion and Analysis. Year Ended December 31, (in $ thousands unless otherwise indicated) Sales: Sand revenue $ 112,962 $ 139,574 $ 118,755 Wellsite solutions revenue $ 21,261 $ 6,208 $ 11,782 Terminal services revenue $ 4,976 $ 7,353 $ 15,969 $ 139,199 $ 153,135 $ 146,506 Gross Margin $ 7,903 $ 29,638 $ 46,391 Adjusted Gross Margin $ 15,942 $ 36,771 $ 51,002 Net Income (Loss) ($ 43,402) ($ 9,766) $ 17,035 Adjusted EBITDA ($ 7,526) $ 22,385 $ 32,802 Statements of Cash Flow Data Cash provided by operating activities ($ 9,453) $ 23,624 ($ 7,882) Cash used in investing activities ($ 10,470) ($ 35,461) ($ 37,621) Cash provided by financing activities $ 20,122 $ 10,970 $ 46,167 Other Financial Data Capital expenditures $ 6,405 $ 38,901 $ 45,390 Long term debt (including current portion) (1) $ 124,351 $ 83,114 $ 63,797 Total assets (1) $ 219,406 $ 231,112 $ 194,788 Operating Data Sand sales volumes (metric tonnes) 832, , ,213 Sand revenue / metric tonne ($/MT) $ 136 $ 170 $ 163 Gross Margin / metric tonne ($/MT) $ 10 $ 36 $ 64 Adjusted Gross Margin / metric tonne ($/MT) $ 19 $ 45 $ 70 Notes: (1) At year end. -38-

62 Reconciliation of EBITDA and Adjusted EBITDA to Net Income: Year Ended December 31, (in $ thousands unless otherwise indicated) Net income (loss) ($43,402) ($ 9,766) $ 17,035 Add: Deferred tax ($ 516) $ 398 $ 379 Current tax $ 4 $ 171 $ 58 Interest expense $ 16,202 $ 12,079 $ 8,838 Cost of sales depreciation $ 8,039 $ 7,133 $ 4,611 Depreciation $ 6,373 $ 5,674 $ 3,146 EBITDA ($13,300) $ 15,689 $ 34,067 Add: Finance expense excluding interest expense $ 3,289 $ 267 $ 160 Management Fee (1) $ 1,043 $ 1,683 $ 1,456 Fair value adjustment on SES Shareholder Loan (2) $ 3,906 Loss (gain) on asset disposal $ 1,082 $ 94 ($ 3,110) Loss (gain) on impairment $ 1,852 Transaction and professional fees (3) $ 926 $ 746 $ 229 Loss (gain) on derivative liability $ 910 Less: Gain on settlement of deferred revenue (4) ($ 3,328) Adjusted EBITDA ($ 7,526) $ 22,385 $ 32,802 Notes: (1) See Corporate Structure Source. (2) See management s discussion and analysis in Appendix FS. (3) Transaction and professional fees relate to certain transaction costs that Management not to be indicative of the underlying business performance of Source. (4) Relates to the settlement of the CMSA Customer dispute. See Legal Proceedings and Regulatory Actions. Reconciliation of Adjusted Gross Margin to Gross Margin: Year Ended December 31, (in $ thousands unless otherwise indicated) Gross Margin $ 7,903 $29,638 $46,391 Add: Cost of sales depreciation $ 8,039 $ 7,133 $ 4,611 Adjusted Gross Margin $15,942 $36,771 $51,002 MANAGEMENT S DISCUSSION AND ANALYSIS Management s discussion and analysis of Source for the years ended December 31, 2016, 2015 and 2014 are included in this prospectus in Appendix FS Financial Statements and Management s Discussion and Analysis. DESCRIPTION OF SHARE CAPITAL The authorized share capital of the Company as of the date hereof consists of an unlimited number of Common Shares, an unlimited number of preferred shares, issuable in series, and an unlimited number Class B Shares. As of the date of this prospectus, there is a single Common Share issued and outstanding. The following is a description of the rights, privileges, restrictions and conditions attaching to Source s share capital. Common Shares The Common Shares have the following rights, privileges, restrictions and conditions: Voting Rights: Holders of Common Shares are entitled to receive notice of, to attend and to vote at all meetings of Shareholders and are entitled to one vote per Common Share held at such meetings, except meetings of holders of another class or one or more series of another class of shares who are entitled to vote separately as a class at such meeting. Dividends: Holders of Common Shares are entitled to receive dividends if, as and when declared by the Board, such dividends or other distributions as may be declared thereon by the Board from time to time. -39-

63 Ranking: In the event of any voluntary or involuntary liquidation, dissolution or winding-up of Source or any other distribution of Source s assets among its shareholders for the purpose of winding-up its affairs (a Distribution ), holders of Common Shares, subject to the preferences accorded to holders of preferred shares and any other shares of the Company ranking senior to the Common Shares from time to time with respect to payment on a Distribution, to share equally, share for share, in the remaining property of the Company. Preferred Shares The preferred shares may at any time and from time to time be issued in one or more series, each series to consist of such number of shares as may, before the issuance thereof, be determined by the Board. Subject to the provisions of the ABCA, the Board shall fix, before issuance, the designation, rights, privileges, restrictions and conditions attaching to each series of preferred shares including, without limitation, participation rights in respect of a Distribution (if any) and dividend rights (if any). The preferred shares of each series will rank on parity with every other series of preferred shares of the Company and shall have priority over the Common Shares and any other shares of the Company ranking junior to the preferred shares with respect to redemption, the payment of dividends and any Distribution. Holders of preferred shares will not be entitled to received notice of, attend or vote at any meetings of Shareholders. Class B Shares The Class B Shares have the following rights, privileges, restrictions and conditions: Voting Rights: Holders of Class B Shares are entitled to receive notice of, to attend and to vote at all meetings of Shareholders and are entitled to one vote per Class B Shares held at such meetings, except meetings of holders of another class or one or more series of another class of shares who are entitled to vote separately as a class at such meeting. Dividends: Holders of Class B Shares are not entitled to dividends. Ranking: In the event of a Distribution, holders of each series of Class B Shares are not entitled to share in the remaining property of the Company. Subdivision, Consolidation, etc.: If the Common Shares are at any time subdivided, consolidated, converted or exchanged for a greater or lesser number of shares of the same or another class, appropriate adjustment will be made in the rights and conditions attached to the Class B Shares so as to maintain and preserve the relative rights of the holders of the Class B Shares. Pursuant to the Source Canada Exchange Agreement, TriWest IV US Fund LP will have to surrender each Class B Share for each Common Share issued on a redemption of the Exchangeable LP Securities. See Corporate Structure Reorganization. DESCRIPTION OF INDEBTEDNESS The following is a summary of the material terms of certain indebtedness of Source. This summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to the full text of such agreements and instruments. A copy of the Credit Agreement and the Note Indenture are available under the Company s profile at Indebtedness outstanding following the Offering Credit Facilities General Source is a party, by way of Source Canada LP, to the Credit Agreement providing for the Credit Facilities, which mature on December 8, Source expects to increase the Revolver Limit to $50,000,000 (which would include a swingline with a sublimit of $5,000,000) following the Closing. Interest Rates, Fees, Payments and Prepayments Under the terms of the Revolver Commitment, margins charged on Canadian prime rate loans, U.S. base rate loans, Libor loans, bankers acceptances, letters of credit and standby fees vary depending on the excess availability. -40-

64 Margins on Canadian prime rate loans and U.S. base rate loans range from 1.00% per annum when the excess availability is greater than 50% and up to 3.00% per annum when the excess availability is less than or equal to 20%. Margins on Libor loans, bankers acceptances and letters of credit under the Revolver Commitment range from 2.50% per annum when the excess availability is greater than 50% and up to 4.50% per annum when the excess availability is less than or equal to 20%. Standby fees will range from 0.50% per annum when the excess availability is greater than 50% and up to 0.90% per annum when the excess availability is less than or equal to 20%. Margins on the SBLC Facility are 1.50% per annum. The excess availability is calculated as (a) the lesser of (i) the borrowing base and (ii) the Revolver Commitment minus (b) the aggregate outstanding principal amount under the Revolver Commitment, or when expressed as a percentage, is the percentage equal to: [(a) (b)] (a); provided that where the result of the numerator is a negative number, the numerator shall be deemed to be zero (the Line Cap ). Loans bearing interest based on Canadian prime rate or U.S. base rate may be prepaid at any time without penalty with written notice one to three days in advance; provided that Source Canada LP may repay a swingline loan without any prior notice. Prepayment of outstanding letters of credit, bankers acceptances and LIBOR loans cannot be prepaid but may be cash collateralized with the Bank Agent pursuant to the terms of the Credit Agreement. Covenants The Credit Agreement contains customary negative covenants including, but not limited to, restrictions on Source Canada LP s and each of the Credit Facilities Guarantors ability to make certain distributions, merge, consolidate and amalgamate with other companies, incur indebtedness, make certain investments, undertake asset sales, use of the proceeds under the Credit Facilities, provide certain forms of financial assistance, transact or have any outstanding financial instruments other than permitted hedging instruments, hypothecate, charge, pledge or otherwise encumber their assets other than certain permitted encumbrances, and prepay or amend the Notes. The Credit Agreement contains customary affirmative covenants including, but not limited to, delivery of financial and other information to the Lenders, notice to the Lenders upon the occurrence of certain material events, maintenance of insurance, maintenance of existence, payment of taxes and other claims, maintenance of properties and insurance, access to books and records by the Lenders (including the right to field exams and inventory appraisals), compliance with applicable laws and regulations and further assurances. The Credit Agreement includes a financial covenant that, at all times when Source s excess availability is less than 20% of the Line Cap, Source must maintain a minimum fixed charge coverage ratio equal to or greater than: (a) 1.10:1.00, from the date the Line Cap is less than 20% to the end of the fiscal quarter ended June 30, 2017 and (b) 1.25:1.00, at all times thereafter. Source Canada LP is subject to a payment condition whereby in the event Source Canada LP s excess availability is greater than 20% of the Line Cap, on a pro forma basis, any Restricted Payments (as defined in the Note Indenture) will be permitted. Events of Default The Credit Agreement provides that, upon occurrence of one or more events of default, Source s obligations thereunder may be accelerated, the lending commitments thereunder terminated and the security granted in favour of the Bank Agent, on behalf of the Lenders, will become enforceable. Such events of default include payment defaults to the Lenders, inaccuracies of representations and warranties, covenant defaults, change of control, bankruptcy proceedings, material money judgments, material adverse effect and other customary events of default. Security and Guarantees The Credit Facilities are guaranteed by each member of the Restricted Group, Source LP GP and Source US LP GP (collectively, the Credit Facilities Guarantors ), Source Canada LP and such Credit Facilities Guarantors have each provided a first-ranking security interest to the Bank Agent, for and on behalf of itself and the Lenders, in all present and after-acquired inventory, accounts receivable, accounts (and the amounts therein) held at any financial or deposit taking institutions (other than amounts which arise from the sale, license, assignment or other disposition of priority collateral under the Notes) and proceeds of each of the foregoing and a second-ranking security interest on all other present and after-acquired real and personal property, which are subject to the terms of an intercreditor agreement -41-

65 among Computershare Trust Company of Canada (in its capacity as trustee and collateral agent for the holders of Notes), the Bank Agent (as collateral agent under the Credit Facilities), the Note Issuers and the Credit Facilities Guarantors. Notes General On December 8, 2016, Source completed the Note Offering in which the Note Issuers issued $130,000,000 aggregate principal amount of 10.5% Senior Secured First Lien Notes due December 15, Interest is payable on the Notes semi-annually on December 15 and June 15. The Notes are direct senior secured obligations of the Note Issuers. As such, the Notes rank senior in right of payment of all future indebtedness of the Note Issuers. The Note Issuers may, at their option, redeem all or part of the Notes at any time prior to December 15, 2018 at a make-whole price set out in the Note Indenture and on or after December 15, 2018 at the redemption prices set forth in the Note Indenture plus, in each case, accrued and unpaid interest, if any, to the redemption date. In addition, prior to December 15, 2018, the Note Issuers may, at their option, redeem up to 35% of the aggregate principal amount of the Notes with the net proceeds of equity offerings by Source at a redemption price of % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date (the Notes Optional Redemption ). Source expects to exercise a portion of the Notes Optional Redemption following completion of the Offering. See Use of Proceeds. Security and Guarantees The Notes and the guarantees of the Notes are secured (a) on a first-priority lien basis, subject to certain permitted liens, by certain collateral comprised of substantially all of the tangible and intangible assets of each member of the Restricted Group other than receivables and inventory of each member of the Restricted Group and certain related rights and proceeds relating thereto which secure the Credit Facilities on a first-priority lien basis and (b) on a secondpriority lien basis, subject to certain permitted liens, by receivables and inventory of each member of the Restricted Group and certain related rights and proceeds relating thereto which secure the Credit Facilities on a first-priority lien basis, in each case, whether now owned or hereafter acquired, subject to certain exceptions, limitations and risks. The Notes are guaranteed by each member of the Restricted Group. Relevant Transaction Rights The Note Indenture provides holders of Notes with the right to receive a cash payment in connection with certain transactions involving the sale of assets or securities of Source on a consolidated basis or an initial public offering, such as this Offering, on or prior to December 15, In connection with the Offering, each $1,000 principal amount of Notes entitles the holder thereof to a payment in cash equal to 125% of the value (the Cash RTR Payment ) of the quotient (the IPO Amount ) obtained by dividing (a) 4.0% of the number of Common Shares outstanding (on a fully-diluted basis) immediately prior to the consummation of the Offering (calculated without giving effect to the issuance of the Common Shares under the Offering), being 1,005,831 and (b) 130,000. Notwithstanding the foregoing, the Note Issuers may, at their option, in lieu of paying the Cash RTR Payment, issue a number of Common Shares that (based on the Offering Price) have an aggregate value equal to 100% of the IPO Amount (the Common Shares RTR Payment ). Source intends to satisfy the aggregate of the Cash RTR Payments that will become owing upon Closing by providing the holders of Notes with a Common Shares RTR Payment. Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common Shares RTR Payment will be deemed to have entered into a lock-up agreement the terms of which are substantially similar to those of the Lock-Up Agreements. Other Provisions The Note Indenture contains the terms and provisions governing the Notes, including covenants respecting limitations on restricted payments, limitations on additional indebtedness, limitations on liens, limitations on transactions with affiliates, limitations on asset sales, limitations on conduct of business, provision of financial information, limitations on amalgamations, mergers and consolidations and designation of restricted and unrestricted subsidiaries. -42-

66 Equipment Loans and Capital Leases Source has entered into various capital lease and equipment loan agreements which are secured by the specific assets under lease or loan. The interest rates for these obligations range from 4.25% to 12% per annum, while the respective maturity dates of such obligations range between 2017 and Indebtedness being repaid in connection with the Offering Shareholder Loans Source Canada LP has been advanced the following Shareholder Loans by way of unsecured promissory notes as amended, from: (a) SES Canada LP issued on March 26, 2014 for $12.5 million bearing interest at 25% per annum which, from October 26, 2016, is paid through in kind interest (the SES Shareholder Loan ); (b) SES Canada LP issued on December 21, 2015 for $7.5 million bearing interest at 18% per annum which, after October 21, 2016, is paid through in kind interest, which interest increases to 25% per annum 18 months following the date of its advance (the SES II Shareholder Loan ); and (c) certain Shareholders, including SES Canada LP, issued on September 7, 2016 for $2 million bearing no interest, the repayment of which is due on September 7, 2026 (the SES III Shareholder Loans ). Further, in connection with the Previous Credit Facility certain Shareholders, including SES Canada LP, provided guarantees to the Previous Credit Facility syndicate in the aggregate of $5.5 million. The agreements governing such guarantees stipulated that if the Previous Credit Facility was repaid, promissory notes for a corresponding amount and on the same terms as the SES III Shareholder Loans would be issued to such Shareholders. The Previous Credit Facility was repaid in connection with the Note Offering and accordingly, Source Canada LP issued such promissory notes as of the closing of the Note Offering to those Shareholders for an aggregate of $5.5 million bearing no interest (the SES IV Shareholder Loans ), the repayment of which is expected to be due on the tenth anniversary of the date of issue. The repayment of amounts due under the Shareholder Loans is subordinated to the Notes. Sand Royalty Loan Source Canada LP, as borrower, is a party to a loan agreement dated October 16, 2013 with Sand Royalty LP, as lender, providing for a reducing term loan to a maximum not to exceed $10,150,000 (the Sand Royalty Loan ). The Sand Royalty Loan may be drawn down in maximum monthly draws of $350,000. Sand Royalty LP is a limited partnership formed by Jim McMahon and the Class B Founder, two of the current unitholders of Source. The Sand Royalty Loan is subordinated to the Notes and bears interest at 8% per annum and matures on March 1, The Sand Royalty Loan is secured by a general security agreement from Source Canada LP and certain of its subsidiaries, which security is subordinated to the security of the Notes. DIVIDEND POLICY Dividends and Dividend Policy The Company has never declared or paid any dividends on the Common Shares and does not currently anticipate paying any dividends on the Common Shares following completion of the Offering. In 2015 and 2016, Source Canada LP and Source US LP declared distributions to each of its unitholders, including the Class B Founder and the Class B Family Trust. In 2015, an aggregate of approximately $1.87 million was distributed to the unitholders (other than the Class B Founder and the Class B Family Trust) and an aggregate of approximately $3.19 million was distributed to the Class B Founder and the Class B Family Trust. In 2014, 2015 and 2016, accrued preferred distributions to the Class B Founder and the Class B Family Trust amounted to an aggregate of approximately $4.45 million, $8.38 million and $4.38 million, respectively. In 2016, an aggregate of approximately $5.09 million was distributed to unitholders (other than the Class B Founder and the Class B Family Trust). See Appendix FS Financial Statements and Management s Discussion and Analysis. The Company does not currently anticipate paying any dividends on the Common Shares following completion of the Offering and it currently intends to use its future earnings and other cash resources for the operation and development of its business, but may declare and pay dividends in the future as operational circumstances permit. Any future determination to pay dividends on the Common Shares will be at the sole discretion of the Board of Directors after considering a variety of factors and conditions existing from time to time, including current and future commodity prices, foreign exchange rates, the Company s hedging program, current operations including production levels, -43-

67 operating costs and debt service requirements, available investment opportunities and the satisfaction of the liquidity and solvency tests imposed by the ABCA for the declaration and payment of dividends. Under the Credit Agreement, Source and the Credit Facilities Guarantors are restricted from making any distributions (including dividends) to or for the benefit of Shareholders or persons associated with Shareholders (within the meaning of the ABCA) in any amount which would cause a breach of a provision of the Credit Agreement. In addition, the payment of dividends by a corporation is governed by the liquidity and insolvency tests described in the ABCA. Pursuant to the ABCA, after the payment of a dividend, the Company must be able to pay its liabilities as they become due and the realizable value of its assets must be greater than its liabilities and the legal stated capital of its outstanding securities. CONSOLIDATED CAPITALIZATION The following table sets forth the cash and consolidated capitalization of Source as at December 31, 2016 before and after giving effect to the Offering and the use of the proceeds therefrom as described in Use of Proceeds. This table must be read in conjunction with Source s management s discussion and analysis and Source s historical financial statements and accompanying notes contained in this prospectus. As at December 31, 2016, before giving effect to the Offering (unaudited) ($000, except share amounts) As at December 31, 2016, after giving effect to the Offering (5)(6) (unaudited) ($000, except share amounts) Cash 54,204 Debt Credit Facilities (1) 12,291 12,291 Notes (2) 110, ,503 Finance lease obligations and other long-term debt 1,889 1,889 Shareholder Loans (3) 36,770 (7) Sand Royalty Loan (4) 4,599 Preferred shares obligation 70,513 (7) Shareholder s Equity Partner s Equity (59,219) (7) Shareholder s equity 190,625 (7)(8) Notes: (1) See Description of Indebtedness Indebtedness outstanding following the Offering Credit Facilities. As at April 4, 2017, approximately $23.5 million was outstanding under the Credit Facilities. The borrowing base under the Credit Facilities was determined to be $35,000,000 as of March 31, (2) See Description of Indebtedness Indebtedness outstanding following the Offering Notes. (3) See Description of Indebtedness Indebtedness being repaid in connection with the Offering Shareholder Loans. (4) See Description of Indebtedness Indebtedness being repaid in connection with the Offering Sand Royalty Loan. (5) Assumes the issuance of 1,005,831 Common Shares pursuant to the Common Shares RTR Payments (assuming no applicable withholdings) to satisfy the aggregate Cash RTR Payments that will become owing under the Note Indenture at Closing, 3,691,942 Common Shares to the Class B Founder and the 1,520,139 Common Shares to the Class B Family Trust each concurrently with the Closing in connection with the Reorganization and 3,586,518 Common Shares to the holders of the Shareholder Loans concurrently with Closing to repay such loans. See Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. (6) After deducting the Underwriters Commission of $9,625,000 and estimated expenses of the Offering of $3,500,000 (after estimated tax effects). (7) See Corporate Structure Reorganization for additional detail, including the number of Common Shares being issued in connection with the repayment of the Shareholder Loans in or around the Closing (being 3,586,518 Common Shares), the settlement of the preferred shares obligation (being 5,212,081 Common Shares) and the settlement of the Prior EEPP Units (being 52,772 Common Shares). (8) Includes 25,145,772 Common Shares before giving effect to the Offering and 51,616,869 Common Shares after giving effect to the Offering. If the Over-Allotment Option is exercised in full, the number of Common Shares outstanding will increase by 2,500,000 to 54,116,869 and shareholder s equity will increase by $21,673 to $212,298. OPTIONS TO PURCHASE SECURITIES The following table sets forth certain information in respect of Options to purchase Common Shares that are anticipated to be outstanding at Closing. Options will be issued to executive officers and certain employees of the Company in connection with the Reorganization at an exercise price equal to the Offering Price. See also Executive Compensation Option Plan. -44-

68 Group (Number in Group) Common Shares Under Option (#) Exercise Price per Common Share (1) ($) Market Value of Common Shares Under Option (2) ($) Expiration Date (3) Executive officers of the Company (4 persons) 2,580, April 13, 2022 Employees of the Company (25 persons) 1,806, April 13, 2022 Total 4,387, April 13, 2022 Notes: (1) The exercise price of all Options will be the Offering Price. (2) Given the exercise price will be the Offering Price, the value of Options upon the Closing is nil. (3) This column discloses the applicable expiry dates. The expiry dates for the Options are based on a set expiry of five years from the date of grant. PRIOR SALES On February 7, 2017, a single Common Share of the Company was issued to Brad Thomson in connection with the incorporation of the Company (the Initial Common Share ). An aggregate of 29,057,679 Common Shares and 1,300,174 Class B Shares will be issued pursuant to the Reorganization and the Initial Common Share will be cancelled. See Corporate Structure Reorganization. No other Common Shares or Class B Shares were issued during the 12 months preceding the date hereof. Pursuant to the Note Indenture, each $1,000 principal amount of Notes entitles the holder thereof to a Cash RTR Payment, which the Note Issuers may satisfy by providing such holder with a Common Shares RTR Payment. Source intends to satisfy the aggregate of the Cash RTR Payments that will become owing upon Closing by providing the holders of Notes with Common Shares RTR Payments, resulting in the issuance of 1,005,831 Common Shares (assuming no applicable withholdings) to the holders of Notes shortly after the Closing. See Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER The following table sets forth the number of securities of each class of securities of Source that, to the knowledge of Source, are anticipated to be in escrow or subject to a contractual restriction on transfer at Closing and the percentage that number represents of the outstanding securities of that class. Designation of Class Number of Securities Held in Escrow or that are Subject to a Contractual Restriction on Transfer (1) Percentage of Class Common Shares 34,950, % (2)(3) Note: (1) The Underwriters and the Company will enter into Lock-Up Agreements with each of the Locked-Up Shareholders representing, in the aggregate, 33,944,371 Common Shares (including any Common Shares that may be acquired on the redemption of Exchangeable LP Securities), representing approximately 65.76% of the outstanding Common Shares after giving effect to the Offering. Subject to certain exceptions (including the Locked-Up Shareholders rights to transfer or distribute Common Shares to certain affiliates, family members, trust and RRSPs, to transfer Common Shares pursuant to a take-over bid for securities of the Company and the ability of the Class B Founder and any of his affiliated entities that hold Common Shares to sell up to 781,812 Common Shares per month), the terms of the Lock-Up Agreements provide that, for a period commencing on the date of filing of this prospectus and continuing to and including the date that is 180 days following Closing, the Locked-Up Shareholders will not, directly or indirectly, without the prior written consent of the Lead Underwriters, which consent shall not be unreasonably withheld, on behalf of the Underwriters, sell, offer or grant any option, warrant or other right to purchase or agree to sell, or otherwise lend, transfer, assign, pledge or dispose of (including without limitation by making any short sale, engaging in any hedging, monetization or derivative transaction or entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Common Shares or other securities of the Company, whether or not cash settled), in a public offering or by way of a private placement or otherwise, any equity securities of the Company or other securities convertible into, exchangeable for, or otherwise exercisable into Common Shares or other equity securities of the Company, or agree to do any of the foregoing or publicly announce any intention to do any of the foregoing. (2) Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common Shares RTR Payment will be deemed to have agreed to the terms of a lock-up agreement the terms of which are substantially similar to those of the Lock-Up Agreements. (3) Following the completion of the Offering. -45-

69 PRINCIPAL SHAREHOLDERS The following table sets out the shareholdings of the Major Shareholders and those Shareholders that, to the knowledge of Source, beneficially own, directly or indirectly, or exercise control or direction over, any class of voting securities carrying in aggregate more than 10% or more of the votes attached to such issued and outstanding voting securities, both before and after giving effect to the Offering. To the knowledge of Source, no person or company will, as of the Closing, beneficially own, directly or indirectly, or exercises control or direction over, any class of voting securities carrying in aggregate 10% or more of the votes attached to such issued and outstanding voting securities, except for the Major Shareholders, as set out below: Name TriWest IV Jim McMahon (4) Brad Thomson (5)(6) Ownership Of Record and Beneficial Of Record and Beneficial and Control or Direction Of Record and Beneficial and Control or Direction Number and Percentage of Common Shares Upon the Reorganization (1) Number and Percentage of Common Shares After Giving Effect to the Offering (1)(2) Number and Percentage of Common Shares After Giving Effect to the Offering and the Over- Allotment Option (1)(2)(3) 13,326,978 (43.88%) 16,677,346 (32.30%) 16,677,346 (30.81%) 8,007,759 (26.37%) 8,240,504 (15.96%) 8,240,504 (15.22%) 3,249,901 (10.70%) 3,251,604 (6.30%) 3,251,604 (6.01%) Notes: (1) On a fully-diluted basis, at the applicable date. (2) Assumes the issuance of 1,005,831 Common Shares pursuant to the Common Shares RTR Payments (assuming no applicable withholdings) to satisfy the aggregate Cash RTR Payments that will become owing under the Note Indenture at Closing, 3,691,942 Common Shares to the Class B Founder and 1,520,139 Common Shares to the Class B Family Trust each concurrently with the Closing in connection with the Reorganization and 3,586,518 Common Shares to the holders of the Shareholder Loans and concurrently with Closing to repay such loans. See Description of Indebtedness Indebtedness outstanding following the Offering Notes Relevant Transaction Rights. (3) Assumes exercise of the Over-Allotment Option in full. (4) Includes Common Shares held by Alberta LP and Alberta LP. (5) Messrs. Newell, Melbourn and Jackson and Alberta Inc. (a company controlled by Mr. Thomson and his spouse) each have contracting arrangements with each of the Major Shareholders or their affiliates, which may entitle such officers and such company to receive payments from such Major Shareholders depending on the amount of the proceeds ultimately received by such Major Shareholders on their investments in Source, to a maximum payment (as of the date of this prospectus) to each of Messrs. Newell, Melbourn and Jackson of approximately $1.894 million (and to Alberta Inc. of $1.538 million) from TriWest IV and affiliates and of approx. $1.132 million (and to Alberta Inc. of $0.919 million) from Mr. McMahon and affiliates, where such payments will be calculated and owing on or before December 31, (6) Includes Common Shares held by Sand Ventures LP, Alberta LP and by Alberta LP, a limited partnership owned by Mr. Thomson s spouse. Distribution and Nomination Rights Upon the Reorganization, the Company and the Distribution Rights Shareholders will enter into the Distribution Rights Agreement and the Company will enter into the TriWest Nomination Agreement with TriWest IV and the McMahon Nomination Agreement with Jim McMahon. The following descriptions of certain provisions of the Distribution Rights Agreement, the TriWest Nomination Agreement and the McMahon Nomination Agreement, as the case may be, are summaries only, are not comprehensive and are qualified in their entirety by reference to the full text of the Distribution Rights Agreement, the TriWest Nomination Agreement and the McMahon Nomination Agreement, as the case may be, copies of which will be available under the Company s profile at Distribution Rights Agreement The Distribution Rights Agreement provides each Distribution Rights Shareholder who (collectively with its affiliates) holds or exercises control or direction over not less than an aggregate of 10% of the outstanding Common Shares (in the case of TriWest IV, assuming the redemption of the Exchangeable LP Securities) with the right to require the Company to qualify Common Shares held by such Distribution Rights Shareholder for distribution by way of a secondary offering prospectus prepared in accordance with Applicable Securities Laws (a Demand Distribution ) at any time after the date that is six months following the date the Company becomes a reporting -46-

70 issuer under Applicable Securities Laws in any jurisdiction in Canada. Each Distribution Rights Shareholder is entitled to a maximum of four Demand Distributions in total, and a maximum of one Demand Distribution in any six month period; provided, however, that the number of Common Shares specified in each request for a Demand Distribution by a Distribution Rights Shareholder (a Demanding Shareholder ) must have an aggregate market value of no less than $50 million (or, if less than such amount, then such securities must represent at least 50% of the total number of Common Shares then held by such Demanding Shareholder) and the Company is not required to fulfill more than one Demand Distribution in any six month period or, in the case of the fifth and any subsequent Demand Distribution, more than one Demand Distribution in any one year period. To the extent permitted by applicable law, the Company will pay all expenses in connection with the Demand Distribution initiated by that Demanding Shareholder, except that each Demanding Shareholder shall pay all fees and expenses of such Demanding Shareholder s counsel and the underwriting discounts, commissions and similar fees, and transfer taxes applicable to the Common Shares of such Demanding Shareholder in such Demand Distribution. The Demanding Shareholder shall have the right to select the underwriter(s) to administer the offering of the Common Shares which are the subject of the Demand Distribution, subject to the Company s approval, which will not be unreasonably withheld. The Distribution Rights Agreement provides each Distribution Rights Shareholder with the right to require the Company to include Common Shares held by a Distribution Rights Shareholder in any qualification or registration of the Company s Common Shares under Applicable Securities Laws (a Piggyback Distribution ). The Company must cause to be included in the Piggyback Distribution all Common Shares a Distribution Rights Shareholder (a Participating Shareholder ) requests to be included in the Piggyback Distribution; provided, however, that: (a) if a Piggyback Distribution is to occur in conjunction with a distribution of securities by the Company and the managing underwriters advise that the total number of securities requested to be included in the distribution exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, acting reasonably, the Company will use its reasonable commercial efforts to cause the distribution of securities to occur in the following order of priority: (i) first, the previously unissued securities that the Company proposes to distribute, (ii) second, the Participating Shareholder s Common Shares requested to be qualified for distribution (provided that if more than one Distribution Rights Shareholder desires to participate, each such Distribution Rights Shareholder shall be entitled to include its pro rata share of Common Shares based on each Distribution Rights Shareholder s overall relative ownership of issued and outstanding Common Shares), and (iii) third, other Common Shares requested to be qualified for distribution; and (b) if a Piggyback Distribution is to occur in conjunction with a secondary distribution on behalf of another Shareholder and the managing underwriters advise that the total number of securities requested to be included in the distribution exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to that other Shareholder, the Company will use its reasonable commercial efforts to cause the distribution of securities to occur in the following order of priority: (i) first, the Distribution Rights Shareholder s Common Shares of each Distribution Rights Shareholder requested to be qualified for distribution, on a pro rata basis based on overall relative ownership of issued and outstanding Common Shares of the Company and (ii) second, other securities requested to be qualified for distribution. The Company shall have the right to select the investment banker(s) and manager(s) to administer the offering from treasury and of the Common Shares which are subject to the Piggyback Distribution. The expenses pursuant to the Piggyback Distribution will be paid by the Company to the extent permitted by applicable law, except that each Participating Shareholder shall be responsible for its own fees and expenses of its counsel, the underwriting discounts, commissions and similar fees, and transfer taxes applicable to the Common Shares of such Participating Shareholder included in such Piggyback Distribution. Upon receipt of a request from a Distribution Rights Shareholder for a Demand Distribution or a request from a Distribution Rights Shareholder for a Piggyback Distribution, as the case may be, and subject to the execution and delivery of an underwriting agreement in form and content satisfactory to the Company, acting reasonably, the Company will use its reasonable commercial efforts to effect the distribution of the Common Shares which are the subject of a Demand Distribution or Piggyback Distribution. Pursuant to the Distribution Rights Agreement, the Company is obligated to indemnify each Demanding Shareholder and Participating Shareholder (and their managers, partners, officers, directors, employees and agents of itself and its manager, and each person that controls such Demanding Shareholder or Participating Shareholder or its manager) for any untrue statement or alleged untrue statement of a material fact contained in any prospectus, offering circular or other document, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make any statement therein not misleading, or any -47-

71 violation or alleged violation by the Company of any rule or regulation promulgated under Applicable Securities Laws in connection with any distribution of such Demanding Shareholder s or Participating Shareholder s Common Shares pursuant to the Distribution Rights Agreement. Pursuant to the Distribution Rights Agreement, each Demanding Shareholder or Participating Shareholder, as the case may be, is obligated to indemnify the Company for any untrue statement or alleged untrue statement of a material fact contained in any prospectus, offering circular or other document, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make any statement therein not misleading, or any violation or alleged violation by such Demanding Shareholder or Participating Shareholder, as the case may be, of any rule or regulation promulgated under Applicable Securities Laws applicable to such Demanding Shareholder or Distribution Rights Shareholder, as the case may be, in connection with any such registration. The Distribution Rights Shareholders may also sell Common Shares other than by way of a prospectus pursuant to the Distribution Rights Agreement under available exemptions from the prospectus requirements of Canadian securities legislation, where applicable. TriWest Nomination Agreement At Closing, the Company expects to enter into an agreement with TriWest IV under which the Company would undertake, subject to certain conditions, to: (a) in the event TriWest IV and its affiliates beneficially own or exercise control or direction over at least 15% of the aggregate issued and outstanding Common Shares and Class B Shares, put forward two nominees of TriWest IV upon the slate of directors proposed by the Company at any meeting of the Shareholders at which directors are to be elected, and (b) in the event TriWest IV and its affiliates beneficially own or exercise control or direction over less than 15% but more than 7.5% of the aggregate issued and outstanding Common Shares and Class B Shares, put forward one nominee of TriWest IV upon the slate of directors proposed by the Company at any meeting of the Shareholders at which directors are to be elected. In the event TriWest IV and its affiliates beneficially own or exercise control or direction over less than 7.5% of the aggregate issued and outstanding Common Shares, the Company will not be obligated to include any nominee of TriWest IV upon the slate of directors proposed by the Company at any meeting of the Shareholders at which directors are to be elected. McMahon Nomination Agreement At Closing, the Company expects to enter into an agreement with the Jim McMahon under which the Company would undertake, subject to certain conditions, to in the event Jim McMahon and his affiliates beneficially own or exercise control or direction over at least 7.5% of the aggregate issued and outstanding Common Shares and Class B Shares, put forward Jim McMahon upon the slate of directors proposed by the Company at any meeting of the Shareholders at which directors are to be elected. In the event Jim McMahon and his affiliates beneficially own or exercise control or direction over less than 7.5% of the aggregate issued and outstanding Common Shares, the Company will not be obligated to include Jim McMahon upon the slate of directors proposed by the Company at any meeting of the Shareholders at which directors are to be elected. -48-

72 USE OF PROCEEDS Proceeds from Offering The following table sets forth the principal purposes for which the Company proposes to use the net proceeds of the Offering: Proceeds to Source ($000s) Gross proceeds raised pursuant to the Offering 175,000 Underwriters Commission 9,625 Expenses and costs relating to the Offering 3,500 Total estimated net proceeds pursuant to the Offering 161,875 Uses by Source Purchase price related to the Blair Facility Acquisition 60,368 (2) Estimated transaction costs related to the Blair Facility Acquisition 1,342 (2) Blair Option Exercise 3,351 (2) Repayment of Sand Royalty Loan 4,662 Notes Optional Redemption 25,784 Class B Payment 17,250 Prior EEPP Unit Holders Payment 410 Capital expenditure program 48,708 Notes: (1) If the Underwriters exercise the Over-Allotment Option in full, the gross proceeds raised pursuant to the Offering, Underwriters Commission, total estimated net proceeds pursuant to Offering and Notes Optional Redemption will be $201,250, $11,069, $186,681, and $50,590. (2) By applying the noon rate of exchange for Canadian dollars in terms of United States dollars, as quoted by the Bank of Canada on April 4, Due to the nature of the frac sand industry and the oil and gas industry, budgets are regularly reviewed with respect to the success of the expenditures and other opportunities which become available to Source. Accordingly, while it is currently intended by Management that the net proceeds of the Offering will be expended as set forth above, actual expenditures may differ from these amounts and allocations. See Business Blair Facility Acquisition and Business Capital Budget. The principal purpose for which the indebtedness under the Sand Royalty Loan was incurred was in order to complete capital projects such as the Sumner Facility, the Weyerhaeuser Facility and the Wembley Terminal. See Description of Indebtedness Indebtedness to be repaid in connection with The Offering and Appendix FS Financial Statements and Management s Discussion and Analysis. Source had negative cash flow from operating activities in its most recently completed financial year for which financial statements have been included in this prospectus. Source does not expect to use any of the net proceeds of the Offering to fund negative cash flow from operations. See Risk Factors Risks Related to Source. Business Objectives and Milestones The principal purposes for the net proceeds from the Offering as described above are consistent with Source s business objectives and strategic goals relating to becoming the most efficient and most reliable supplier of frac sand in the WCSB by servicing the entire frac sand supply chain. By its nature, the frac sand business and corresponding oil and natural gas business is dynamic and requires constant review, analysis, and determination of prudent allocations of capital spending. Depending on the degree of success achieved from Source s planned activities, Source will assess, and may establish, additional objectives and milestones to be met. -49-

73 DIRECTORS AND OFFICERS Summary Information The following table sets forth certain summary information in respect of the Company s directors and officers as of the Closing. Name, Province and Country of Residence Brad Thomson (2) Calgary, AB Canada James (Jim) McMahon (2)(4)(5) Calgary, AB Canada Cody Church (2)(4) Calgary, AB Canada Jeff Belford (2)(3) Calgary, AB Canada Neil Cameron (2)(3)(4)(5) Saskatoon, SK Canada Marshall McRae (2)(3)(4) Calgary, AB Canada Stew Hanlon (2)(3)(4)(5) Calgary, AB Canada Derren Newell Calgary, AB Canada Scott Melbourn Calgary, AB Canada Joe Jackson Frisco, Texas United States Position Held Chief Executive Officer and Director Director Principal Occupation for the Last Five Years President and Chief Executive Officer and a Director of Source, roles he has held since June Prior to joining Source, Mr. Thomson was the President of ZEEP Canada from April 2009 to April Director of Source since October Previously, Mr. McMahon was Executive Vice-President, Director and Secretary of Source, roles he held from May 2009 to December Director (Chair) Senior Managing Director, TriWest Capital since 2012, and in senior roles with TriWest Capital Partners Inc. and its related companies since September, Director Senior Managing Director, TriWest Capital since 2012, and in senior roles with TriWest Capital Partners II (2003) Inc. and its related companies since October, Director President and Chief Executive Officer of NSC Minerals Ltd., a position he has held since May Prior to such appointment, he was the Chief Operating Officer and Vice- President Operations of NSC Minerals Ltd. positions he held since September Director Mr. McRae served as interim Chief Financial Officer and Executive Vice-President of Black Diamond Group Limited from October 2013 to August 2014, and as interim Executive Vice-President of Black Diamond Group Limited from August 2014 to December Mr. McRae has also been an independent financial and management consultant since August Director President, Chief Executive Officer and Director of Gibson Energy Inc., a position he has held since April Chief Financial Officer Chief Operating Officer Senior Vice- President, Commercial Development Chief Financial Officer of Source, a role he has held since July Prior to joining Source, Mr. Newell was the Chief Financial Officer of CE Franklin between June 2011 and July Prior to that Mr. Newell was Corporate Controller of CE Franklin from September 2010 to June Chief Operating Officer of Source, a role he has held since October Mr. Melbourn has been with Source since October 2011 in a series of roles. Senior Vice-President, Commercial Development of Source, a role he has held since December Mr. Jackson has been with Source since December 2010 in a series of roles. Director of the Company Since (Director of Source Since) February 7, 2017 (June 1, 2012) February 7, 2017 (October 16, 2013) February 7, 2017 (October 2013) February 7, 2017 (October 16, 2013) N/A N/A N/A Common Share and Class B Share Ownership and Percentage (1) 3,251,604 (6) (6.30%) 8,240,504 (7) (15.96%) - (8) (-%) - (8) (-%) Nil Nil Nil N/A 158,774 (9)(12) (0.31%) N/A 175,645 (10)(12) (0.34%) N/A 175,645 (11)(12) (0.34%) Notes: (1) Assuming completion of the Offering before giving effect to the Over-Allotment Option. (2) Mr. Thomson, Mr. McMahon, Mr. Church and Mr. Belford are directors as of the date of this prospectus. The elections and/or appointments of each of Mr. Cameron, Mr. McRae and Mr. Hanlon are expected to be effective immediately prior to Closing and, as such, these individuals have no liability for this prospectus as directors pursuant to Applicable Securities Laws. (3) Expected member of the Audit Committee. (4) Expected member of the Compensation and Corporate Governance Committee (5) Expected member of the Health, Safety and Environment Committee. (6) Includes Common Shares held by Sand Ventures LP, Alberta LP and by Alberta LP, a limited partnership owned by Mr. Thomson s spouse. (7) Includes Common Shares held by Alberta LP and Alberta LP. (8) Messrs. Church and Belford are each Senior Managing Directors of TriWest Capital, the general partner of the limited partnerships comprising TriWest IV, which exercises control or direction over 15,377,172 Common Shares and 1,300,174 Class B Shares. (9) Includes Common Shares held by Alberta LP. (10) Includes Common Shares held by Alberta LP. (11) Includes Common Shares held by Alberta LP. (12) Messrs. Newell, Melbourn and Jackson are each unitholders of Alberta LP. -50-

74 All of the Company s directors terms of office will expire at the earliest of their resignation, the close of the next annual Shareholder meeting called for the election of directors, or on such other date as they may be removed according to the ABCA. Each director will devote the amount of time as is required to fulfill his obligations to the Company. The Company s officers are appointed by and serve at the discretion of the Board of Directors. Directors and Officers Biographies The following are brief profiles of the directors and officers of the Company, including a description of each individual s principal occupation within the past five years. Cody Church Director (Chair) Mr. Cody Church is a Senior Managing Director of TriWest Capital. Mr. Church co-founded TriWest Capital Partners Inc. in Since 1997, Mr. Church has been deeply involved in the TriWest Capital funds portfolio investments, with special emphasis on the valuation, financing, structuring and negotiation of these investments. From 1995 to 1997, Mr. Church was with EXOR America, a New York-based private equity firm. Prior to joining EXOR, Mr. Church was a member of the Leveraged Finance Group of Credit Suisse First Boston, where he worked with financial buyers in areas of acquisition and divestiture, high-yield bonds, initial public offerings and refinancings from 1993 to Mr. Church graduated cum laude with a Bachelor of Economics from Harvard University. Jeff Belford Director Mr. Jeff Belford is a Senior Managing Director of TriWest Capital and joined the TriWest Capital Partners Group at the inception of TriWest Capital Fund II in 2003 from Swiss Water Decaffeinated Coffee Company Inc. ( Swiss Water ), a former TriWest Capital fund portfolio company. Mr. Belford contributes both financial and operations experience to the TriWest Capital team. Mr. Belford gained significant financial and operating experience before joining the TriWest Capital Partners Group. He was Chief Financial Officer of Swiss Water from 2000 to 2003; and participated in the remarkable success of the company during his tenure. Swiss Water was subsequently listed on the TSX as an Income Trust. From 1996 to 2000, Mr. Belford was Director of Finance and Operations for Descente North America, an international sportswear company. Mr. Belford holds a Bachelor of Commerce degree from the University of Toronto and is a member of the Canadian Institute of Chartered Professional Accountants. Jim McMahon Director Mr. James (Jim) McMahon is the former Owner, Executive Vice President, Director and Secretary of Source s predecessor entity. Mr. McMahon previously provided day-to-day direction as a consultant to Source through his consulting corporation, McMahon Enterprises Ltd. Prior to joining Source, Mr. McMahon was Vice President Business Development for CCS Corporation (now Tervita) ( CCS ), a large Canadian based multinational oilfield services company with its primary business in oilfield waste management. At CCS, Mr. McMahon led the company to enter the frac sand mining and processing business. Mr. McMahon left CCS in May 2009 to purchase an interest in Source. Mr. McMahon has 20 years of oilfield experience primarily in the midstream sector. Prior to working in the oilfield sector, Mr. McMahon had a varied background in numerous business fields including time as a Marketing Representative with IBM and as a Second Lieutenant in the Canadian Forces. Mr. McMahon has a Bachelor of Science in Electrical Engineering and a Master of Business Administration both from the University of Saskatchewan. Neil Cameron Proposed Director Mr. Neil Cameron is the President and Chief Executive Officer of NSC Minerals Ltd., a leading supplier in de-icing products in Western Canada and Mid-Western United States. Mr. Cameron joined NSC Minerals Ltd. as Vice President of Operations in 2010, responsible for the assets and production of the company. In 2013, he was promoted to Chief Operating Officer, taking over the responsibility for logistics and sales. Prior to joining NSC Minerals Ltd., Mr. Cameron was President and Chief Executive Officer of Peters Excavating Ltd., a Saskatoon, Saskatchewan based excavating company serving the commercial and municipal customers in and around Saskatoon, Saskatchewan. Prior to working in the excavating business, Mr. Cameron spent 25 years working in the road construction and related materials business going through two sale events eventually ending up with Lafarge Canada Inc. Mr. Cameron spent time working in operations, estimating, project management, as divisional manager and ending up as General Manager of Northern Saskatchewan. Mr. Cameron has a Business Administration Certificate from the University of Saskatchewan. -51-

75 Marshall L. McRae Proposed Director Mr. Marshall McRae has been an independent financial and management consultant since August Prior thereto, Mr. McRae was Chief Financial Officer of CCS Inc., administrator of CCS Income Trust and its successor corporation, CCS since August Mr. McRae has over 30 years of experience in senior operating and financial management positions with a number of publicly traded and private companies, including CCS Inc., Versacold Corporation, Mark s Work Wearhouse Limited and Black Diamond Group Limited. Mr. McRae is a director and the Chair of the audit committee of Athabasca Oil Corporation and Gibson Energy Inc. and a director of Black Diamond Group Limited. Mr. McRae obtained a Bachelor of Commerce degree, with Distinction, from the University of Calgary in 1979, and a Chartered Professional Accountant Chartered Accountant Designation from the Institute of Chartered Accountants of Alberta in Stew Hanlon Proposed Director Mr. Stew Hanlon joined Gibson Energy Inc. in April 1991 as Controller of Canwest Propane and, in his 24-year tenure with Gibson Energy Inc., has filled senior roles in finance, business development and operations culminating in his role as Executive Vice President and Chief Operating Officer, a position he held from 2007 to April 2009, when he was appointed President and Chief Executive Officer. Mr. Hanlon was named as a member of the board of directors of Gibson Energy ULC in October 2008 and Gibson Energy Holding ULC in December Mr. Hanlon holds a Bachelor of Commerce degree (Finance and Accounting) from the University of Saskatchewan, is a Chartered Professional Accountant and was admitted to the ICAS (Saskatchewan) in 1989 and ICAA (Alberta) in Brad Thomson Chief Executive Officer and Director Mr. Brad Thomson joined Source in June 2012 at the invitation of the founding owners to become a partner and to provide executive leadership for the substantial growth initiatives of Source. Mr. Thomson has extensive experience in fast growth organizations as a founder, officer and director of a number of business success stories. Mr. Thomson has over 25 years of leadership experience. Mr. Thomson was a Principal and the Chief Financial Officer of the Northridge Group of Companies ( Northridge ) which among other things, built one of North America s largest private petroleum and natural gas marketing and trading companies. Northridge had operations in seven provinces and twentyfive states. He was also a founder and officer of an oil and gas investment fund (now AGF Resource Capital) and Metronet Communications (now Allstream Canada). Mr. Thomson also served as a senior officer of TransCanada Corporation ( TransCanada ) where he was responsible for its growth program. While at TransCanada, he spearheaded the creation of TransCanada Power LP (which is now traded as Capital Power Corporation). In addition, Mr. Thomson has served as a Director of a number of oil and gas exploration companies as well as CCS Income Fund, CE Franklin Limited and Bruce Power Ltd. Mr. Thomson is a Chartered Professional Accountant Chartered Accountant Designation and has received his ICD.D designation from the Canadian Institute of Corporate Directors. Derren Newell Chief Financial Officer Mr. Derren Newell is Chief Financial Officer of Source with responsibility for the execution of all aspects of Source s Finance, Information Technology and Human Resources operations. He has over 20 years of finance experience in the distribution, oil and gas and energy industries. Prior to joining Source, Mr. Newell was the Chief Financial Officer of CE Franklin, a leading distributor of pipes, valves and fittings to the energy industry. Mr. Newell has also been the Vice President Finance and Chief Financial Officer of a group of wind power companies. Prior to that, he was senior member of the Superior Plus Inc. finance team, where he held various positions covering all aspects of Finance and Risk Management. Mr. Newell has a Chartered Professional Accountant Chartered Accountant Designation and has a Bachelor of Commerce Degree from the University of Alberta. Scott Melbourn Chief Operating Officer Mr. Scott Melbourn is Chief Operating Officer of Source with responsibility for the execution of all aspects of Source s operations. He has over 16 years of operations, financial and business development experience, primarily in the oilfield services industry. Prior to joining Source, Mr. Melbourn held a number of positions with CCS, including Director of Business Development & Strategy (for the Concord Well Services division), and Manager of Corporate Business Development. During Mr. Melbourn s time at CCS, he completed numerous strategic acquisitions and -52-

76 divestitures. Mr. Melbourn left CCS in October 2011 to join Source. Prior to working in oilfield services, Mr. Melbourn held financial and business development positions with Telus Communications and Verizon Information Services. Mr. Melbourn holds the Chartered Financial Analyst designation and has a Bachelor of Commerce in Finance from the University of Calgary. He is a member of the Calgary Society of Chartered Financial Analysts. Joe Jackson Senior Vice President of Commercial Development Mr. Joe Jackson is Senior Vice President of Commercial Development for Source with responsibility for execution of all sales and commercial development activities within Source. He has over 10 years of business development and sales experience in the midstream and oilfield services industries. Prior to joining Source, Mr. Jackson worked at CCS and was responsible for the mergers and acquisitions function of CCS growing business in the United States. At Keyera Facilities Income Fund, Mr. Jackson held various positions in business development and in risk management. Mr. Jackson holds the Chartered Financial Analyst designation and has a Bachelor of Commerce in Marketing from the University of Calgary. He is a member of the Dallas Society of Chartered Financial Analysts. Share Ownership by Directors and Officers As a group and as at the date of the Closing, the Company s officers and directors are expected to beneficially own or exercise control or direction over, directly or indirectly, 27,379,343 Common Shares and 1,300,174 Class B Shares, representing approximately 55.55% of the aggregate number of issued and outstanding Common Shares and Class B Shares after giving effect to this Offering. Cease Trade Orders, Bankruptcies, Penalties or Sanctions Cease Trade Orders and Bankruptcies Except as described below, to the knowledge of the Company, no director or executive officer of the Company (nor any personal holding company of any of such persons) is, as of the date of this prospectus, or was within ten years before the date of this prospectus, a director, chief executive officer or chief financial officer of any company (including the Company), that: (a) was subject to a cease trade order (including a management cease trade order), an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, in each case that was in effect for a period of more than 30 consecutive days (collectively, an Order ), that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or (b) was subject to an Order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer. Except as described below, to the knowledge of the Company no director or executive officer of the Company (nor any personal holding company of any of such persons), or Shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company: (a) is, as of the date of this prospectus, or has been within the ten years before the date of this prospectus, a director or executive officer of any company (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or (b) has, within the ten years before the date of this prospectus, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or Shareholder. Mr. Derren Newell, the Chief Financial Officer of the Company, was Vice President and Chief Financial Officer of EarthFirst Canada Inc. ( EarthFirst ) from June 2006 to March On November 4, 2008 EarthFirst commenced proceedings in the Court of Queen s Bench of Alberta under the Companies Creditors Arrangement Act ( CCAA ). On March 2, 2010, EarthFirst was amalgamated with Maxim Power Corp. by way of a plan of arrangement approved by the Court of Queen s Bench of Alberta under the CCAA procedures. Mr. Cody Church, a director of the Company, was a director of Concreate USL (GP) Inc., the general partner of Concreate USL Limited Partnership from February 2011 until an interim receiver in bankruptcy was appointed over its -53-

77 and certain of its affiliates assets on April 12, 2012 pursuant to the Bankruptcy and Insolvency Act ( BIA ). On April 12, 2013, Concreate USL Limited Partnership and Concreate USL (GP) Inc. were adjudged bankrupt and a trustee in bankruptcy was appointed. The Court of Queen s Bench issued a discharge order in respect of these matters on July 14, 2015 under the BIA procedures. Penalties or Sanctions To the knowledge of the Company, no director or executive officer of the Company (nor any personal holding company of any of such persons), or Shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company, has been subject to: (a) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision. Conflicts of Interest Certain officers and directors of the Company are also officers and/or directors of other companies engaged in the mining and the oil and natural gas businesses generally. As a result, situations may arise where the interest of such directors and officers conflict with their interests as directors and officers of other companies. The resolution of such conflicts is governed by applicable corporate laws, which require that directors act honestly, in good faith and with a view to the best interests of the Company. Conflicts, if any, will be handled in a manner consistent with the procedures and remedies set forth in the ABCA. The ABCA provides that in the event that a director has an interest in a material contract or material transaction, whether made or proposed, the director shall disclose his interest in such contract or transaction to the Company and shall refrain from voting on any matter in respect of such contract or agreement unless otherwise provided by the ABCA. EXECUTIVE COMPENSATION Compensation Discussion and Analysis The following discussion describes the expected significant elements of the Company s executive compensation program upon Closing, with particular emphasis on the process for determining compensation payable to the Named Executive Officers. For the year ended December 31, 2017, the Named Executive Officers are expected to be: (a) Brad Thomson (CEO); (b) Derren Newell (CFO); (c) Scott Melbourn (Chief Operating Officer); (d) Joe Jackson (Senior Vice-President, Commercial Development); and (e) Jason Allen (General Manager, Wisconsin Operations). Compensation Philosophy and Objectives The Company s approach to executive compensation will be to pay for performance. Accordingly, salary will generally be positioned near market median levels, while variable compensation opportunity (short and long-term incentives) will be structured to provide above-market total compensation for high levels of corporate performance. Compensation elements will be designed to balance the following compensation objectives: total compensation realization will be aligned with the overall performance of the Company; compensation programs will encourage a long-term view to Shareholder value creation as a significant portion of each executive s variable pay will be equity-based and executives will be required to have a significant personal financial interest in the Company; and compensation programs will facilitate the attraction, retention and motivation of experienced and talented executives who will, in turn, drive Shareholder value creation. Compensation Benchmarking The Compensation and Corporate Governance Committee will, as part of its annual compensation review process, benchmark the compensation levels and practices of companies that can be considered reasonably similar to the Company. See Statement of Corporate Governance Practices Board Committees Compensation and Corporate Governance Committee for a more detailed description of the Compensation and Corporate Governance s Committee s mandate. -54-

78 In selecting a group of companies and/or sectors to benchmark, the Compensation and Corporate Governance Committee will consider characteristics and variables such as: Canadian-based, publicly-traded organizations operating in the oilfield services sector; organizations of similar size and with a similar scope of operations; and organizations from which future executives may reasonably be expected to be recruited from or to which the Company could reasonably expect to otherwise be in competition with for senior level talent. The compensation benchmark information derived from such sources will not necessarily be directly acted upon by the Compensation and Corporate Governance Committee, but will be one of a number of factors the Compensation and Corporate Governance Committee will consider from time to time in its review of executive compensation. In order to assist the Compensation and Corporate Governance Committee with the preliminary thinking surrounding compensation structure and magnitude for the Company, the following list of oilfield services companies has been developed: Calfrac Well Services Ltd. Gibson Energy Inc. Secure Energy Services Inc. Canadian Energy Services & Mullen Group Inc. Trican Well Service Ltd. Technology Corp. Canyon Services Group Inc. Newalta Corp. Notes: (1) Although used for the determination of compensation structure, not all of these companies will be used in the determination of compensation levels as the Compensation and Corporate Governance Committee does not deem all companies to be of comparable size. Share-Based Compensation Arrangements Option Plan Source will adopt the Option Plan in connection with the Reorganization to provide additional long-term incentives to executive officers and other employees of Source. Options will be granted based on the same criteria as base salary, with a greater emphasis on the applicable employee s performance during the year. Previous grants will be considered when contemplating new grants of Options. Options will be granted to provide additional compensation to employees when Source performs well. This element of incentive compensation is not only designed to reward employees for past-performance, but is also designed to provide increased incentive to continue to strive to improve Source s success. See Executive Compensation Option Plan. LTIP Source will adopt the LTIP in connection with the Reorganization to provide additional long-term incentives to directors, executive officers and employees of Source. Pursuant to the LTIP, participants will be entitled to receive RSUs, PSUs and/or DSUs, which will fluctuate with the market price of the Common Shares and are therefore aligned with the interests of the Shareholders. Such RSUs, PSUs and DSUs, which will be equity based awards and settled in cash and therefore non-dilutive to Shareholders. Previous grants will be considered when contemplating new grants of RSUs, PSUs or DSUs. Executive officers and employees will be eligible to receive RSUs and PSUs while only non-executive directors will be eligible to receive DSUs. Prior Employee Equity Participation Plan On October 16, 2013, Source Canada LP adopted the Prior Employee Equity Participation Plan and thereafter issued the Prior EEPP Units to executive officers and employees of Source Canada LP in order to support the successful execution of Source Canada LP s business plan and long term strategy at the time. Each Prior EEPP Unit vested as to one-third on each of the first, second and third anniversaries of their grant date. The Prior EEPP Units are solely exercisable upon a Change of Control as defined in the Prior Employee Equity Participation Plan. The Prior EEPP Units are anticipated to be surrendered and terminated in connection with the Reorganization. See Corporate Structure Reorganization. -55-

79 Compensation Components The Company s executive compensation program will consist primarily of the following elements. Compensation Element Form Purpose of Element Determination Base Salary Cash Forms a baseline level of compensation for role fulfillment commensurate with the experience, skills and market demand for the executive role and/or incumbent. Annual Performance Incentive Cash To recognize short-term (typically annual) efforts and milestone achievement that are aligned with the long-term success of the Company. LTIP Cash Designed to motivate executives and employees to create and grow sustainable Shareholder total return over successive three-year performance cycles, through the use of RSUs and PSUs. The LTIP will also serve to align the interests of non-executive directors with Shareholders through the provision of DSUs. Option Plan Common Shares Promotes a share ownership perspective among executives, encourages executive retention, encourages executives to generate sustained share price growth over the longer term (i.e. five years) and aligns Management s interests with Shareholders interests through participation in share price appreciation. Salaries will be based on relevant marketplace information, experience, individual performance and level of responsibility. Actual salary levels will be set in relation to the Company s compensation philosophy and relative to the emphasis on other compensation program elements. The Company generally intends to pay salaries near market median levels and will increase salaries commensurate with the growth and complexity of the Company and the position in question. Initially, in the early stages of the Company s development, annual performance incentive payments will be determined by the Compensation and Corporate Governance Committee based upon a discretionary assessment of individual and corporate performance. Based on this discretionary assessment of performance, incentive payments from 0% to 100% of base salary for the CEO and 0% to 50% of base salary for the remaining NEOs could be payable. As the Company matures, a more formal target-setting and performance assessment process will be implemented. RSUs are anticipated to vest ratably over three years and may be subject to other performance restrictions, subject to the determination of the Compensation and Corporate Governance Committee. PSU awards will be limited to the executive and senior-managerial levels in the Company and the Compensation and Corporate Governance Committee anticipates the vesting of these units to be subject to the achievement of various performance targets, including, but not limited to, relative Total Shareholder Return targets and financial and/or operational performance targets. RSUs, PSUs and DSUs accounts shall be credited with additional units in accordance with the LTIP in the event dividends on the Common Shares are paid by the Company. It is expected that grants of Options under the Option Plan will be made upon the commencement of an executive s employment with the Company and will be based on the executive s experience, skill set and level of responsibility within the Company. Additional grants may be made annually at the discretion of the Board and are based on the individual s contribution to corporate performance, as well as the overall competitiveness of the executive compensation package. The Board will determine the exercise price of Options at the time of grant, provided that the exercise price will not be permitted to be lower than the Market -56-

80 Compensation Element Form Purpose of Element Determination Price. It is intended that the exercise price of the first award of Options will be at the Offering Price. The Board will also have the discretion to determine the term of Options, which is not expected to exceed five years, and vesting provisions, which are generally expected to vest as to one-third on each of the first, second and third anniversaries of the grant date. Pension, Benefits and Perquisites The Company does not currently have a pension plan or post-employment compensation and benefits in place for any of its employees. The Compensation and Corporate Governance Committee will annually review the benefits provided to NEOs, which will generally be the same as those provided to other employees of the Company. The Company offers only limited perquisites to the Named Executive Officers, and only where the Company believes such perquisites are market competitive and promote the retention of the Named Executive Officers or promote the efficient performance of the Named Executive Officers duties. The Company does not believe that perquisites and benefits should represent a significant portion of the compensation package for Named Executive Officers. In 2017, Named Executive Officers perquisites and benefits are expected to total less than $50,000, representing less than 10% of total compensation for the Named Executive Officers. Risks of Compensation Policies and Practices The Company s compensation program will be designed to provide executive officers incentives for the achievement of near-term and long-term objectives, without motivating them to take unnecessary risk. The Board will provide regular oversight of the Company s risk management practices, and may delegate to the Compensation and Corporate Governance Committee the responsibility to provide risk oversight of Source s compensation policies and practices, and to identify and mitigate compensation policies and practices that could encourage inappropriate or excessive risk taking by members of Management. As part of its review and discussion of expected executive compensation, the Board noted the following factors that will discourage the Company s executives from taking unnecessary or excessive risk: the Company s approach to performance evaluation and compensation will provide greater rewards to an officer achieving both short-term and long-term agreed-upon objectives; executive officers and directors will be required to hold a minimum amount of Common Shares under the Company s share ownership guidelines; Board discretion with respect to incentive awards and payouts in the event incentives will understated or overstated due to extraordinary circumstances or conditions; a commitment to a periodic evaluation and testing by the Compensation and Corporate Governance Committee of variable compensation plan metrics; a cap on bonus payments, subject to the discretion of the Board; a balanced mix of post-closing equity incentive awards in the form of Options and RSUs, PSUs and DSUs; a formal clawback policy specifying the recoupment of incentive compensation applicable to the executive officers upon material financial restatements and misconduct; and the Board has retained a compensation consultant that is independent of Management and provides no advice to Management. Based on this review, the Board believes that the Company s total executive compensation program will not encourage executive officers to take unnecessary or excessive risk. -57-

81 Compensation Governance Hedging Prohibition The Company is of the view that its securities should be purchased by its directors, offices and employees for investment purposes only. Pursuant to the Company s disclosure, trading and confidentiality policy, transactions that could be perceived as speculative or influenced by positive or negative perceptions of Source s prospects, including the use of puts, calls, collars, spread bets, contracts for difference and hedging transactions are not considered to be in Source s best interests and must be avoided. In particular, directors, officers and employees of Source are prohibited from engaging in hedging activities of any kind respecting Source s securities or related financial instruments including, without limitation, selling a call or buying a put on the Company s securities or purchasing the Company s securities with the intention of reselling them within six months or selling the Company s securities with the intention of buying them within six months (other than the sale of Company securities shortly after they were acquired through the exercise of securities granted under a share-based compensation arrangement). Notwithstanding the foregoing, the above-mentioned restrictions will not be applicable to any of the Company s securities held by a representative of the Company that are in excess of the required ownership thresholds under the Company s director share ownership guidelines or the Company s executive share ownership guidelines, as the case may be. Share Ownership Guidelines The Company will adopt the following share ownership guidelines in connection with the Reorganization, pursuant to which the Company s executive officers and any other employee specified by the Board are required to hold, directly or indirectly, Common Shares with an aggregate value as follows: Participant CEO CFO Other Officers Share Ownership Guideline 3x base salary 1.5x base salary 1.5x base salary Common Shares are valued at the higher of: (a) value at the time of award or acquisition; and (b) the current market price of the Common Shares. Each officer will have five years from the later of the introduction of the executive share ownership guidelines and the date of their election or appointment as an officer to achieve this minimum share ownership requirement. Clawback Policy The Board will adopt a clawback policy specifying the consequences with respect to incentive awards in the event of gross negligence, fraud or willful misconduct resulting in a restatement of the Company s financial statements. The clawback policy will provide that where there is a restatement of the financial results of Source for any reason other than a restatement caused by a change in applicable accounting rules or interpretations, and, in connection with such restatement an executive officer engaged in gross negligence, fraud or willful misconduct, the Board or the Compensation and Corporate Governance Committee may: (a) require that the executive officer return or repay to Source, or reimburse Source for, all or part of the after-tax portion of any excess compensation; and/or (b) cause all or part of any awarded and unpaid or unexercised performance-based compensation (whether vested or unvested) that constitutes excess compensation for an executive officer to be cancelled. In determining whether to require any cancellation, repayment or reimbursement under the clawback policy, the Board or the Compensation and Corporate Governance Committee shall have regard to, in its sole discretion and in light of the circumstances, the best interests of Source. In making such determination, the Board may take into account any considerations it deems appropriate, including, without limitation: (a) the applicable governing law including the likelihood of success and the cost of pursuing recovery; (b) any prejudice to the interests of Source, including in any related proceeding or investigation; and (c) the participation of the executive officer in the circumstances relating to the financial restatement, including his or her involvement in any gross negligence, fraud or willful misconduct. For purposes of the clawback policy, excess compensation means the difference between the amount or value of any performance-based compensation actually paid or awarded to an executive officer subsequent to the effective date of the policy and the amount or value that would have been paid or awarded as calculated or determined based on the -58-

82 financial statements of Source as restated (and shall include an entire amount or value of an award or payment where it is determined that no award or payment would have been made based on the financial statements of Source as restated), and performance-based compensation includes all bonuses and other incentive compensation that is paid or awarded to any executive officer, the award, amount, payment and/or vesting of which was calculated or determined having regard to or based in whole or in part on the application of performance criteria or financial metrics measured during the three years preceding the applicable restatement and includes incentive compensation awarded or paid in any form, including cash or equity-based, whether vested or unvested. Compensation Consultants In January 2017, Source engaged Lane Caputo Compensation Inc. to assist with the development of a go-forward compensation program for the Company. As at the date of this prospectus, Lane Caputo Compensation Inc. has provided its preliminary recommendations, with work expected to continue until completion of the Reorganization Compensation Details Summary Compensation Table Based on the information available as of the date of this prospectus, the following table sets forth information concerning the expected initial annualized compensation of the Named Executive Officers for the 2017 year. Name and Principal Position Year Salary ($) (1) Sharebased Awards ($) (2) Non-equity incentive plan compensation ($) Optionbased Long- Annual term ($) (3) Plans (4) Plans Awards Incentive Incentive Pension Value ($) All other ($) (5) ($) Compensation Total Compensation Brad Thomson CEO , ,000 92,548 (6) 617,548 Derren Newell CFO ,000 62,500 12,528 (6) 325,028 Scott Melbourn Chief Operating Officer ,000 62,500 12,528 (6) 325,028 Joe Jackson Senior VP ,375 (7) 83,844 (7) 12,528 (6) 431,747 Jason Allen General Manager, Wisconsin Operations ,103 (7) 36,221 (7) 96,393 (6) 313,717 Notes: (1) In connection with the Offering, the Compensation and Corporate Governance Committee will review the 2017 salaries of its executive officers and, as such, these amounts are subject to change. (2) Share-based awards for 2017 have yet to be determined, but will be determined in accordance with the LTIP. See Executive Compensation Compensation Discussion and Analysis Share-Based Compensation Arrangements LTIP. (3) Options are anticipated to be issued in connection with the Reorganization with an exercise price equal to the Offering Price. Given the exercise price will be the Offering Price, the value of Options upon the Closing is nil. See Options to Purchase Securities. Additional Options may be issued in 2017, however, such determination has not yet occurred. In the event such determination does occur, it will be determined in accordance with the Option Plan. See Executive Compensation Option Plan. (4) The amount of bonuses to be paid or payable in or with respect to 2017 has yet to be determined; however, each of the NEOs will be eligible for an annual cash bonus to be determined in accordance with the Company s annual performances incentive program to be implemented in connection with the Reorganization. (5) The NEOs receive minimal perquisites and other benefits. However, none of the NEOs are entitled to perquisites or other personal benefits which, in the aggregate, are worth over $50,000 or over 10% of their base salary. (6) In connection with the surrender of the Prior EEPP Units, Mr. Thomson will receive $27,763 in cash and 6,170 Common Shares, Mr. Newell will receive $3,760 in cash and 835 Common Shares, Mr. Melbourn will receive $3,760 in cash and 835 Common Shares, Mr. Jackson will receive $3,760 in cash and 835 Common Shares and Mr. Allen will receive $28,920 in cash and 6,426 Common Shares. Such Common Shares are valued using the Offering Price. (7) By applying the noon rate of exchange for Canadian dollars in terms of United States dollars, as quoted by the Bank of Canada on April 4,

83 Incentive Plan Awards Outstanding Share-Based Awards and Option-Based Awards Based on the information available as of the date of this prospectus, the following table sets forth information concerning all awards expected to be issued to NEOs for the 2017 year. Name Number of Common Shares Underlying Unexercised Options (#) Option-Based Awards Options Exercise Price ($) Option Expiration Date Value of Unexercised in-the-money Options ($) (1) Number of Shares or Units of Shares that have not Vested (#) Market or Payout Value of Share- Based Awards that have not Vested ($) Share-Based Awards Market or Payout Value of Vested Share-Based Awards not Paid out or Distributed ($) Brad Thomson 1,032, April 13, 2022 Derren Newell 516, April 13, 2022 Scott Melbourn 516, April 13, 2022 Joe Jackson 516, April 13, 2022 Jason Allen 154, April 13, 2022 Notes: (1) The exercise price of all Options will be the Offering Price and accordingly the value of unexercised Options will be nil as of the Closing Date. Incentive Plan Awards Value Vested or Earned During the Year None of the expected Options to be issued in connection with the Reorganization will vest during 2017 and none of the RSUs, PSUs or DSUs that may be issued during 2017 are expected to vest during Accordingly, no value is attributed to such Options and share-based awards for Option Plan In connection with the Reorganization, Source will adopt the Option Plan, which will allow for the grant of Options to officers, employees and consultants of the Company with the objective of providing an incentive to Option Plan participants to achieve the longer-term objectives of the Company and attract and retain the talent required for the Company to execute its long-term strategy. Non-executive directors will not be permitted to participate in the Option Plan. The maximum number of Common Shares reserved for issuance, in the aggregate, under the Option Plan and all other security-based compensation arrangements of the Company, will be 10% of the aggregate number of outstanding Common Shares and Class B Shares from time to time (calculated on a non-diluted basis). The Option Plan will provide that: (a) the maximum number of Common Shares issuable to insiders and their associates at any time under all security-based compensation arrangements of the Company shall not exceed 10% of the aggregate number of issued and outstanding Common Shares and Class B Shares from time to time (calculated on a non-diluted basis); and (b) the maximum number of Common Shares that may be issued to insiders and their associates within any one year period under all security-based compensation arrangements of the Company shall not exceed 10% of the aggregate number of issued and outstanding Common Shares and Class B Shares from time to time (calculated on a non-diluted basis), provided that for the purpose of the foregoing limits, any Option granted pursuant to the Option Plan, or securities issued under any other incentive plan of the Company, prior to the holder becoming an insider shall be excluded for the purposes of the limits set out in (b) and (c) above. The Option Plan will be administered by the Board, which may delegate authority over the administration and operation of the Option Plan to a committee. The Board will have the authority to determine the terms and conditions of any grant of Options, provided that: the exercise price per Common Share of each Option must not be less than the Market Price of the Common Shares at the time of the grant; unless otherwise determined by the Board and except as otherwise provided by the Option Plan, all Options will expire on the fifth anniversary of the date of grant, subject to earlier termination in the event the holder ceases to be an officer, employee or consultant of the Company or if the Board determines, in its sole discretion, to accelerate the expiry time in connection with a change of control (as defined in the Option Plan); -60-

84 Options will vest as to one-third of the total grant on each of the first three anniversaries of the grant date, or as otherwise set out by the Board in the applicable grant agreement; except as otherwise provided by the Option Plan, upon the occurrence of a change of control, vesting of Options will accelerate only if: (a) the continuing or successor entity fails to substitute or replace the Options with stock options or other similar awards of such continuing or successor entity on the same terms and conditions as the Options; or (b) within 12 months of the change of control, the service, consulting arrangement or employment is terminated other than for cause or the holder of the Options resigns for good reason; and vested options held by a holder who ceases to be an eligible participant under the Option Plan: (a) due to termination for cause terminate on the last date the holder was actively at work for the Company; (b) due to death or disability terminate 180 days after the last date the holder was actively at work for the Company; and (c) for any reason other than termination for cause, death or disability, terminate 30 days after the last date the holder was actively at work for the Company. The Option Plan also contains provisions which effect appropriate adjustments to the number and kind of shares or other securities to be received upon exercise of outstanding Options, or to the exercise price per Common Shares of outstanding Options, in the event of a subdivision, redivision, consolidation, reclassification of shares of the Company, in the event of any special distribution to all Shareholders, in the event of any consolidation, amalgamation, merger with or into another corporation and in the event of any transfer of the entirety or substantially the entirety of the undertaking or assets of the Company to another corporation. Options may not be transferred or assigned other than by bequeath or the laws of descent and distribution. The Company may not provide financial assistance to the holder of an Option in connection with the exercise of Options. Subject to the applicable rules of the TSX, the Board may from time to time, in its absolute discretion and without the approval of the Shareholders, make amendments to the Option Plan or any Option including, without limitation, the following: any amendment to the vesting provisions of the Option Plan and any option agreement, including to accelerate, conditionally or otherwise, on such terms as it sees fit, the vesting date of an Option; any amendment to the Option Plan or an Option as necessary to comply with applicable law or the requirements of the TSX or any other regulatory body having authority over the Company, the Option Plan or the Shareholders; any amendment to the Option Plan and any option agreement to permit the conditional exercise of any Option; any amendment of a housekeeping nature, including, without limitation, to clarify the meaning of an existing provision of the Option Plan, correct or supplement any provision of the Option Plan that is inconsistent with any other provision of the Option Plan, correct any grammatical or typographical errors or amend the definitions in the Option Plan regarding administration of the Option Plan; any amendment respecting the administration of the Option Plan; and other amendment to the Option Plan or any option agreement that does not require the approval of Shareholders. Approval of the Shareholders will be required for the following amendments to the Option Plan or any Option: any increase in the number of Common Shares reserved for issuance under the Option Plan; any amendment to the insider participation limits set forth in the Option Plan; any reduction in the exercise price per Common Share of an Option, cancellation and reissue of Options or substitution of Options with cash or other awards on terms that are more favourable to the holders of Options; any extension of the expiry of an Option, except as otherwise provided by the Option Plan; an amendment that would permit Options to be transferable or assignable other than for normal estate settlement purposes; -61-

85 any amendment that would materially modify the eligibility requirements for participation in the Option Plan, including any amendment which would allow non-executive directors to participate in the Option Plan; an amendment to any of the amending provisions of the Option Plan; and such other matters in respect of which the TSX may require approval by the Shareholders. Subject to the foregoing amendment provisions, the Board may, at any time and from time to time, without the approval of the Shareholders, suspend, discontinue or amend the Option Plan or an Option; provided that the Board may not suspend, discontinue or amend the Option Plan or amend any outstanding Option in a manner that would materially adversely affect any Option previously granted to a grantee under the Option Plan, and any such suspension, discontinuance or amendment of the Option Plan or amendment to an Option shall apply only in respect of Options granted on or after the date of such suspension, discontinuance or amendment. Termination and Change of Control Benefits Employment agreements with each of the NEOs are currently being finalized and expected to be entered into following Closing. It is expected that these agreements will provide for certain severance arrangements such that if: (a) there is a change of control of the Company and such officer s employment is terminated by the Company or by the officer as a result of a materially detrimental change in the terms of employment; or (b) the services of such officer are terminated by the Company without cause or by the officer as a result of a materially detrimental change in the terms of employment, the NEO will receive: in the case of the CEO, a severance payment equal to 24 months salary plus the annualized value of the most recent performance incentive received by the CEO (less applicable withholdings); in the case of the CFO, a severance payment equal to 18 months salary plus the annualized value of the most recent performance incentive received by the CFO (less applicable withholdings); and in the case of the remaining NEOs, a severance payment equal to 12 months salary plus the annualized value of the most recent performance incentive received by each incumbent (less applicable withholdings). In the event that the services of an NEO are terminated by the Company for cause, such NEO will be entitled to any pro rata base salary, vacation pay and expenses earned or due, but not yet paid, up to and including the termination date paid as a lump sum. Any annual performance incentive will be forfeited. -62-

86 DIRECTOR COMPENSATION Source s directors compensation program has been designed to attract and retain the most qualified individuals to serve on its Board. The Compensation and Corporate Governance Committee is responsible for reviewing and approving any changes to director compensation arrangements. Unlike compensation for the Named Executive Officers, the directors compensation program is not designed to pay for performance; rather, directors receive retainers for their services in order to help ensure unbiased decision-making. General Non-executive directors of the Company will be paid an annual Board retainer fee of $45,000 ($75,000 for the Chair), with committee chair fees paid as follows: Audit Committee Chair $15,000; Compensation and Corporate Governance Committee Chair $7,500; Health, Safety & Environment Committee Chair $7,500. Non-executive directors will also receive a meeting fee of $1,350 for each Board meeting attended. Retainers will be prorated for Pursuant to the LTIP, each eligible director would receive an annual grant of DSUs. The timing and grant of DSUs granted to non-executive directors will be determined by the Board, upon recommendation by the Compensation and Corporate Governance Committee. Under the LTIP, each non-executive director may elect, once each calendar year, to receive all or a portion of his or her annual Board retainer fee compensation in DSUs, including any fees paid to such non-executive director for attendance at meetings of the Board or committees thereof. DSUs are expected to vest on the date the non-executive director ceases to be a director and are paid out only at such time. Dividend equivalents are earned at the same rate as cash dividends paid on the Common Shares. Share Ownership Guidelines The Company will adopt the share ownership guidelines for non-executive directors in connection with the Reorganization to demonstrate their commitment to the achievement of long-term success and alignment of their interests with Shareholders. Pursuant to the non-executive director share ownership guidelines, the Company s non-executive directors are required to hold, directly or indirectly, an aggregate number of Common Shares and Class B Shares with an aggregate value equal to three times his or her annual base retainer. Common Shares, Class B Shares or DSUs held for purposes of the non-executive director share ownership guidelines are valued at the higher of value at the time of award or acquisition and the current market price of the Common Shares. Each director will have five years from the later of the introduction of the share ownership guidelines and the dated of their election or appointment as a director to achieve this minimum share ownership requirement. Director Compensation Table Based on the information available as of the date of this prospectus, the following table sets forth information concerning the expected initial annualized compensation of the directors (other than Brad Thomson, who will receive no compensation in his capacity as a director) for the 2017 year. Name Fees ($) (3) ($) (4) Earned Share-Based Awards Option- Based Awards ($) Non-Equity Incentive Plan Compensation ($) Pension Value ($) All Other Compensation Total ($) (5) ($) Cody Church (1) 75,000 90, ,000 Jeff Belford (1) 45,000 90, ,000 Jim McMahon 45,000 90, ,000 Neil Cameron (2) 52,500 90, ,500 Marshall McRae (2)(6) 75,000 90, ,000 Stew Hanlon (2) 52,500 90, ,500 Notes: (1) Fees earned by Messrs. Church and Belford will be held by such individuals for the benefit of TriWest IV. (2) Messrs. Cameron, McRae and Hanlon are not currently directors, but are expected to be appointed to the Board at or prior to Closing. (3) Anticipated annual retainers for Fees will be prorated for (4) Determined in accordance with the LTIP. (5) Does not include meeting fees. (6) Mr. McRae will receive an additional $15,000 a year for being the designated lead director if a conflict of interests in respect of the Chair of the Board arises. -63-

87 Outstanding Share-Based Awards Directors Based on the information available as of the date of this prospectus, the following table sets forth information concerning all awards expected to be issued to directors (other than Brad Thomson, who will receive no compensation in his capacity as a director) for the 2017 year. Name Number of Shares or Units that have not Vested (#) (3) Market or Payout Value of Share-Based Awards that have not Vested ($) (3) Cody Church (1) 8,571 90,000 Jeff Belford (1) 8,571 90,000 Jim McMahon 8,571 90,000 Neil Cameron (2) 8,571 90,000 Marshall McRae (2) 8,571 90,000 Stew Hanlon (2) 8,571 90,000 (1) Awards granted to Messrs. Church and Belford will be held by such individuals for the benefit of TriWest IV. (2) Messrs. Cameron, McRae and Hanlon are not currently directors, but are expected to be appointed to the Board at or prior to Closing. (3) Based on the Offering Price. Incentive Plan Awards Value Vested or Earned During the Year Directors Given DSUs will only be initially issued in 2017, no DSUs are expected to vest during Accordingly, no value is attributed to such DSUs for Indemnity Agreements for Directors and Officers Source has entered into indemnity agreements with each of the directors and officers pursuant to which Source has agreed to indemnify such directors and officers from liability arising in connection with the performance of their duties. Such indemnity agreements conform to the provisions of the ABCA. INDEBTEDNESS OF DIRECTORS AND OFFICERS The Company is not aware of any individuals who are either current or former executive officers, directors or employees of the Company, or any of its subsidiaries and who have indebtedness outstanding as at the date hereof (whether entered into in connection with the purchase of securities of the Company or otherwise) that is owing to: (a) the Company or any of its subsidiaries, or (b) another entity where such indebtedness is the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Company or any of its subsidiaries. Except for: (a) indebtedness that has been entirely repaid on or before the date of this prospectus, and (b) routine indebtedness (as defined in Form F5 of the Canadian Securities Administrators), the Company is not aware of any individuals who are, or who at any time since inception were, a director or executive officer of the Company, a proposed nominee for election as a director or an associate of any of those directors, executive officers or proposed nominees who are, or have been since the beginning of the most recently completed financial year, indebted to the Company or any of its subsidiaries, or whose indebtedness to another entity is, or at any time since the beginning of the most recently completed financial year has been, the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Company. AUDIT COMMITTEE Audit Committee Mandate The Board has adopted a written mandate for the Audit Committee, which sets out the Audit Committee s responsibility for (among other things) reviewing the Company s financial statements and the Company s public disclosure documents containing financial information and reporting on such review to the Board, ensuring the Company s compliance with legal and regulatory requirements, overseeing qualifications, engagement, compensation, performance and independence of the Company s external auditors and reviewing, evaluating and approving the internal control and risk assessment systems that are implemented and maintained by Management. A copy of the Audit Committee mandate is attached to this prospectus as Appendix C. -64-

88 Composition of the Audit Committee and Relevant Education and Experience The Audit Committee will consist of Messrs. McRae (Chair), Cameron, Hanlon and Belford. Each of the members of the Audit Committee is considered financially literate and independent within the meaning of NI The Company believes that each of the members of the Audit Committee possesses: (a) an understanding of the accounting principles used by the Company to prepare its financial statements; (b) the ability to assess the general application of such accounting principles in connection with the accounting for estimates, accruals and provisions; (c) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company s financial statements, or experience actively supervising one or more individuals engaged in such activities; and (d) an understanding of internal controls and procedures for financial reporting. For a summary of the education and experience of each member of the Audit Committee that is relevant to the performance of his responsibilities as a member of the Audit Committee, see Directors and Officers. Pre-Approval Policies and Procedures for the Engagement of Non-Audit Services The Audit Committee must pre-approve all non-audit services to be provided to the Company by its external auditors, PricewaterhouseCoopers LLP. The Audit Committee may delegate such pre-approval authority, if and to the extent permitted by law. External Audit Service Fees The following table summarizes the fees paid by Source to its external auditors, PricewaterhouseCoopers LLP, for external audit and other services during the period indicated. The amounts disclosed exclude administrative charges ($) ($) Audit Fees (1) 80,000 80,000 Audit-Related Fees (2) 120,000 Tax Fees (3) 130, ,246 All Other Fees Total 325, ,000 Notes: (1) Represents the aggregate fees for services related to the audit of annual financial statements and review of quarterly financial statements. (2) Represents aggregate fees for services provided in connection with equity and debt financings, including review of offering documents, completion of comfort letters for underwriters and attendance at due diligence meetings. (3) Represents the aggregate fees billed for tax compliance, tax advice and tax planning. -65-

89 STATEMENT OF CORPORATE GOVERNANCE PRACTICES Following the completion of the Offering, the Board may ultimately determine to implement governance practices, policies, structure and mechanisms which differ from those noted below. Board of Directors Under NI , a director is considered to be independent if he or she is independent within the meaning of NI Pursuant to NI , the independent director is a director who is free from any direct or indirect relationship which could, in the view of the Board, be reasonably expected to interfere with a director s independent judgment. Based on information provided by each director concerning his background, employment and affiliations, the Board has determined that: (a) Mr. Church, Mr. Belford, Mr. McMahon, Mr. Cameron, Mr. McRae and Mr. Hanlon are independent within the meaning set out in NI ; and (b) Mr. Thomson is not independent within the meaning set out in NI as he is the CEO. Mr. Church and Mr. Belford are each Senior Managing Directors of TriWest Capital, the general partner of the limited partnerships comprising TriWest IV, and Mr. McMahon is a significant shareholder of Source. See Principal Shareholders. Notwithstanding the significant ownership of each of their respective organizations in the Company, the Board has determined that each of Mr. Church, Mr. Belford and Mr. McMahon are independent within the meaning set out in NI The Board has also specified in the Board s mandate that in the event the Chair of the Board is not independent with respect to a particular matter, a majority of the Board s independent directors will appoint an independent lead director who will be responsible for ensuring that the Board approaches its responsibilities in respect of such matter in an independent and conflict free manner. See Statement of Corporate Governance Practices Board Mandate. The Board believes that given its size and structure, it is organized properly, functions effectively and is able to facilitate independent judgment in carrying out its responsibilities, including those set forth in the mandate of the Board, and will continue to do so after Closing. To enhance such independent judgement, while the Company s independent directors may not hold regularly scheduled meetings at which the non-independent directors and Management are not in attendance, at the end of, or during, each Board meeting, the members of Management who are present at such meeting, including Mr. Thomson will leave the meeting in order that the independent directors can discuss any necessary matters without Management and the non-independent directors being present. The following directors or proposed directors of the Company are presently directors of other issuers that are reporting issuers (or the equivalent): Name of Director Cody Church Marshall McRae Stew Hanlon Name of Other Reporting Issuers EdgeFront Real Estate Investment Trust Athabasca Oil Corporation, Black Diamond Group Limited and Gibson Energy Inc. Gibson Energy Inc. The Company does not have a formal policy on board interlocks. A board interlock occurs when two of the Company s directors also serve together on the board of another reporting issuer. As of the date of this prospectus, there are no board interlocks among the Board members, however, upon Closing, there will be a board interlock as Mr. Hanlon and Mr. McRae both serve on the board of directors of Gibson Energy Inc. Majority Voting Policy In accordance with the requirements of the TSX, Source will adopt a majority voting policy, which requires that any nominee for director who receives a greater number of votes withheld than for his or her election shall tender his or her resignation to the Chair of the Board following the meeting of shareholders at which the directors were elected. This policy applies only to uncontested elections, meaning elections where the number of nominees for director is equal to the number of directors being elected. The Compensation and Corporate Governance Committee and the Board shall consider the resignation, and whether or not it should be accepted. In doing so, the Compensation and Corporate Governance Committee may consider any stated reasons as to why Shareholders withheld votes from the election of the relevant director, the length of service and the qualifications of the director, the director s contributions to the Company, the effect such resignation may have on the Company s ability to comply with any applicable governance rules and policies, the dynamics of the Board, and any other factors that the members of the Compensation and Corporate Governance Committee consider relevant. The nominee shall not participate in any committee or Board -66-

90 deliberations until after the resignation offer. Resignations are expected to be promptly accepted except in situations where extraordinary circumstances warrant the applicable director continuing to serve as a member of the Board. The Board shall disclose its election decision, via press release, within 90 days of the applicable meeting at which directors were elected. If a resignation is accepted, the Board may appoint a new director to fill the vacancy created by the resignation. If a director nominee that is an employee of the Company receives a greater number of votes withheld than in favour during an uncontested election of directors and is required to tender his or her resignation as director pursuant to the majority voting policy, then to the extent that no events or circumstances have otherwise occurred that would be grounds for termination for cause, such individual may opt to be deemed to have been terminated from his or her employment without cause and be entitled to the rights and benefits arising under the terms of his or her employment agreement or that may otherwise arise pursuant to applicable laws. Board Mandate The Board, either directly or through its committees, is responsible for the supervision of management of the Company s business and affairs with the objective of enhancing Shareholder value. A copy of the mandate of the Board of Directors is attached to this prospectus as Appendix B. Meeting Attendances Since the Company s incorporation, the Board has held one Board meeting and each of Mr. Church, Mr. Belford, Mr. McMahon and Mr. Thomson attended such meeting. Board Committees The Board has three committees, the Audit Committee, the Compensation and Corporate Governance Committee and the Health, Safety and Environment Committee. Audit Committee See Audit Committee above. Compensation and Corporate Governance Committee The members of the Compensation and Corporate Governance Committee will be: Messrs. Hanlon (Chair), McRae, Cameron, McMahon and Church. Each of the members of the Compensation and Corporate Governance Committee is independent within the meaning of NI The Compensation and Corporate Governance Committee s mandate is to, among other things, assess and formulate and make recommendations to the Board in respect of corporate governance, compensation issues related to Source s officers and employees, compensation and other issues relating to the Company s directors. In addition to any other duties and authorities delegated to it by the Board from time to time, the Compensation and Corporate Governance Committee s mandate includes: reviewing and recommending to the Board, on a non-binding basis, changes to its mandate, as considered appropriate from time to time; reviewing and making recommendations to the Board on Source s general compensation philosophy and overseeing the development and administration of compensation programs; overseeing the preparation of and recommending to the Board any required disclosures of governance practices to be included in any disclosure document of Source, as required; reviewing the senior management and Board compensation policies and/or practices followed by Source and seeking to ensure such policies are designed to recognize and reward performance and establish a compensation framework, which results in the effective development and execution of a Board-approved strategy; seeking to ensure that base salaries are competitive relative to the industry and that bonuses, if any, reflect industry-competitive cash composition relative to corporate performance and considering individual performance in the context of the overall performance of Source; developing, for review and approval of the Board, a written position description for the CEO; annually evaluating Source s and the senior executives performance by the degree that Source s strategy (as proposed and justified by Management and modified and approved by the Board) and value growth -67-

91 performance (as compared to its peers including other Canadian public companies of a similar size and other Canadian mining or oilfield services companies of a similar size in general and also the Canadian mining or oilfield services companies with the most similar scope of business) differentiate; annually reviewing and recommending to the Board an evaluation of the performance of senior executives and providing recommendations for annual compensation based on such evaluation and other appropriate factors; administering any share-based compensation plan and such other compensation plans or structures for non-senior executive employees as are adopted by Source from time to time in accordance with the terms of the applicable plan or structure, including the recommendation to the Board of the grant of Options or other compensation in accordance with the terms of the applicable plan or structure; regularly reviewing all incentive compensation plans and share-based plans and, in its discretion, making recommendations to the Board for consideration; reviewing employee benefit plans and reports and, in its discretion, making recommendations to the Board for consideration; providing risk oversight in respect of Source s compensation policies and practices; identifying any compensation plans or practices that could encourage senior executives or other individuals in a principal business unit or a division of Source to take inappropriate or excessive risks; identifying any other risks that may arise from Source s compensation policies and practices that are reasonably likely to have a material adverse effect on Source; overseeing and approving a report prepared by Management on senior executive compensation on an annual basis in connection with the preparation of the annual management information circular or as otherwise required pursuant to Applicable Securities Laws; reviewing in advance all proposed executive compensation disclosure; reviewing and recommending to the Board the compensation of the Board members, including annual retainer, meeting fees, share-based compensation and other benefits conferred upon the Board members; reviewing annually the effectiveness of the CEO and, in consultation with the CEO, other senior management and other executive officers, including their contributions, performance and qualifications; considering such other human resource matters as are delegated to the Compensation and Corporate Governance Committee by the Board, for review or recommendation, as considered appropriate from time to time; reviewing, on a periodic basis, the size and composition of the Board, making recommendations as to the number of independent directors and advising the Board on filling vacancies; facilitating the independent functioning of the Board, including by assessing which directors are independent directors and which independent directors serve the Board as a matter of duty to a third-party and identifying areas of conflict of interest between Source and any such third parties, and seeking to maintain an effective relationship between the Board and senior management of the Company; reviewing, annually, the mandates of the Board and its committees and the position descriptions for the Chair of the Board and the Chair of each committee and recommending to the Board such amendments to those mandates and position descriptions as it believes are necessary or desirable; assessing, annually, the effectiveness of the Chair of the Board, the Board as a whole, all committees of the Board and the contribution, competency, skill and qualification and, if applicable, position distributions, of individual directors, including making recommendations where appropriate that a sitting director be removed or not be re-appointed; reviewing, on a periodic basis, the Company s code of business conduct and ethics, recommending to the Board any changes thereto as considered appropriate from time to time, ensuring that management has established a system to monitor compliance with the code of business conduct and ethics, and reviewing management s monitoring of Source s compliance with the code of business conduct and ethics; -68-

92 establishing a process for direct communications with Shareholders and other stakeholders, including through the Company s whistleblower policy; developing processes to address any conflict of interest and to periodically review such processes; reviewing, on a periodic basis, senior management succession plans; reviewing and submitting to the Board, as a whole, recommendations concerning executive and board compensation, compensation plan matters and corporate governance; reviewing with the Board the Compensation and Corporate Governance Committee s judgment as to the quality of the Company s governance and suggesting changes to the Company s operating governance guidelines and deemed appropriate; as necessary or appropriate, establishing qualifications for directors and procedures for identifying possible nominees who meet these criteria; considering, in recommending to the Board suitable candidates to be nominated for election as directors at the next annual meeting of Shareholders: (a) the competencies and skills considered necessary for the Board, as a whole, to possess, (b) the competencies and skills of the existing members of the Board, (c) the needs of the Board and the competencies and skills each new nominee will bring to the boardroom, and (d) whether or not each new nominee can devote sufficient time and resources to his or her duties as a member of the Board; and periodically reviewing the policy on mandatory share ownership for directors and senior officers of the Company and, in its discretion, recommending any changes to the Board for consideration. Consultants may be periodically retained to assist the Compensation and Corporate Governance Committee in fulfilling its responsibilities. Further particulars of the process by which compensation for the Company s directors and officers is determined can be found under the headings Executive Compensation and Director Compensation. Health, Safety and Environment Committee The members of the Health, Safety and Environment Committee will be Messrs. Cameron (Chair), Hanlon and McMahon. Each of the members of the Health, Safety and Environment Committee is independent within the meaning of NI The Health, Safety and Environment s Committee s mandate is to oversee Source s policies and management systems, which are designed to cause it to comply with applicable laws and regulations, and evaluate the performance of Source with respect to: (a) the protection of the health and safety of all persons associated with Source s operations; (b) the protection of the biological and physical environments; and (c) the relationship of Source with the communities nearest its operations. In addition to any other duties and authorities delegated to it by the Board from time to time, the Health, Safety and Environment s Committee s mandate includes: reviewing, annually, and recommending to the Board changes to its mandate, as considered appropriate from time to time; monitoring changes to applicable laws, regulations and rules and industry standards in regard to health, safety and environmental matters; monitoring on a regular basis, the existing health, safety and environmental practices, procedures and policies of Source as prepared by and updated from time to time by management to ensure that they comply with applicable laws, regulations and rules, conform to industry standards and prevent or mitigate losses and, in its discretion, directing changes to such practices, procedures and policies; reviewing periodically the relationship of Source with the communities affected by its business and operations; considering and implementing policies for the improvement of the relationship of Source with the communities affected by its business and operations; evaluating the effectiveness of the implementation of Source s policies relating to health, safety and environmental matters; directing the preparation of, and reviewing and considering reports and recommendations issued by management or by external advisors relating to health and safety issues, compliance matters and the interaction -69-

93 of Source with the communities affected by its business and operations, together with management s response to those reports and recommendations; from time to time, touring Source s operations, interviewing the senior officers of Source responsible for operations and a sampling of the operating personnel reporting to the Board on such meetings; reviewing periodically Source s emergency response plan, if any, and state of readiness to respond to crisis situations; reviewing any civil or criminal occupational health and safety or environmental proceedings, claims, orders, actions or government investigation contemplated or threatened against Source; reviewing circumstances involving any emergency that forces the indefinite shut-down of operations, loss of safe operating control, serious injuries or fatalities among employees, contractors or the public, extensive damage to property or a serious harm to the environment; reviewing health, safety, and environmental programs implemented by Management for any of Source s employees; and submitting to the Board, as a whole, reports concerning health, safety and environmental matters Orientation and Continuing Education The Compensation and Corporate Governance Committee is responsible for the orientation and continuing education of the members of the Board. As new directors join the Board, they are provided with, among other things, corporate policies, historical information about Source, information on Source s performance and its strategic plan and an outline of the general duties and responsibilities entailed in carrying out their duties. Source encourages directors to attend, enroll or participate in courses and/or seminars dealing with financial literacy, corporate governance and related matters. Each director of Source has the responsibility for ensuring that he or she maintains the skill and knowledge necessary to meet his or her obligations as a director. Ethical Business Conduct The Board encourages and promotes an overall culture of ethical business conduct by promoting compliance with applicable laws, rules and regulations, providing guidance to Management to help them recognize and deal with ethical issues, promoting a culture of open communication, honesty and accountability and ensuring awareness of disciplinary action for violations of ethical business conduct. In connection with its commitment to ensuring the ethical operation of Source, the Board has adopted a code of business conduct and ethics, a copy of which will be made available under the Company s profile at Any reports of variance from the code of business conduct and ethics are to be reported to the Board. The Board monitors compliance with the code of business conduct and ethics through reports of Management to the Board and requires that all directors, officers and designated employees provide an annual certification of compliance with the code. A director who has a material interest in a matter before the Board or any committee on which he or she serves is required to disclose such interest as soon as the director becomes aware of it. In situations where a director has a material interest in a matter to be considered by the Board or any committee on which he or she serves, such director may be required to absent himself or herself from the meeting while discussions and voting with respect to the matter are taking place. Directors will also be required to comply with the relevant provisions of the ABCA regarding conflicts of interest. The Board has also adopted a whistleblower policy which provides employees, clients and contractors with the ability to report, on a confidential and anonymous basis, any violation within Source including (but not limited to), criminal conduct, falsification of financial records or unethical conduct. The Board believes that providing a forum for employees, clients, contractors, officers and directors to raise concerns about ethical conduct and treating all complaints with the appropriate level of seriousness fosters a culture of ethical conduct. Nomination of Directors The Compensation and Corporate Governance Committee is responsible for selecting nominees for election to the Board. The Compensation and Corporate Governance Committee is responsible for recommending suitable candidates -70-

94 for nomination for election or appointment as director, and recommending the criteria governing the overall composition of the Board and governing the desirable characteristics for directors. In making such recommendations, the Compensation and Corporate Governance Committee considers: (a) the competencies and skills that the Board considers to be necessary for the Board, as a whole, to possess; (b) the competencies and skills that the Board considers to be necessary for each existing director to possess; (c) the competencies and skills that each new nominee will bring to the Board; and (d) whether or not each new nominee can devote sufficient time and resources to his or her duties as a member of the Board. The Compensation and Corporate Governance Committee also reviews on a periodic basis the composition of the Board, and analyzes the needs of the Board and recommends nominees who meet such needs. Notwithstanding the foregoing, pursuant to the TriWest Nomination Agreement, for so long as TriWest IV and its affiliates collectively own or exercises control or direction over 7.5% or more of the aggregate outstanding Common Shares and Class B Shares, TriWest IV will have the right to nominate one representative to stand for appointment and election as a director of the Company and for so long as TriWest IV and its affiliates own or exercise control or direction over 15% or more of the aggregate outstanding Common Shares and Class B Shares, TriWest IV will have the right to nominate two representatives to stand for appointment and election as directors of Source, and such nominees will be included in any slate of directors proposed by Source. Further, pursuant to the McMahon Nomination Agreement, for so long as the Jim McMahon and his affiliates collectively own or exercises control or direction over 7.5% or more of the aggregate outstanding Common Shares and Class B Shares, Jim McMahon will have the right to nominate himself as representative to stand for appointment and election as a director of the Company. See Principal Shareholders Distribution and Nomination Rights TriWest Nomination Agreement and McMahon Nomination Agreement. Compensation The Compensation and Corporate Governance Committee is currently responsible for determining the compensation for Source s directors and officers. See Executive Compensation Compensation Discussion and Analysis. Board Assessments To date, a formal process of assessing the Board and its committees, or the independent directors has not been implemented and the Board has satisfied itself that the Board, its committees and individual directors are performing effectively through informal discussions. Following Closing, the Compensation and Corporate Governance Committee will establish and implement procedures to evaluate the performance and effectiveness of the Board, its committees and the contributions of individual directors. The Compensation and Corporate Governance Committee will also take reasonable steps to evaluate and assess, on an annual basis, directors performance and the effectiveness of the Board, its committees, the individual directors, the Chair and the committee chairs. The assessment will address, among other things, individual director independence, individual director and overall Board skills and individual director financial literacy. The Board will receive and consider the recommendations from the Compensation and Corporate Governance Committee regarding the results of such evaluations. Position Descriptions The Board has approved written position descriptions or terms of reference for the Chair of the Board and the Chair of each of the Audit Committee, the Compensation and Corporate Governance Committee and the Health, Safety and Environment Committee. The Board has also developed a written position description for the CEO. Director Term Limits and Board Renewal The Board has not adopted director term limits or other mechanisms of board renewal because: Source has found that having long standing directors on its Board does not negatively impact board effectiveness and instead contributes to boardroom dynamics such that Source has for many years had a consistently high performing Board; -71-

95 the imposition of director term limits implicitly discounts the value of experience and continuity amongst Board members and runs the risk of excluding experienced and potentially valuable Board members as a result of an arbitrary determination; it is important to retain directors who hold significant investments in the Company, such that their interests are aligned with the interests of the Shareholders; it is important to ensure that directors with significant and unique business experience in Source s industry are retained; directors with the level of understanding of Source s business, history and culture acquired through long service on the Board provide additional value; and term limits have the disadvantage of losing the contribution of directors who have been able to develop, over a period of time, increasing insight into Source and its operations and thereby may provide an increasing contribution to the Board as a whole. Consideration of Gender in Director Nominations and Executive Appointments As at the date of this prospectus, there are no women on the Board and none of the Company s executive officers are female. The Company has not adopted formal targets regarding the number of women to be elected to the Board or to be appointed to executive officer positions and the Company does not have written policies regarding the identification and nomination of female director candidates for election to the Board. The Compensation and Corporate Governance Committee considers the level of representation of women on the Board as one of many factors when seeking candidates for nomination. Similarly, the Company considers the level of representation of women in executive officer positions as one of many factors when making executive officer appointments. The Compensation and Corporate Governance Committee is focused on finding the most qualified individuals available with skills and experience that will complement the Board and assist it in providing strong stewardship for the Company, with gender being only one of many factors taken into consideration when evaluating individuals as potential directors. The Company is similarly focused on seeking the most qualified individuals with skills and experience that will be of greatest benefit to the Company, with gender being only one of many factors taken into consideration when evaluating individuals for senior management positions. This approach is believed to be in the best interests of the Company and its stakeholders. ELIGIBILITY FOR INVESTMENT In the opinion of Stikeman Elliott LLP, counsel to the Company, and Blake, Cassels & Graydon LLP, counsel to the Underwriters, based on the provisions of the Tax Act in force on the date hereof, provided the Common Shares are listed on a designated stock exchange (which currently includes the TSX) on the Closing Date, the Common Shares will on that date be qualified investments under the Tax Act for Deferred Plans. Notwithstanding the foregoing, an annuitant under an RRSP or RRIF or the holder of a TFSA, as the case may be, that holds Common Shares will be subject to a penalty tax if the Common Shares are a prohibited investment (as defined in the Tax Act) for the RRSP, RRIF or TFSA, as the case may be. The Common Shares will generally not be a prohibited investment provided that the annuitant under the RRSP or RRIF or the holder of the TFSA, as the case may be, deals at arm s length with the Company for the purposes of the Tax Act and does not have a significant interest (within meaning of the Tax Act) in the Company. In addition, the Common Shares will not be a prohibited investment if the Common Shares are excluded property (as defined in the Tax Act for purposes of the prohibited investment rules) for the RRSP, RRIF or TFSA. On March 22, 2017, the Minister of Finance (Canada) announced proposals ( Tax Proposals ) to amend the Tax Act to extend the prohibited investment rules and corresponding provisions, which are currently applicable to RRSPs, RRIFs and TFSAs and the annuitants or holders thereof, as the case may be, to registered education savings plans and registered disability savings plans and the subscribers or holders thereof, as the case may be. The Tax Proposals are intended to apply to transactions occurring and investments acquired after March 22, 2017, subject to certain transitional rules. Prospective investors who intend to hold the Common Shares in Deferred Plans should consult their own tax advisors regarding their particular circumstances and requirements and rules regarding holding and transferring securities therein. -72-

96 PLAN OF DISTRIBUTION The Company is offering the Common Shares described in this prospectus through the Underwriters. The Company has entered into the Underwriting Agreement dated April 6, 2017 with the Underwriters. Subject to the terms and conditions of the Underwriting Agreement, each of the Underwriters has severally agreed to purchase the Common Shares offered hereby. Closing is expected to occur on or about April 13, 2017 or such later date as the Company and the Underwriters may agree, but in any event not later than May 11, 2017, at a price of $10.50 per Common Share payable in cash to the Company against delivery of the Common Shares. The Common Shares offered under this prospectus are to be taken up by the Underwriters, if at all, on or before a date not later than 42 days after the date of the receipt for the final prospectus. The Offering Price of the Common Shares offered under the Offering was determined by negotiation between the Company and the Underwriters. The Company has agreed to pay a fee to the Underwriters in the amount of $ per Common Share sold pursuant to the Offering, being an aggregate fee of $9,625,000 ($11,068,750 if the Over- Allotment Option is exercised in full). The Underwriter s fee is payable on Closing. The Company has also agreed to reimburse the Underwriters for their reasonable expenses in connection with the Offering. The Underwriting Agreement also provides that the Company will indemnify the Underwriters, their respective affiliates and each of their respective directors, officers, employees, partners, agents and each other person, if any, controlling an Underwriter or any of its subsidiaries against certain liabilities, claims, actions, complaints, losses, costs, fines, penalties, taxes, interest, damages and expenses in connection with the Offering. The obligations of the Underwriters are several and neither joint nor joint and several, and may be terminated at their discretion on the basis of their assessment of the state of the financial markets and may also be terminated upon the occurrence of certain stated events. If an Underwriter fails to purchase the Common Shares which it has agreed to purchase, the remaining Underwriters may terminate their obligation to purchase their allotment of Common Shares, or may, but are not obligated to, purchase the Common Shares not purchased by the Underwriter or Underwriters which fail to purchase; provided, however, that if the aggregate number of Common Shares not so purchased is not more than 10% of the Common Shares agreed to be purchased by the Underwriters, then each of the other Underwriters shall be obliged to purchase severally the Common Shares not taken up, on a pro rata basis or in such other proportions as they may agree among themselves. The Underwriters are, however, obligated to take up and pay for all of the Common Shares if any of the Common Shares are purchased under the Underwriting Agreement. The Underwriters are not required to take or pay for the Common Shares covered by the Over-Allotment Option described below. The Common Shares are offered subject to a number of conditions, including receipt and acceptance of the Common Shares by the Underwriters and the Underwriters right to reject orders in whole or in part and compliance by the Company with industry-standard closing conditions. The Underwriters propose to offer the Common Shares initially at the Offering Price specified on the cover page of this Prospectus. After the Underwriters have made a reasonable effort to sell all of the Common Shares at such price, the Offering Price may be decreased and may be further changed from time to time to an amount not greater than such price, and the compensation realized by the Underwriters will be decreased by the amount that the aggregate price paid by purchasers for the Common Shares is less than the gross purchase price paid by the Underwriters to the Company for the Common Shares. Any such reduction in price will not affect the proceeds received by the Company. In connection with the Offering, certain of the Underwriters or other securities dealers may distribute prospectuses electronically. The Offering is being made in each of the provinces and territories of Canada through those Underwriters or their affiliates who are registered to offer the Common Shares for sale in such provinces and territories and such other registered dealers as may be designated by the Underwriters. Subject to applicable law and the provisions of the Underwriting Agreement, the Underwriters may offer the Common Shares outside of Canada. The TSX has conditionally approved the listing of the Common Shares. Listing is subject to the Company fulfilling all of the requirements of the TSX on or before June 13,

97 The Common Shares offered hereby have not been and will not be registered under the U.S. Securities Act, and may not be offered or sold in the United States, except in transactions exempt from registration under the U.S. Securities Act and under the securities laws of any applicable state. The Underwriters have agreed that they will not sell the Common Shares within the United States except in accordance with Rule 144A under the U.S. Securities Act and in compliance with applicable U.S. state securities laws. In connection therewith, the Underwriting Agreement permits the Underwriters to resell the Common Shares to qualified institutional buyers (as defined in Rule 144A under the U.S. Securities Act) in the United States, provided such sales are made in accordance with Rule 144A under the U.S. Securities Act and applicable U.S. state securities laws. Moreover, the Underwriting Agreement provides that the Underwriters will sell Common Shares outside the United States only in accordance with Rule 903 of Regulation S under the U.S. Securities Act. In addition, until 40 days after the commencement of the Offering, an offer or sale of Common Shares within the United States by any dealer (whether or not participating in the Offering) may violate the registration requirement of the U.S. Securities Act if such offer or sale is made otherwise than in accordance with an exemption from the registration requirement of the U.S. Securities Act. Upon the completion of the Offering, the Company expects to have a total of 50,316,694 outstanding Common Shares and 1,300,174 outstanding Class B Shares. All of the Common Shares sold in the Offering will be freely tradable in Canada without restriction or further registration under applicable Canadian securities laws. Prior to the Offering, there will be no public market for the Common Shares. The sale of a substantial number of the Common Shares in the public market after the Offering, or the belief that such sales may occur, could adversely affect the prevailing market price of the Common Shares. Furthermore, because some of the Common Shares will not be available for sale after the Closing due to the contractual restrictions on resale described above under Escrowed Securities and Securities Subject to Contractual Restriction on Transfer, the sale of a substantial number of Common Shares in the public market after these restrictions lapse could adversely affect the prevailing market price of the Common Shares and the Company s ability to raise equity capital in the future. Subscriptions for Common Shares will be received subject to rejection or allotment in whole or in part and the Underwriters reserve the right to close the subscription books at any time without notice. Common Shares sold pursuant to the Offering will be registered in the name of CDS and electronically deposited with CDS on the Closing Date. Purchasers of Common Shares will receive only a customer confirmation from the Underwriter or other registered dealer who is a CDS participant and from or through whom a beneficial interest in the Common Shares is acquired. Cowen and Company, LLC is not registered to sell securities in any Canadian jurisdiction and, accordingly, will only sell Common Shares outside of Canada. Over-Allotment Option The Company has granted to the Underwriters the Over-Allotment Option, exercisable at the Underwriters sole discretion, in whole or in part, from time to time, for a period of 30 days after Closing, to purchase from the Company up to an additional 2,500,000 Common Shares (representing approximately 15% of the Offering) at the Offering Price and on the same terms as set forth above, for the purpose of covering over-allocations, if any. If the Over-Allotment Option is exercised in full, the total Price to the Public, Underwriters Commission and Net Proceeds to the Company (before deducting the expenses of the Offering) will be $201,250,004, $11,068,750 and $190,181,254, respectively. The Company has agreed to pay the Underwriters a fee equal to $ per Common Share for each Common Share purchased on exercise of the Over-Allotment Option. This prospectus also qualifies the grant of the Over-Allotment Option and the distribution of the Common Shares to be delivered upon the exercise of the Over-Allotment Option. A purchaser who acquires Common Shares forming part of the Underwriters over-allocation position acquires such Common Shares under this prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. -74-

98 Price Stabilization, Short Positions and Passive Market Making In connection with the Offering, the Underwriters may over allocate or effect transactions which stabilize or maintain the market price of the Common Shares at levels other than those which otherwise might prevail on the open market, including: stabilizing transactions; short sales; purchases to cover positions created by short sales; imposition of penalty bids; and syndicate covering transactions. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or slowing a decline in the market price of the Common Shares while the Offering is in progress. These transactions may also include making short sales of the Common Shares, which involve the sale by the Underwriters of a greater number of Common Shares than they are required to purchase in the Offering. Short sales may be covered short sales, which are short positions in an amount not greater than the Over-Allotment Option, or may be naked short sales, which are short positions in excess of that amount. The Underwriters may close out any covered short position either by exercising the Over- Allotment Option, in whole or in part, or by purchasing Common Shares in the open market. In making this determination, the Underwriters will consider, among other things, the price of Common Shares available for purchase in the open market compared with the price at which they may purchase Common Shares through the Over-Allotment Option. The Underwriters must close out any naked short position by purchasing Common Shares in the open market. A naked short position is more likely to be created if the Underwriters are concerned that there may be downward pressure on the price of the Common Shares in the open market that could adversely affect purchasers who purchase in the Offering. In addition, in accordance with rules and policy statements of certain Canadian securities regulators, the Underwriters may not, at any time during the period of distribution, bid for or purchase Common Shares. The foregoing restriction is, however, subject to exceptions where the bid or purchase is not made for the purpose of creating actual or apparent active trading in, or raising the price of, the Common Shares. These exceptions include a bid or purchase permitted under the by-laws and rules of applicable regulatory authorities and the applicable stock exchange, including the Universal Market Integrity Rules for Canadian Marketplaces, relating to market stabilization and passive market making activities and a bid or purchase made for and on behalf of a customer where the order was not solicited during the period of distribution. As a result of these activities, the price of the Common Shares may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time. The Underwriters may carry out these transactions on any stock exchange on which the Common Shares are listed, in the over-the-counter market, or otherwise. Pricing of the Offering Prior to the Offering, there was no public market for the Common Shares. The final Offering Price was negotiated between the Company and the Underwriters. Expenses Related to the Offering It is estimated that the total expenses of the Offering, not including the Underwriters Commission, will be approximately $3,500,000. Lock-Up Arrangements Pursuant to the Underwriting Agreement, the Company has agreed that it will not, directly or indirectly, without the prior written consent of the Lead Underwriters, on behalf of all of the Underwriters, such consent not to be unreasonably withheld, file in any jurisdiction any prospectus or registration statement, sell, offer to sell, issue, grant -75-

99 any option, warrant or other right for the sale or issuance of, or otherwise lend, transfer, assign or dispose of, in a public offering or by way of private placement or otherwise (or agree to any of the foregoing or publicly announce any intention to do so) any Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, for a period commencing on the Closing Date and ending 180 days after the Closing Date, subject to certain exemptions, including, without limitation, the issuance of Common Shares (pursuant to a series of steps) upon the redemption of the applicable Exchangeable LP Securities and the corresponding surrender of Class B Shares. It is a condition of Closing that each of the Locked-Up Shareholders will enter into Lock-Up Agreements under which they will agree not to, directly or indirectly, for a period commencing on the Closing Date and ending on the date that is 180 days following the Closing Date, subject to certain exceptions, without the prior written consent of the Lead Underwriters, on behalf of the Underwriters, such consent not to be unreasonably withheld, (a) file in any jurisdiction any prospectus or registration statement, or exercise any demand rights, with respect to the Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, (b) sell, offer to sell, grant any option, right or warrant for the sale of, or otherwise lend, transfer or dispose of any Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, owned by such holder; (c) make any short sale, engage in any hedging transaction, or enter into any swap, monetization, securitization or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of the Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, owned by such holder, (d) secure or pledge any Common Shares or other equity securities of the Company, or any securities convertible, exchangeable or otherwise exercisable into Common Shares or other equity securities of the Company, or (e) agree to or announce any intention to do any of the foregoing; provided, however, that the Class B Founder and any of his affiliated entities that hold Common Shares will be permitted to sell up to 781,812 Common Shares per month without the prior written consent of the Lead Underwriters. See Escrowed Securities and Securities Subject to Contractual Restriction on Transfer. Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common Shares RTR Payment will be deemed to have agreed to the terms of a lock-up agreement the terms of which are substantially similar to those of the Lock-Up Agreements. RELATIONSHIP AMONG THE COMPANY AND CERTAIN UNDERWRITERS BMO is an affiliate of Bank of Montreal which is the sole Lender pursuant to the Credit Agreement to which the Company is currently indebted. Scotia is an affiliate of The Bank of Nova Scotia which is expected to become a Lender following the Offering in connection with the planned increase of the Revolver Limit. Accordingly, the Company may be considered a connected issuer of BMO and Scotia under Applicable Securities Laws. As at April 4, 2017, approximately $23.5 million was outstanding under the Credit Facilities. See Consolidated Capitalization. Source is in compliance with all materials terms of the Credit Agreement and the Lender has not waived any breach by Source thereunder since its execution. Source s financial position has not materially changed, in an adverse manner, since the indebtedness was incurred under the Credit Facilities. See Description of Indebtedness Indebtedness outstanding following the Offering Credit Facilities for a description of the Credit Facilities, including its corresponding security arrangements. The decision to distribute the Common Shares offered hereunder and the determination of the terms of the distribution were made through negotiations primarily between the Underwriters. Bank of Montreal and The Bank of Nova Scotia did not have any involvement in such decision or determination, but have been advised of terms thereof. As a consequence of this issuance, BMO and Scotia will receive their respective shares of the Underwriters Commission. In addition, Bank of Montreal and The Bank of Nova Scotia and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the Company, for which they received or will receive customary fees. MARKET FOR SECURITIES There is currently no market through which the Common Shares may be sold and purchasers may not be able to resell the Common Shares purchased under this prospectus. See Risk Factors Risks Related to the Offering. -76-

100 RISK FACTORS An investment in Common Shares is speculative and involves a high degree of risk that should be considered by potential investors. A potential investor should carefully consider the following risk factors in addition to the other information contained in this prospectus before purchasing Common Shares. The risks and uncertainties set out below are not the only ones Source faces. There are additional risks and uncertainties that Source does not currently know about or that Source currently considers immaterial which may also impair Source s business operations and cause the price of the Common Shares to decline. If any of the following risks actually occur, Source s business may be harmed and its financial condition and results of operations may suffer significantly. In that event, the trading price of the Common Shares could decline, and a purchaser of Common Shares may lose all or part of his or her investment. Risks Related to Source Source s operations are subject to operating risks that are often beyond its control and could adversely affect production levels and costs. Source s mining, processing and production facilities, its logistics operations and any future properties it develops or may acquire in the future are and will be subject to risks normally encountered in the frac sand industry. These risks include: changes in the price and availability of transportation; inability to obtain necessary production equipment or replacement parts; inclement or hazardous weather conditions, including flooding, and the physical impacts of climate change; unanticipated ground, grade or water conditions; inability to acquire or maintain necessary permits or mining or water rights; late delivery of supplies; changes in the price and availability of natural gas or electricity that Source uses as fuel sources for its frac sand plants and equipment; technical difficulties or failures; cave-ins or similar pit wall failures; environmental hazards, such as unauthorized spills, releases and discharges of wastes, tank ruptures and emissions of unpermitted levels of pollutants; industrial accidents; changes in laws and regulations (or the interpretation thereof) related to the mining and oil and natural gas industries, silica dust exposure or the environment; inability of Source s customers or distribution partners to take delivery; reduction in the amount of water available for processing; fires, explosions or other accidents; and facility shutdowns in response to environmental regulatory actions. The occurrence of any of these events could have a material adverse effect on Source s business, financial position, results of operations and cash flows. Source s business may be adversely affected by changing economic conditions beyond its control, including decreases in oil and natural gas development Source s revenue is closely tied to conditions in the oil and natural gas industry in which its customers operate, and more broadly to general economic conditions. Source s product and services are used primarily in oil and gas -77-

101 exploration and production in Western Canada and the United States. Consequently, economic downturns and particularly weakness in the oil and natural gas market may lead to a significant decrease in demand for Source s products and services or depress utilization rates and the prices for the products and services Source sells. During periods of expansion in Source s respective end markets, Source generally has benefited from increased demand for its products and services. However, during recessionary periods in Source s end markets, Source may be adversely affected by reduced demand for its products and services. Weakness in Source s end markets, such as a decline in oil and natural gas exploration and production, may in the future lead to a decrease in the demand for Source s products and services or the price Source can charge for its products and services, which could adversely affect Source s operating results by decreasing revenues and profit margins. Deterioration in the oil and natural gas industry could have a material adverse effect on Source s business, financial position, results of operations and cash flows in the future. Source s business and financial performance depend on the level of activity in the oil and natural gas industry Substantially all of Source s revenues are derived from the sale of proppant to companies in the oil and natural gas industry. As a result, Source s operations are dependent on the levels of activity in oil and natural gas exploration, development and production. More specifically, the demand for the proppants Source produces is closely related to the number of oil and natural gas wells completed in geological formations that Source serves and where sand-based proppants are used in hydraulic fracturing activities. These activity levels are affected by both short and long term trends in oil and natural gas prices, among other factors. In recent years, oil and natural gas prices and, therefore, the level of exploration, development and production activity, have experienced a sustained decline from the highs in the latter half of Beginning in September 2014 and continuing through to the end of 2016, increasing global supply of oil, including a decision by the OPEC to sustain its production levels in spite of the decline in oil prices, in conjunction with weakened demand from slowing economic growth in the Eurozone and China, created downward pressure on crude oil prices resulting in reduced demand for Source s products and pressure to reduce its product prices. Although such conditions have slightly improved recently, if conditions deteriorate and persist, this will adversely impact Source s operations. Furthermore, the availability of key resources that impact drilling activity has experienced significant fluctuations and could impact demand for the Company s products. A prolonged reduction in oil and natural gas prices would generally depress the level of oil and natural gas exploration, development, production and well completion activity and would result in a corresponding decline in the demand for the proppants Source produces. Such a decline would have a material adverse effect on Source s business, results of its operations, and its financial condition. Furthermore, the commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. Any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on Source s business and financial condition, even in a stronger oil and natural gas price environment. Continued downturn in business could result in potential impairment of property, plant and equipment Although commodity prices have recently improved, the decrease in commodity prices since 2014 has had, and may continue to have, a negative impact on industry drilling and well completion activity, which affects the demand for frac sand. Should energy industry conditions deteriorate, there is a possibility that property, plant and equipment may be impaired in a future period. Any resulting non-cash impairment charges to earnings may be material. Specific uncertainties affecting Source s estimated fair value include the impact of competition, the prices of frac sand, future overall activity levels and demand for frac sand, the activity levels of Source s significant customers, and other factors affecting the rate of Source s future growth. These factors will continue to be reviewed and assessed going forward. Additional adverse developments with regard to these factors could have a further negative impact on Source s fair value. Source relies on a small number of customers for the majority of its revenue Source relies on a small number of large customers for most of its revenue, and the loss of one or more such customers would adversely affect Source s results of operations and cash flows. Source s five largest customers -78-

102 accounted for 78% and 87%, respectively, of its revenue for the years ended December 31, 2015 and December 31, Although a significant percentage of Source s customers are under contract, certain contracts do not provide for guaranteed volumes and can be terminated on short notice and, on occasion, certain customers may demand to renegotiate a contract prior to the end of its term. There can be no assurance that Source s current customers will continue their relationships with Source or that contracts that come up for renewal will be renewed or, if they are renewed, that customers will contract for the same amounts or that they will pay the same prices as they have in the past. The loss of one or more major customers, the failure to renew customer contracts, or any decrease in products or services purchased or prices paid or any other changes to the terms of service under renewed contracts could have a material adverse effect on Source s business, financial position, results of operations and cash flows. A substantial portion of Source s customer contracts, including contract renewals, are subject to competitive tender processes, and there can be no assurance that Source will be successful in acquiring new business or retaining existing business subject to competitive tender. As a result of the limited number of customers that Source currently serves, Source s operations are subject to counterparty risk. The ability or willingness of each of Source s customers to perform its obligations under an agreement with Source will depend on a number of factors that are beyond Source s control and may include, among other things, the overall financial condition of the counterparty, the condition of the Canadian and United States oil and natural gas exploration and production industry, the continuing use of frac sand in hydraulic fracturing operations and general economic conditions. In addition, in depressed market conditions, Source s customers may no longer need the amount of frac sand for which they have indicated or agreed to, or may be able to obtain comparable products at a lower price. If Source s customers experience a significant downturn in their business or financial condition, they may attempt to renegotiate Source s agreements. In addition, as agreements expire, depending on market conditions at the time, Source s customers may choose not to extend, or to adjust the terms of, these agreements which could lead to a significant reduction of sales volumes and corresponding revenues cash flows and financial condition if Source is not able to replace these expected sales volumes with new sales volumes. Additionally, even if Source were to replace any lost volumes, under current market conditions, lower prices for its product could materially reduce its revenues, cash flow and financial condition. Negative Cash Flow From Operating Activities Source had negative cash flow from operating activities in its most recently completed financial year. Source s cash flow from operating activities is subject to a number of factors, including oil and gas developments and market pricing. Source does not anticipate that it will continue to have negative operating cash flow from operating activities for the annual year 2017; however, there can be no assurance that Source will generate earnings, operate profitably or provide a return on investment in the future. Certain of Source s long-term contracts may preclude Source from taking advantage of increasing prices for frac sand or mitigating the effect of increased operational costs during the term of its long-term contracts Certain long-term supply contracts Source has may negatively impact Source s results of operations. Source s long-term contracts require its customers to pay a specified price for a specified volume of frac sand each month. As a result, in periods with increasing prices, Source s sales will not keep pace with market prices. Additionally, if Source s operational costs increase during the terms of its long-term supply contracts, Source will not be able to pass any of those increased costs to its customers. If Source is unable to otherwise mitigate these increased operational costs, its net income and available cash for distributions could decline. Certain of Source s contracts contain provisions requiring it to deliver minimum amounts of frac sand or purchase minimum amounts of services. Non-compliance with these contractual obligations may result in penalties or termination of the agreement In certain instances, Source commits to deliver products, under penalty of non-performance. Source s inability to meet the minimum contract requirements may permit the counterparty to terminate the agreements or require Source to pay a fee. The amount of the fee would be based on the difference between the minimum amount contracted for and the amount delivered or purchased. In such events, Source s business, financial condition and results of operations may be materially adversely affected. -79-

103 A majority of Source s contracts are cancelable at the option of Source s customers and are not a guarantee of continued revenues A majority of the contracts Source enters into with Source s customers do not guarantee Source any volumes or revenues and are generally cancelable by Source s customers without cause. Source s contracts generally provide the terms under which Source will provide proppant, but do not obligate Source s customers to purchase any specific amount of proppant, nor do the contracts prohibit Source s customers from purchasing a competitor s proppant. As a result, if Source s customers elect to delay or forego completions programs, or to purchase frac sand from a competitor, Source s product will not be needed. Source faces significant competition that may cause it to lose market share The proppant industry is highly competitive. The proppant market is characterized by a small number of large, national producers and a larger number of small, regional or local producers. Competition in this industry is based on price, consistency and quality of product, site location, distribution capability, customer service, reliability of supply, breadth of product offering and technical support. Some of Source s competitors have greater financial and other resources than Source does. In addition, Source s larger competitors may develop technology superior to Source s or may have production facilities that offer lower cost transportation to certain customer locations than Source does. When the demand for hydraulic fracturing services decreases or the supply of proppant available in the market increases, prices in the frac sand market can materially decrease. Furthermore, oil and natural gas exploration and production companies and other providers of hydraulic fracturing services have acquired and in the future may acquire their own frac sand reserves to fulfill their proppant requirements, and these other market participants may expand their existing frac sand production capacity, all of which would negatively impact demand for Source s frac sand. In addition, increased competition in the proppant industry could have an adverse impact on Source s ability to enter into long term contracts or to enter into contracts on favourable terms. Seasonality may have an adverse effect on Source s results and business The level of activity in the oil and gas industry is influenced by seasonal weather patterns. The spring breakup makes the ground unstable and less capable of supporting heavy weights. Consequently, municipalities and transportation departments enforce road bans that restrict the movement of heavy equipment, thereby reducing drilling and well servicing activity levels. Source could therefore be adversely affected by a spring breakup that is longer in duration than usual. In addition, in any geography in which Source operates, during excessively rainy periods, equipment moves may be delayed, thereby adversely affecting revenues. There is greater demand for certain of Source s services in the winter season when freezing permits the movement and operation of heavy equipment. Activity in Source s business tends to increase in the fall and peak in the winter months of November through March. However, if an unseasonably warm winter prevents sufficient freezing, Source may not be able to access certain customer sites and Source s operating results and financial condition may therefore be adversely affected. Seasonal volatility can therefore create unpredictability in activity, which could have a material adverse effect on Source s business, financial position, results of operations and cash flows. Source s proppant sales are subject to fluctuations in market pricing A majority of Source s supply agreements involving the sale of frac sand contain market-based pricing mechanisms. Accordingly, in periods with decreasing prices, Source s results of operations may be lower than if Source s agreements had fixed prices. During these periods Source s customers may also elect to reduce their purchases from Source and seek to find alternative, cheaper sources of supply. In periods with increasing prices, these agreements permit Source to increase prices; however, these increases are generally calculated on a quarterly basis and do not increase on a dollar for dollar basis with increases in spot market pricing. Furthermore, certain volume-based supply agreements may restrict the ability to fully capture current market pricing. These pricing provisions may result in significant variability in Source s results of operations and cash flows from period to period. Changes in supply and demand dynamics could also impact market pricing for proppants. A number of existing proppant providers and new market entrants have recently announced reserve acquisitions, processing capacity expansions and greenfield projects. In periods where sources of supply of frac sand exceed market demand, market prices for frac sand may decline and Source s results of operations and cash flows may correspondingly decline, be -80-

104 volatile, or otherwise be adversely affected. For example, beginning in September 2014 and continuing through 2016, increasing global supply of oil, in conjunction with weakened demand from slowing economic growth in the Eurozone and China, created downward pressure on crude oil prices resulting in reduced demand for hydraulic fracturing services leading to a corresponding reduced demand for Source s products and pressure to reduce prices. Source may be adversely affected by decreased demand for frac sand due to the development of effective alternative proppants or new processes to replace hydraulic fracturing Frac sand is a proppant used in the completion and recompletion of oil and natural gas wells to stimulate and maintain oil and natural gas production through the process of hydraulic fracturing. Frac sand is the most commonly used proppant and is less expensive than other proppants, such as resin coated sand and manufactured ceramics. A significant shift in demand from frac sand to other proppants, or the development of new processes to make hydraulic fracturing more efficient could replace frac sand altogether, could cause a decline in the demand for the frac sand Source produces and result in a material adverse effect on Source s business, results of operations and financial condition. An increase in the supply of frac sand having similar characteristics as the frac sand Source produces could make it more difficult for Source to renew or replace its existing contracts on favourable terms, or at all. If significant new reserves of frac sand are discovered and developed, and those frac sands have similar characteristics to the frac sand Source produces, Source may be unable to renew or replace its existing sales on favourable terms, or at all. Specifically, if high quality frac sand becomes more readily available, Source s customers may demand lower prices, which could have a material adverse effect on Source s business, results of operations and financial condition. Fluctuations in exchange rates may adversely affect Source s financial position, results of operations, cash flows or Source s ability to make payments on its indebtedness A significant portion of Source s financial activities are currently, and are expected to continue to be, transacted or denominated in or referenced to both Canadian and U.S. dollars. Source generates revenues and incur expenses and capital expenditures in Source s operations in both Canadian and U.S. dollars. Fluctuations in exchange rates between the U.S. and Canadian dollar, could have a material adverse effect on Source s financial position, results of operations, cash flows or Source s ability to make payments on Source s indebtedness. Since Source presents Source s combined financial statements in Canadian dollars, any change in the value of the Canadian dollar relative to the U.S. dollar during a given financial reporting period would result in a foreign currency loss or gain on the translation of Source s U.S. dollar assets into Canadian dollars. Consequently, Source s reported earnings could fluctuate materially as a result of foreign exchange translation gains or losses. In addition, as world oil prices and many other resource prices are quoted in U.S. dollars, fluctuations in the Canada/U.S. dollar exchange rate could also have an impact on Source s customers, which could affect the demand for Source s services and have a material adverse impact on us. Source is and may continue to be subject to various litigation and other proceedings In the normal course of Source s business, Source may become involved in, be named as a party to, or be the subject of, various legal proceedings, including regulatory proceedings, tax proceedings and legal actions, related to personal injuries, property damage, property tax, the environment and contract disputes. Litigation in general can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits brought against Source, or legal actions that Source may initiate, can often be expensive and time-consuming. Unfavourable outcomes from these claims and/or lawsuits could adversely affect Source s business, results of operations or financial condition, and Source could incur substantial monetary liability and/or be required to change Source s business practices. In addition, Source s business exposes it to claims for personal injury, death or property damage resulting from the sale of proppant and other employee related matters. The outcome of outstanding, pending or future proceedings cannot be predicted with certainty and may be determined adversely to Source and, as a result, could have a material adverse effect on Source s business, financial position, results of operations and cash flows. -81-

105 Changes resulting from the 2016 U.S. presidential election may result in legislative and regulatory changes that could have an adverse effect on Source There may be uncertainty as to the position the United States will take with respect to world affairs and events following the 2016 U.S. presidential election and related change in political agenda, coupled with the transition of administrations. This uncertainty may include such issues as United States support for existing treaty and trade relationships with Canada. This uncertainty may adversely impact (a) the ability or willingness of Canadian companies to transact business with companies such as Source whose products are being exported from the United States, (b) Source s profitability if the Government of Canada imposes any restrictions on imports from the United States if the United States imposes any border adjustment taxes that would impose taxes of goods imported to the United States, (c) regulation and trade agreements affecting the United States and Canada, (d) global stock markets (including the TSX), and (e) general global economic conditions. All of these factors are outside of Source s control, but may nonetheless cause Source to adjust its strategy in order to compete effectively in global markets. Source is subject to numerous environmental laws and regulations that may result in Source incurring unanticipated liabilities, which could have an adverse effect on Source s operating performance Federal, provincial, state and local authorities subject Source s facilities and operations to requirements relating to environmental protection. These requirements can be expected to change and expand in the future, and may impose significant capital and operating costs on Source s business. Environmental laws and regulations govern, among other things, the discharge of substances into the air, water and land, impact on wetlands, the handling, storage, use and disposal of hazardous materials and wastes and the cleanup of properties affected by pollutants. If Source violates environmental laws or regulations, Source may be required to implement corrective actions and could be subject to civil or criminal fines or penalties. There can be no assurance that Source will not have to make significant capital expenditures in the future in order to remain in compliance with applicable laws and regulations or that Source will comply with applicable environmental laws at all times. Such violations or liability could have an adverse effect on Source s business, financial condition and results of operations. Source holds numerous environmental and other governmental permits and approvals authorizing operations at each of Source s facilities. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing permit or approval, or a determination that Source has violated a law or permit as a result of a governmental inspection of its facilities could have a material adverse effect on Source s ability to continue operations at its facilities and on Source s business, financial condition, results of operations and cash flows. Environmental laws also impose obligations and liability for the investigation and cleanup of properties affected by hazardous substance spills or releases. Source can be subject to liability for the disposal of substances which Source generates and for substances disposed of on property which Source owns or operates, even if such disposal occurred before Source s ownership or occupancy. Accordingly, Source may become liable, either contractually or by operation of law, for investigation, remediation and monitoring costs even if the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during or prior to Source s ownership or operation of the property. In addition, because environmental laws frequently impose joint and several liability on all responsible parties, Source may be held liable for more than Source s proportionate share of environmental investigation and cleanup costs. Contamination and exposure to hazardous substances can also result in claims for damages, including personal injury, property damage, and natural resources damage claims. Future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination, may give rise to remediation liabilities or other claims that may be material. Environmental requirements may become stricter or be interpreted and applied more strictly in the future. In addition, Source may be required to indemnify other parties for adverse environmental conditions that are now unknown to Source. These future changes or interpretations, or the indemnification for such adverse environmental conditions, could result in environmental compliance or remediation costs Source has not anticipated, which could have a material adverse effect on Source s business, financial position, results of operations and cash flows. Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs on Source and its customers and reduced demand for the oil, natural gas and natural gas liquids that Source s customers produce, which ultimately may cause an adverse effect on Source s business, financial position, results of operations and cash flows. -82-

106 Source faces distribution and logistical challenges in its business Transportation and logistical operating expenses comprise a significant portion of the costs incurred by Source to deliver frac sand to the customer at the wellhead, which could favour suppliers located in close proximity to the customer. As oil and natural gas prices fluctuate, Source s customers may shift their focus to different resource plays, some of which may be located in geographic areas that do not have well developed transportation and distribution infrastructure systems. Serving Source s customers in these less developed areas presents distribution and other operational challenges that may affect Source s sales and negatively impact Source s operating costs. Any delays Source experiences in optimizing Source s logistics infrastructure or developing additional origination and destination points may adversely affect Source s ability to renew existing contracts with customers seeking additional delivery and pricing alternatives. Disruptions in transportation services, including shortages of rail cars, lack of developed infrastructure, weather related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts, bottlenecks or other events could affect Source s ability to timely and cost effectively deliver to Source s customers and could temporarily impair Source s ability to deliver proppant to Source s customers. Additionally, increases in the price of transportation costs, including freight charges, fuel surcharges, transloading fees, terminal switch fees and demurrage costs, could negatively impact operating costs if Source is unable to pass those increased costs along to Source s customers. Source is also dependent on rail infrastructure, and if there are disruptions of the rail transportation services utilized by Source or its customers, and Source is unable to find alternative transportation providers to transport Source s products, Source s business and results of operations could be adversely affected. All of Source s frac sand is currently produced from the Sumner Facility (and the Blair Facility in the event the Blair Facility Acquisition is completed), and the delivery of that frac sand to Source s customers is primarily served by one rail line. Any adverse developments at a facility or on the rail line could have a material adverse effect on Source s business, financial condition and results of operations All of Source s sand is currently derived from the Sumner Facility, which is served primarily by a single Class I rail line owned by CN. Further, the Blair Facility is also served primarily by a single Class I rail line owned by CN. Any adverse development at the Sumner Facility or the Blair Facility (in the event the Blair Facility Acquisition is completed) or on the rail line due to catastrophic events or weather, or any other event that would cause Source to curtail, suspend or terminate operations at its facilities, could result in Source being unable to meet its sand deliveries. Although Source maintains insurance coverage to cover a portion of these types of risks, there are potential risks associated with Source s operations not covered by insurance. There also may be certain risks covered by insurance where the policy does not reimburse Source for all of the costs related to a loss. Downtime or other delays or interruptions to Source s operations that are not covered by insurance could have a material adverse effect on Source s business, results of operations and financial condition. In addition, since the Sumner Facility and the Blair Facility (in the event the Blair Facility Acquisition is completed) are each served by a single Class I rail line, any adverse changes to the existing rail rates, rail car leases, or other logistics costs would adversely affect Source s business operations and financial position. Source is dependent upon key personnel, the loss of whom may adversely impact its business and Source s results of operations Source depends on the expertise, experience and continued services of Source s senior management employees, especially Mr. Brad Thomson, Source s President and CEO, and Mr. Derren Newell, Source s CFO, as well as senior management employees of Source s operating subsidiaries. Mr. Thomson has acquired specialized knowledge and skills with respect to Source s and its subsidiaries operations and most decisions concerning Source s business are made or significantly influenced by him. The loss of any of the foregoing individuals or other senior management employees, without a proper succession plan, or an inability to attract or retain other key individuals, could materially adversely affect us. Source seeks to compensate and incentivize Source s key executives, as well as other employees, through competitive salaries and bonus plans, but there can be no assurance that these programs will allow Source to retain key employees or hire new key employees. As a result, if Messrs. Thomson or Newell or other senior executives of Source s operating subsidiaries were to leave, Source could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successors obtain the necessary training and experience. -83-

107 Source s future success depends on its ability to attract and retain qualified employees Source s future success and financial performance depends on its ability to attract and retain qualified and experienced employees, including mine excavation employees, mechanics, safety personnel and field supervisors. There is demand for such highly skilled personnel in Source s main markets and Source may be unable to obtain and retain appropriate levels of skilled labor. In the event of a labor shortage, Source could experience difficulty delivering Source s services in a high-quality or timely manner and could be forced to increase wages in order to attract and retain employees, which would result in higher operating costs and adversely affect Source s business, financial position, results of operations and cash flows. If Source is unable to obtain additional capital as required, Source may be unable to fund the capital outlays required for the success of Source s business, including those relating to purchasing and establishing new locations Source s ability to compete, sustain Source s growth and expand Source s logistics network largely depends on access to capital. If the cash Source generates from Source s operations, together with cash on hand and cash that Source may borrow, is not sufficient to implement Source s growth strategy and meet Source s capital needs, Source will require additional financing. However, Source may not succeed in obtaining additional financing on terms that are satisfactory to Source or at all. In addition, Source s ability to obtain additional financing collateralized by Source s assets and Source s ability to obtain additional financing on a secured or unsecured basis will be restricted by the Note Indenture and the Credit Agreement. If Source is unable to obtain sufficient additional capital in the future, Source may be unable to fund the capital outlays required for the success of Source s business, including those relating to construction of new terminal locations. Furthermore, any additional indebtedness that Source does incur may make Source more vulnerable to economic downturns and may limit Source s ability to withstand competitive pressures. Growing Source s business by constructing new terminals and facilities subjects Source to construction risks as well as market risks relating to insufficient demand for the services of such terminals and facilities upon completion thereof One of the ways Source may grow Source s business is through the construction of new terminal locations. The construction of such terminal locations requires the expenditure of significant amounts of capital, which may exceed Source s resources, and involves numerous regulatory, environmental, political, and legal uncertainties. If Source undertakes these projects, it may not be able to complete them on schedule or at all or at the budgeted cost. Moreover, Source s revenues may not increase upon the expenditure of funds on a particular project. For instance, if Source builds a new terminal location or facility, the construction will occur over an extended period of time, and Source will not receive any material increases in revenues until at least after completion of the project, if at all. Moreover, Source may construct new terminal locations or facilities to capture anticipated future demand in a region in which anticipated market conditions do not materialize or for which Source is unable to acquire new customers. As a result, new terminal locations or facilities may not be able to attract enough demand to achieve Source s expected investment return, which could materially and adversely affect Source s results of operations and financial condition. If Source is unable to make acquisitions on economically acceptable terms, or integrate acquired businesses, Source s future growth would be limited A portion of Source s strategy to grow Source s business is dependent on its ability to make acquisitions. If Source is unable to make acquisitions from third parties because Source is unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, Source is unable to obtain financing for these acquisitions on economically acceptable terms or Source is outbid by competitors, Source s future growth may be limited. Any acquisition (including the Blair Facility Acquisition) involves potential risks, some of which are beyond Source s control, including, among other things: inaccurate assumptions about revenues and costs of the businesses Source acquires, including synergies; inability to integrate successfully the businesses Source acquires; inability to hire, train or retain qualified personnel to manage and operate Source s business and newly acquired assets; the assumption of unknown liabilities; limitations on rights to indemnity from the seller; -84-

108 diversion of Management s attention from other business concerns; unforeseen difficulties operating in new product areas or new geographic areas; and customer or key employee losses at the acquired businesses. If Source completes any future acquisitions, Source s capitalization and results of operations may change significantly, and Shareholders will not have the opportunity to evaluate the economic, financial and other relevant information that Source will consider in determining the application of these funds and other resources. Source is exposed to the credit risk of its customers, and any material non-payment or non-performance by Source s customers could adversely affect its business, results of operations and financial condition Source is subject to the risk of loss resulting from non-payment or non-performance by Source s customers. Source s credit procedures and policies may not be adequate to fully eliminate customer credit risk. If Source fails to adequately asses the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in non-payment or non-performance by them and Source s inability to re-market or otherwise use the production could have a material adverse effect on its business, results of operations and financial condition. The decline and volatility in natural gas and crude oil prices over the last two years has negatively impacted the financial condition of Source s customers and further declines, sustained lower prices, or continued volatility could impact their ability to meet their financial obligations to us. Further, Source s counterparties may not perform or adhere to Source s existing or future arrangements, contractual or otherwise. To the extent one or more of Source s contract counterparties is in financial distress or commences bankruptcy proceedings, agreements with these counterparties may be subject to renegotiation or rejection under applicable provisions of applicable bankruptcy and/or creditor protection laws of Canada or the United States. Any material non-payment or non-performance by Source s counterparties due to inability or unwillingness to perform or adhere to arrangements, contractual or otherwise, could adversely affect its business and results of operations. Source may not be able to complete greenfield development or expansion projects or, if Source does, it may not realize the expected benefits Any greenfield development or expansion project may require Source to raise substantial capital and obtain numerous federal, provincial, state and/or local permits. A decision by any governmental agency not to issue a required permit or substantial delays in the permitting process could prevent Source from pursuing the development or expansion project. In addition, if the demand for Source s products declines during a period in which Source experience delays in raising capital or completing the permitting process, Source may not realize the expected benefits from Source s greenfield facility or expansion project. Furthermore, Source s new or modified facilities may not operate at designed capacity or may cost more to operate than Source expects. The inability to complete greenfield development or expansion projects, or to complete them on a timely basis and in turn grow Source s business, could adversely affect its business and results of operations. Federal, provincial, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related litigation could result in increased costs or additional operating restrictions or delays for Source s customers, which could cause a decline in the demand for Source s frac sand and negatively impact its business, results of operations and financial condition Although Source does not directly engage in hydraulic fracturing activities, Source s customers purchase its frac sand for use in their hydraulic fracturing activities. In Canada, hydraulic fracturing is regulated by provincial oil and natural gas commissions and similar agencies. Some provinces have adopted, and other provinces are considering adopting, regulations that could impose new or more stringent permitting, disclosure or well construction requirements on hydraulic fracturing operations. Aside from provincial laws, state prohibitions or moratoria and local land use restrictions may restrict drilling in general or hydraulic fracturing in particular. Municipalities may adopt local ordinances attempting to prohibit hydraulic fracturing altogether or, at a minimum, allow such fracturing processes within their jurisdictions to proceed but regulating the time, place and manner of those processes. In addition, United States federal agencies have started to assert regulatory authority over the process and various studies have been conducted or are currently underway by the EPA, and other federal agencies concerning the potential environmental impacts of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that additional laws may be needed and, in some instances, have pursued voter ballot initiatives to more closely and -85-

109 uniformly limit or otherwise regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation. The adoption of new laws or regulations at the federal, provincial, state or local levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete natural gas wells, increase Source s customers costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing activities they undertake, which could negatively impact demand for Source s frac sand. In addition, heightened political, regulatory, and public scrutiny of hydraulic fracturing practices could expose Source or its customers to increased legal and regulatory proceedings, which could be time consuming, costly, or result in substantial legal liability or significant reputational harm. Source could be directly affected by adverse litigation involving us, or indirectly affected if the cost of compliance limits the ability of Source s customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for Source s frac sand, have a material adverse effect on its business, financial condition and results of operations. Source is subject to numerous occupational health and safety laws and regulations that may result in Source incurring unanticipated liabilities, which could have an adverse effect on its operating performance Source s operations are subject to federal, provincial, state and local laws and regulations pertaining to occupational health and safety. Source is subject to various regulations that primarily deal with maintaining a safe workplace environment. Such regulations require Source, among other things, to maintain documentation of workrelated injuries, illnesses and fatalities and files for recordable events, complete workers compensation loss reports and review the status of outstanding worker compensation claims, and complete certain annual filings and postings. Source may be involved from time to time in administrative and judicial proceedings and investigations with these governmental agencies, including inspections and audits by the applicable agencies related to Source s compliance with these requirements. Any failure to comply with these and other applicable requirements could result in fines and penalties and require Source to undertake certain remedial actions or be subject to a suspension of business, which could materially adversely affect its business or results of operations. Moreover, involvement in any audits and investigations or other proceedings could result in substantial financial cost to Source and divert Management s attention. Additionally, future events, such as changes in existing laws and regulations, new laws or regulations or the discovery of conditions not currently known to us, may give rise to additional compliance or remedial costs that could be material. Safety requirements may become stricter or be interpreted and applied more strictly in the future. These future changes or interpretations could have a material adverse effect on Source s business, financial position, results of operations and cash flows. Source s operations are subject to operational hazards and unforeseen interruptions for which Source may not be adequately insured Source s operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. If any of these events were to occur, Source could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of Source s operations. Source is not fully insured against all risks incident to its business, including the risk of Source s operations being interrupted due to severe weather and natural disasters. Furthermore, Source may be unable to maintain or obtain insurance of the type and amount Source desires at reasonable rates. As a result of market conditions, premiums and deductibles for certain of Source s insurance policies have increased and could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If Source were to incur a significant liability for which Source is not fully insured, it could have a material adverse effect on its business, results of operations and financial condition. A terrorist attack or armed conflict could harm Source s business Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States and Canada could adversely affect the U.S., Canadian and global economies and could prevent Source from meeting financial and other obligations. Source could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are -86-

110 direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for Source s frac sand. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect Source s results of operations, impair its ability to raise capital or otherwise adversely impact Source s ability to realize certain business strategies. Source s customers in the oil and natural gas industries are subject to complex federal, provincial, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting their operations Source s customers in the oil and natural gas industry are subject to complex and stringent laws and regulations governing the acquisition, development, operation, production and marketing of oil and natural gas, taxation, safety matters and the discharge of materials into the environment. In order to conduct their operations in compliance with these laws and regulations, Source s oil and natural gas customers must obtain and maintain numerous permits, approvals and certificates from various federal, provincial, state and local governmental authorities. Failure or delay in obtaining and maintaining regulatory approvals or drilling permits could have a material adverse effect on Source s oil and natural gas customers ability to develop their properties, and receipt of drilling or other environmental permits with onerous conditions could increase their compliance costs. In addition, regulations regarding resource conservation practices and the protection of correlative rights affect their operations by limiting the quantity of oil, natural gas and natural gas liquids they may produce and sell. Source s oil and natural gas customers are subject to federal, provincial, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration, production and transportation of oil, natural gas and natural gas liquids. There are legislative and regulatory uncertainties, including proposed changes to climate change legislation and regulation of hydraulic fracturing. New laws, regulations or enforcement policies may be more stringent and significantly increase Source s oil and natural gas customers compliance costs. If Source s oil and natural gas customers are not able to recover increased costs resulting from laws, regulations and related permit requirements, they could be adversely affected and, in turn, Source s business, financial position, results of operations and cash flows could be adversely affected due to Source s dependence on these customers. In addition, any failure to obtain or maintain required permits may result in project delays which could adversely affect Source s business. Source s oil and natural gas customers rely on third party infrastructure, equipment and technology Source s oil and natural gas customers rely on certain infrastructure owned and operated by third parties, including, without limitation, the following: pipelines for the transportation of feedstocks to refineries and certain diluents to purchasers; pipelines for the transportation of natural gas; railways and trucking for the transportation of refinery products and by-products; electricity transmission systems; and terminal operation for truck and rail car loading. A disruption in the provision of any of these services or the supply of these services will negatively affect the operations of Source s oil and natural gas customers and, in turn, Source s business, financial position, results of operations and cash flows could be adversely affected due to Source s dependence on these customers. Public opposition to infrastructure development projects related to the oil and natural gas industries (including pipelines) could lead to delays in the commencement or completion, or cancellation, of such projects Public opposition to infrastructure development projects related to the oil and natural gas industries (including pipelines) could lead to delays in the commencement or completion, or cancellation, of such projects. Such a delay or cancellation could have a material adverse effect on Source s customers in the oil and natural gas industries and, in turn, Source s business, financial position, results of operations and cash flows could be adversely affected due to Source s dependence on these customers. Source operates on worksites managed and maintained by Source s customers, and its ability to complete Source s work may be adversely affected by actions and events beyond Source s control Source operates on worksites managed and maintained by Source s customers. As such, Source s ability to operate its business may be adversely affected by actions and events outside of Source s control. Work on a given site -87-

111 may be suspended or halted because of the actions of persons not under Source s employment. Because Source may not control the site on which Source is operating, the decision to suspend or halt work may be made without consulting Source and without notice. In the event work on a site is suspended or halted, Source may incur costs if Source s employees and equipment are forced to sit idle. Source may not be adequately insured to protect against such risk. Furthermore, Source s contracts with its customers may not provide for compensation in the event that Source is forced to suspend operations because of an event outside of Source s control. Source s business is subject to inflationary pressures Improving economic conditions and competition for available personnel may result in significant increases in Source s cost structure, and Source may not be able to pass such cost increases on to its customers. In addition, inflation in the oil and natural gas industry could lead to higher resource development costs and generally hinder development. As a result, Source s gross margins and profitability could be adversely affected. Disruptions in Source s information technology systems could adversely affect Source s operating results by limiting its capacity to effectively monitor and control Source s operations Source s information technology systems facilitate its ability to monitor and control Source s operations and adjust to changing market conditions. Any disruptions in these systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect Source s operating results by limiting its capacity to effectively monitor and control Source s operations and adjust to changing market conditions. In addition, because Source s systems sometimes contain information about individuals and businesses, Source s failure to appropriately maintain the security of the data Source holds, whether as a result of Source s own error or the malfeasance or errors of others, could harm Source s reputation or give rise to legal liabilities leading to lower revenues, increased costs and other adverse effects on Source s results of operations. Any future cyber security attacks that affect Source s facilities, communications systems, Source s customers or any of Source s financial data could have a material adverse effect on Source s business. In addition, cyber-attacks on Source s customer and employee data may result in a financial loss and may negatively impact Source s reputation. Source does not maintain specialized insurance for possible liability resulting from a cyber-attack on Source s assets that may shut down all or part of Source s business. Third-party systems on which Source relies could also suffer operational system failure. Any of these occurrences could disrupt Source s business, result in potential liability or reputational damage or otherwise have an adverse effect on Source s financial results. Inaccuracies in estimates of volumes and qualities of Source s sand resources could result in lower than expected sales and higher than expected production costs APEX, Source s independent professional geologists, prepared the Sumner APEX Report and the Blair APEX Report which are each based on engineering, economic and geological data assembled and analyzed by the facility owner s engineers and geologists. However, frac sand resources estimates are by nature imprecise and depend to some extent on statistical inferences drawn from available data, which may prove to be unreliable. There are numerous uncertainties inherent in estimating quantities and qualities of resources and costs to mine recoverable resources, including many factors beyond the facility owner s control. Estimates of economically recoverable frac sand resources necessarily depend on a number of factors and assumptions, all of which may vary considerably from actual results, such as: geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience; assumptions concerning future prices of frac sand, operating costs, mining technology improvements, development costs and reclamation costs; and assumptions concerning future effects of regulation, including the issuance of required permits and the assessment of taxes by governmental agencies. Any inaccuracy in the Sumner APEX Report or the Blair Facility Report related to Source s frac sand resources (in the event the Blair Facility Acquisition is completed for the Blair Facility Report) could result in lower than expected sales or higher than expected costs. For example, APEX s estimates of the Sumner Facility s and the Blair Facility s resources assume that the owner s revenue and cost structure will remain relatively constant over the life of -88-

112 the owner s resources. If these assumptions prove to be inaccurate, some or all of the owner s resources may not be economically mineable, which could have a material adverse effect on Source s results of operations and cash flows. In addition, Source s current customer contracts require Source to deliver frac sand that meets certain API and ISO specifications. If APEX s estimates of the quality of the resources, including the volumes of the various specifications of those resources, prove to be inaccurate, Source may incur significantly higher excavation costs without corresponding increases in revenues, Source may not be able to meet Source s contractual obligations, or Source s facilities may have a shorter than expected resource life, any of which could have a material adverse effect on Source s results of operations and cash flows. The Sumner Facility and the Blair Facility do not have an interest in any Mineral Reserves Currently, there are no Mineral Reserves on the Sumner Facility or the Blair Facility. Only those mineral deposits that Source can economically and legally extract or produce, based on a comprehensive evaluation of cost, grade, recovery and other factors, are considered Mineral Reserves. The Mineral Resources estimates contained in the Sumner APEX Report, as the case may be, and the Blair APEX Report are Indicated Mineral Resource and Inferred Mineral Resource estimates only and no assurance can be given that any particular level of recovery of frac sand minerals from mineralized material will in fact be realized or that an identified mineralized deposit will ever qualify as a commercially mineable (or viable) Mineral Reserve. In particular, Inferred Mineral Resources have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. Substantial additional work, including mine design and mining schedules, flow sheets and process plant designs, would be required in order to determine if any economic deposits exist on the Sumner Facility and the Blair Facility. Substantial expenditures would be required to establish Mineral Reserves through drilling and other testing techniques. The costs, timing and complexities of upgrading the mineralized material to Proven Mineral Reserves and Probable Mineral Reserves may be greater than the value of Source s Mineral Reserves on a mineral property and may require Source to write-off the costs capitalized for that property in its financial statements. Source cannot provide any assurance that future feasibility studies will establish Mineral Reserves at the Sumner Facility or the Blair Facility, as the case may be. The failure to establish Mineral Reserves could restrict the Company s ability to successfully implement its strategies for long-term growth. Source s production process consumes large amounts of natural gas and electricity. An increase in the price or a significant interruption in the supply of these or any other energy sources could have a material adverse effect on Source s business, results of operations and financial condition Energy costs, primarily natural gas and electricity, represented approximately 3.1% of Source s total cost of sales for the year ended December 31, Natural gas is currently the primary fuel source used for drying in Source s frac sand production process. As a result, Source s profitability will be impacted by the price and availability of natural gas Source purchases from third parties. Because Source has not contracted for the provision of natural gas on a fixed price basis, Source s costs and profitability will be impacted by fluctuations in prices for natural gas. The price and supply of natural gas is unpredictable and can fluctuate significantly based on international, political and economic circumstances, as well as other events outside Source s control, such as changes in supply and demand due to weather conditions, actions by OPEC and other oil and natural gas producers, regional production patterns, security threats and environmental concerns. In addition, potential climate change regulations or carbon or emissions taxes could result in higher production costs for energy, which may be passed on to Source in whole or in part. The price of natural gas has been extremely volatile over the last two years, from a high of $4.12 per million BTU in November 2014 to a low of $1.73 per million BTU in March 2016, and this volatility may continue. In order to manage this risk, Source may hedge natural gas prices through the use of derivative financial instruments, such as forwards, swaps and futures. However, these measures carry risk (including non-performance by counterparties) and do not in any event entirely eliminate the risk of decreased margins as a result of propane or natural gas price increases. Source further attempts to mitigate these risks by including in Source s sales contracts fuel surcharges based on natural gas prices exceeding certain benchmarks. A significant increase in the price of energy that is not recovered through an increase in the price of Source s products or covered through Source s hedging arrangements or an extended interruption in the supply of natural gas or electricity to Source s production facilities could have a material adverse effect on its business, results of operations and financial condition. -89-

113 Increases in the price of diesel fuel may adversely affect Source s results of operations Diesel fuel costs generally fluctuate with increasing and decreasing world crude oil prices, and accordingly are subject to political, economic and market factors that are outside of Source s control. Source s operations are dependent on earthmoving equipment, railcars and tractor trailers, and diesel fuel costs are a significant component of the operating expense of these vehicles. Source uses earthmoving equipment in Source s mining operations, and Source ships the vast majority of its products by either railcar or tractor trailer. To the extent that Source performs these services with equipment that it owns, it is responsible for buying and supplying the diesel fuel needed to operate these vehicles. To the extent that these services are provided by independent contractors, Source may be subject to fuel surcharges that attempt to recoup increased diesel fuel expenses. To the extent Source is unable to pass along increased diesel fuel costs to its customers, Source s results of operations could be adversely affected. Source relies upon trade secrets, contractual restrictions and patents to protect Source s proprietary rights. Failure to protect Source s intellectual property rights may undermine its competitive position, and protecting Source s rights or defending against third-party allegations of infringement may be costly Source s commercial success depends on its proprietary information and technologies, know-how and other intellectual property. Because of the technical nature of its business, Source relies on patents, trade secrets, trademarks and contractual restrictions to protect Source s intellectual property rights, particularly with respect to Sahara. The measures Source takes to protect its trade secrets and other intellectual property rights may be insufficient. Failure to protect, monitor and control the use of Source s existing intellectual property rights could cause Source to lose its competitive advantage and result in significant expenses. It is possible that Source s competitors or others could independently develop the same or similar technologies or otherwise obtain access to Source s unpatented technologies. In such case, Source s trade secrets would not prevent third parties from competing with it. As a result, Source s results of operations may be adversely affected. Furthermore, third parties or Source s employees may infringe or misappropriate Source s proprietary technologies or other intellectual property rights, which could also harm Source s business and results of operations. Policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available. In addition, third parties may claim that Source s products infringe or otherwise violate their patents or other proprietary rights and seek corresponding damages or injunctive relief. Defending Source against such claims, with or without merit, could be time-consuming and result in costly litigation. An adverse outcome in any such litigation could subject Source to significant liability to third parties (potentially including treble damages) or temporary or permanent injunctions prohibiting the manufacture or sale of Source s products, the use of Source s technologies or the conduct of Source s business. Any adverse outcome could also require Source to seek licenses from third parties (which may not be available on acceptable terms, or at all) or to make substantial one-time or ongoing royalty payments. Protracted litigation could also result in Source s customers or potential customers deferring or limiting their purchase or use of Source s products until resolution of such litigation. In addition, Source may not have insurance coverage in connection with such litigation and may have to bear all costs arising from any such litigation to the extent Source is unable to recover them from other parties. Any of these outcomes could have a material adverse effect on Source s business, financial condition and results of operations. Source will incur additional costs as a result of this Offering, and Management will be required to devote additional time to compliance efforts As a result of this Offering and other transactions contemplated thereby, including the Blair Facility Acquisition, Source will incur additional legal, accounting and other expenses that Source did not incur prior to the Offering. Management and other personnel will need to devote a substantial amount of time and financial resources to comply with obligations related to the Offering. Source s indebtedness could adversely affect its financial flexibility and its competitive position Source s indebtedness under the Credit Facilities and the Notes could have significant effects on its business. For example, it could: increase Source s vulnerability to adverse changes in general economic, industry and competitive conditions; -90-

114 require Source to dedicate a substantial portion of its cash flow from operations to make payments on its indebtedness, thereby reducing the availability of its cash flow to fund working capital, capital expenditures and other general corporate purposes; limit its flexibility in planning for, or reacting to, changes in Source s business and the industry in which Source operates; restrict Source from exploiting business opportunities; make it more difficult to satisfy its financial obligations, including payments on its indebtedness; place Source at a disadvantage compared to its competitors that have less debt; and limit Source s ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of its business strategy or other general corporate purposes. Restrictions in the Credit Agreement and the Note Indenture may limit Source s ability to capitalize on potential acquisition and other business opportunities The operating and financial restrictions and covenants in the Credit Agreement and the Note Indenture and any future financing agreements could restrict Source s ability to finance future operations or capital needs or to expand or pursue its business activities. For example, the Credit Agreement and the Note Indenture restrict or limit Source s ability to: grant liens; incur additional indebtedness; engage in a merger, consolidation or dissolution; enter into transactions with affiliates; sell or otherwise dispose of assets, businesses and operations; materially alter the character of Source s business; and make acquisitions, investments and capital expenditures. Furthermore, the Credit Agreement and the Note Indenture contain certain operating and financial covenants. Source s ability to comply with such covenants and restrictions may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, Source s ability to comply with these covenants may be impaired. Further, if Source violates any of the restrictions, covenants, ratios or tests in the Credit Agreement, a significant portion of Source s indebtedness may become immediately due and payable, and any lenders commitment to make further loans to Source may terminate. Source might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of the Credit Agreement or any new indebtedness could have similar or greater restrictions. Risks Related to Environmental, Mining and Other Regulation Failure to maintain effective quality control systems at Source s mining, processing and production facilities could have a material adverse effect on Source s business, results of operations and financial condition The performance and quality of Source s products are critical to the success of Source s business. These factors depend significantly on the effectiveness of Source s quality control systems, which, in turn, depends on a number of factors, including the design of Source s quality control systems, Source s quality training program and Source s ability to ensure that Source s employees adhere to Source s quality control policies and guidelines. Any significant failure or deterioration of Source s quality control systems could have a material adverse effect on Source s business, results of operations and financial condition. A facility closure entails substantial costs, and if Source closes its facilities sooner than anticipated, Source s results of operations may be adversely affected Source bases its assumptions regarding the life of its facilities on detailed studies that Source performs from time to time, but Source s studies and assumptions may not prove to be accurate. If Source closes the Sumner Facility or the -91-

115 Blair Facility (in the event the Blair Facility Acquisition is completed) sooner than expected, sales will decline unless Source is able to acquire and develop additional facilities, which may not be possible. The closure of the Sumner Facility and the Blair Facility (in the event the Blair Facility Acquisition is completed) would involve significant fixed closure costs, including accelerated employment legacy costs, severance related obligations, reclamation and other environmental costs and the costs of terminating long term obligations, including energy contracts and equipment leases. Source accrues for the costs of reclaiming open pits, stockpiles, non-saleable sand, ponds, roads and other mining support areas over the estimated mining life of Source s property. If Source were to reduce the estimated life of the Sumner Facility and the Blair Facility (in the event the Blair Facility Acquisition is completed), the fixed facility closure costs would be applied to shorter period of production, which would increase production costs per metric tonne produced and could materially and adversely affect Source s business, results of operations and financial condition. Applicable statutes and regulations require that mining property be reclaimed following a mine closure in accordance with specified standards and an approved reclamation plan. The plan addresses matters such as removal of facilities and equipment, regrading, prevention of erosion and other forms of water pollution, revegetation and postmining land use. Source may be required to post a surety bond or other form of financial assurance equal to the cost of reclamation as set forth in the approved reclamation plan. The establishment of the final mine closure reclamation liability is based on permit requirements and requires various estimates and assumptions, principally associated with reclamation costs and production levels. If Source s accruals for expected reclamation and other costs associated with facility closures for which Source will be responsible were later determined to be insufficient, Source s business, results of operations and financial condition may be adversely affected. Source s inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on Source s business, financial condition, and results of operations Source is generally obligated to restore property in accordance with regulatory standards and Source s approved reclamation plan after it has been mined. Source is required under federal, state and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The inability to acquire, maintain or renew such assurances, as required by federal, state and local laws, could subject Source to fines and penalties as well as the revocation of Source s operating permits. Such inability could result from a variety of factors, including: the lack of availability, higher expense, or unreasonable terms of such financial assurances; the ability of current and future financial assurance counterparties to increase required collateral; and the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance instruments. Source s inability to acquire, maintain or renew necessary financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on Source s business, financial condition, and results of operations. Climate change legislation and regulatory initiatives could result in increased compliance costs for Source and its customers In recent years, the United States Congress has considered legislation to reduce emissions of GHGs, including methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of natural gas. It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although energy legislation and other regulatory initiatives are expected to be proposed that may be relevant to GHG emissions issues. In addition, a number of states are addressing GHG emissions, primarily through the development of emission inventories or regional GHG cap and trade programs. In Canada, several provinces have recently adopted legislation to either reduce or cap GHG emissions, or establish regional GHG cap and trade programs. The Government of Canada has also announced its intention to reduce GHG emissions through a national carbon pricing scheme. Depending on the particular program, Source could be required to control GHG emissions or to purchase and surrender allowances for GHG emissions resulting from Source s operations. Independent of Congress, the EPA has adopted regulations controlling GHG emissions under its existing authority under the CAA. For example, following its findings that emissions of GHGs present an endangerment to human health and the environment because such emissions contributed to warming of the earth s atmosphere and other climatic changes, the EPA has adopted -92-

116 regulations under existing provisions of the CAA that, among other things establish construction and operating permit reviews for GHG emissions from certain large stationary sources that are already potential major sources for conventional pollutants. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified production, processing, transmission and storage facilities in the United States on an annual basis. In Alberta, the Climate Change and Emissions Management Act specifies GHG emissions reduction targets for Further, the Specified Gas Emitters Regulation requires facilities that emit greater than 100,000 metric tonnes of GHGs to conform to emissions intensity limits, either through the reduction of emissions per unit of production, or the purchase of emissions credits. In Saskatchewan, the legislature has passed, but has not proclaimed in force, the Management and Reduction of Greenhouse Gases Act, which would establish a program similar to that in place in Alberta, although precise targets and limits have yet to be identified. British Columbia has adopted a cap and trade program for GHG emissions and further imposes GHG emissions reduction targets under the Carbon Tax Act and Greenhouse Gas Industrial Reporting and Control Act. Also, the United States and Canada are among almost 200 nations that, in December 2015, agreed to the Paris Agreement, an international climate change agreement in Paris, France that calls for countries to set their own GHG emissions targets and be transparent about the measures each country will use to achieve its GHG emissions targets. The agreement came into force on November 4, Canada and the United States are among over 70 nations having ratified or otherwise consented to be bound by the agreement. Although it is not possible at this time to predict how new laws or regulations in the United States and Canada, or any legal requirements imposed following the United States and Canada agreeing to the Paris Agreement that may be adopted or issued to address GHG emissions would impact Source s business, any such future laws, regulations or legal requirements imposing reporting or permitting obligations on, or limiting emissions of GHGs from, Source s equipment and operations could require Source to incur costs to reduce emissions of GHGs associated with Source s operations as well as delays or restrictions in Source s ability to permit GHG emissions from new or modified sources. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas Source produces. Finally, it should be noted that increasing concentrations of GHGs in the Earth s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on Source s and its customers exploration and production operations. Although it is not currently possible to predict how any such proposed or future GHG legislation or regulation by Congress, the states, multistate regions, the Government of Canada, or provinces, or any legal requirements imposed following the United States and Canada agreeing to the Paris Agreement will impact Source s business, any legislation or regulation of GHG emissions that may be imposed in areas in which Source conducts business could result in increased compliance costs or additional operating restrictions to Source or its exploration and production customers, and could reduce demand for Source s frac sand, which could have a significant adverse effect on Source s operations. Source and its customers are subject to other extensive regulations, including licensing, plant and wildlife protection and reclamation regulation, which impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect Source s results of operations In addition to the regulatory matters described above, Source and its customers are subject to extensive governmental regulation on matters such as permitting and licensing requirements, plant and wildlife protection, wetlands protection, reclamation and restoration activities at mining properties after mining is completed, the discharge of materials into the environment, and the effects that mining and hydraulic fracturing have on groundwater quality and availability. Source s future success depends, among other things, on the quantity and quality of Source s frac sand deposits, its ability to extract these deposits profitably, and its customers being able to operate their businesses as they currently do. In order to obtain permits and renewals of permits in the future, Source may be required to prepare and present data to governmental authorities pertaining to the potential adverse impact that any proposed excavation or production activities, individually or in the aggregate, may have on the environment. Certain approval procedures may require preparation of archaeological surveys, endangered species studies, and other studies to assess the environmental impact of new sites or the expansion of existing sites. Compliance with these regulatory requirements is expensive and significantly lengthens the time needed to develop a site. Finally, obtaining or renewing required permits is sometimes delayed or prevented due to community opposition and other factors beyond Source s control. The denial of a permit essential to Source s operations or the imposition of conditions with which it is not practicable or feasible to comply -93-

117 could impair or prevent Source s ability to develop or expand a site. Significant opposition to a permit by neighboring property owners, members of the public, or other third parties, or delay in the environmental review and permitting process also could delay or impair Source s ability to develop or expand a site. New legal requirements, including those related to the protection of the environment, could be adopted that could materially adversely affect Source s mining operations (including its ability to extract or the pace of extraction of mineral deposits), Source s cost structure, or its customers ability to use Source s frac sand. Such current or future regulations could have a material adverse effect on Source s business and it may not be able to obtain or renew permits in the future. Silica-related legislation, health issues and litigation could have a material adverse effect on Source s business, reputation or results of operations Source is subject to laws and regulations relating to human exposure to crystalline silica. Several federal and state regulatory authorities, including the MSHA may continue to propose changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment. Source may not be able to comply with any new or amended laws and regulations that are adopted, and any new or amended laws and regulations could have a material adverse effect on Source s operating results by requiring Source to modify or cease its operations. In addition, the inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the proppant industry. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability from the use of frac sand, may have the effect of discouraging Source s customers use of Source s frac sand. The actual or perceived health risks of mining, processing and handling proppants could materially and adversely affect proppant producers, including us, through reduced use of frac sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of Source and its customers or reduced financing sources available to the frac sand industry. Source s operations are dependent on Source s rights and ability to mine Source s properties and on Source having renewed or received the required permits and approvals from governmental authorities and other third parties Source holds numerous governmental, environmental, mining and other permits, water rights and approvals authorizing operations at Source s Sumner Facility and expects to acquire similar permits and authorizations in connection with the Blair Facility Acquisition if such acquisition is completed. For Source s extraction and processing in Wisconsin, the permitting process is subject to federal, state and local authority. For example, on the federal level, a Mine Identification Request (MSHA Form ) must be filed and obtained before mining commences. If wetlands are impacted, a U.S. Army Corps of Engineers wetland permit is required. At the state level, a series of permits are required, including but not limited to, matters related to air quality, wetlands, water quality (waste water, storm water), grading permits, endangered species, archeological assessments and high capacity wells in addition to others depending upon site specific factors and operational detail. At the local level, matters including but not limited to zoning, building, storm water, erosion control, wellhead protection, road usage and access are all regulated and require permitting to some degree. A nonmetallic mining reclamation permit is required. A decision by a governmental agency or other third party to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could impair or prevent Source s ability to develop or expand Source s operations, and have a material adverse effect on Source s business, results of operations and financial condition. Title to, and the area of, mineral properties and water rights may also be disputed. Mineral properties sometimes contain claims or transfer histories that examiners cannot verify. A successful claim that Source lacks appropriate mineral and water rights on one or more of its properties could cause Source to lose any rights to explore, develop and extract minerals, without compensation for Source s prior expenditures relating to such property. Source s business may suffer a material adverse effect in the event it has title deficiencies. In some instances, Source has received access rights or easements from third parties, which allow for a more efficient operation than would exist without the access or easement. A third party could take action to suspend the access or easement, and any such action could be materially adverse to Source s results of operations or financial condition. -94-

118 Source is subject to the United States Federal Mine Safety and Health Act of 1977, which imposes stringent health and safety standards on numerous aspects of Source s operations Source s operations are subject to the United States Federal Mine Safety and Health Act of 1977, as amended by the United States Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment, and other matters. Source s failure to comply with such standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on Source s business and financial condition or otherwise impose significant restrictions on its ability to conduct mineral extraction and processing operations. Diminished access to water may adversely affect Source s operations or the operations of its customers The mining and processing activities at the Sumner Facility and the Blair Facility (in the event the Blair Facility Acquisition is completed) require significant amounts of water. Additionally, the development of oil and natural gas properties through fracture stimulation likewise requires significant water use. Source has obtained water rights that it currently uses to service the activities at the Sumner Facility, and Source plans to obtain all required water rights to service the Blair Facility (in the event the Blair Facility Acquisition is completed) and any other properties it may develop or acquire in the future. However, the amount of water that Source and its customers are entitled to use pursuant to Source s water rights must be determined by the appropriate regulatory authorities in the jurisdictions in which Source and its customers operate. Such regulatory authorities may amend the regulations regarding such water rights, increase the cost of maintaining such water rights or eliminate Source s current water rights, and Source and its customers may be unable to retain all or a portion of such water rights. These new regulations, which could also affect local municipalities and other industrial operations, could have a material adverse effect on Source s operating costs and effectiveness if implemented. Such changes in laws, regulations or government policy and related interpretations pertaining to water rights may alter the environment in which Source and its customers do business, which may negatively affect Source s financial condition and results of operations. Source s inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on Source s business, financial condition, and results of operations Source is generally obligated to restore property in accordance with regulatory standards and Source s approved reclamation plan after it has been mined. Source is required under federal, state and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The inability to acquire, maintain or renew such assurances, as required by federal, state and local laws, could subject Source to fines and penalties as well as the revocation of Source s operating permits. Such inability could result from a variety of factors, including: the lack of availability, higher expense, or unreasonable terms of such financial assurances; the ability of current and future financial assurance counterparties to increase required collateral; and the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance instruments. Source s inability to acquire, maintain or renew necessary financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on Source s business, financial condition, and results of operations. Risks Related to Source s Structure and Organization Source s directors who are nominees of TriWest IV may have conflicts of interest with respect to matters involving Source Certain of Source s directors are affiliated with TriWest Capital. These persons have fiduciary duties to Source and, in addition, will have duties to TriWest Capital. As a result, such circumstances may entail real or apparent conflicts of interest with respect to matters affecting both Source and TriWest Capital, whose interests, in some circumstances, may be averse to those of Source. In addition, as a result of TriWest Capital s indirect ownership interest, conflicts of interest could arise with respect to transactions involving business dealings between Source and TriWest Capital (or TriWest IV) or their respective affiliates, including potential business transactions, potential -95-

119 acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by Source and other matters. TriWest Capital is in the business of making investments in companies and may in the future acquire interests in businesses that directly or indirectly compete with certain portions of the Company s business or are suppliers or clients of the Company. The Major Shareholders will retain a significant portion of the voting power of the Company after the Offering After the Offering, it is anticipated that the Major Shareholders will beneficially own or control 23,617,676 Common Shares and 1,300,174 Class B Shares, which in the aggregate will represent approximately 48.27% of the aggregate issued and outstanding Common Shares and Class B Shares following Closing (46.04% if the Over- Allotment Option is exercised in full). As a result, the Major Shareholders will collectively have significant influence over certain matters submitted to the Shareholders for approval, including without limitation the election and removal of directors, amendments to the Company s articles and by-laws and the approval of any business combination. This may negatively affect the attractiveness of the Company to third parties considering an acquisition of the Company or cause the market price of the Common Shares to decline. In addition, TriWest IV and Jim McMahon will be entitled to nominate directors for election pursuant to the TriWest Nomination Agreement and the McMahon Nomination Agreement. Upon the completion of the Reorganization the Company will be a holding company and a substantial portion of its assets will be the shares or partnership units of its subsidiaries Following completion of the Reorganization, the Company will be a holding company and a substantial portion of its assets will be the shares or partnership units of its subsidiaries. As a result, prospective purchasers of Common Shares are subject to the risks attributable to the Company s subsidiaries. As a holding company, the Company will conduct substantially all of its business through its subsidiaries, which will generate substantially all of its revenues. Consequently, the Company s cash flows and ability to execute on current or desirable future business opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings to the Company. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and minimum capital standards requirements be maintained by such companies and, to the extent applicable, contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of the Company s subsidiaries, holders of indebtedness and other creditors will generally be entitled to payment of their claims from the assets of such subsidiaries before any assets are made available for distribution to the Company. Risks Related to the Blair Facility Acquisition Possible Failure to Realize Anticipated Benefits of the Blair Facility Acquisition Source is pursuing the Blair Facility Acquisition to strengthen Source s position in the frac sand industry and to create the opportunity to realize certain benefits, as described under the heading Blair Facility Acquisition. Achieving the benefits of the Blair Facility Acquisition depends in part on successfully consolidating functions, integrating operations, procedures and personnel in a timely and efficient manner, as well as Source s ability to realize the anticipated growth opportunities and synergies from integrating the Blair Facility into its existing facilities. The integration of the Blair Facility requires the dedication of substantial Management effort, time and resources, which may divert Management s focus and resources from other strategic opportunities and from operational matters during this process. The integration process may result in the disruption of ongoing business, customer and employee relationships that may adversely affect its ability to achieve the anticipated benefits of the Blair Facility Acquisition. See Blair Facility Acquisition. Possible Failure to Complete the Blair Facility Acquisition The Blair Facility Acquisition is subject to completion of the conditions described herein and normal commercial risk that the Blair Facility Acquisition may not be completed on the terms negotiated or at all. Potential Undisclosed Liabilities Associated with the Blair Facility Acquisition In connection with the Blair Facility Acquisition, Source may not be able to discover or quantify all historical liabilities of the companies being purchased in its due diligence which was conducted prior to the execution of the Blair -96-

120 Purchase Agreement. Further, Source may not be indemnified for some or all of these liabilities. If these liabilities are material and are not adequately addressed by indemnification from the Seller Indemnification Parties, Source would have to pay or satisfy those liabilities or risk having them adversely affect Source s rights to the Blair Facility. There can be no assurances that Source would be able to pay or satisfy those liabilities. Operational, Environmental and Reserves Risks Relating to the Blair Facility Acquisition The risk factors set forth in this prospectus relating to the frac sand business, the oil and gas business, regulatory environmental and Source s operations and reserves apply equally in respect of the Blair Facility. Nature of Acquisitions Acquisitions of frac sand properties or companies are based in large part on engineering, environmental and economic assessments made by the acquiror, independent engineers and consultants. These assessments include a series of assumptions regarding such factors as recoverability and marketability of frac sand, environmental restrictions and prohibitions regarding releases and emissions of various substances, future prices of frac sand, the oil and gas industry and related techniques and operating costs, future capital expenditures and royalties and other government levies which will be imposed over the producing life of the properties. Many of these factors are subject to change and are beyond Source s control. All such assessments involve a measure of geologic, engineering, environmental and regulatory uncertainty that could result in lower production and resources or higher operating or capital expenditures than anticipated. Although select title and environmental reviews are conducted prior to any purchase of resource assets, such reviews cannot guarantee that any unforeseen defects in the chain of title will not arise to defeat Source s title to certain assets or that environmental defects, liabilities or deficiencies do not exist or are greater than anticipated. Such deficiencies or defects could adversely affect the value of assets and Source s securities. Significant Transaction and Related Costs Source expects to incur a number of costs associated with completing the Blair Facility Acquisition and integrating the Blair Facility. The substantial majority of such costs will consist of transaction costs related to the Blair Facility Acquisition, facilities and systems consolidation costs and employment-related costs. Additional unanticipated costs may be incurred in the integration of the Assets into Source s business. Risks Related to the Offering There can be no assurances that a liquid public market will develop for the Common Shares. Before the completion of the Offering, there has been no public market for the Common Shares and there can be no assurance that a liquid, public market will develop for the Common Shares. The Offering Price was determined by negotiation among the Company and the Underwriters. Among the factors considered in determining the Offering Price were Source s future prospects and the prospects of the industry in general, Source s financial and operating information in recent periods, and the market prices of securities and certain financial and other operating information of companies engaged in activities similar to those of Source. The Offering Price may not be indicative of the market price for the Common Shares after the Offering, which price may decline below the Offering Price. See Plan of Distribution. The price of the Common Shares could be volatile. A number of factors could influence the volatility in the trading price of the Common Shares, including changes in the economy or in the financial markets, industry related developments and the impact of changes in Source s daily operations. Each of these factors could lead to increased volatility in the market price of the Common Shares. In addition, variations in Source s earnings estimates or other financial or operating metrics by securities analysts and the market prices of the securities of Source s competitors may also lead to fluctuations in the trading price of the Common Shares. Management will have discretion in the use of proceeds. Management will have broad discretion concerning the use of the proceeds of the Offering, as well as the timing of their expenditure. As a result, purchasers will be relying on the judgment of Management for the application of the proceeds of the Offering. Management may use the net proceeds of the Offering in ways that purchasers may not -97-

121 consider desirable. The results and the effectiveness of the application of the net proceeds are uncertain. If the proceeds are not applied effectively, the results of Source s operations may suffer. There may be no return on investment in the Common Shares. There is no assurance that the business of Source will be operated successfully, or that the business will generate sufficient income to allow investors to recoup all or any portion of their investment. There is no assurance that an investment in the Common Shares will earn a specified rate of return or any return over the life of the investment. The Common Shares will be subject to further dilution. The Company may make future acquisitions or enter into financings or other transactions involving the issuance of securities of the Company which may be dilutive. The Company and the Locked-Up Shareholders have agreed to refrain from issuing or selling further Common Shares for a period of 180 days following the Closing Date without the consent of the Underwriters, subject to certain exceptions. However, at the end of that period (or earlier if a release is granted by the Underwriters), there will be no restrictions on the Company issuing or selling, or on the Locked-Up Shareholders selling, Common Shares other than those pursuant to Applicable Securities Laws and stock exchange policies. In addition, pursuant to the Distribution Rights Agreement, the Company has granted the Distribution Rights Shareholder demand rights and piggyback rights which permit the Distribution Rights Shareholders to sell all or a portion of their Common Shares through one or more prospectus offerings. See Principal Shareholders Distribution and Nomination Rights Distribution Rights Agreement. The Locked-Up Shareholders have entered into Lock-Up Agreements as described in Plan of Distribution Lock- Up Arrangements and other than as set out therein, there are no restrictions on sales of Common Shares by any of the Locked-up Shareholders of the Company following the Closing Date, some of whom may wish to reduce their share position in the Company and sell some or all of their shares. No prediction can be made as to the effect, if any, such future sales of Common Shares will have on the market price of the Common Shares prevailing from time to time. The sale of a substantial number of the Common Shares in the public market after the Offering, or the perception that such sales may occur, could adversely affect the prevailing market price of the Common Shares and negatively impact the Company s ability to raise equity capital in the future. Pursuant to the Note Indenture, each holder of Notes that receives Common Shares as a result of a Common Shares RTR Payment will be deemed to have agreed to the terms of a lock-up agreement the terms of which are substantially similar to those of the Lock-Up Agreements. The Lead Underwriters may waive or release parties to the Lock-Up Agreements entered into in connection with this Offering, which could adversely affect the price of the Common Shares. The Lead Underwriters, in their discretion, may, at any time and without notice, release all or any portion of the Common Shares subject to the Lock-Up Agreements to be entered into in connection with the Offering. If the restrictions under the Lock-Up Agreements are waived, then Common Shares will be available for sale into the public markets, which could cause the market price of our Common Shares to decline and impair Source s ability to raise capital. Residents of the United States may have limited ability to enforce civil remedies. Source is organized under the laws of Alberta, Canada and its head office is located in Canada. Source s directors and officers and the experts named herein are residents of Canada. As a result, it may be difficult for investors in the United States to effect service of process within the United States upon those directors, officers and experts who are not residents of the United States or to enforce against them judgments of U.S. courts based upon civil liability under the U.S. federal securities laws or the securities laws of any state within the United States. There is doubt as to the enforceability in Canada against Source or against any of Source s directors, officers or experts who are not residents of the United States, in original actions or in actions for enforcement of judgments of U.S. courts of liabilities based solely upon the U.S. federal securities laws or the securities laws of any state within the United States. The Company has no plans to pay dividends. The Company currently intends to use its future earnings, if any, and other cash resources for the operation and development of its business and does not currently anticipate paying any dividends on the Common Shares. Any future -98-

122 determinations to pay dividends on the Common Shares will be at the sole discretion of the Board of Directors after considering a variety of factors and conditions existing from time to time, including current and future commodity prices, production levels, capital expenditure requirements, debt service requirements, operating costs, royalty burdens, foreign exchange rates and the satisfaction of the liquidity and solvency tests imposed by the ABCA for the declaration and payment of dividends. In addition, the Company s ability to pay dividends may be restricted by restrictions and/or limitations imposed by the Credit Agreement or any other future outstanding indebtedness of the Company. As a result, a holder of Common Shares may not receive any return on an investment in the Common Shares. The forward-looking statements contained in this prospectus may prove to be inaccurate. This prospectus contains forward-looking statements, including, without limitation, the forward-looking statements listed in Forward-Looking Statements. By their nature, forward-looking statements involve numerous assumptions, known and unknown risk and uncertainties, of both a general and specific nature, that could cause actual results to differ materially from those suggested by the forward-looking statements or contribute to the possibility that predictions, forecasts or projections will prove to be materially inaccurate. The factors discussed in this section and the section entitled Forward-Looking Statements should therefore be weighed carefully and prospective investors should not place undue reliance on the forward-looking statements provided in this prospectus. A Purchaser of the Common Shares under the Offering will do so at a substantial premium to book value per Common Share. The Offering Price is substantially higher than the book value per share of the Common Shares issued prior to the Closing. As a result, purchasers of Common Shares pursuant to the Offering will experience immediate dilution. Additional information on the risks, assumptions and uncertainties are found in this prospectus under the heading Forward-Looking Statements. LEGAL PROCEEDINGS AND REGULATORY ACTIONS Other than as described below, there are no legal proceedings Source is or was a party to, or that any of its property is or was the subject of, during Source s most recent financial year, nor are any such legal proceedings known to Source to be contemplated, that involves a claim for damages, exclusive of interest and costs, exceeding 10% of the current assets of Source. In 2015, a dispute arose between SES Proppants and a customer (the CMSA Customer ) under a master supply agreement providing for the supply of proppant pursuant to purchase orders (the CMSA ). Pursuant to the CMSA, SES Proppants received US$20,000,000 as a prepayment for future purchases of processed frac sand which was paid upon three installments by the completion of certain phases of Source s frac wet plant at the Sumner Facility. To evidence the underlying obligations for prepayment, SES Proppants executed and delivered to the CMSA Customer a promissory note (the Prepayment Note ) in the principal amount of US$20,000,000. The CMSA Customer claimed that the entire outstanding balance of the principal and accrued interest on the Prepayment Note became due and payable in cash on November 16, 2015 and that SES Proppants failed to pay as required. The CMSA Customer threatened to commence foreclosure under certain mortgages over the Sumner Facility which secured the Prepayment Note. SES Proppants sought a declaratory judgment that (a) absent an event of default or prepayment as set forth in the Prepayment Note, the Prepayment Note is payable only through credits against invoices for proppant supplied by SES Proppants to the CMSA Customer, all as specified under the terms of the CMSA; and (b) the Customer had no existing right, under the CMSA, the Prepayment Note, or the applicable mortgages, to foreclose on the Sumner Facility. SES Proppants also asserted a claim against the CMSA Customer for breach of its obligations under the CMSA by failing to purchase the quantities required to amortize the Prepayment Note. SES Proppants obtained a preliminary injunction against the CMSA Customer from taking any action to enforce the mortgages. In November 2016, the parties entered into a confidential settlement agreement and have settled the dispute amicably for payment by SES Proppants to the CMSA Customer of US$16.5 million. On November 30, 2016, the applicable court issued an order granting the motion to dismiss the lawsuit. There are no: (a) penalties or sanctions imposed against Source by a court relating to securities legislation or by a securities regulatory authority since Source s inception; (b) other penalties or sanctions imposed by a court or regulatory body against Source that would likely be considered important to a reasonable investor in making an -99-

123 investment decision; or (c) settlement agreements Source entered into before a court relating to securities legislation or with a securities regulatory authority since Source s inception. EXEMPTION The Company has requested relief from the requirement of subsection 5.9(1) of NI to the extent that such provisions would require Cowen to sign the Certificate of the Underwriters in this prospectus for a distribution to purchasers resident outside of Canada (the Relief ). The Company has determined that a distribution of Common Shares to purchasers resident outside of Canada would be a distribution in Alberta, but not Ontario, and therefore sought the Relief in Alberta. The conditions to the Relief are all of the following: (a) distributions under this prospectus by Cowen are not made to a purchaser resident in Canada; (b) the purchaser certifies in an agreement with the Company that the purchaser is not resident in Canada, or if there is no agreement directly between the purchaser and the Company, Cowen has agreed in writing with the Company that it will not, to the best of its knowledge, after reasonable inquiry, distribute Common Shares under this prospectus to a purchaser resident in Canada; (c) no advertisement or solicitation in furtherance of the distribution under this prospectus is undertaken in Canada by Cowen; and (d) the Common Shares distributed under this prospectus by Cowen are lawfully distributed in the jurisdiction of residence of the purchasers. The issuance by the ASC of the final receipt issued for this prospectus is evidence of the granting of the Relief. No similar relief was requested from or granted by the Ontario Securities Commission. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS Except as otherwise set out herein, there is no material interest, direct or indirect, of any: (a) director or executive officer of Source; (b) person or company that beneficially owns, or controls or directs, directly or indirectly, more than 10% of any class or series of Source s voting securities; or (c) associate or affiliate of any of the persons or companies referred to in (a) or (b) above in any transaction within three years before the date of this prospectus that has materially affected or is reasonably expected to materially affect Source. AUDITORS, TRANSFER AGENT AND REGISTRAR The external auditors of the Company are PricewaterhouseCoopers LLP, Chartered Professional Accountants, Suncor Energy Centre East Tower, th Avenue S.W., Calgary, Alberta T2P 5L3. PricewaterhouseCoopers LLP has been the Company s auditors since February 7, 2017 and the auditors of Source since July The transfer agent and registrar for the Common Shares is Computershare Trust Company of Canada at its principal offices in Calgary, Alberta and Toronto, Ontario

124 MATERIAL CONTRACTS Except for contracts entered into in the ordinary course of business, the only material contracts that the Company has entered into prior to the date of this prospectus or that are expected to be entered into in connection with the Reorganization, which can reasonably be regarded as presently material, are the following: 1. the Credit Agreement (see Description of Indebtedness Indebtedness outstanding following the Offering Credit Facilities ); 2. the Note Indenture (see Description of Indebtedness Indebtedness outstanding following the Offering Notes ); 3. the Distribution Rights Agreement (see Principal Shareholders Distribution and Nomination Rights ); 4. the TriWest Nomination Agreement (see Principal Shareholders Distribution and Nomination Rights ); 5. the McMahon Nomination Agreement (see Principal Shareholders Distribution and Nomination Rights ); 6. the Underwriting Agreement (see Plan of Distribution ); 7. the Blair Purchase Agreement (see Business Blair Facility Acquisition Blair Purchase Agreement ); and 8. the Source Canada Exchange Agreement (see Corporate Structure Reorganization ). Copies of the foregoing and the articles and by-laws of the Company may be inspected during ordinary office business hours at the Company s principal offices located at 100, th Avenue S.E., Calgary, Alberta T2G 0Y4 during the period of the distribution of the Common Shares or may be viewed under the Company s profile at Names of Experts EXPERTS The only persons or companies who are named as having prepared or certified a report, valuation, statement or opinion in this prospectus and whose profession or business gives authority to such report, valuation, statement or opinion, are: (a) APEX, the Company s independent professional geologists; (b) Stikeman Elliott LLP, the Company s counsel and Blake, Cassels & Graydon LLP, the Underwriters counsel; and (c) PricewaterhouseCoopers LLP, the Company s independent auditors. Interests of Experts As at the date hereof, the designated professionals of APEX, the Company s independent professional geologists, the designated professionals of Stikeman Elliott LLP, the Company s counsel, and the designated professionals of Blake, Cassels & Graydon LLP, the Underwriters counsel, as respective groups, beneficially own, directly or indirectly, less than one percent of the outstanding Common Shares. PricewaterhouseCoopers LLP are the external auditors of the Company and have confirmed that they are independent with respect to the Company within the meaning of the Rules of Professional Conduct of the Institute of Chartered Professional Accountants of Alberta. PURCHASERS STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION Securities legislation in certain of the provinces and territories of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces and territories, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages where the prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, provided that such remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the province or territory in which the purchaser resides for the particulars of these rights or consult with a legal advisor

125 APPENDIX FS FINANCIAL STATEMENTS AND MANAGEMENT S DISCUSSION AND ANALYSIS Page Audited Balance Sheet of the Company as at December 31, Audited Combined Financial Statements of Source as at and for the years ended December 31, 2016 and 2015 and for each of the three years in the three-year period ended December 31, 2016, including the notes thereto and the auditor s report thereon... Management s Discussion and Analysis of Source s Operations, Financial Position and Outlook for each of the Three Years ended December 31, 2016, December 31, 2015 and December 31, FS-2 FS-7 FS-36

126 SOURCE ENERGY SERVICES LTD. Balance Sheet AS AT FEBRUARY 7, 2017 FS-2

127 February 10, 2017 Independent Auditor s Report To the Board of Directors of Source Energy Services Ltd. We have audited the accompanying financial statement of Source Energy Services Ltd., which comprises the balance sheet as at February 7, 2017 and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statement Management is responsible for the preparation and fair presentation of this financial statement in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statement is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statement presents fairly, in all material respects, the financial position of Source Energy Services Ltd. as at February 7, 2017 in accordance with International Financial Reporting Standards. Chartered Professional Accountants PricewaterhouseCoopers LLP th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3 T: , F: , PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. FS-3

128 SOURCE ENERGY SERVICES LTD. Contents FEBRUARY 7, 2017 Financial Statements Balance Sheet... Notes to Balance Sheet... Page FS-5 FS-6 FS-4

129 Source Energy Services Ltd. Balance Sheet As at February 7, 2017 Assets Cash $10 Shareholder s Equity Share Capital $10 Approved on behalf of the Board of Directors of Source Energy Services Ltd. (signed) Cody Church Cody Church Director (signed) Brad Thomson) Brad Thomson President and Chief Executive Officer FS-5

130 Source Energy Services Ltd. Notes to the Balance Sheet as at February 7, Company Information Source Energy Services Ltd. (the Company ) was formed as an Alberta corporation established under the laws of Business Corporation Act (Alberta), pursuant to articles of incorporation dated February 7, The Company was established to serve as the public company for Source Energy Services Canada LP and Source Energy Services US LP after the completion of the closing of the public issuance by the Company. The sole shareholder of the Company is Brad Thomson, CEO of Source Energy Services Canada LP and Source Energy Services US LP, each a related entity. The Company s registered office is at 100, th Avenue S.W., Calgary Alberta, Canada, T2G 0Y4. The financial statement was approved by the Board of Directors and authorized for issue on February 10, Significant accounting policies The Balance Sheet has been prepared in accordance with International Financial Reporting Standards. Separate statements of Operations and Comprehensive Income, Changes in shareholder s equity, and cash flows have not been presented as there has been no activity since its inception. Common Control Transactions Business combinations involving entities under common control are excluded from IFRS 3, Business Combinations. As there is no specific guidance in IFRS, management has selected an accounting policy that is consistent with IAS 8, Accounting policies. Management has chosen to apply the predecessor value method since inception for common control transactions. The predecessor value method involves accounting for the acquired assets and liabilities at existing carrying values rather than at fair value, which results in no goodwill being recorded. 3. Share Capital The Company is authorized to issue an unlimited number of voting common shares, an unlimited number of preference shares issuable in series and an unlimited number of voting class B shares. As at February 7, 2017, the Company issued one common share. FS-6

131 SOURCE ENERGY SERVICES COMBINED FINANCIAL STATEMENTS AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 FS-7

132 February 10, 2017 Independent Auditor s Report To the Board of Directors of Source Energy Services We have audited the accompanying combined financial statements of Source Energy Services and its subsidiaries, which comprise the balance sheets as at December 31, 2016, December 31, 2015 and December 31, 2014 and the combined statements of operations and comprehensive income (loss), changes in partners equity and cash flows for each of the years in the three year period ended December 31, 2016, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the combined financial statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of combined financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements present fairly, in all material respects, the financial position of Source Energy Services and its subsidiaries as at December 31, 2016, December 31, 2015 and December 31, 2014 and its financial performance and its cash flows for each of the years in the three year period ended December 31, 2016 in accordance with International Financial Reporting Standards. PricewaterhouseCoopers LLP th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3 T: , F: , PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. FS-8

133 Emphasis of matter Without modifying our opinion, we draw attention the fact that, as described in note 2 to the combined financial statements, the businesses included in the combined financial statements have not operated as a single entity. These combined financial statements are, therefore, not necessarily indicative of results that would have occurred if the businesses had operated as a single business during the year presented or of future results of the combined businesses. Chartered Professional Accountants FS-9

134 SOURCE ENERGY SERVICES Contents December 31, 2016 Financial Statements Combined Balance Sheet... Combined Statement of Operations and Comprehensive Income... Combined Statement of Partners Equity... Combined Statement of Cash Flows... Notes to the Combined Financial Statements... Page FS-11 FS-12 FS-13 FS-14 FS-15 - FS-35 FS-10

135 Source Energy Services Combined Balance Sheet As at (Stated in thousands of Canadian dollars) Note December December December Assets Current assets Cash $ $ 276 $ 3,202 Accounts receivable 4(c) 14,634 21,756 37,562 Prepaid expenses 2,943 2,973 3,398 Inventories 6 27,710 24,415 13,527 Property, plant and equipment available for sale 7 12,850 Total current assets 45,287 49,420 70,539 Deferred income tax 8 $ 597 $ 81 $ 479 Due from related parties Property, plant and equipment 7 173, , ,661 Total Assets $219,406 $231,112 $194,788 Liabilities and Partners Equity Current liabilities Overdraft $ $ 475 $ 2,598 Accounts payable and accruals 4(d) 21,358 25,393 22,498 Deferred revenue 9 1,792 5,245 7,552 Shareholder loan 16 Due to related parties 16 Derivative Liability 14,817 Current portion of long-term debt 10 1,109 8,164 11,624 Total current liabilities 39,076 39,277 44,272 Deferred revenue 9 $ $ 22,852 $ 17,053 Due to related parties 16 4,599 4,363 3,356 Long-term debt ,242 74,950 52,173 Derivative Liability Shareholder Loan 16 36,770 26,841 13,486 Decommissioning provision 11 4,300 1, Preferred shares obligation 12 70,513 66,032 65,187 Total long-term liabilities 239, , ,677 Total liabilities $278,625 $235,954 $195,949 Equity Partners equity 13 (64,820) (11,349) 222 Cumulative translation adjustment 13 5,601 6,507 (1,383) Total equity (59,219) (4,842) (1,161) Total Liabilities and Equity $219,406 $231,112 $194,788 Approved on behalf of the Board of Directors of Source Energy Services (signed) CODY CHURCH Cody Church Director (signed) BRAD THOMSON Brad Thomson President and Chief Executive Officer FS-11

136 Source Energy Services Combined Statements of Operations and Comprehensive Income (Loss) For the years ended December 31, (Stated in thousands of Canadian dollars) Note Sales Sand revenue $112,962 $139,574 $118,755 Wellsite Solutions 21,261 6,208 11,782 Terminal Services 4,976 7,353 15,969 Sales $139,199 $153,135 $146,506 Cost of sales 14 $123,257 $116,364 $ 95,504 Cost of sales depreciation 8,039 7,133 4,611 Gross margin $ 7,903 $ 29,638 $ 46,391 Operating and general & administration expense 14 $ 23,866 $ 18,183 $ 18,913 Depreciation 6,373 5,674 3,146 Income (loss) from operations $ (22,336) $ 5,781 $ 24,332 Other expense (income): Loss (gain) on asset disposal $ 1,082 $ 94 $ (3,110) Loss (gain) on impairment $ 1,852 $ $ Finance expense 17 19,491 12,346 8,998 Loss (gain) on derivative liability Fair value adjustment on shareholder loan 3,906 Other income $ (4,859) $ (1,796) $ (420) Management Fees 16 1,043 1,683 1,456 Foreign exchange loss/(gain) 2,059 (1,255) (64) Total other expense (income) $ 21,578 $ 14,978 $ 6,860 Income (loss) before income taxes $ (43,914) $ (9,197) $ 17,472 Income taxes Current tax $ 4 $ 171 $ 58 Deferred tax 8 (516) Net income (loss) $ (43,402) $ (9,766) $ 17,035 Other comprehensive (income) loss Foreign currency translation adjustment (not subject to recycling) $ 906 $ (7,890) $ (2,302) Consolidated comprehensive income (loss) $ (44,308) $ (1,876) $ 19,337 FS-12

137 Source Energy Services Combined Statement of Partners Equity For the years ended December 31, 2016, 2015 and 2014 (Stated in thousands of Canadian dollars) Partners Units Number of Units $ Partners Equity Accumulated Other Comprehensive Income (Loss) Total Equity Balance at January 1, ,880 $41,665 $ (58,663) $(3,685) $(20,683) Unrealized foreign exchange gain 2,302 2,302 Stock based compensation expense Net income 17,035 17,035 Balance at December 31, ,880 $41,850 $ (41,628) $(1,383) $ (1,161) Unrealized foreign exchange gain 7,890 7,890 Stock based compensation expense Payment to unitholders (1,872) (1,872) Net loss (9,766) (9,766) Balance at December 31, ,880 $41,917 $ (53,266) $ 6,507 $ (4,842) Fair Value of Warrants Issuance $ Promissory Note Issuance (5,500) (5,500) Unrealized foreign exchange loss (906) (906) Stock based compensation expense Distribution to Unitholders (5,093) (5,093) Net loss (43,402) (43,402) Balance at December 31, ,880 $41,941 $(106,761) $ 5,601 $(59,219) FS-13

138 Source Energy Services Combined Statements of Cash Flows For the years ended December 31, (Stated in thousands of Canadian dollars) Note Cash Flows Provided by (Used in) Operating Activities Net income (loss) $ (43,402) $ (9,766) $ 17,035 Adjusted for the following: provided by (used in) operating activities: Depreciation 14,412 12,807 7,672 Stock based compensation Loss (Gain) on sale of assets 1, (3,110) Loss (Gain) on impairment 1,852 Finance expense 17 19,491 12,346 8,838 Fair value adjustment on shareholder loan 3,906 Gain on settlement of deferred revenue (3,328) Deferred income taxes (516) Onerous lease costs 227 Loss (Gain) on derivative liability 910 Payments Deferred Revenue (2,860) (2,686) Payments made to decommissioning liability (3,220) Net changes in non-cash working capital 5 3,015 6,632 (36,195) Cash flows provided by operating activities (9,453) 23,624 (7,882) Investing Activities Purchase of property, plant and equipment (6,405) (38,901) (45,390) Proceeds on disposal of property, plant and equipment ,692 Net changes in non-cash working capital (4,906) 3,216 2,077 Cash flows used in investing activities (10,470) (35,461) (37,621) Financing Activities Proceeds on long-term debt 38,346 73,770 45,526 Payments on long-term debt (106,607) (59,759) (12,161) Proceeds on note 130,000 Payments on Deferred Revenue (23,571) Financing expense paid (14,953) (5,481) (2,787) Proceeds on shareholder loan 2,000 7,500 15,589 Payments made to preferred shareholders (3,188) Payments made to unitholders (5,093) (1,872) Cash flows provided by financing activities 20,122 10,970 46,167 Effect of exchange rate changes on cash 64 (139) Increase (Decrease) in cash 199 (803) 525 Cash and cash equivalents, beginning of year (199) Cash and cash equivalents, end of year $ $ (199) $ 604 Cash consists of the following: Cash Overdraft 276 3,202 (475) (2,598) FS-14

139 SOURCE ENERGY SERVICES Notes to the Combined Financial Statements For the Years Ended December 31, 2016, 2015 and 2014 (All amounts are in thousands of Canadian dollars, unless otherwise noted) 1. GENERAL DESCRIPTION OF BUSINESS Source Energy Services ( Source or the Partnership ) is headquartered in Calgary, Alberta. The registered office is at 100, th Avenue S.W., Calgary Alberta, Canada, T2G 0Y4. Source is primarily engaged in mining, processing, storing and transporting frac sand in Western Canada and the United States, and coordinating trucking services for sand, hydrochloric acid and other chemicals for use in the oilfield industry. The Partnership consists of Source Energy Services Canada LP ( SES Canada ) and Source Energy Services US LP ( SES US ). SES Canada is privately owned and registered under the Alberta Partnership Act. SES US is privately owned and register under the Alberta Partnership Act and the Delaware Partnership Act. Triwest Capital holds majority of the ownership of the Partnership. 2. BASIS OF PRESENTATION Statement of compliance The combined financial statements were prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). The policies applied in these combined financial statements are based on IFRS issued and outstanding as at February 10, 2017, the date of the final approval of the financial statements by the Board of Directors. Basis of measurement The financial statements have been combined on the basis of common control, as the users of the financial statements view the Partnership as a whole business, and viewing the business as less than the whole does not portray its results properly. The combined financial statements of the Partnership include the accounts of all entities over which the Partnership has the ability to exercise control through ownership ( Subsidiaries ). The Partnership controls an entity when the Partnership is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The combined financial statements include the activities of Source Energy Services Canada LP, Source Energy Services Canada Holdings Ltd., Source Energy Services Canadian Logistics LP, Source Energy Services Canadian Chemical LP, Source Energy Services US LP, Source Energy Services Logistics US LP, Source Energy Services Proppants LP, Source Energy Services Chemical US LP, CSP Property Holdings LLC, and Berthold Transload Inc. Intercompany balances and transactions are eliminated on combination. The combined financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and liabilities to estimated fair value. The combined financial statements have also been prepared on the basis that the Partnership will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Use of estimates and judgments The preparation of the combined financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future years affected. The following discussion sets forth management s most critical estimates and assumptions in determining the value of assets, liabilities and equity. FS-15

140 Allowance for Doubtful Accounts The Partnership performs ongoing credit evaluations of its customers and grants credit based on a review of historical collection experience, current aging status, the customer s financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based on specific situations and overall industry conditions. Inventories The Partnership evaluates its inventory to ensure it is carried at the lower of average cost and net realizable value. Allowances are made against obsolete or damaged inventories and charged to the cost of sales. The reversal of any write-down of inventory arising from an increase in net realizable value would be recognized as a reduction in cost of sales in the period in which the reversal occurred. Depreciation The amounts recorded for depreciation of property and equipment are based on estimates of the useful lives of the assets and residual values. This estimated residual value and useful lives of property and equipment are reviewed at the end of each reporting period and adjusted if required. Decommissioning liabilities The amounts recorded for decommissioning liabilities are based on the Company s mining activities and the estimated costs to abandon and reclaim the land and facilities, the estimated time period in which these costs will be incurred in the future and the discount and inflation rates. Any changes to these estimates could change the amount of decommissioning liability and may materially impact the combined financial statements in future periods. Income Taxes The amounts recorded for deferred income taxes are based on estimates as to the timing of the reversal of temporary differences and tax rates currently substantively enacted. Legislation and Regulations in the various jurisdictions that the company operates in are subject to change and differing interpretations require management judgement. Income tax filings are subject to audits, re-assessments and changes in facts, circumstances and interpretations of the standards could result in a material change in the Partnerships provision for income taxes. As such, income taxes are subject to measurement uncertainty. Stock-Based Compensation The fair value of the restricted share units is estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the risk-free interest rate, average expected unit life, estimated forfeitures, and estimated volatility of the Partnership. Cash-Generating Units (CGUs) The determination of CGUs is based on management s judgment regarding geographical proximity, shared equipment, and mobility of equipment. Management has determined that the Partnership s operations represent one CGU. Impairment of non-financial assets Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (CGUs). Prior impairments of non-financial assets are reviewed for possible reversal at each reporting date. FS-16

141 Embedded Derivatives An embedded derivative is a component of a contract that modifies the cash flows of the contract. The relevant transaction rights and the prepayment option included in the $130M senior secured notes represents a hybrid contract. The embedded derivatives are separated from the note payable and accounted for as derivative liabilities. The embedded derivatives are measured at Fair value through profit or loss (FVTPL). The fair value of the derivatives is based on prices or valuation techniques that require inputs that are not based on observable market data. Shareholder Loans Shareholder loans have been recorded at fair value, which represents the amount of the loan plus applicable interest. One of the promissory note bears interest at 25% per annum which is paid in a combination of cash and in kind interest. According to the agreement, the Partnership is obligated to pay the 25% interest for a minimum of 3 months after December 31, For the year ended December 31, 2016, the Partnership has recorded the interest obligation up to March 31, SIGNIFICANT ACCOUNTING POLICIES Inventories Inventories represent unprocessed but mined sand, work in process and sand available for shipment, as well as spare parts and supplies. The Partnership values inventory at the lower of cost or net realizable value. Cost is determined using the weighted average cost method. Cost includes the cost of mining of the sand as well as the direct labor costs, utility costs, transportation costs, and other processing costs to wash and dry the sand, as well as depreciation directly attributable to production equipment and depreciation of capitalized stripping activities. Net realizable value is the estimated selling price less applicable selling expenses. When the weighted average cost of inventories exceeds the net realizable value, inventory is written down to the net realizable value. All write downs are charged to cost of goods sold. The amount of the write down may be reversed (up to original amount of the write down) where there is a change in the economic circumstances. Foreign currency translation The combined financial statements are presented in Canadian dollars, which is the Partnership s presentation currency. Each entity of the combined statements is measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The financial statements of the entities that have a different functional currency are translated into Canadian dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenue and expenses are translated at average exchange rate for the period (as this is considered a reasonable approximation of actual rates), and gains and losses in translation are recognized in partners equity as accumulated other comprehensive income (loss). Foreign currency transactions in entities that have Canadian dollars as the functional currency are translated into the functional currency using the exchange rate prevailing on the transaction date. Foreign exchange gains and losses resulting from the settlement of foreign currency translation and from the translation at period-end exchange rates of monetary assets and liabilities denominated in currencies other than an entity s functional currency are recognized in the Combined Statements of Operations and Comprehensive Income (Loss). Property, plant and equipment All costs directly associated with the purchase and development of property, plant and equipment are capitalized and reflected at cost less accumulated depreciation and net impairment losses. Costs of replacing parts of property, plant and equipment are capitalized only when they increase the future economic benefits embodied in the specific assets to which they relate. All other expenditures are recognized in income as incurred. The carrying amount of any replaced or sold component is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in the Combined Statements of Operations and Comprehensive Income as incurred. Exchanges or swaps of property, plant and equipment are measured at fair value unless the transaction lacks commercial substance or neither the fair value of the asset received nor the asset given up can be reliably estimated. FS-17

142 When fair value is not used, the cost of the acquired asset is measured at the carrying amount of the asset given up. Any gains or losses from the divestiture of property and equipment are recognized in the Combined Statements of Operations and Comprehensive Income. Depreciation of property, plant and equipment is provided using the declining balance method at the following annual rates approximating their estimated useful lives in years: Buildings 20 Equipment 7 15 Vehicles 5 7 Computer hardware and software 3 5 Depreciation of an asset or an asset under construction begins when it is available for use. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. The Partnership allocates the amount initially recognized in respect of an item of property and equipment to its significant components and depreciates separately each such component where applicable. In 2015, the Partnership adopted IFRIC 20 stripping costs in the production phase of a surface mine. During the production phase of the mine, stripping costs incurred that provide access to a component of reserves that will be produced in future periods and that would not have otherwise been accessible are capitalized. The costs qualifying for capitalization are those costs directly incurred to perform the stripping activity that improves access to the resource body. The stripping activity asset is included as part of the carrying amount of the mining property. Capitalized stripping costs are amortized on a straight-line basis over the production period it relates to. Refer to note 7 for more details. Property, plant and equipment available for sale Property, plant and equipment assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. Property, plant and equipment held for sale are measured at the lower of carrying amount and fair value less costs to dispose and presented as a current asset on the Combined Balance Sheet. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Property, plant and equipment available for sale is reviewed periodically by management and if the fair value less cost to dispose is less than the cost, an impairment loss is recognized in the Combined Statements of Operations and Comprehensive Income (Loss). A previously recognized impairment loss may be reversed to the extent of the improvement and the amount of the reversal is recognized in the Combined Statements of Operations and Comprehensive Income. The reversal may be recorded provided it is no greater than the amount that had been previously reported as a reduction in the asset and it does not exceed original cost. Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included in the Combined Statements of Operations and Comprehensive Income (Loss). Impairment of non-financial assets The carrying amounts of the Partnership s non-financial assets, other than deferred tax assets, are reviewed for indicators of impairment at least annually. If indicators of impairment exist, the recoverable amount of the assets is estimated. For purposes of assessing impairment, property, plant and equipment and intangibles are grouped into cash-generating units ( CGUs ), defined as the lowest levels for which there are separately identifiable independent cash inflows. The recoverable amount of a CGU is the greater of its fair value less costs to dispose and its value in use. Fair value is determined to be the amount for which the asset would be sold in an arm s length transaction between knowledgeable and willing parties. Value in use is determined by estimating the present value of the future net cash flows to be derived from the continued use of the cash-generating unit in its present form. These cash flows are discounted at a rate based on the time value of money and risks specific to the CGU. FS-18

143 An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its recoverable amount. An impairment loss recognized in respect of a CGU is allocated to reduce the carrying amounts of the assets in the CGU on a pro rata basis. Impairment losses are recognized in Combined Statements of Operations and Comprehensive Income (Loss). Impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Deferred revenue The Partnership has entered into agreements with some of its customers where deposits are paid by the customers in exchange for goods and services at a discounted rate. These deposits received have been recorded as deferred revenue on the Partnership s Combined Balance Sheet, and are recognized as revenue as goods and services are provided to the customers, consistent with the Partnership s revenue recognition policy. Provision and contingent liabilities Provisions are recognized by the Partnership when it has a legal or constructive obligation as a result of past events, it is probable that an outflow of economic resources will be required to settle the obligation and a reliable estimate can be made of the amount of that obligation. The obligation is not recorded and is disclosed as a contingent liability if it is not probable that an outflow will be required, if the amount cannot be estimated reliably or if the existence of the outflow can only be confirmed by the occurrence of a future event. Decommissioning provision Decommissioning provision is recognized for decommissioning and restoration obligations associated with the Partnership s mining reserves. The best estimate of the expenditure required to settle the present obligations at the balance sheet date is recorded on a discounted basis using the pre-tax risk-free interest rate at each reporting date. The future cash flow estimates are adjusted to reflect the risks specific to the liability. The value of the provision is added to the carrying amount of the associated property, plant and equipment asset and is depreciated over the useful life of the asset. The provision is accreted over time through charges to finance expenses. Changes in the future cash flow estimates resulting from revisions to the estimated timing or amount of undiscounted cash flows or the discount rate are recognized as changes in the decommissioning provision and related assets. Actual decommissioning expenditures up to the recorded liability at the time are charged against the provision as the costs are incurred. Any differences between the recorded liability and the actual costs incurred are recorded as a gain/loss in the Combined Statements of Operations and Comprehensive Income (Loss). Income taxes Current and deferred income tax expenses are recognized in the Combined Statements of Operations and Comprehensive Income (Loss) except to the extent that it relates to items recognized directly in equity or other comprehensive income. Current income taxes for current and prior periods are measured at the amount expected to be payable or recoverable from the taxation authorities based on the income tax rates enacted at the end of the period Deferred income tax is recognized using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities and the carrying amounts used for taxation purposes. Deferred income tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are recognized for all temporary differences deductible to the extent future recovery is probable. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be generated to allow for all or part of the asset to be recovered. Deferred income tax balances are calculated using enacted or substantively enacted tax rates. Deferred income tax balances are adjusted to reflect changes in income tax rates that are enacted or substantively enacted with the adjustment being recognized in the period the change occurs, except items recognized in equity. FS-19

144 Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same taxation authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. Leases Leases that transfer substantially all of the benefits and risks of ownership to the Partnership are accounted for at the commencement of the lease term as finance leases and are recorded as property, plant and equipment at the fair value of the leased asset, or, if lower, at the present value of the minimum lease payments, together with an offsetting liability. Finance charges are allocated to each period so as to achieve a constant rate of interest on the remaining balance of the liability and are charged directly against income. Capitalized leased assets are amortized over the shorter of the estimated useful life of the asset or the lease term. All other leases are accounted for as operating leases and the lease costs are expensed as incurred. Preferred shares obligation Partnership units that have no voting rights and bear a fixed mandatory return have been classified as liability on the Partnership s Combined Balance Sheet. Restricted share units Restricted share units ( RSU ) are granted to specific employees, which entitle the participant, at the Partnership s option, to receive either a partnership unit or cash equivalent in exchange for a vested unit. The vesting period for RSUs is one third per year over the three-year period from the grant date. Compensation expense related to the units granted is recognized over the vesting period based on fair value of the units, calculating using the Black Scholes option pricing model. Revenue recognition The Partnership s revenue, which is comprised principally of sand sales and other services, is generally subject to contractual arrangements, which specify price and general terms and conditions. The Partnership recognizes sand sales when the risks and rewards of ownership of goods have been transferred to the customer and it is probable that the economic benefits associated with the transaction will flow to the Partnership. The Partnership also considers if it has retained any material involvement in the sand being sold and if the revenue and costs related to the sale can be measured reliably. Revenue for third party sand and chemical distribution is recognized based on contractual arrangements or when services have been completed Revenue for trucking is recognized when services are provided. Revenue for rental of tanks is recognized on a monthly basis. Finance income and expenses Finance income, consisting of interest income, is recognized as it accrues in the Combined Statements of Operations and Comprehensive Income (Loss), using the effective interest method. Finance expense comprises interest expense on borrowings and impairment losses recognized on financial assets. Amounts paid to financial institutions for the purpose of borrowing funds are capitalized upon recognition and are offset against the outstanding obligation to the financial institution. These costs are amortized over the remaining term of the facility placed. Borrowing costs are recognized in the Combined Statements of Operations and Comprehensive Income (Loss) in the period in which they are incurred using the effective interest method. Segment Reporting An operating segment is a component of the Partnership that engages in business activities from which it may earn revenues and incur expenses. All operating results are reviewed regularly on a segmented basis by Partnership management to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available. Segment results that are reported to management include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. FS-20

145 Financial Instruments (i) Classification and measurement Recognition Recognition Financial assets and liabilities are generally initially recognized at fair value when the Partnership becomes a party to the contractual provisions of the instrument. However, where the fair value differs on initial recognition from the transaction price and the fair value is not measured using entirely observable inputs the instrument is recognized at the transaction price. In the case of instruments not measured at fair value through profit and loss, incremental, directly attributable transaction costs are accounted for as an adjustment to the carrying amount and in all other cases such transaction costs are expensed as incurred. The Partnership evaluates contracts to purchase non-financial items which are subject to net settlement (whether explicitly or in substance) to determine if such contracts should be considered derivatives or if they were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity s expected purchase, sale or usage requirements ( Own Use ). If such contracts qualify as Own Use they are considered executory contracts outside the scope of financial instrument accounting. The Partnership evaluates financial and non-financial contracts not measured at fair value through profit and loss to determine whether they contain embedded derivatives. An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. For such instruments, an embedded derivative is separated where the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. Financial assets and liabilities are not offset unless they are with a counterparty for which the Partnership has a legally enforceable right to settle the financial instruments on a net basis and the Partnership intends to settle on a net basis. The fair value of a financial instrument is 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. The Partnership discloses more details about fair value of financial instruments in Note 4. Derecognition Financial assets are derecognized when the rights to receive cash flows from the assets have expired or it transfers the financial instrument in a manner that qualifies for derecognition through transfer of substantially all risks and rewards or transfer of control. Financial liabilities are derecognized upon extinguishment. A modification of a financial liability with an existing lender is evaluated to determine whether the amendment results in substantially different terms in which case it is accounted for as an extinguishment. Classification The financial instruments of the Partnership are classified in the following categories: fair value through profit or loss (which includes financial assets and financial liabilities), loans and receivables, available-for-sale and other financial liabilities. The classification depends on the nature and purpose of the financial instrument and is determined at the time of initial recognition. Financial assets and financial liabilities acquired principally for the purpose of selling or repurchasing in the short term are classified as fair value through profit or loss and are recognized initially at fair value with changes in fair value recognized in the Combined Statements of Operations and Comprehensive Income (Loss). The shareholder loan payable is classified as fair value through the Combined Statements of Operations and Comprehensive Income (Loss). Financial assets classified as loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially measured at fair value and subsequently carried at amortized cost using the effective interest method of amortization. The Partnership s loans and receivables are comprised of cash, accounts receivable, and due from (to) related parties. FS-21

146 Financial assets and liabilities classified as available-for-sale are measured at fair value, with changes in fair value recognized in other comprehensive income. Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. The Partnership has no available-for-sale financial assets. Other financial liabilities include overdraft, accounts payable and accruals and long-term debt. Financial instruments in this category are initially recorded at fair value, net of any transaction costs incurred, and subsequently carried at amortized cost using the effective interest method. (ii) Equity instruments The Partnership s common units are classified as equity. Incremental costs directly attributable to the issue of common units are recognized as a reduction from equity. Partnership units which have redemption rights and include fixed annual returns have been classified as long term liabilities. (iii) Impairment At each balance sheet date, the Partnership assesses whether there is objective evidence that financial assets, other than those designated as fair value through the statement of income are impaired. When impairment has occurred, the cumulative loss is recognized in the Combined Statements of Operations and Comprehensive Income (Loss). For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate. When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to the Combined Statements of Operations and Comprehensive Income (Loss) in the period. Impairment losses may be reversed in subsequent periods. Recently Issued Accounting Standards Not Yet Applied Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after January 1, 2017 with earlier application permitted. (i) IFRS 9 Financial Instruments On January 1, 2018, the Corporation will be required to adopt IFRS 9 Financial Instruments, which is the result of the first phase of the International Accounting Standards Board ( IASB ) project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Partnership is in the process of assessing the impact of IFRS 9 on its financial statements. (ii) IFRS 15 Revenue from Contracts with Customers On January 1, 2018, the Partnership will be required to adopt IFRS 15 Revenue from Contracts with Customers. IFRS 15 was issued in May 2014 and will replace IAS 11 Construction Contracts, IAS 18, Revenue Recognition, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31 Revenue Barter Transactions Involving Advertising Services. IFRS 15 provides a single, principle-based five-step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17 and financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements. In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The standard s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity s ordinary activities. The Partnership is in the process of assessing the impact of IFRS 15 on its financial statements. (iii) IFRS 16 Leases On January 1, 2019, the Partnership will be required to adopt IFRS 16 Leases. The new standard requires lessees to recognize a lease liability reflecting future lease payments and a right-of-use-asset for most lease contracts. The FS-22

147 standard permits a simplified approach that includes certain reliefs related to the measurement of the right-of-use-asset and the lease liability, rather than full retrospective application. IFRS 16 must be applied for financial years commencing on or after January 1, Early adoption is permitted, but only in conjunction with IFRS 15. The Partnership is in the process of assessing the impact of IFRS 16 on its financial statements. 4. FINANCIAL INSTRUMENT AND RISK MANAGEMENT (a) Risk management overview The Partnership s activities expose it to a variety of financial risks including credit risk, liquidity risk and market risk. Further quantitative disclosures are included throughout these combined financial statements. The Partnership employs risk management strategies and polices to ensure that any exposures to risk are in compliance with the Partnership s business objectives and risk tolerance levels. While the Board of Directors has the overall responsibility for the Partnership s risk management framework, Source s management has the responsibility to administer and monitor these risks. (b) Fair value of financial instruments The fair values of cash, accounts receivable, overdraft, accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of those instruments. The fair value of the ABL facility approximates the carrying values as they bear interest at market floating rates consistent with market rates for similar debt. Based on the closing market price at December 31, 2016, the fair value of the $130,000 notes is $137,800. The Partnership analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Level 1: Values based on unadjusted quoted prices in active markets for identical assets or liabilities, accessible at the measurement date. Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Values based on prices or valuation techniques that require inputs for the asset or liability that are not based on observable market data (unobservable inputs). FS-23

148 A financial instrument is classified as Level 3 if one or more of its unobservable inputs may significantly affect the measurement of its fair value. Appropriate inputs are chosen so that they are consistent with market evidence or management judgment. Due to the unobservable nature of the inputs, there may be uncertainty about the value of Level 3 financial instruments. Fair Value December 31, 2016 Carrying amount Level 1 Level 2 Level 3 Financial liabilities at Fair value through profit and loss: $12,500 and $7,500 promissory note $ 29,270 $29,270 Derivative Liability $ 14, $14,816 Financial liabilities at amortized cost: $130.0M of Senior Secured First Lien Notes $110,171 $137,800 $5,500 and $2,000 promissory notes $ 7,500 $ 7,500 Finance lease obligations current $ 1,109 $1,109 Finance lease obligations long term $ 524 $ 524 Fair Value December 31, 2015 Carrying amount Level 1 Level 2 Level 3 Financial liabilities at Fair value through profit and loss: Shareholder loan $ 26,841 $26,841 Financial liabilities at amortized cost: Finance lease obligations current $ 1,153 $1,153 Finance lease obligations long term $ 530 $ 530 Fair Value December 31, 2014 Carrying amount Level 1 Level 2 Level 3 Financial liabilities at Fair value through profit and loss: Shareholder loan $ 13,486 $13,486 Financial liabilities at amortized cost: Finance lease obligations current $ 994 $ 994 Finance lease obligations long term $ 1,197 $1,197 (c) Credit risk Credit risk is the risk of financial loss to the Partnership if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Substantially all of the Partnership s accounts receivable are due from purchasers of proppants and logistics service and are subject to normal industry credit risk. The Partnership s revenues are generally derived from a group of large and reputable oilfield services and oilfield production customers. Orders for proppants are subject to the Partnership s credit and collection programs. The five largest customers account for 87% of total revenue in 2016 (78% in 2015, 63% in 2014), and two of those customers (four in 2015, four in 2014) account for more than 10% of total revenue individually. The Partnership performs ongoing credit evaluations of its customers and establishes an allowance for doubtful accounts based on credit risk applicable to certain accounts, historical trends and other relevant information. The Partnership s maximum exposure to credit risk is the fair value of cash and accounts receivable on the balance sheet shown net of an appropriate allowance for doubtful accounts. Significant changes in industry conditions will increase the risk of not collecting receivables. Management believes the risk is often mitigated by the size and reputation of the companies to which they extend credit. As at December 31, 2016, 2015 and 2014, the Partnership s accounts receivable comprised the following: As at December 31, 2016 December 31, 2015 December 31, days $11,179 $21,004 $32, days 3, , days 96 1,234 (420) 91+ days 304 (747) 3 Total Trade Receivables $14,634 $21,756 $37,562 FS-24

149 The Partnership manages the credit exposure related to cash by using major Canadian chartered banks and monitors all short-term deposits to ensure an adequate rate of return. Given these institutions, management does not expect any counterparty to fail to meet its obligations. For the year ended December 31, 2016, $2,929 of bad debt expense was recorded (2015 $150, $176) (d) Liquidity risk Liquidity risk is the risk that the Partnership will not be able to meet its financial obligations as they are due. The Partnership s approach to managing liquidity is to ensure it will have sufficient liquidity to meet its liabilities when due. The Partnership s ongoing liquidity is impacted by various external events and conditions, including commodity price fluctuations, foreign currency fluctuations, and the global economic conditions. The financial liabilities on the combined balance sheet consist of overdraft, accounts payable and accrued liabilities, long-term debt and shareholder loans. The Partnership manages this risk through detailed monitoring of budgeted and projected operating results and cash requirements. Formal monthly senior management meetings address levels of firm sales and monitor obligations and customer credit facilities. The Partnership expects to repay its financial liabilities in the normal course of operations and to fund future operational and capital requirements through the use of its asset backed loan facility and operating cash flows, as well as future debt and equity financings. If available liquidity is not sufficient to meet the Partnership s obligations as they come due, expenditures will be reduced as necessary, and additional financing arrangements will be pursued. See Note 10 for ABL facility disclosure. The Partnership s planned cash outflows relating to financial liabilities is outlined in the table below: Year ended December 31, 2016 Total and thereafter Accounts payable and accruals $ 21,358 21,358 Capital loan and finance lease $ 1,633 1, Bank debt (a)(b) $ 13, ,832 Notes Payable (a)(b) $178,497 13,650 13,650 13, ,547 Shareholder loan (a)(b) $ 57,325 57,325 Due to related parties (b) $ 4,599 4,599 Preferred shares obligation (b) $ 70,513 70,513 (a) (b) Includes interest for future periods. Although these items are long term, the Partnership may settle them within a year, either by cash or common stock. Year ended December 31, 2015 Total and thereafter Accounts payable and accruals $25,395 25,395 Capital loan and finance lease (a) $ 2,253 1, Bank debt (a) $90,813 11,453 79,360 Shareholder loan $26,841 7,537 19,304 Due to related parties $ 4,363 4,363 Preferred shares obligation $66,032 66,032 (a) Includes interest for future periods. (e) Market risk Market risk is the risk that changes in market prices, foreign exchange rates and interest rates will affect the Partnership s net earnings or the value of financial instruments and are largely outside the control of the Partnership. The objective of the Partnership is to manage and mitigate market risk exposures within acceptable limits, while maximizing returns. Primary market risks are as follows: Foreign currency risk The Partnership is exposed to currency price risk on sales denominated in U.S. dollars to the extent that the receipt of payment of the U.S. denominated accounts receivable are subject to fluctuations in the related foreign exchange rate. In FS-25

150 addition, foreign currency risk exists on U.S. costs of manufacturing and transporting inventory for sale to the extent that the payment of those costs are U.S. dollar denominated accounts payable are subject to fluctuations in the foreign exchange rate. Included in accounts receivable and accounts payable and accrued liabilities at December 31, 2016 are $1,693 (2015 $17,611, 2014 $32,270) and $8,380 (2015 $14,499, 2014 $16,351) denominated in foreign currency respectively. The net effect of each 1% change in foreign exchange would have an impact of $179 for 2016 net income (2015 $189, 2014 $161). As at December 31, 2016, December 31, 2015 and December 31, 2014, the Partnership had no forward exchange rate contracts in place. Interest rate risk Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Partnership is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the floating rate credit facility. The Partnership is exposed to interest rate price risk its asset backed loan facility that bear interest at floating rates. The Partnership had no interest rate swaps or financial contracts in place as at or during the periods ended December 31, 2016, December 31, 2015 or December 31, For the year ended December 31, 2016, a 1% change to the effective interest rate would have an impact of approximately $175 (2015 $669, 2014 $403) on net income and cash flow. (f) Capital management The Partnership s capital management policy is to maintain a strong capital base that optimizes the Partnership s ability to grow, maintain partner and creditor confidence and to provide a platform to create value for its common Partnership unitholders. The Partnership s officers are responsible for managing the Partnership s capital and do so through monthly management meetings and quarterly board meetings including regular reviews of financial information including budgets and forecasts. The Partnership s Directors are responsible for overseeing this process. The Partnership considers its capital structure to include partners equity, bank debt and due to related parties. The Partnership monitors capital based on its current working capital, available bank line, projected cash flow from operations and anticipated capital expenditures. In order to manage its capital structure, the Partnership prepares annual capital expenditure and operating budgets, which are updated as necessary. The annual and updated budgets are prepared by the Partnership s management and approved by the Partnership s Board of Directors. The budget results are regularly reviewed and updated as required. In order to maintain or adjust the capital structure, the Partnership may issue units, seek debt financing and adjust its capital spending to manage its current and projected capital structure. The Partnership s ability to raise additional debt or equity financing is impacted by external conditions, including the global economic conditions. The Partnership continually monitors economic and general business conditions. The Partnership s share capital is not subject to external restrictions but the amount of the bank operating facility is determined with reference to inventory and accounts receivable levels maintained. The Partnership is subject to externally imposed capital requirements for the asset backed loan facility, requiring the Partnership to maintain. a springing fixed charge ratio of (a) 1.10:1 up to and including June 30, 2017, and then (b) 1.25:1 at all times thereafter to be measured when Source s excess availability is less than 20% of the lesser of the borrowing base and the operating facility. As of December 31, 2016, the excess availability was greater than 20%. The Partnership is compliant with all covenants as of December 31, The Partnerships capital management policy has not changed during the years ended December 31, , or SUPPLEMENTAL CASH FLOW INFORMATION Changes in non-cash operating assets and liabilities for the years ended December 31, 2016 and 2015 are as follows: Accounts receivable $ 7,100 $16,207 $(32,166) Prepaid expenses and deposits (308) (169) (1,949) Inventory (5,551) (9,149) (10,241) Accounts payable and accrued liabilities 1,774 (257) (8,161) Changes in non-cash working capital $ 3,015 $ 6,632 $(36,195) FS-26

151 Included in change in inventory is $1,297 for 2016 (2015 $1,544, 2014 $384) related to depreciation for sand producing equipment. Changes in non-cash investing assets and liabilities for the years ended December 31, 2016, 2015 and are as follows: Prepaid expenses and deposits $ 259 $1,646 $1,059 Accounts payable and accrued liabilities (5,165) 1,570 $1,018 Changes in non-cash working capital $(4,906) $3,216 $2, INVENTORIES Inventory consists of three main classifications: As at, December 31, 2016 December 31, 2015 December 31, 2014 Unprocessed sand and work in progress $17,807 $10,910 $ 2,396 Sand available for shipment 8,423 11,998 10,084 Spare parts and supplies 1,480 1,507 1,047 Total inventories $27,710 $24,415 $13,527 Spare parts and supplies include spare parts and supplies for routine facilities maintenance. Included in the inventory balance is the depreciation expense related to sand producing properties of $4,108 as of December 31, 2016 (2015 $1,362, 2014 $430). The total amount of inventory expensed through cost of sales during the year was $98,143 (2015 $107,370, 2014 $80,830). An inventory write-down of $439 was recorded for the year ended December 31, 2016 (2015 $0, 2014 $0). 7. PROPERTY, PLANT AND EQUIPMENT Land & Building Equipment & vehicles Other Construction in Progress Cost Balance as at January 1, 2014 $ 31,503 $ 48,611 $ 1,352 $ 8,812 $ 90,278 Assets acquired 18,542 3,754 1,666 24,162 48,124 Reclassification from held for sale 1,600 1,600 Disposals (2,461) (3,305) (5,766) CIP Completed 17,460 7,460 (24,920) Exchange Differences 2,941 2, ,462 Balance as at December 31, ,585 59,491 3,182 8, ,698 Assets acquired 4,588 7, ,182 39,264 Reclassification from held for sale 15,231 15,231 Disposals (3,787) (354) (4,141) CIP Completed 12,163 7, (20,960) Exchange Differences 10,473 8, ,062 21,258 Balance as at December 31, 2015 $108,253 $ 83,284 $ 5,049 $ 15,724 $212,310 Assets acquired 9, ,340 12,216 Disposals (2,235) (1,641) (17) (9) (3,902) CIP Completed (1,126) Exchange Differences (2,282) (1,703) (90) (137) (4,212) Balance as at December 31, 2016 $113,870 $ 80,584 $ 5,166 $ 16,792 $216,412 Accumulated Depreciation Balance as at January 1, 2014 $ (2,902) $ (7,837) $ (566) $ (11,305) Depreciation (3,666) (3,663) (812) (8,141) Disposals 1,182 1,652 2,834 Exchange Differences (101) (244) (80) (425) Balance as at December 31, 2014 (5,487) (10,092) (1,458) $ (17,037) Moved from Held for Sale (1,069) (1,069) Depreciation (8,398) (5,201) (940) (14,539) Disposals 3, ,876 Exchange Differences (724) (1,043) (308) (2,075) Balance as at December 31, 2015 $ (11,891) $(16,247) $(2,706) $ (30,844) Total FS-27

152 Land & Building Equipment & vehicles Other Construction in Progress Moved from Held for Sale Depreciation (6,037) (6,095) (927) (13,059) Disposals Exchange Differences Balance as at December 31, 2016 $(17,598) $(21,764) $(3,560) $ (42,922) Carrying Amounts At December 31, ,098 49,399 1,724 8, ,661 At December 31, ,362 67,037 2,343 15, ,466 At December 31, ,272 58,820 1,606 16, ,490 The Partnership incurred stripping costs of $3,541 in 2016 (December 31, 2015 $3,230, December 31, 2014 $1,755). $445 of it remains unamortized in Property, plant and equipment as of December 31, 2016 (December 31, 2015 $160, December 31, 2014 $640). Previously these amounts would have been included in Prepaids. The amount of $3,110 has been included in Cost of sales depreciation for 2016 (December 31, 2015 $2,867, December 31, 2014 $896). Previously these expenses would have been included in Cost of sales. Unamortized stripping costs of $1,624 in 2016 (December 21, 2015 $1,540, December 31, 2014 $262) remain in inventory. Assets under construction represent the transloading facilities that are being built at year end. Assets under construction are not amortized until the asset is deemed to be ready for use. Once deemed ready for use, the assets under construction will be allocated to their corresponding capital asset group and commence depreciating. For the year ended December 31, 2016 the partnership recorded impairment of property plant and equipment of $1,414 (December 31, 2015 $0, December 31, 2015 $0. Current year impairment of assets was based on specific identifiable assets. Property, plant and equipment are tested annually for impairment in accordance with the accounting policy stated in Note 2. The Partnership recognized that there were indicators for impairment in the industry and performed impairment assessment using a value in use method. The partnership is considered to be one CGU for impairment purposes. Under valuation model, five years of cash flows were utilized using management s best estimates and a discount rate of 12%. No terminal value was factored into the calculation. Based on this assessment, the Partnership has determined that no impairment has occurred as of December 31, Total 8. DEFERRED INCOME TAXES The only taxable entity of the Partnership is Source Energy Services Canada Holdings Ltd. The provision of deferred income taxes for Source Energy Services Canada Holdings Ltd has been calculated and recorded as at December 31, 2016, December 31, 2015 and December 31, December 31, 2016 December 31, 2015 December 31, 2014 Earnings Before Income Taxes $ 332 ($1,175) $3,078 Statutory Income Tax Rate 27.00% 26.00% 25.00% Expected Income Taxes 90 (306) 770 Increase (Decrease) in taxes from: Finance Fees (799) Non-Deductible Expense Rate Changes (21) Unrealized F/X (368) Other 1 30 (36) Total Income Tax Expense (Recovery) ($ 516) $ 399 $ 380 Deferred income tax expense ($ 516) $ 399 $ 380 Current income tax expense Total Income Tax Expense ($ 516) $ 399 $ 380 (a) Significant components of the deferred income tax assets at December 31, 2016, December 31, 2015 and December 31, 2014 are as follows. FS-28

153 December 31, 2016 December 31, 2015 December 31, 2014 Difference between tax and reported ($ 75) ($ 98) ($264) amounts for depreciable assets Tax loss carryforwards recognized Finance Fees Other Deferred Income Taxes $ 597 $ 81 $ 479 (b) The Partnership has available the following non-capital loss carry forwards as of December 31, 2016 (December 31, 2015 $460, December 31, 2014 $2,667: Year of Expiry Amount 2032 $24 At December 31, 2016 the Company had tax pools of approximately $3,307 (December 31, 2015 $1,081, December 31, 2014 $1,128) 9. DEFERRED REVENUE The Partnership has entered into storage subscription agreements with select customers to provide them with guaranteed proppant storage at the Partnership s facilities. The agreements all expire by August Under the terms of the agreements customers pay a non-refundable subscription fee entitling them to a discount of $2 per metric tonne from the Partnership s normal sand distribution fees. The subscription fees have been deferred and are recognized as revenue as proppant is transloaded by the subscribers. In September 2011, the Partnership entered into a sale agreement with one of its major customers where the Partnership received $20,000US as a prepayment for future purchases of processed frac sand. The prepayment clause was such that the customer made three installments upon completion of certain phases of the Partnership s frac sand plant located in Wisconsin. These pre-payments accrued interest at 5%. In consideration of the prepayment amounts, the cash price per ton to the customer was reduced for each ton of sand sold in the US or Canada. The prepayment amount was also reduced by 50% of the customer s billings for storage and transloading services provided in North America. The agreement was secured by a first charge mortgage on land the Partnership uses to mine and process frac sand. The Partnership commenced sales under the contract in These amounts were recognized as deferred revenue on the Combined Balance Sheets. On December 8, 2016, the Partnership settled the above sales agreement for $16,500US. The total of this customer s advances and interest accrued at the time of settlement was $18,985US (December 31, 2015 $18,208US, December 31, 2014 $19,687US). The Partnership recorded a gain of $2,485US on the settlement of this contract. In 2015, one customer failed to meet their minimum sand purchase requirement outlined in their sale agreement. As a result, the Partnership deferred $922 of revenue relating to this penalty in 2015, and this amount was deemed collectible at that time. Subsequently, this amount was deemed uncollectible in 2016 due to bankruptcy of that customer and was written off. Due to the 2017 expiry dates of the remaining contracts, the Partnership has estimated the recognition of these deferred revenues with the assumption of equal usage of storage facilities, and minimum frac sand supply over the term of the agreements as follows As at December 31, 2016 December 31, 2015 December 31, 2014 Current $1,792 $ 5,245 $ 7,552 Long-term: , ,512 7, ,930 2, , , and later 10,550 22,852 17,053 Total $1,792 $28,097 $24,605 FS-29

154 10. LONG TERM DEBT As at December 31, 2016 December 31, 2015 December 31, 2014 Senior Secured First Lien Notes, due on December 15, 2021, bearing interest at 10.5% per annum $110,171 Asset backed loan facility (the ABL ) due December Interest is based on floating rates dependent upon the amount of the facility used. $ 12,291 Bank facility that was drawn in 2015 and Consists of three facilities with varying repayment terms. Interest is based on a floating rate is paid monthly on outstanding balances. 81,407 61,114 Finance Lease obligations related to equipment, bearing interest at rates ranging from 4.25% to 12% per annum, with final payments due between January 2017 and August 2018 $ 1,633 1,683 2,192 Other long term debt $ 256 Capital loans payable in monthly instalments of $43 including interest at 6.5% to 6.9%, final instalments due between June 2015 and December Collateral provided by equipment with a net book value of $0 as of December 31, 2016 $ $ 24 $ 491 $124,351 $83,114 $ 63,797 Less: current portion term portion (1,109) (8,164) (11,624) $123,242 $74,950 $ 52,173 On December 8, 2016, the Partnership issued a $130.0M Senior Secured First Lien Notes (the Notes ) which bear interest at 10.5% per annum, and mature December 15, The Notes are secured by a fixed and floating charge over all of the assets of the business except Accounts Receivable and Inventory, which the Notes have a second charge on. Each debt holder is entitled to a relevant right of 4% of the equity value of the Partnership upon various liquidation or change of control events. There are prepayment options, where the Partnership may redeem 35% of the aggregate principal amounts of the Notes with the net proceeds of an equity offering by Source at a redemption price of 110.5% of the principal amount. The Partnership may also redeem all or part of the Notes at any time prior to December 15, 2018 for 100% of the principal, accrued and unpaid interest, and the applicable premium as defined in the agreement. After December 15, 2018 the Notes may be redeemed in whole or in part at the applicable percentage ( %, %, %), plus accrued and unpaid interest. Both the relevant rights and prepayment option have been classified as a derivative liability and are measured at fair value through profit or loss, for a total of $14,817 for the rights and $125 for the prepayment option as at December 31, Changes in fair value of the derivative liabilities are recorded through the Combined Statements of Operations and Comprehensive Income (Loss). The partnership has recorded a fair value loss on the relevant rights of $862 and $48 on the prepayment option as of December 31, 2016 (2015 $0, 2014 $0). The $35,000 ABL facility is secured by floating first lien charge on the Accounts Receivable and Inventory of the Partnership under a general business security agreement and a second lien charge on all other assets of the business. The facilities bear interest based on the bank s prime lending rate, banker s acceptances or LIBOR rates, plus an applicable margin depending on the amount of excess availability. The ABL facility matures on December 8, The amount available under the general operating facility is subject to a borrowing base formula applied to accounts receivable and inventories, at December 31, 2016 $12,995 was drawn under this facility, and $26,032 was available. The borrowing base is updated by the bank monthly. Letters of credits were issued for the amount of $5,923US. To date no amounts have been drawn against these letters of credit. The ABL facility includes a springing fixed charge ratio of (a) 1.10:1 up to and including June 30, 2017, and then (b) 1.25:1 at all times thereafter to be measured when Source s excess availability is less than 20% of the lesser of the borrowing base and the operating facility. As of December 31, 2016, the excess availability was greater than 20%. At December 31, 2015, the Partnership had a syndicated bank facility composed of three facilities: a $35 million operating facility, a $45 million term facility, and a $15 million capital facility. The syndicated facility was secured by fixed and floating charges on all the assets of the Partnership under a general business security agreement. The facilities bore interest based on the bank s prime lending rate plus an applicable margin, ranging from Prime plus 0.75% to Prime plus 2.75% per annum. The amount available under the general operating facility was subject to a FS-30

155 borrowing base formula applied to accounts receivable and inventories. At December 31, 2015, $24,210 ($17,008 at December 31, 2014) was drawn under this facility. The borrowing base was updated by the bank monthly. This facility was extinguished on December 8, Source has deferred $727 in financing costs for the ABL facility and $5,915 for the Notes, with $23 and $117 of these costs amortized as at December 31, Financing costs of $1,234 relating to the old facility have been expensed for the year ended December 31, Interest on the above debt amounted to $6,833 for 2016 (2015 $4,005, 2014 $1,960) for the year. Effective interest rate for 2016 is 7.05% ( %, %). 11. DECOMMISSIONING PROVISION December 31, 2016 December 31, 2015 December 31, 2014 Balance, Beginning of year $ 1,639 $ 422 $316 Liabilities incurred 1,144 1, Liabilities settled (3,220) Accretion Changes in estimate 4,756 Changes in discount and inflation rates (26) (27) 14 Changes in F/X Rate (49) Balance, end of year $ 4,300 $1,639 $422 The Partnerships decommission provision relates to reclamation of land and facilities where the mine operates. Management estimates the costs to abandon and re-claim its properties based on current reclamation technology, acres disturbed and the estimated time period in which these costs will be incurred in the future. The total future estimate of undiscounted cash flows required to settle the provisions is $4,765 at December 31, 2016 (December 31, 2015 $1,814, December 31, 2014 $488), which has been discounted using risk-free rate of 1.50% at December 31, 2016 (December 31, %, December 31, %). These obligations are to be settled based on the economic lives of the underlying assets, which is currently estimated to be between 8 and 20 years. 12. PREFERRED SHARES OBLIGATION As at December 31, 2016 December 31, 2015 December 31, 2014 (Restated) Preferred shares obligation $66,032 $60,807 $60,807 Payments (3,159) Accrued preferred distribution 4,481 8,384 4,380 $70,513 $66,032 $65,187 The Partnership issued class B preferred shares as a result of the reorganization on October 16, Class B units are non-voting, and are entitled to a preferred distribution as follows: 5.92% per annum up to June 30, 2016; 6.82% per annum from July 1, 2016 to June 30, 2017; 7.7% per annum from July 1, 2017 to June 30, 2018; 8.59% per annum from July 1, 2018 and thereafter. Based on the nature of the Class B preferred shares, the Partnership has an obligation to pay the preferred distribution. The preferred shares are callable by the Partnership, but not by the holder. The Class B preferred shares have the same features of debt, bear a fixed return and obligation. They have been classified as a liability and the corresponding preferred distribution has been treated like interest. There are no specific terms of repayment. FS-31

156 13. PARTNER S EQUITY a) Partners Capital in 000 s The Partnership has six classes of units. The table below shows the combined units of Canada and US LP, as the Partnership agreements mirror each other. Voting units: Class A units are redeemable at option of the Partnership, participating and voting units which earn a return of up to 225% on their originally issued value; Class D units: 12,946 US units are non-participating and voting units. Non-voting units: Class C units are non-participating, non-voting units. The units are redeemable after the Class A units earn a 225% return on their original issued value; Class E units are non-participating, non-voting units and are redeemable after the Class A units earn a 225% return on their original issued value. Preferred Units: Class B units are non-voting, classified as liability. December 31, 2016 December 31, 2015 December 31, 2014 # of Units $ # of Units $ # of Units $ Class A 70,968 41,535 70,968 41,535 70,968 41,535 Class D US 12,946 12,946 12,946 Total voting units 83,914 41,535 83,914 41,535 83,914 41,535 Class C 12, , , Class E Total non voting units 12, , , Total voting and non-voting units 96,880 41,665 96,880 41,665 96,880 41,665 Class B preferred units 60,807 60,807 60,807 Total units 157,687 41, ,687 41, ,687 41,665 Cumulative Stock Based Compensation ,087 41, ,087 41, ,087 41,850 b) Warrants in $ and units December 31, 2016 December 31, 2015 & 2014 As at (in 000 s) # of Units $ # of Units $ Warrants During 2016 the Partnership in conjunction with the issuance of a $2,000 promissory note and the receipt of $2,000, issued warrants exercisable into 20 units for an aggregate price of $20. Given the nature of the warrants related to the $2,000 promissory note they have been recorded at a fair value of $500, as part of finance expense and with a corresponding charge to equity. Each warrant allows the holder to acquire Class D units of the Canadian Partnership and Class F units of the U.S. Partnership. The Warrants are exercisable into an aggregate of 20 Class D units of the Canadian Partnership and 20 Class F units of the US Partnership. As of December 31, 2016 none of the warrants had been exercised. The shares issued under these warrants are non-participating voting warrants which earn a return of up to 225% of their originally issued value. FS-32

157 c) Restricted Share Units in $ and units The Partnership issued 400 restricted share units to its employees as of September 30, 2014, these units have an exercise price of $0.001, vest over a three-year period, and expire five years from the date of grant. Stock based compensation of $24 was expensed as for the year ended December 31, 2016 (December 31, 2015 $67, December 31, 2014 $185) and was included in the operating and general & administration expense on the Partnership s Combined Statement of Operations and Comprehensive Income. There have been no new restricted share units issued during OPERATING AND GENERAL & ADMINISTRATIVE COSTS The Partnership presents its expenses on the Combined Statements of Operations and Comprehensive Income (Loss) using the function of expense method whereby expenses are classified according to function within the Partnership. This method was selected as it is more closely aligned with the Partnership s business structure. The Partnership s functions under IFRS are as follows: Cost of sales; and Operating, general and administrative Cost of sales includes direct operating costs (including product costs, direct labour and overhead costs) and depreciation on assets relating to operations. Additional information on the nature of expenses is as follows: Year ended December 31, 2016 Cost of Sales Operating and General & Administrative Costs Total Direct Materials $ 74,138 $ $ 74,138 People costs 12,451 8,446 20,897 Equipment costs 6,720 5,229 11,949 Transportation costs 24,695 24,695 Facility costs 5,253 3,064 8,317 Selling costs 3,521 3,521 Administration costs 3,606 3,606 Total $123,257 23, ,123 Year ended December 31, 2015 Cost of Sales Operating and General & Administrative Costs Total Direct Material $ 78,157 $ $ 78,157 People costs 13,094 9,389 22,483 Equipment costs 10,912 3,278 14,190 Transportation costs 9,633 9,633 Facility costs 4,568 2,703 7,271 Selling costs (20) (20) Administration costs 2,833 2,833 Total $116,364 $18,183 $134,547 Year ended December 31, 2014 Cost of Sales Operating and General & Administrative Costs Total Direct Material 61,496 61,496 People costs 11,232 10,869 22,101 Equipment costs 5,054 3,186 8,240 Transportation costs 13,833 13,833 Facility costs 3,889 2,531 6,420 Selling costs (1,011) (1,011) Administration costs 3,338 3,338 Total 95,504 18, ,417 FS-33

158 15. COMMITMENTS AND CONTINGENCIES The Partnership has various lease commitments regarding equipment, railcars, physical natural gas contract and office space. The leases expire between January 2017 and December Estimated annual lease commitment is as follows: , , , , ,994 Subsequent Years 9,124 $42,333 In the ordinary course of conducting business, the Partnership occasionally becomes involved in legal proceedings relating to contracts, environmental issues, or other matters. While any proceeding or litigation has an element of uncertainty, management of the Partnership believes that the outcome of any pending or threatened actions will not have a material adverse effect on the business or financial condition of the Partnership. In 2016, the Partnership was named as a defendant in a lawsuit regarding underpayment of a contract. The lawsuit alleges that the Plaintiff fulfilled all terms of the agreement with the Partnership and that there are amounts owing to the Plaintiff under the contract. The maximum aggregate settlement under the claim is estimated to be approximately $617 US as at December 31, A provision of $617 US has been recorded in these combined financial statements. 16. RELATED PARTY TRANSACTIONS As at December 31, 2016 December 31, 2015 December 31, 2014 Amounts due from Shareholder receivable $ $ 98 $ 82 Due from GP $ 32 $ 145 $ 109 Amounts due to related Due to Sand Royalty LP $ 4,599 $ 4,363 3,356 $ 4,599 $ 4,363 $ 3,356 Shareholder loan $36,770 $26,841 $13,486 Shareholder loan payable consist of four promissory notes. A $12,500 promissory note from common unitholders issued on March 27, This promissory note bears interest at 25% per annum which is paid with in kind interest. According to the agreement, the Partnership is obligated to pay the 25% interest for a minimum of 3 months after December 31, Therefore, for the year ended December 31, 2015, a fair value adjustment of $3,906 was recorded to record the interest obligation until March 31, The second promissory note from the common unitholders was advanced on December 21, 2015 in the amount of $7,500. This promissory note bears interest at 18% per annum which is also paid in a combination of cash and in kind interest, the interest increases to 25% per annum after eighteen months. The promissory note and any accrued interest is convertible to equity eighteen months after the date of issue at the option of the shareholder. The conversion and the prepayment represent derivatives, however, the Partnership has elected to designate the shareholder loan as fair value through the Combined Statements of Operations and Comprehensive Income (Loss). The maturity date of these promissory notes is on December 31, The third promissory note has a face value of $2,000 and was recorded at a fair value of $2,000. It does not bear interest and is due September 7, During 2016, certain unitholders provided guarantees to the syndicated bank group totaling $5,500. In exchange for these guarantees, these unitholders were provided with 5,500 warrants at an aggregate price of $55 dollars or a 0%, 10-year promissory note depending on whether the guarantees were drawn or not. The promissory note would be issued for an amount equal to the amount that the guarantee was less than $5,500 prior to February 28, 2017, for reasons other than the call of the guarantee by the syndicated banking group. The agreements governing such guarantees stipulated that if the syndicated bank facility was repaid, promissory notes for the full amount of the guarantee would be issued and the related warrants would be cancelled. The promissory notes come due if there was a change of control. The syndicated bank facility was repaid and the related warrants were cancelled. The $5,500 promissory note was issued. The amount due to Sand Royalty LP bears interest at 8% per annum with no maturity date. The partnership has accrued all interest due as of December 1, No payments have been made. FS-34

159 Interest expense includes $2,428 (2015 $2,753, 2014 $1,736) relating to long term debt held by common unitholders of the Partnership. Of the 2016 interest expense, $2,428 (2015 $2,367, 2014 $986) is unpaid and is subject to the Partnership s standard payment policies. Key management personnel are comprised of the Company s directors and executive officers. Key management personnel compensation comprised: Short term employment benefits $1,099 $1,081 $ 991 Management Fees owing to common unitholders that are not executive officers 1,043 1,683 1,456 Total $2,142 $2,764 $2, FINANCE EXPENSE (1) Finance expense $ 3,094 $ 252 $ 128 Interest expense 16,202 12,079 8,838 Reorganization expense 26 Accretion Total $19,491 $12,346 $8,998 (1) Certain prior year amounts have been reclassified to conform to current year presentation. 18. OPERATING SEGMENTS The Partnership considers operations to be one operating segment. The performance of this segment is measured based on revenue and gross margin as included in internal management reports. These reports are reviewed monthly by the executive team. The Partnership has operations in both the United States and Canada; the two geographic segments are summarized in the table below. For major customer information, refer to Note 4(c). The Corporate Segment does not represent an operating segment and is included for informational purposes only. Corporate segment administrative expenses consist of salary and office expenses and other general costs related to corporate employees. Year ended December 31, 2016 Canadian Operations United States Operations Corporate Total Sales 136,909 2, ,199 Gross Margin 12,773 (4,870) 7,903 Total Assets 71, ,329 1, ,406 Year ended December 31, 2015 Canadian Operations United States Operations Corporate Total Sales 144,447 8, ,135 Gross Margin 32,382 (2,744) 29,638 Total Assets 83, , ,112 Year ended December 31, 2014 Canadian Operations United States Operations Corporate Total Sales 113,096 33, ,506 Gross Margin 35,755 10,636 46,391 Total Assets 84, , , SUBSEQUENT EVENTS On February 9, 2017, the Partnership entered into a purchase and sale agreement with Sand Products Wisconsin, LLC. The transaction involves the purchase of the mineral rights to sand reserves at multiple sites, a sand mine and associated rail facilities, property, plant and equipment, and prepaid royalties. The purchase price is $45,000 US. Closing of the transaction is subject to Source Energy Services Ltd. completing an initial public offering for stock to be traded on the Toronto Stock Exchange, and various other conditions. The transaction is expected to close within 5 business days of the initial public offering. FS-35

160 MANAGEMENT S DISCUSSION AND ANALYSIS The following Management s Discussion and Analysis should be read in conjunction with Source s audited combined annual financial statements and related notes as at and for the years ended December 31, 2016, December 31, 2015, and December 31, 2014, each of which are provided in Appendix FS Financial Statements and Management s Discussion and Analysis. This Management s Discussion and Analysis contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the Risk Factors section of the prospectus. Actual results may differ materially from those expressed or implied by such forward-looking statements. See Forward-Looking Statements. Capitalized terms used in this Management s Discussion and Analysis which are not defined herein have the meanings given to those terms in the prospectus. Overview Source is a fully integrated producer, supplier and distributor of high-quality Northern White frac sand, which is a preferred proppant used to enhance hydrocarbon recovery in the hydraulic fracturing of oil and natural gas wells. Source sells frac sand, primarily to customers operating in the WCSB through its strategically located terminal network, which Source believes is the largest of its kind in the WCSB. Source s fully integrated logistics platform enables it to transport high volumes of frac sand from its facilities in Wisconsin to its customers in the WCSB such that during 2016 Source sold substantially all of its product in-basin and over 50% of its product directly at its customers wellsites. Source believes that its terminal network, along with its focus on logistics and ability to efficiently deliver sand directly to the wellsite, attractively position Source as a leading player in the WCSB with the ability to reliably deliver high volumes of frac sand to its customers in a cost effective manner. Non-IFRS Measures Source utilizes EBITDA and Adjusted EBITDA, and Adjusted Gross Margin in its financial analysis of its performance. These measures are not financial measures determined in accordance with IFRS. See Non-IFRS Financial Measures and Selected Historical Information in the prospectus for a reconciliation of EBITDA, Adjusted EBITDA and Adjusted Gross Margin to the most comparable financial measures for the years ended December 31, 2016, December 31, 2015, and December 31, See Summary of Quarterly Results herein for a reconciliation of EBITDA and Adjusted EBITDA for the noted quarterly periods. History of Business Source began operations in 1998, as a proppant transloading business. From 1998 to 2007, Source further developed its geographic footprint by adding terminals in key oil and gas basins in Canada and the United States. In 2007, Source commenced developing mine and sand processing facilities at Chippewa Falls, Wisconsin, which it subsequently sold to EOG Resources, Inc. before completion. In 2010, Source began developing the Sumner Facility and Weyerhaeuser Facility. In October 2013, TriWest IV invested in the Source business and collectively became its majority unitholder. TriWest IV s investment facilitated the completion of the Sumner Facility, the Weyerhaeuser Facility and the Wembley Terminal. See Corporate Structure and Three-Year History in the prospectus. FS-36

161 Review of Operations for 2016, 2015 and 2014 ($000 s CDN, except MT and per unit amounts) For the Year Ended or As at December Sand Volumes (MT) 832, , ,213 Sand Revenue 112, , ,755 Wellsite Solutions 21,261 6,208 11,782 Terminal Services 4,976 7,353 15,969 Sales 139, , ,506 Cost of Sales 123, ,364 95,504 Cost of Sales Depreciation 8,039 7,133 4,611 Cost of Sales 131, , ,115 Gross Margin 7,903 29,638 46,391 Operating and General and Administrative Expenses 23,866 18,183 18,913 Depreciation 6,373 5,674 3,146 Income (loss) from operations (22,336) 5,781 24,332 Other expense(income): Loss/(gain) on asset disposal 1, (3,110) Loss/(gain) on impairment 1,852 Finance expense 19,491 12,346 8,998 Loss/(gain) on derivative liability 910 Fair Value adjustment on shareholder loan 3,906 Other income (4,859) (1,796) (420) Management Fees 1,043 1,683 1,456 Foreign exchange loss/(gain) 2,059 (1,255) (64) Total other expense (income) 21,578 14,978 6,860 Income (loss) before income taxes (43,914) (9,197) 17,472 Income taxes (512) Net Income(loss) (43,402) (9,766) 17,035 Adjusted EBITDA (7,526) 22,385 32,802 Sand Revenue Sales/MT Total Assets 219, , ,788 Total non-current financial liabilities 239, , ,677 See Selected Historical Financial Information for a reconciliation of EBITDA and Adjusted EBITDA to Net Income (loss) and of Adjusted Gross Margin to Gross Margin. Sales The majority of Source s sales are derived from mining, processing and providing a full frac sand delivery solution to customers in basin or at the wellsite. Frac sand sales occur at Source s terminals or at the customer s wellsite. These sales primarily occur under a combination of contracts with terms between one and three years. Sales also occur on a spot basis. The contracts commit customers to a percentage of their Northern White frac sand requirements, that range from 25% to 100% of their sand needs. The pricing under the contracts ranges from current market pricing to fixed prices with adjustment mechanisms based on various factors. Transloading, wellsite storage and logistics coordination service sales are earned on a fee-for-service basis. Sustained freezing temperatures during the winter months in Wisconsin, where Source s processing facilities are located, create a general industry practice to halt excavation activities and sand washing operations during these months. Source s sand washing facility at the Sumner Facility is fully enclosed and heated making it capable of operating year round, including through the winter months. Winter operations at the Sumner Facility are an important facet of Source s business, as the WCSB is seasonally busiest in the winter months. Regardless of its ability to wash sand in the winter, Source excavates and washes sand in excess of current delivery requirements during the warmer months when Source s processing facilities are more efficient. The excess sand is placed in stockpiles that feed the drying operations throughout the year. Sales in 2016 were $139.2 million, which was a decrease of $13.9 million from sales of $153.1 million in The continued soft oil and gas commodity price environment in 2016 was particularly impactful for the first three quarters FS-37

162 of 2016, and led most exploration and development companies to significantly reduce their drilling and completion programs for This low activity environment, combined with a very wet and prolonged spring breakup, led to a very price competitive environment for frac sand throughout the WCSB and most of North America. In this low activity environment all the frac sand competitors were able to service the jobs and they were all actively bidding to do so which lead to significant price compression particularly in the second and third quarters of Source s sand sales decreased by $26.6 million in 2016, reflecting a 19% price decrease compared to 2015, causing a price variance in sand sales of $28.5 million. Partially offsetting the price decrease was a 1% increase in sales volumes that increased sand sales by $1.9 million. In the fourth quarter of 2016, when oil and gas commodity prices stabilized and rose, the larger, better financed exploration and development companies returned to work, and Source saw a 79% sequential increase in sales volumes compared to the third quarter of 2016 and a 64% increase in sales volumes compared to the fourth quarter of As North American sand sales volumes have ramped up in the fourth quarter of 2016 and into the first quarter of 2017, sand pricing has also begun to rise. Compared to 2015, Source saw an increase in its sales to customers at the wellsite in 2016 as it worked closely with its customers to find ways to help them reduce their completion costs. As part of this transition to wellsite sales, Source saw 37% of its customer sand sales convert from US dollar denominated sales to Canadian dollar denominated sales. In 2015, sand prices were mainly U.S. dollar denominated. In 2016, 41% of Source s sand sales were U.S. dollar denominated and benefitted from a 4% decrease in the strength of the Canadian dollar. In 2015, 85% of our sales were U.S. dollar denominated and were impacted by a 16% decrease in the strength of the Canadian dollar. With the push for additional sand sales at the wellsite in 2016, Source saw a $15.1 million, or a 242%, increase in wellsite solutions sales as compared to In 2016, as the exploration and production companies worked to manage their well completion costs, they used Source to help manage their last mile logistics costs from the terminal to the wellsite and to provide them with wellsite sand storage solutions. By placing Source s personnel and its Sahara unit on customers wellsites, it was able to better manage overall trucking costs and sand supply reliability for its customers, which in turn helped them succeed with their completion programs. Terminal services sales declined by $2.4 million or 32%, in 2016 from 2015 levels, as the overall slowdown in completion activity in the WCSB reduced the Source s trans loading activities for non-sand proppants (mainly resins) and chemicals. Terminal services sales generally follow completion trends in the WCSB. In 2015, sales increased by $6.6 million to $153.1 million as compared to $146.5 million in 2014, as sand sales increased by $20.8 million in 2015 which offset an $8.6 million decline in terminal services sales and a $5.6 million decline in wellsite solutions sales in 2015 as compared to The increase in sand revenue compared with 2014 was the result of both a 13% increase in volumes and a 4% increase in average realized sand prices in Volumes increased in 2015, despite the downturn in the oil and natural gas industry as natural gas and crude oil prices fell dramatically during 2015, as a result of limited 2014 sand sales due to the delay in completion of Source s sand processing facilities, growing Source s rail car fleet and building the Wembley Terminal in Sand prices which were mainly U.S. dollar denominated in 2015 were improved in Canadian dollar terms by the weakening of the Canadian dollar by 16% during With the significant slowdown in the energy industry during 2015, Source extended certain price concessions to customers in order to maintain its market share. Terminal services and wellsite solutions sales fell in 2015 as Source changed its focus to selling its own sand and these parts of the business were more noticeably impacted by the down turn in the oil and gas industry. Expenses The principal expenses involved in the production of frac sand are excavation, labour, utilities, transportation and maintenance costs. Source contracts a third party to remove the Sumner Facility s overburden, to excavate the unprocessed frac sand and to deliver that material to its washing facility at the Sumner Facility. Source pays a fixed price per metric tonne of material excavated and delivered to the washing facility. Until this material is washed and dried it will not necessarily meet API specifications and not be a saleable product. Therefore, Source incurs excavation costs for materials which are handled but from which it does not ultimately generate sales (rejected materials). Source also incurs costs related to sand that is washed and stockpiled awaiting completion of the drying process. The ratio of rejected materials to the total amounts excavated has been and is expected to continue to be in line with Source s expectations, based on the core sampling Source has undertaken at the Sumner Facility. Labour costs associated with employees at Source s processing facilities represent the most significant cost of converting frac sand to finished product. Source incurs utility costs in connection with the operation of its processing FS-38

163 facilities, primarily natural gas and electricity. Source has entered into a physical fixed price natural gas contract for a portion of its natural gas needs. The balance of Source s utility purchases is based on local market prices. Source has contracted a third party to transport the washed sand from the Sumner Facility to the Weyerhaeuser Facility, and to transport waste material back to the Sumner Facility. Source s processing facilities require periodic scheduled maintenance to ensure their efficient operation. Direct and indirect labour costs, utilities, transportation and maintenance costs associated with sand processing are capitalized as a component of inventory and are included in cost of sales when that inventory is ultimately sold. To distribute sand from its processing facilities to its terminals or the customer s wellsite, Source purchases freight from CN and then, if applicable, incurs third party trucking costs to move the sand to the customer s wellsite. Source is charged fuel surcharges by the various transportation companies, leasing costs related to its railcars, labour and other terminal operating costs. Rail related costs are capitalized as a component of inventory and are then included in the cost of sales when that inventory is sold. Costs related to directly moving sand or other transloaded products at Source s terminals are directly charged to cost of goods sold, while overhead costs of operating the terminals are recorded as operating costs of the business. Occasionally, Source will purchase sand from third party producers. This may occur when there are third party transportation disruptions, when Source has other production constraints or when it identifies the opportunity to make purchases of sand in the market place from third parties. When Source purchases sand these costs are included in inventory until the sand is sold and then such costs are recognized in cost of goods sold. Source incurs general and administrative expenses related to its corporate operations, including operating its corporate offices and maintaining its limited partnership statuses and operations. Significant costs include salaries for the corporate staff, facility costs for the corporate offices, professional and advisory fees and information systems related costs for Source. Cost of Sales ($000 s CDN, except MT and per unit amounts) Direct Materials 74,138 78,157 61,496 People Costs 12,451 13,094 11,232 Equipment Costs 6,720 10,912 5,054 Transportation Costs 24,695 9,633 13,833 Facility Costs 5,253 4,568 3,889 Cost of Sales 123, ,364 95,504 Cost of sales, which is composed of sand processing costs, rail freight, rail car lease, terminal operation costs, third party trucking costs, and wellsite operations costs, increased by $6.9 million to $123.3 million in 2016 as compared to The increase is primarily due to the increased use of third party trucking firms to support the last mile solution for Source s customers. Offsetting this increase was a reduction in Source s cost to produce and land sand at its terminals despite a 1% increase in the volumes sold in Significant components of cost of sales are mainly U.S. dollar denominated costs including sand processing, rail freight, and rail car leases and therefore subject to fluctuations of the Canadian dollar compared to the U.S. dollar. In 2016, the average U.S./Canadian dollar exchange rate weakened by 4% as compared to 2015, which led to increases in the Canadian dollar equivalent cost of sales. Cost of sales depreciation is comprised of costs incurred in Source s mining operations. These costs consist of depreciation on sand processing equipment and stripping costs to remove overburden. Costs associated with sand processing equipment, and overburden stripping costs are capitalized as the cost is incurred and depreciated on a unit of production basis. Cost of sales depreciation increased by $0.9 million year over year, primarily due to taking a full year of depreciation on 2015 capital additions as compared to a partial year in 2015 as construction of part of the sand processing facilities were not completed until part way through the year. Cost of sales increased by $20.9 million to $116.4 million in 2015 as compared to The increase is partially due to the 13% increase in sales volumes, as described above. In 2015, the average U.S./Canadian dollar exchange rate weakened by 16% as compared to 2014, which led to increases in the Canadian dollar equivalent cost of sales. Depreciation on the sand processing equipment, increased by $2.5 million year over year, as there was a full year of depreciation in this equipment in 2015 as compared to a partial year in 2014 as construction of part of the sand processing facilities were not completed until part way through the year. FS-39

164 Gross Margin ($000 s CDN, except MT and per unit amounts) Gross Margin 7,903 29,638 46,391 Cost of Sales depreciation 8,039 7,133 4,611 Adjusted Gross Margin 15,942 36,771 51,002 Gross Margin % 5.7% 19.4% 31.7% Gross Margin/MT Adjusted Gross Margin % 11.5% 24.0% 34.8% Adjusted Gross Margin/MT Adjusted Gross Margin was $15.9 million or 11.5% in 2016 vs $36.8 million or 24% in The Adjusted Gross Margin declined year over year due to the compression of sand prices that occurred. The Adjusted Gross Margin was also impacted by the increase in lower margin wellsite solutions services year over year. Gross margin of $7.9 million or 5.7% in 2016 declined by $21.7 million year over year due to the same reasons the adjusted gross margin declined. Gross margins were also impacted by an increase in cost of sales depreciation due to a full year of depreciation on production capital expenditures made in Gross margin of $29.6 million or 19.4% in 2015 declined by $16.8 million year over year, as the increase in cost of sales was not offset by the increase in sales. Operating and General and Administrative Expenses ($000 s CDN, except MT and per unit amounts) Operating and General and Administrative Expenses People 8,446 9,389 10,869 Equipment 5,229 3,278 3,186 Facility 3,064 2,703 2,531 Selling and Administrative 7,127 2,813 2,327 23,866 18,183 18,913 Operating and general and administrative expenses for the year ended December 31, 2016 were $23.9 million in 2016, an increase of $5.7 million from the prior year. Costs associated with Source s people declined year over year due to: not replacing non-operational staff that left Source during the year; not having any bonus program in 2016 and some salary roll backs that were undertaken in response to the downturn in the oil and natural gas industry. Equipment costs of $5.2 million in 2016 were $2.0 million higher than 2015, as Source stored older less desirable rail cars for a total of 119,260 car storage days in The majority of these leases expired by the end of 2016 and have been removed from the rail fleet. These rail cars are being replaced with newer, more functional cars at lower lease rates. Facility costs were $0.4 million higher than 2015 levels due to increased property taxes and other general increases. Selling and administrative costs were $4.3 million higher than the prior year due to a $2.9 million bad debt expense when a pressure pumper customer went bankrupt in 2016 compared to a $0.2 million recovery of a bad debt in the prior year. Professional fees were also $1.0 million higher in 2016 due to the settlement of the CMSA (see note 9 of the audited financial statements of Source for the year ended December 31, 2016 and Legal Proceedings and Regulatory Actions in the prospectus) and the settlement of several smaller lawsuits during the year. Operating and general and administrative expenses for the year ended December 31, 2015 were $18.2 million, a decline of $0.7 million from the prior year. Costs associated with Source s employees declined year over year due to staffing reductions that were undertaken in response to the downturn in the oil and natural gas industry and lower bonus payouts as only safety targets were achieved. Facility and equipment costs were higher due to a full year of operation of the Wembley Terminal and the opening of the Eckville, Alberta terminal to better service Source s central Alberta customers. Selling and administrative costs were $0.5 million higher than the prior year due to higher professional fees, related to establishing sand sales contracts with customers and ancillary costs related to upgrading Source s enterprise resource system. Depreciation Depreciation primarily consists of depreciation on property plant and equipment and depreciation of capitalized stripping costs. Depreciation of the processing equipment used in the processing of frac sand to a final saleable product FS-40

165 and depreciation of capitalized stripping costs are included in cost of goods sold. Depreciation of other equipment used in the business is recorded in a separate line item in the statements of operations and comprehensive income. Depreciation in 2016 increased by $0.7 million year over year due to a full year of depreciation being taken on 2015 capital additions as compared to a partial year in Depreciation in 2015 increased year over year by $2.5 million due to having a full year of depreciation on the Wembley Terminal assets as well as the depreciation associated with a terminal located in Eckville, Alberta that was completed in Finance Expense Finance expense is primarily composed of interest expense on the Notes, the Credit Facilities, the Previous Credit Facility, the preferred shares obligation, the Sand Royalty Loan, the Shareholder Loans and interest on the Prepayment Note. These items are all further described in the prospectus and notes to the audited financial statements of Source for the year ended December 31, See Appendix FS Financial Statements and Management s Discussion and Analysis. Finance expenses increased by $7.2 million to $19.5 million in 2016 as compared to Source s financial performance during the first three quarters of 2016 led to an increase in the interest rate on its Previous Credit Facility as well as some additional advisory fees. The Previous Credit Facility was ultimately repaid from the proceeds of the Note Offering. At the same time the Credit Facilities were put in place and the prior deferred financing costs of $1.2 million were expensed. Financing costs also increased by $1.4 million in 2016 due to having a full year of interest on the SES II Shareholder Loan. The distribution rate on the preferred share obligation owed to the Class B Founder also increased on July 1, 2016 to 6.82%, resulting in an increase to finance expense of $0.3 million in Finance expense increased by $3.3 million to $12.3 million in 2015 as compared to Increases in the Previous Credit Facility and the Shareholder Loans were put in place to finance further growth in Source s terminal network as it started work on a unit train facility in Edson, Alberta. Construction activities on this facility were subsequently suspended as a result of the continued downturn in the energy industry. Additional financing was also put in place to support the growth in working capital that arose from the additional sales volumes. The interest on the SES Shareholder Loan was converted to more permanent capital in 2015 and its interest rate was increased by 7% to 25% per annum. Other Expense and Income In 2016, the loss on asset disposals was $1.1 million as compared to $0.1 million for 2015 as surplus miscellaneous equipment was sold throughout the year. In 2014, there was a gain on asset sales as Source disposed of a number of surplus assets as part of the transition to selling its own sand, resulting in a higher amount of other income. A loss on impairment of $1.9 million was recognized in 2016 as Source closed and moved out of its Eckville terminal due to a lack of oil and gas activity in the area. There was no loss on impairments in 2015 or In December 2016, the Note Offering was completed. Embedded in these Notes were two derivative instruments. The first instrument includes relevant rights which entitles debt holders to 4% of the equity value of Source on a combined basis upon an initial public offering or various liquidation or change of control events. There are also prepayment options entitling Source to redeem the Notes in part or in whole prior to their maturity. Such rights and the prepayment options have been classified as derivative liabilities and are measured at fair value through profit and loss. As of December 31, 2016, Source recorded a combined fair value loss on both derivatives of $0.9 million. There were no such losses recorded in 2015 or In 2015, when the SES Shareholder Loan was converted to more permanent capital, Source became obligated to pay 25% per annum interest for a minimum of 15 months, which expires in March Therefore, a fair value adjustment of $3.9 million was recorded as of December 31, No fair value adjustments related to the SES Shareholder Loan were recognized in 2016 or Other income of $4.9 million was recorded in 2016, compared to other income of $1.8 million in 2015 and $0.4 million in In December 2016, Source settled a deferred revenue contract with the CMSA Customer and recognized a gain on the settlement of $3.3 million. FS-41

166 Source realized a foreign exchange loss of $2.1 million in 2016, which was a $3.3 million change from the $1.3 million gain recognized in The 2016 loss was generated from a weakening Canadian dollar and lower average U.S. dollar denominated net working capital balances in 2016 than 2015, as some of Source s customers changed from buying sand in U.S. dollars to Canadian dollars. The weakening of the Canadian dollar against the U.S. dollar in 2015 resulted in a realized foreign exchange gain on stronger U.S. dollar denominated working capital balances. Adjusted EBITDA for 2016 declined by $29.1 million to a loss of $7.5 million, as the decline in oil and gas commodity prices put downward pressure on sand prices, which lowered revenues despite an increase in sand sales volumes. Operating and general and administrative costs were higher year over year due to storing older less desirable rail cars until their leases expired late in Summary of Quarterly Results The following quarterly results have been calculated by aggregating management s internal monthly financial data and other than the results for the third quarter of 2016 and 2015 have not been reviewed or audited by Source s auditors. Although Source believes such aggregations are accurate undue reliance should not be placed thereon $000 s, except MT and per unit amounts Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sand Sales MT 260, , , , , , , ,624 37, , , ,265 Sand Revenue 40,947 17,066 19,109 35,840 44,770 26,222 45,299 23,283 5,613 27,377 37,875 47,890 Wellsite Solutions 858 6,982 4,499 8,922 1,276 1,112 2,038 1,782 3,654 1,839 3,872 2,417 Terminal Services 1,530 1,049 1,112 1,285 2,562 1,052 2,088 1,651 6,301 2,680 3,672 3,316 Sales 43,335 25,097 24,720 46,047 48,608 28,386 49,425 26,716 15,568 31,896 45,419 53,623 Cost of Sales 34,249 25,755 24,048 39,205 32,116 22,494 37,027 24,728 10,229 23,424 30,311 31,540 Cost of Sales Depreciation 2,360 1,989 2,078 1,612 1,620 1,782 1,551 2,181 1,200 1,146 1,097 1,167 Cost of Sales 36,609 27,744 26,126 40,817 33,735 24,275 38,578 26,909 11,429 24,570 31,408 32,707 Gross Margin 6,726 (2,647) (1,406) 5,230 14,873 4,111 10,847 (193) 4,139 7,326 14,011 20,916 Operating and General and Admin Expenses 4,766 7,906 4,444 6,750 4,183 4,055 4,040 5,905 4,249 4,616 3,908 6,140 Depreciation 1,299 1,523 1,200 2,351 1,397 1,305 1,816 1, Income (loss) from operations 661 (12,076) (7,050) (3,871) 9,293 (1,249) 4,991 (7,254) (834) 1,932 9,276 13,958 Other expense (income): Loss (gain) on asset disposal 1,460 1,410 (1,788) (1) (7) (8,915) (917) (509) 7,231 Loss (gain) on impairment 1,852 Finance expense 3,500 4,902 3,984 7,105 2,513 2,272 3,676 3, ,312 4,495 2,448 Loss (gain) on derivative liability 910 Fair Value adjustment on shareholder loan 3,906 Other income (1,028) (55) (310) (3,466) (146) (217) (53) (1,380) (127) (105) (122) (66) Management Fees Foreign exchange loss/(gain) ,063 (1,460) 11 (106) (1) (39) (71) Total other expense (income) 2,959 7,512 5,278 5,829 1,330 2,685 7,586 3,377 (7,888) 653 4,189 9,906 Income (loss) before income taxes (2,298)(19,588) (12,328) (9,700) 7,963 (3,934) (2,595) (10,631) 7,054 1,279 5,087 4,052 Income taxes 4 81 (597) (6) 23 (1) Net Income (loss) (2,298)(19,592) (12,409) (9,103) 7,969 (3,957) (2,594) (11,184) 7,021 1,257 5,084 3,673 Net Income (loss) (2,298)(19,592) (12,409) (9,103) 7,969 (3,957) (2,594) (11,184) 7,021 1,257 5,084 3,673 Interest 3,193 4,325 3,840 4,844 2,487 2,256 3,676 3, ,316 4,295 2,507 Income taxes 4 81 (597) (6) 23 (1) Depreciation 1,299 1,523 1,200 2,351 1,397 1,305 1,816 1, Cost of Sales Depreciation 2,360 1,989 2,078 1,612 1,620 1,782 1,551 2,181 1,200 1,146 1,097 1,167 EBITDA 4,554 (11,751) (5,210) (893) 13,467 1,409 4,448 (3,634) 9,698 4,519 11,306 8,544 Add: Loss (gain) on asset disposal 1,460 1,410 (1,788) (1) (7) (8,915) (917) (509) 7,231 Loss (gain) on impairment 1,852 Finance expense , (4) 200 (59) Loss (gain) on derivative liability 910 Fair Value adjustment on shareholder loan 3,906 Management Fees Transaction and professional fees Gain on settlement of deferred revenue (3,328) Adjusted EBITDA 5,303 (9,078) (2,918) (833) 13,916 2,044 8,517 (2,091) 1,170 3,962 11,361 16,309 Sand Revenue Sales/MT Gross Margin 6,726 (2,647) (1,406) 5,230 14,873 4,111 10,847 (193) 4,139 7,326 14,011 20,916 Cost of Sales Depreciation 2,360 1,989 2,078 1,612 1,620 1,782 1,551 2,181 1,200 1,146 1,097 1,167 Adjusted Gross Margin 9,086 (658) 672 6,842 16,493 5,893 12,398 1,988 5,339 8,472 15,108 22,083 Gross Margin/MT (19.81) (8.94) (1.12) Adjusted Gross Margin/MT (4.92) FS-42

167 Quarters Ended December 31, 2016, 2015 and 2014 In the fourth quarter of 2016, when oil and gas commodity prices stabilized and began to rise, the larger, better financed exploration and development companies returned to work, and Source saw a 79% sequential increase in sales volumes from the third quarter of 2016 and an 64% increase in sales volumes from the fourth quarter of Fourth quarter 2016 sales volumes were consistent with fourth quarter 2014 sales volumes. As North American sand sales volumes have ramped up in the fourth quarter of 2016 and into the first quarter of 2017, sand pricing which was stable in the fourth quarter has begun to rise as the industry wide supply and demand have begun to better align. Sales in the fourth quarter of 2016 were $35.8 million an increase of $12.6 million from 2015 s sales of $23.3 million. In the fourth quarter of 2016, Source sold 78 % of its sand sales volumes at the wellsite, compared to 0% in 2015, which resulted in a dramatic increase in wellsite solution sales. The higher sales volumes in the fourth quarter of 2016 help drive down the cost of the delivered product, which resulted in improved adjusted gross margins for the quarter. In the fourth quarter of 2016, the Note Offering was completed. The proceeds from the Note Offering were used to repay the Previous Credit Facility and to settle the Prepayment Note. As explained in the section above entitled Finance Expense this increased finance expense in the fourth quarter of 2016 as the Previous Credit Facility s deferred financing costs were expensed. Source also recognized a gain of $3.3 million on the settlement of the Prepayment Note. The fourth quarter of 2015 saw sand sales volumes at 171,624 MT, representing a 39% decrease from the fourth quarter of The continued softening of oil and gas commodity prices has caused the exploration and production companies to curtail their capital spending programs which has led to a significant decline in the amount of completion activity in the WCSB. Source s sales levels are affected by weather conditions. As warm weather returns in the spring each year, the winter s frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment or trucks hauling sand until they have dried out. In addition, many exploration and production areas in northern Canada are accessible only in the winter months when the ground is frozen. In 2014, Source began the transition from being a third party transloader of frac sand in the WCSB to being a sand producer selling sand in the WCSB. Throughout 2014, Source was completing its Wisconsin production facilities, its Wembley Terminal and assembling its rail car fleet. It was not until the latter part of the fourth quarter of 2014 that Source was actually able to achieve its full run rate, in a robust pricing environment. In 2015, while the first part of the first quarter was very strong, the impact of the continuing softening of the oil and natural gas commodity prices eventually led to pricing reductions, which was partially offset by increased sales volumes as Source continued to grow its market share. The soft oil and gas commodity price environment continued into the first three quarters of Sales volumes were also impacted by a very wet second and third quarter in the WCSB in 2016, which impacted the timing of customer s completion programs, as many were delayed until the access roads were usable again in the fourth quarter. As described above, the fourth quarter of 2016 represented a significant turnaround in sales volumes. Liquidity and Capital Resources Source operates in a working capital and capital expenditure intensive industry where capital is required to fund working capital growth and the continued development of the transload terminal network and processing facilities. To date free cash flow from operations, amounts available under the Notes, the Credit Facilities and the Shareholder Loans have been the primary sources of liquidity that allowed Source to meet its financial requirements to both grow and operate the business operations in the short and long term. Source s capital management policy is to maintain a strong capital base that optimizes Source s ability to grow, maintain investor and creditor confidence and to provide a platform to create value for its stakeholders. Source s officers are responsible for managing its capital and do so through monthly management meetings and quarterly board meetings including regular reviews of financial information including budgets and forecasts. Source s Board is responsible for overseeing this process. Source considers its capital structure to include Source s equity, bank debt and due to related parties. Source monitors its capital, based on its current working capital, available bank line, projected cash flow from operations and anticipated capital expenditures. In order to manage its capital structure, Source prepares annual capital expenditure and operating budgets, which are updated as necessary. The annual and updated budgets are prepared by Management and approved by each of the boards of directors of Source Canada LP GP and Source US LP GP. The budget results are regularly reviewed and updated as required. FS-43

168 In order to maintain or adjust the capital structure, Source may issue equity securities, seek debt financing and adjust its capital spending to manage its current and projected capital structure. Source s ability to raise additional debt or equity financing is impacted by external conditions, including the global economic conditions. Source continually monitors economic and general business conditions. Source s share capital is not subject to external restrictions but the amount of the Credit Facilities is determined with reference to inventory and accounts receivable levels maintained. Source s capital management policy has not changed during the years ended December 31, 2016, 2015, or Source intends to meet its future capital requirements primarily through cash flow from operations, the Credit Facilities and raising equity in the public markets in Canada. Source expects these sources will be sufficient to meet its capital needs. However, Source s ability to fund future operating expenses and capital expenditures and its ability to make scheduled payments of interest on the Notes and the Credit Facilities and to satisfy any of Source s other present or future debt obligations will depend on our future operating performance which will be affected by general economic, financial and other factors including the risks described in the following paragraphs, and those described under Risk Factors in the body of the prospectus and factors beyond Source s control. On December 8, 2016, the Note Issuers issued the Notes which bear interest at 10.5% per annum, and mature December 15, The Notes are secured by a fixed and floating charge over all of the assets of the business except accounts receivable and inventory, on which the Notes carry a second charge. Each holder of Notes is entitled to a relevant right of 4% of the equity value of the Note Issuers upon an initial public offering and various liquidation or change of control events. There are prepayment options, where the Note Issuers may redeem 35% of the aggregate principal amounts of the Notes with the net proceeds of an equity offering by Source at a redemption price of 110.5% of the principal amount. The Note Issuers may also redeem all or part of the Notes at any time prior to December 15, 2018 for 100% of the principal, accrued and unpaid interest, and the applicable premium as defined in the agreement. After December 15, 2018 the Notes may be redeemed in whole or in part at the applicable percentage ( %, %, %), plus accrued and unpaid interest. Such rights and prepayment option have been classified as a derivative liability and are measured at fair value through profit or loss, for a total of $14.8 million for the rights and $0.1 million for the prepayment option as of December 31, Changes in fair value of the derivative liabilities are recorded through the Combined Statements of Operations and Comprehensive Income (Loss). Source has recorded a fair value loss on the relevant rights of $0.8 million and $0.1 million on the prepayment option as of December 31, 2016 (2015 $0, 2014 $0). The Credit Facilities are secured by floating first lien charge on the accounts receivable and inventory of Source under a general business security agreement and a second lien charge on all other assets of the business. The amount available under the general operating facility is subject to a borrowing base formula applied to accounts receivable and inventories. As of December 31, 2016, $13.0 million was drawn under the Credit Facilities, and $26.0 million was available. The borrowing base is updated by the bank monthly. Letters of credits were issued for the amount of US$5.9 million. To date no amounts have been drawn against these letters of credit. Source is subject to externally imposed capital requirements for the Credit Facility, requiring Source Canada LP to maintain a springing fixed charge ratio of (a) 1.10:1 up to and including June 30, 2017, and then (b) 1.25:1 at all times thereafter to be measured when Source s excess availability is less than 20% of the lesser of the borrowing base and the operating facility. As of December 31, 2016, the excess availability was greater than 20%. Source Canada LP is in compliance with all covenants of the Credit Facilities as of December 31, As of December 31, 2015, the Previous Credit Facility composed of three facilities: a $35 million operating facility, a $45 million term facility, and a $15 million capital facility. The Previous Credit Facility was secured by fixed and floating charges on all the assets of Source under a general business security agreement. The facilities bore interest based on the bank s prime lending rate plus an applicable margin, ranging from prime plus 0.75% to prime plus 2.75% per annum. The amount available under the general operating facility was subject to a borrowing base formula applied to accounts receivable and inventories. As of December 31, 2015, $24.2 million ($17.0 million as of December 31, 2014) was drawn under this facility. The borrowing base was updated by the bank monthly. This facility was extinguished in connection with the Note Offering FS-44

169 Interest Rate Risk Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. Source is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the Credit Facilities and loans payable. Source is exposed to interest rate price risk on the long-term debt that bears interest at floating rates. Source had no interest rate swaps or financial contracts in place as at or during the periods ended December 31, 2016, or December 31, 2015 or December 31, For the year ended December 31, 2016, a 1% change to the effective interest rate would have an impact of approximately $0.2 million (year ended December 31, 2015 $0.7 million and 2014 $0.4 million) on net income and cash flow. Foreign Currency Risk Source is exposed to currency price risk on sales denominated in U.S. dollars to the extent that the receipt of payment of the U.S. dollar denominated accounts receivable are subject to fluctuations in the related foreign exchange rate. In addition, foreign currency risk exists on U.S. costs of manufacturing and transporting inventory for sale to the extent that the payment of those costs are U.S. dollar denominated accounts payable are subject to fluctuations in the foreign exchange rate. Included in accounts receivable and accounts payable and accrued liabilities as of December 31, 2016 are $1.7 million (2015 $17.6 million, 2014 $32.3 million) and $8.4 million (2015 $14.5 million, 2014 $16.4 million) denominated in foreign currency respectively. The net effect of each 1% change in foreign exchange would have an impact of $0.2 million for 2016 net income ( $0.2 million, 2014 $0.2 million). As of December 31, 2016, December 31, 2015 and December 31, 2014, Source had no forward exchange rate contracts in place. Cash and Net Working Capital As of December 31, 2016, Source had no cash on hand and had senior long term debt outstanding of $124.4 million, as compared to $83.1 million as of December 31, Cash flow deficit from operations was $9.5 million in 2016, and this shortfall was funded by additional senior debt borrowings and additional Shareholder Loans. Net capital expenditures for 2016 were $5.6 million which was also funded through proceeds from the increase in senior debt borrowings and additional Shareholder Loans. The balance of the proceeds was used to pay financing charges and tax distributions to limited partners for prior years taxes owed by those partners. As of December 31, 2015, Source had no cash on hand and had senior long term debt outstanding of $83.1 million, as compared to $63.8 million as of December 31, Cash flows from operations were $23.6 million in 2015, which were used to partially fund the net capital expenditures in the year of $38.7 million. The balance of the capital expenditure program was funded through proceeds from the increase in the Credit Facilities and additional Shareholder Loans. The balance of the proceeds was used to pay financing charges and distributions to limited partners. Net working capital as of December 31, 2016 was $6.2 million, as compared to $10.1 million as of December 31, The decrease was primarily driven by lower accounts receivable balances as Source had better collections of its accounts receivable in the fourth quarter of 2016 compared to the fourth quarter of This decrease was partially offset from higher inventory levels at December 2016 as Source prepared for a busy first quarter in Net working capital as of December 31, 2015 was $10.1 million, as compared to $26.3 million as of December 31, The decrease was mainly driven from lower accounts receivable balances and no assets held for sale in 2015, partially offset by higher inventory levels. Source was in a better position to build inventory in the fall of 2015 than 2014 to prepare for the busy drilling and completion season that occurs in the WCSB. Sales were slower in the fourth quarter of 2015 than 2014 as the oil and gas industry was dealing with softer commodity prices. Capital expenditures in 2016 were $6.4 million, as compared to $38.9 million in The 2016 capital expenditure program predominately related to overburden removal expenditures at the mine site and additional payments related to land acquisitions at the mine site. The 2015 capital expenditure program was focused on completing the sand processing facilities, and the terminal network to begin to sell Source s own sand as well as land acquisitions at the mine site. Capital expenditures in 2015 were $38.9 million, as compared to $45.4 million in The capital expenditure programs for both years were focused on completing the sand processing facilities and the terminal network to begin to sell Source s own sand. FS-45

170 Deferred Revenue Source has entered into storage subscription agreements with some customers to provide them with guaranteed proppant storage at our facilities, which will all expire by August Under the terms of such agreements, customers pay a non-refundable subscription fee entitling them to a discount of $2 per tonne from our normal sand distribution fees. The subscription fees have been deferred and are recognized as revenue as proppant is transloaded by the subscribers. In September 2011, Source entered into the Prepayment Note. The prepayment clause was such that the CMSA Customer made three installments upon completion of certain phases of Source s frac sand plant located in Wisconsin. These pre-payments accrued interest at 5%. In consideration of the prepayment amounts, the cash price per ton to the customer was reduced for each metric tonne of frac sand sold in the United States or Canada. The prepayment amount was also reduced by 50% of the customer s billings for storage and transloading services provided in North America. The agreement was secured by a first charge mortgage on land Source uses to mine and process frac sand. Source commenced sales under the contract in These amounts were recognized as deferred revenue on the combined balance sheets. On December 8, 2016, Source settled the above sales agreement for US$16.5 million. The total of this customer s advances and interest accrued at the time of settlement was US$19.0 million (December 31, 2015 US$18.2 million December 31, 2014 US$19.7 million). Source recorded a gain of US$2.5 million on the settlement of this contract. One customer failed to meet the minimum sand purchase requirement outlined in their sale agreement during As a result, Source deferred $0.9 million of revenue relating to this penalty, which was recognized in 2016, but subsequently written off as the customer went bankrupt. Contractual Obligations Source has various lease commitments regarding equipment, railcars, physical natural gas contract and office space. The leases expire between January 2017 and December Estimated annual lease commitment is as follows: $000 s, except MT and per unit amounts , , , , ,994 Subsequent Years 9,124 42,333 Source is a party to contracts with numerous customers. Source s customers are primarily exploration and development companies and pressure pumping companies operating in the WCSB. Source s goal is to create long-term relationships with its customers. Source has structured contracts with customers outlining volume commitments and in some cases fixed pricing, the terms of which vary from one to three years. This mitigates the impact of any nonpayment or non-performance by, or significant reduction in purchases by, any of these contracted customers. A significant number of our customers are serviced on a spot basis where volume thresholds are not set and orders are serviced on an as-available basis at prevailing market prices. In the ordinary course of conducting business, Source occasionally becomes involved in legal proceedings relating to contracts, environmental issues, or other matters. While any proceeding or litigation has an element of uncertainty, management of Source believes that the outcome of any pending or threatened actions will not have a material adverse effect on the business or financial condition of Source. Outstanding Security Data Source s partners equity is described in note 13 of the audited financial statements of Source for the year ended December 31, FS-46

171 Transactions between Related Parties Shareholder Loans payable consist of four promissory notes. The first promissory note from common unitholders was issued on March 27, 2014 in the amount of $12.5 million. This promissory note bears interest at 25% per annum which is paid with in kind interest. According to the agreement, Source is obligated to pay the 25% interest for a minimum of three months after December 31, Therefore, for the year ended December 31, 2015, a fair value adjustment of $3.9 million was recorded to record the interest obligation until March 31, The second promissory note from the common unitholders was advanced on December 21, 2015 in the amount of $7.5 million. This promissory note bears interest at 18% per annum which is also paid in a combination of cash and in kind interest, and the interest increases to 25% per annum after eighteen months. The promissory note and any accrued interest is convertible to equity eighteen months after the date of issue at the option of the unitholder. The conversion and the prepayment represent derivatives, however, Source has elected to designate the Shareholder Loans as fair value through the combined statements of operations and comprehensive income (loss). The maturity date of these promissory notes is on December 31, The third promissory note has a face value of $2 million and was recorded at a fair value of $2 million. It does not bear interest and is due September 7, See Description of Indebtedness Indebtedness being repaid in connection with the Offering Shareholder Loans in the prospectus. During 2016, certain unitholders provided guarantees to the syndicated bank group of the Previous Credit Facility totaling $5.5 million. In exchange for these guarantees, these unitholders were provided with 5,500 warrants at an aggregate price of $55 dollars or a 0% 10-year promissory note depending on whether the guarantees were drawn or not. The promissory note would be issued for an amount equal to the amount that the guarantee was less than $5.5 million prior to February 28, 2017, for reasons other than the call of the guarantee by the syndicated banking group of the Previous Credit Facility. The agreements governing such guarantees stipulated that if the syndicated bank facility was repaid, promissory notes for the full amount of the guarantee would be issued and the related warrants would be cancelled. The promissory notes will become due and payable if there is a change of control. The Previous Credit Facility was repaid and the related warrants were cancelled. The $5,500 promissory note was issued in The Sand Royalty Loan bears interest at 8% per annum with no maturity date. Source has accrued all interest due as of December 1, No payments have been made. Proposed Transactions There are no proposed transactions other than described in the prospectus. Critical Accounting Estimates The following discussion sets forth Management s most critical estimates and assumptions in determining the value of assets, liabilities and equity. Allowance for Doubtful Accounts Source perform ongoing credit evaluations of its customers and grants credit based on a review of historical collection experience, current aging status, the customer s financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based on specific situations and overall industry conditions. Inventories Source evaluates its inventory to ensure it is carried at the lower of average cost and net realizable value. Allowances are made against obsolete or damaged inventories and charged to the cost of sales. The reversal of any write-down of inventory arising from an increase in net realizable value would be recognized as a reduction in cost of sales in the period in which the reversal occurred. Depreciation The amounts recorded for depreciation of property and equipment are based on estimates of the useful lives of the assets and residual values. This estimated residual value and useful lives of property and equipment are reviewed at the end of each reporting period and adjusted if required. FS-47

172 Decommissioning Liabilities The amount recorded for decommissioning liabilities and accretion expense depends on estimates of current risk-free interest rates, future restoration and reclamation expenditures, and the timing of those expenditures. Income Taxes The amounts recorded for deferred income taxes are based on estimates as to the timing of the reversal of temporary differences and tax rates currently substantively enacted. They are also based on estimates of the probability of Source utilizing certain tax losses in future periods and tax rates applicable to those periods. Stock-Based Compensation The fair value of the restricted share units is estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the risk-free interest rate, average expected unit life, estimated forfeitures, and estimated volatility of Source. Cash-Generating Units The determination of cash-generating units is based on Management s judgment regarding geographical proximity, shared equipment, and mobility of equipment. Impairment of Non-Financial Assets Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows, prior to impairments of non-financial assets and are reviewed for possible reversal at each reporting date. Embedded Derivatives An embedded derivative is a component of a contract that modifies the cash flows of the contract. The relevant transaction rights and the prepayment option included in the Notes represents a hybrid contract. The embedded derivatives are separated from the note payable and accounted for as derivative liabilities. The embedded derivatives are measured at Fair value through profit or loss (FVTPL). The fair value of the derivatives is based on prices or valuation techniques that require inputs that are not based on observable market data. Shareholder Loans Shareholder loans have been recorded at fair value, which represents the amount of the loan plus applicable interest. One of the promissory note bears interest at 25% per annum which is paid in a combination of cash and in kind interest. According to the agreement, the Partnership is obligated to pay Changes in Accounting Policies including Initial Adoption and Recently Issued Accounting Standards Not Yet Applied Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after January 1, 2017 with earlier application permitted. IFRS 9 Financial Instruments On January 1, 2018, Source will be required to adopt IFRS 9 Financial Instruments, which is the result of the first phase of the International Accounting Standards Board ( IASB ) project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. Source is in the process of assessing the impact of IFRS 9 on its financial statements. FS-48

173 IFRS 15 Revenue from Contracts with Customers On January 1, 2018, Source will be required to adopt IFRS 15 Revenue from Contracts with Customers. IFRS 15 was issued in May 2014 and will replace IAS 11 Construction Contracts, IAS 18, Revenue Recognition, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31 Revenue Barter Transactions Involving Advertising Services. IFRS 15 provides a single, principle-based five-step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17 and financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements. In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The standard s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity s ordinary activities. Source is in the process of assessing the impact of IFRS 15 on its financial statements. IFRS 16 Leases On January 1, 2019, Source will be required to adopt IFRS 16 Leases. The new standard requires lessees to recognize a lease liability reflecting future lease payments and a right-of-use-asset for most lease contracts. The standard permits a simplified approach that includes certain reliefs related to the measurement of the right-of-use-asset and the lease liability, rather than full retrospective application. IFRS 16 must be applied for financial years commencing on or after January 1, Early adoption is permitted, but only in conjunction with IFRS 15. Source is in the process of assessing the impact of IFRS 16 on its financial statements. Financial Instruments and Other Instruments Risk management overview Source s activities expose it to a variety of financial risks including credit risk, liquidity risk and market risk. Further quantitative disclosures are included in the December 2016 combined financial statements. Source employs risk management strategies and polices to ensure that any exposures to risk are in compliance with Source s business objectives and risk tolerance levels. While the board of directors has the overall responsibility for Source s risk management framework, Source s management has the responsibility to administer and monitor these risks. Fair value of financial instruments The fair values of cash, accounts receivable, overdraft, accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of those instruments. The fair value of the asset backed loan facility approximates the carrying values as they bear interest at market floating rates consistent with market rates for similar debt. Based on the closing market price as of December 31, 2016, the fair value of the $130 million Notes is $137.8 million. FS-49

174 APPENDIX A DESCRIPTIONS OF THE MINERAL PROPERTIES A-1

175 DESCRIPTION OF THE SUMNER FACILITY Current Technical Report The information in this section of the prospectus related to the Sumner Facility is based upon the Sumner APEX Report authored by the QPs. The QPs have verified the data disclosed, including sampling, analytical, and test data underlying the information contained in the prospectus. Any reference to figures, tables or citations below correspond to such items in the Sumner APEX Report. For an explanation of certain technical terms used in this prospectus, see Scientific and Technical Information. Portions of the following information are based on assumptions, qualifications and procedures which are not fully described herein. Reference should be made to the full text of the Sumner APEX Report, which is available for review under the Company s profile on the SEDAR website at Project Description, Location, and Access Property Location The Sumner Facility is located in Barron County directly east of the village of Cameron and near the town of Sumner. The approximate center of the Sumner Facility, in Universal Transverse Mercator coordinates is: m Easting, m Northing, Zone 15, North American Datum 83. The Sumner Facility is located in the Public Land Survey System at Township 34, Range 10W (Sumner) and encompasses most of Section 28 and parts of sections 27, 29, 32 and 34. The Sumner Facility is located on the south side of U.S. Hwy 8 at 2595 State Highway 8, Cameron, Wisconsin USA The Weyerhaeuser Facility is located eight miles (12.9 km) east of the Sumner Facility on the north side of U.S. Hwy 8 at W14251 Stiles Road, Weyerhaeuser, Wisconsin USA Nature and Extent of Source Land Titles The majority of the land parcels are either: owned by Source; under contract to be purchased by Source in the near term; or are leased by Source with established royalties. The current status of the private lands is presented in Figure 3 and Table 3, and is summarized as follows: (a) thirty of the 36 parcels are 100% owned by Source; (b) three parcels are under contract to be 100% owned by Source with the current land holders land rights terminating between July 31, 2016 and October 31, 2017; and (c) three parcels are presently being leased from the current land owners by Source with sand tonnage royalties established with the individual owners (Vincent 1, Vincent 2 and Vincent 3). Figure 2. Sumner Facility land package is comprised of 36 separate parcels. A-2

176 Table 3. Permit descriptions and status for Sumner Facility. Public Land Survey System (section- Township- Range-quarter quarter section- Quarter section) Parcel # Sub-permit name Area (acres) Area (hectares) Private (deeded) land owner (1) Ownership status Benik 27-34N-10W CSP PROPERTY Owned by Source NW-NW HOLDINGS LLC Bronstad N-10W CSP PROPERTY Owned by Source NW-NE HOLDINGS LLC Bronstad A 29-34N-10W CSP PROPERTY Owned by Source NW-NE HOLDINGS LLC Bronstad N-10W CSP PROPERTY Owned by Source HOLDINGS LLC Bronstad N-10W CSP PROPERTY Owned by Source HOLDINGS LLC CSP N-10W CSP PROPERTY Owned by Source NE-NE/ HOLDINGS LLC N-10W- NW-NE CSP N-10W-SE CSP PROPERTY Owned by Source NE HOLDINGS LLC CSP N-10W CSP PROPERTY Owned by Source NE-SE HOLDINGS LLC CSP N-10W-SE CSP PROPERTY Owned by Source SE HOLDINGS LLC CSP N-10W CSP PROPERTY Owned by Source SW-SE HOLDINGS LLC D Johnson 28-34N-10W CSP PROPERTY Owned by Source NE-NW HOLDINGS LLC Frank 28-34N-10W-SE FRANK, ALLAN H Under contract with NW & NORMA J Source to own; closes 12/31/16 (2) Fredrickson 28-34N-10W CSP PROPERTY Owned by Source NE-SE HOLDINGS LLC Givens 27-34N-10W CSP PROPERTY Owned by Source NE-SW HOLDINGS LLC Goss N-10W CSP PROPERTY Owned by Source NW-NE HOLDINGS LLC Goss N-10W CSP PROPERTY Owned by Source NW-NE HOLDINGS LLC J Johnson 32-34N-10W JOHNSON, JOHN R Under contract with NE-NE & SALLY A Source to own; closes 12/31/16 (2) Kirk 27-34N-10W CSP PROPERTY Owned by Source SW-SW HOLDINGS LLC Klump 28-34N-10W KLUMP, JON W & Under contract with MELISSA M Source to own; closes 7/31/16 (2) Kreier N-10W KREIER, JOHN E & Leased to Source NW-SE SHARON M (Royalty) (2) Kreier N-10W KREIER, JOHN E & Leased to Source SW-SE SHARON M (Royalty) (2) Nelson N-10W NELSON Under contract with NE-NW TRUSTEES, Source to own; GREGORY S & closes 10/31/17 JUDY K Nelson N-10W NELSON Under contract with NW-NW TRUSTEES, Source to own; GREGORY S & closes 10/31/17 JUDY K Nelson N-10W NELSON Under contract with SW-NW TRUSTEES, Source to own; GREGORY S & closes 10/31/17 JUDY K Ort Lumber 28-34N-10W CSP PROPERTY Owned by Source NW-NW HOLDINGS LLC. A-3

177 Public Land Survey System (section- Township- Range-quarter quarter section- Quarter section) Parcel # Sub-permit name Area (acres) Area (hectares) Private (deeded) land owner (1) Ownership status Postle 28-34N-10W-SE CSP PROPERTY Owned by Source SE HOLDINGS LLC Schoenecker 27-34N-10W CSP PROPERTY Owned by Source SW-NW HOLDINGS LLC Scoville N-10W-SE CSP PROPERTY Owned by Source SW HOLDINGS LLC Scoville N-10W CSP PROPERTY Owned by Source NE-NW HOLDINGS LLC Smith 27-34N-10W CSP PROPERTY Owned by Source NW-SW HOLDINGS LLC St. Louis 28-34N-10W CSP PROPERTY Owned by Source SW-NE HOLDINGS LLC Vincent N-10W VINCENT FAMILY Leased to Source NW-SW TRUST (Royalty) (3) Vincent N-10W VINCENT FAMILY Leased to Source SW-SW TRUST (Royalty) (3) Vincent N-10W-SE VINCENT FAMILY Leased to Source SW TRUST (Royalty) (3) Waggoner 28-34N-10W CSP PROPERTY Owned by Source NE-NE HOLDINGS LLC Wiesner 28-34N-10W CSP PROPERTY Owned by Source HOLDINGS LLC. Totals 1, Notes: (1) In October 2013, CSP Property Holdings LLC and other Source ventures were consolidated under the Source Energy Services brand. (2) Subsequently purchased since the date of the Sumner APEX Report. (3) Mineral lease and royalty agreements dated September 25, 2014 for a term of 10 years. Source must pay a royalty of $1.50 for each tonne of washed sand extracted from the respective property. Figure 3. Summary of land titles (to accompany Table 3 and text). A-4

178 The purchase agreements are for 100% of the land title including mineral rights, buildings, etc. The purchase agreements do not include any additional payouts or percentages. The purchase agreements meet the standard Wisconsin real estate purchase agreements: (a) WB-11 Residential Offer to Purchase; and (b) WB-13 Vacant Land Offer to Purchase (Wisconsin Department of Regulation and Licensing, 2015). With respect to the leased parcels (Vincent 1, Vincent 2 and Vincent 3), the landowners agreed to royalty agreements allowing Source the right to mine their properties in exchange for a royalty, which is outlined in Table 3 and on Figure 3. In the purchase and leased/royalty agreements, there is no designation between mineral and surface rights. The purchase agreements are for 100% of the land title including surface and mineral rights. The royalty agreement does not define mineral rights and the property owner grants to Source a lease to excavate, remove, and process any and all marketable nonmetallic minerals including silica (frac) sand. Source must pay a royalty of $1.50 for each tonne of washed sand extracted from the respective property (See Footnote 3 in Table 3). Permitting and Environmental Approvals The 100% owned Source parcels and parcels under contract to be owned by Source were rezoned from Agriculture to Mineral Reservation. Source has the following local, Barron County, and Wisconsin State permits: (a) Conditional Use Permit, which stipulates that Source mining operations shall maintain a minimum of five feet (1.5 m) separation from groundwater table (Barron County Zoning Committee); (b) Nonmetallic Mining Reclamation Permit, which includes a Reclamation Plan (Barron County); (c) Air Pollution Control Permit (Wisconsin Department of Natural Resources); (d) Nonmetallic Mining Operations General Permit (storm water; Wisconsin Department of Natural Resources); and (e) High Capacity Well Permit (Wisconsin Department of Natural Resources). There are no federal permits required. With respect to environmental work conducted to meet the criteria of the permitting, an Endangered Resource Review was conducted prior to the issuance of new or revised permits by the Wisconsin Department of Natural Resources. There are no other significant factors or risks that may affect the access, land title, or the right or ability to perform work on the Sumner Facility. History Four separate historical resource estimates have been prepared by independent contractors on behalf of Source. Such historical Mineral Resource estimates are not a current Mineral Resource. The historical Mineral Resource estimates are not NI defined Mineral Resources and have not been verified by a QP. The historical estimates should not be relied upon, particularly in light of preparation of the Sumner APEX Report. Accessibility, Climate, Local Resources, Infrastructure and Physiography The Sumner Facility, which encompasses the Sumner Open Pit Mine and Sumner Wet Processing Plant, is located in east-central Barron County in the northwestern corner of Wisconsin. The Sumner Facility is adjacent to United States Highway 8, which runs primarily east west for 280 miles (451 km), mostly within the State of Wisconsin. United States Hwy 8 connects to State Hwy 53 at Cameron, Wisconsin and to State Hwy 35 (I-35) at Forest Lake, Minnesota. Except for a short freeway segment near Forest Lake, and sections near the St. Croix River Bridge and Rhinelander, Wisconsin, US Hwy 8 is mostly undivided surface road. As a state highway running through three states, US Hwy 8 is maintained by the Minnesota, Wisconsin and Michigan departments of transportation. The Sumner Facility can be assessed by driving north from Eau Claire, Wisconsin to Cameron, Wisconsin, which is approximately 50 miles (80 km) on paved double lane State Hwy 53. The Sumner Facility is then located another 8 miles (12.9 km) east of Cameron on the south side of single lane, paved US Hwy 8. The Weyerhaeuser Facility is located at Weyerhaeuser, Wisconsin, which is an additional 8 miles (12.9 km) east of the Sumner Facility on US Hwy 8 and is situated on the north side of the highway. The Weyerhaeuser Facility is located away from the Sumner Facility to allow for direct access to the Wisconsin Central Railroad, a subsidiary of the CN. The annual weather patterns in Cameron, Wisconsin are seasonal. The annual average temperature is 42.5º F (5.8º C), and the hottest and coolest months are typically July (80º F; 27º C) and January (21º F; -6º C), respectively. The average annual rainfall is 31 inches (79 mm) and annual snowfall is 54 inches (137 cm). The Weyerhaeuser Facility is not subject to seasonal conditions and operates year-round, 24 hours a day and seven days a week. A-5

179 With respect to infrastructure and resources, it is important to note that Wisconsin accounts for nearly one-half of all the frac sand capacity in the United States (Benson and White, 2015). Accordingly, the State of Wisconsin has a significant infrastructure, and a knowledgeable and vibrant workforce for the development, and continuation of, silica sand mining. Regarding physiography, the Sumner Facility is landlocked, however, as noted earlier, it is located adjacent to well-maintained, paved US highways. Geological Setting, Mineralization and Deposit Types Regional Geology, Local and Property Geology In the general Sumner Facility area, silica sand units include the Cambrian Mount Simon, Wonewoc and Jordan formations (Figure 10). These silica sand units are divided by the Eau Claire Formation and Tunnel City Group, which can be differentiated from the silica sand by their variable lithologies including: mudstone; intercalated mudstone and sandstone; very fine- to fine-grained sandstone; and cemented sandstone. Figure 10. Regional bedrock geology (from Mudrey et al., 1987). Cambrian Mount Simon Formation In the northwest quadrant of Wisconsin, the Mount Simon Formation contains three informal quartzose sandstone sub-units (Mudrey et al., 1987), including: (a) an uppermost sandstone that is quartzose, feldspar-bearing, white to light gray to pale brown, medium to course grained, angular, medium bedded, locally lenticular bedded, and at least 170 feet (52 m) thick; (b) a second sandstone horizon that is quartzose, pale yellow orange to pale gray orange, very fine grained, thin to medium bedded, angular, limonite cemented, and 125 feet (38 m) thick, This unit is underlain by a 60 foot (18 m) thick, gray to pale-orange, silty shale; and (c) a basal sandstone unit that is quartzose, very pale orange, very fine to fine grained, subangular to subrounded, and at least 115 feet (35 m) thick; this sub-unit is known only in the northwestern Wisconsin subsurface. The unit is overlain by very fine to fine grained sandstone and shale of the Eau Claire Formation. Cambrian Wonewoc Formation The Wonewoc Sandstone, which is the subject of the Sumner APEX Report, overlies the Eau Claire Formation and is observed in Wisconsin, Michigan, Illinois, Indiana, Minnesota, Iowa and in northeastern Nebraska (Clayton and Attig, 1990; Runkel et al., 1998); effectively throughout the area known as the Hollandale Embayment. The reference section for the Wonewoc Sandstone is near the village of Wonewoc in Juneau County, Wisconsin. A-6

180 The Wonewoc Formation is characterized by a stratigraphically complex cratonic sheet of sandstone that was deposited from a continuously abundant supply of quartzose sand in a slowly and uniformly subsiding low-relief basin (Hollandale Embayment) under fluctuating sea level conditions during the Sauk II and Sauk III subsequences (Palmer, 1981; Runkel et al., 1998). The Wonewoc Formation sandstone varies in thickness from 50 to 150 feet (15 to 46 m) and is principally medium to coarse grained quartzose sandstone with high-angle cross-stratification. It is divided into two major lithofacies the Ironton Member and Galesville Member; however, the two members are commonly classified together as the Wonewoc Sandstone because lithostratigraphic studies have shown that it is difficult to consistently distinguish the two formations. The Wonewoc Formation is overlain by the Tunnel City Group, which varies in thickness from feet (43 to 55 m) and is divided into two sub-formations: the Mazomanie Formation and the Lone Rock Formation (Mossler, 2008). The Mazomanie Formation is dominantly white to yellowish-gray, fine- to medium-grained, cross-stratified, generally friable, quartz sandstone. Some beds contain brown, intergranular dolomite as cement. Skolithos burrows and sandstone intraclasts are common along discrete horizons. The Lone Rock Formation underlies the Mazomanie Formation and the two sub-units are often inter-tongued. It consists of pale yellowish-green, very fine- to finegrained glauconitic, feldspathic sandstone and siltstone, with thin, greenish-gray shale partings. Thin beds with dolomitic intraclasts are common. Cambrian Jordan Formation The Jordan Sandstone was named for the city of Jordan, Wisconsin and consists of two distinct, intercalated quartzose sandstone members that are summarized by Mudrey et al. (1987) as: (a) the uppermost Van Oser Member, which is a quartzose, white to brown to yellow or orange, fine to medium grained, poorly sorted, medium to thin bedded, cross bedded, with calcite-cemented nodules, is iron cemented in places, may be locally interbedded with the underlying unit, and is feet (9 to 15 m) thick; and (b) the lower Norwalk Member is a quartzose, white, finegrained, rounded, moderately-sorted, medium-bedded sandstone with a trace of garnet, and a thickness of feet (15 to 18 m). In the extreme western Wisconsin, the Norwalk is a fine- to very fine-grained feldspathic sandstone (Ostrom,1987; Runkel, 2000). The Van Oser and Norwalk members are characterized as the quartzose and feldspathic lithofacies, respectively, and as such, they are interpreted as high energy, marine intertidal sand deposited as the sea shallowed, and a low-energy, below wave base, marine deposits (Runkel, 1994). Pleistocene Surficial Geology The Sumner Facility occurs on the approximate margin of an unglaciated region known as the driftless area. The surficial geology of the Sumner Facility area is predominantly comprised of Pokegama Creek of the Copper Falls Formation. These surficial deposits consist of yellowish-red, slightly gravelly sandy-loam till deposited by the Chippewa Lobe (Johnson, 1986). Generally, the Pokegama Creek till is thin and discontinuous and outcrops of Cambrian sandstone bedrock and Precambrian Barron Quartzite are common. Johnson (1986) did not conduct a surficial auger program in the Sumner Facility, but generally reported that the area consists of till that is less than 50 feet thick (15 m). Source s auger test work (see Drilling ) shows that the surficial material is highly variable in the Sumner Facility area with surficial deposit thicknesses of between zero and 27.9 feet (8.5 m and averaging less than 2.5 m thick). The southeastern-most portion of the Sumner Facility (Scoville sub-claim) includes undifferentiated Cambrian formations, which are comprised of Cambrian sand and sandstone exposed at the surface or capped by a thin layer of silt or till of the Pokegama Creek Member. To the southwest of the southwestern-most sub-claims (CPS5 sub-claim) several northeast-trending lobes of Chetek Member occur (C5sp s=stream sediment; p=pitted stream plain). These surficial deposits include sand and gravelly sand deposited by melt-water streams that flowed from the Superior and Chippewa lobes (Johnson, 1986). Their orientation could indicate that the southwestern-most claims are influenced by paleochannels that would deposit this kind of surficial deposit. A-7

181 Property Geology Silica (frac) sand mining activity in the northwestern part of Wisconsin, primarily in Barron and Chippewa counties, has concentrated on mining the Wonewoc and Jordan formations from silica sand-strata that is situated on lower hillsides and hilltops, respectively. At the Sumner Facility, the Wonewoc Formation is the primary silica (frac) sand mining target as the sandstone unit is generally situated right through the middle of the Sumner Facility. In general, the upper Wonewoc contact(s) is sharp and easily distinguished. The mine process confidently strips off the Pleistocene surficial deposits (overburden) and/or the Tunnel City Group to access the Wonewoc Formation silica sand. The overburden consists of dark grey to reddish dark grey, clay-rich sandy till with abundant pebbles and minor cobbles; a thin (<1 ) iron-stained regolith occurs at the base of the overburden. The basal portion of the Tunnel City Group consisted of fine grained sandstone and siltstone with a higher component of mudstone in comparison to the underlying Wonewoc Formation. It is evident that there is regional, and even local variation associated with the thickness of the overburden and Tunnel City Group overlying the Wonewoc Formation. The Wonewoc Formation is dominated by white to iron-stained, medium to coarse grained quartzose sandstone. The overall observation of the mine pit face(s) is that the Wonewoc is stratigraphically continuous, and uniformly, is composed of clean, white silica sand. The stratigraphy can be traced laterally with the aid of minor, thin, continuous clay-mudstone bands that are likely associated with inter-tidal and/or transitions in marine, near-marine and non-marine deposition. In general, the mudstone and/or mudstone-sandstone intercalated horizons appear to be thin less than one foot (<31 cm) in thickness. The basal portion and lowermost contact of the Wonewoc Formation is not as clearly understood as the upper contact. This is because the majority of the auger drilling to date, including deeper groundwater monitoring holes, has defined a water table elevation of approximately 1140 feet (347.5 m) above mean sea level ( amsl ) on the Sumner Facility. This groundwater elevation establishes the lowermost mining extents as defined by the Conditional Use Permit, which states that mining operations shall maintain a minimum of five feet (1.5 m) separation from groundwater table. Accordingly, Source has not drill tested below this depth with regularity to define the detailed extent of the lowermost Wonewoc Formation. Mineralization Paleozoic age bedrock layers of quartzose sandstone in the central mid-continent of North America are known as some of the most mineralogically pure sandstone on Earth with greater than 95% of the sand grains consisting of silicon dioxide (SiO2). Whole rock chemical analysis (x-ray fluorescence) of the Wonewoc Formation sandstone, which was conducted by the Department of Natural Resources (Brown, 2012), shows that the Wonewoc silica sand consists of: (a) Silicon dioxide (SiO2), %; (b) Aluminum oxide (Al2O3), %; (c) Calcium oxide (CaO), %; (d) Iron oxide (Fe2O3), %; (e) Potassium oxide (K2O), %; (f) Sodium oxide (Na2O), %; (g) Magnesium oxide (MgO), %; (h) Titanium oxide (TiO2), <0.01%. In addition to being composed mostly of quartz, a mineral known for being of high-strength and relatively inert, the grains are especially well-rounded, well-sorted, coarse-grained and poorly cemented. The advanced level of textural maturity in Cambrian quartz grains, including the Wonewoc Formation, remains more uncertain, but is believe to be related to chemical weathering that may have preferentially dissolved plagioclase and similarly unstable minerals, and a long history of abrasion in marine conditions and wind abrasion (Morey, 1972; Odom, 1975, 1978; Dott et al., 1986; Runkel, 1998; Dott, 2003; see Description of the Sumner Facility Deposit Types ). Lastly, grain size is an important factor in determining the value of a silica sand deposit because, for example, the 20/40 mesh sand fraction typically has a relatively high value because of its demand for specific hydrofracturing procedures, and the 20/40 fraction is relative scarce in silica sand deposits elsewhere on the continent (Beckwith, 2011). Runkel and Steenberg (2012) synthesized grain size data from Ostrom (1971) and Thiel (1957) for the Jordan, Wonewoc, Mt. Simon and St. Peter formations from throughout Wisconsin; the histogram shows that: (a) St. Peter sandstone has a relatively small percentage of mesh sand and contains the highest proportion of sand finer than 100 mesh; (b) the Wonewoc and Mt. Simon sandstones generally have a diminished coarser fraction compared to the Jordan; and (c) the St. Peter, Jordan and Wonewoc have similar 40/70 mesh contents. Despite the relatively finer grain size in comparison to the Jordan Formation, the Wonewoc sandstone can be mined for multiple markets including those oil and gas hydrofracking plays that are asking for a smaller proportion of coarser grained silica sand (Brown, 2014). A-8

182 Deposit Types The most prospective settings for the accumulation of mineralogical and mechanically competent frac sand occur in marine shoreline, marine shoreface, marine intertidal and deltaic settings, and coastal aeolian environments (e.g., Winfree, 1983; Dott et al., 1986; Dott, 2003; Hickin et al., 2010). A well-documented example of a geological setting that has produced high-quality frac sand occurred during the Cambrian in central mid-continental North America (Minnesota, Wisconsin and Iowa). This setting coincides with the Sumner Facility area, which is the focus of the Sumner APEX Report. The Cambrian Period was characterized by a major transgressive event that was bracketed between two ice ages, one during the late Proterozoic and the other during the Ordovician. With the retreat of Proterozoic ice, the sea level rose significantly and extensive sequences of Cambrian marine sedimentary rocks (sandstone, shale and fossil-bearing limestone) show that much of the world was covered by shallow epeiric seaways. The North America Craton was almost completely drowned in Late Cambrian time by what came to be known as the Sauk transgression, and subsequently, the central mid-continent is characterized by a series of sedimentary rock depositional cycles known as the Sauk sequence (Sloss, 1963; Palmer, 1981). The Precambrian surface had significant and variable relief prior to deposition of Sauk sedimentary rocks. In northern Wisconsin, the Wisconsin Dome (with its southward extending arch) and nearby regions of the Canadian Shield represented a vast upland area composed of Precambrian igneous and metamorphic rocks. In contrast to the Wisconsin dome upland, a broad lowland area named the Hollandale Embayment developed during the Upper Cambrian and extended across southeastern Minnesota and eastern Iowa, and was situated directly southwest of the Wisconsin Dome (Austin, 1969, 1970). For long periods of time, broad positive features such as the Wisconsin Dome were subject to weathering and shed significant volumes of detrital sediment, including eroded Precambrian granite and metamorphic rock, and Late Precambrian Keweenawan volcanic rock to the Cambrian eiperic seaway and shorelines that covered the Hollandale Embayment. The sand, silt and clay sized particles were carried by wind and in rivers across the cratonic interior to the oceanic shoreline where shallow ocean currents formed a texturally graded shelf (Runkel, 1998, 2007). On this shelf the coarsest sand, composed mostly of quartz grains, was deposited in shoreface deposits where currents were strongest. Finer-grained, feldspathic sand, silt and clay sized particles were carried seaward to deeper water. Fluctuations in sea level caused the shoreface settings to relocate resulting in quartzose sand being deposited for hundreds of miles/ kilometres. While the shoreface setting naturally modifies the textural maturity of the quartz grains, an advanced level of the super-mature Cambrian quartz grains in central mid-continental North America remains uncertain. The physical maturity of the Cambrian sands could not been achieved solely by fluvial transport, but probably involves other factors such as: (a) a long history of abrasion in marine conditions (Odom, 1975, 1978) along with wind abrasion, which is far more effective at rounding grains than abrasion in water (Dott et al., 1986); and (b) chemical weathering in the cratonic interior, which is believed to have preferentially dissolved plagioclase and similarly unstable minerals, creating a source area that is dominated mineralogically by quartz (Morey, 1972; Runkel, 1998; Dott, 2003). Lastly, much of the silica (frac) sand mining in central mid-continental North America occurs in the driftless area (Syverson and Colgan, 2004), which is defined as an area of Wisconsin that was untouched by the advance of the Wisconsinan ice sheets (pre-35,000 to 10,000 years before present; Syverson and Colgan, 2004; Syverson and others, 2011). Because the area is largely devoid of surficial deposits, the Cambrian silica sand strata is accessible to surface mining. In addition, post-glacial processes has resulted in the exposure of near-surface silica (frac) sand source units in incised terrains (e.g., rivers and hillsides) such that some silica sand deposits are amenable to surface and/or side-entry mining. Exploration As a current silica (frac) sand miner, processor and transporter, Source has successfully completed numerous exploration programs on the Sumner Facility. These programs took place between 2011 and The primary method of testing the Wonewoc Formation for its stratigraphic position and silica sand potential has been through auger drill testing. A detailed summary of 77 auger holes that have been drilled to test the stratigraphy and the grain size distribution of the Wonewoc Formation silica sand is presented in Drilling. The results and evaluation of analytical A-9

183 work conducted on the auger returns from these drillholes, which includes particle size/gradation analysis and proppant test work characterization, is presented in: Description of the Sumner Facility Sample Preparation, Analyses and Security ; Description of the Sumner Facility Mineral Processing and Metallurgical Testing ; and Description of the Sumner Facility Mineral Resource Estimate. Summary of Archival Sampling Conducted During the Site Inspection An initial review of the data provided to APEX by Source revealed that there were very few bulk density measurements. As part of a personal site inspection of the Sumner Facility, which was completed on September 14-17, 2015 by the QP, it was decided to collect archived samples for additional bulk density analysis. The sampling also allowed the QP to review complete stratigraphic sections from selected drillholes occurring throughout the Sumner Facility to verify the stratigraphy, geology and silica sand mineralization at the Sumner Facility: (a) Source s archival auger clippings are preserved in zip-lock plastic bags at Source s lab located at the Sumner Facility. In general, the archived samples consist of ~1-3 lb ( kg) of sample material that are labelled in permanent marker by their borehole ID and sample interval; (b) the archive collection appears to include samples of every borehole completed on the Sumner Facility; however a few of the archived samples could not be matched to boreholes (due to naming discrepancies; e.g., hole 1, hole 2 and hole 3, which are poorly identified); (c) the QP reviewed over half of the archive samples and a total of 31 samples were collected for bulk density analysis; the sampling included both bulk sample material (i.e., a representative, un-sieved sample), and 20/40, 40/70 and 70/140 screened fractions, which were screened on site at Source s lab (Table 8); and (d) the samples were labelled, bagged, tied, placed in a plastic 5-gallon pail and delivered via UPS to Stim-Lab Inc. in Duncan, OK. The results of the density analysis show that the bulk, 20/40, 40/70 and 70/140 fractions have varying densities (Table 8). With respect to selecting a bulk density value for the resource estimation, the QP used the average density value of the bulk samples (1.57 g/cm3) in the resource modelling due to the following: (1) Source is mining the entire Wonewoc sequence, which is blasted from the mine face and then mined as a bulk sample. Hence, the density of the bulk samples is the most representative density measurement of the material being mined (as opposed to using the densities of the individual size fractions); (2) The average density analyses of the individual size fractions averages out to 1.46 g/cm3 (20/40 = 1.51; 40/70 = 1.48; 70/140 = 1.37 g/cm3), all of which are lower than the bulk density value (1.57 g/cm3). These size fractions do not take into consideration the +20 sizing and the -140 material, which means the individual size fractions do not factor in, for example, the mudstone/clay material that is ubiquitously present in the Wonewoc Formation albeit in relatively small amounts. Because mudstone/clay has a higher density (clay typically ranges from 1.63 to 2.6 with an average of 2.21 g/cm3; Berkman, 1995), a typical mine sample would be expected to have a higher density in comparison to the individual size fractions ; and (3) The samples collected to measure the density of the individual size fractions were dried prior to sieving; this drying process would create a lower density. Accordingly, the Sumner APEX Report converts the volumes of the various size fractions to tonnages using a bulk density of 1.57 g/cm3. A-10

184 Table 8. Description of samples collected during the site inspection and analyzed for bulk density. Sample ID SES Sample ID Unit Elevation (top) Elevation (bottom) Bulk 20/40 40/70 70/140 15RER-SES01 STB-01_60-65 Wonewoc Yes RER-SES02 JJ-01_30-35 Wonewoc Yes RER-SES03 HO-2_20-25 Wonewoc Yes RER-SES04 HO-9_15-20 Wonewoc Yes RER-SES05 HO-9_15-20 Wonewoc Yes RER-SES06 HO-9_10-25 Wonewoc Yes RER-SES07 K-3_30-35 Wonewoc Yes RER-SES08 P-2_65-70 Wonewoc Yes RER-SES09 P-2_65-70 Wonewoc Yes RER-SES10 P-2_60-80 Wonewoc Yes RER-SES11 STB-2 Wonewoc Yes RER-SES12 HO-6_40-45 Wonewoc Yes RER-SES13 HO-10_50-55 Wonewoc Yes RER-SES14 HO-10_50-55 Wonewoc Yes RER-SES15 HO-10_50-55 Wonewoc Yes RER-SES16 Vincent-B-2_90-95 Wonewoc Yes RER-SES17 LG-1_35-40 Wonewoc Yes RER-SES18 BR-TB-1_55-60 Wonewoc Yes RER-SES19 HO-11_45-50 Wonewoc Yes RER-SES20 HO-11_45-50 Wonewoc Yes RER-SES21 HO-11_45-55 Wonewoc Yes RER-SES22 DJ-1_65-70 Wonewoc Yes RER-SES23 SL-3_30-35 Wonewoc n/a n/a Yes RER-SES24 SL-3_30-35 Wonewoc n/a n/a Yes RER-SES25 SL-3_30-35 Wonewoc n/a n/a Yes RER-SES26 JW-1_0-10 Overburden n/a n/a Yes RER-SES27 JW-1_10-20 Overburden n/a n/a Yes RER-SES28 JW-1_20-26 Overburden n/a n/a Yes RER-SES29 JW-1_40-45 Wonewoc n/a n/a Yes RER-SES30 TB-1_15-20 Wonewoc n/a n/a Yes RER-SES31 Site sample Wonewoc Open pit sample Yes 1.52 Drilling Bluk density (g/cm3) As of the date of the Sumner APEX Report, Source auger drilled a total of 77 test holes throughout the Sumner Facility, which include: 66 auger holes to test the stratigraphy and the grain size composition of the Wonewoc Formation silica sand; and 11 holes for groundwater monitoring. The 77 holes do not include auger drilling related to current mine operations such as auger holes designed for grid blasting of the mine face. The auger holes were drilled in consecutive years between 2011 and A spatial depiction of the auger test hole locations throughout the Sumner Facility is presented in Figure 17. The auger programs are summarized in the text that follows. The auger drilling generally had two primary objectives: (1) Test and obtain sub-surface geological information towards definition of the lithostratigraphic contacts between, from stratigraphic top to bottom: Pleistocene surficial deposits; Tunnel City Group; and the silica sand target unit the Cambrian aged Wonewoc Formation; and (2) Investigate and characterize the lateral and vertical grain-size distribution, and proppant quality, of the silica sand within the Wonewoc Formation. The initial location of the auger test holes was designed by Source. Source marked the proposed boring locations and coordinated access on to the Sumner Facility for various third-party consulting companies who conducted the auger drilling, lithological logging and sampling of the auger returns on behalf of Source. Third party consultants included: Source; Summit; and Foth. Regardless of year or contractor, the auger programs generally adopted the same auger methodology. Truck mounted air rotary auger rigs were used to drill vertical (-90º) auger holes with zero orientations. The diameter of the auger stem was generally 6 inches (15 cm). The average depth of the auger test holes is 88.5 feet (27 m); the groundwater monitoring holes have slightly deeper average depths of feet (41 m). As of the date of the Sumner Report, none of the auger collars have surveyed collar locations or elevations; rather the auger collar information was A-11

185 initially recorded by the respective drill company in either lambert conformal projection (Latitude, Longitude) or Public Land Survey System (Township, Range, and Section) land descriptions. In 2014, the collar elevations were reviewed by, who accordingly, adjusted the collar elevations to correlate with their respective positions on topographic contour maps. As part of the Sumner APEX Report, APEX acquired remotesensing technology, Light Detection and Ranging (LiDar), from Barron County, and the high-resolution bare-earth LiDar data were used to fine-tune the collar elevations. Figure 17. Location of auger test holes and groundwater monitoring wells drilled by Source. The outline of the current Sumner Open Pit Mine workings and two historical water wells that were drilled within the boundaries of the Sumner Facility are also shown. Chronologically, the auger test hole programs has generally advanced the Sumner Facility as follows: (a) the 2011 and 2012 programs focused on parcels CSP-1, CSP-2, CSP-3, CSP-4 and CSP-5, which defined the Sumner Facility at the time (the Sumner Facility was expanded to the current land position in ); (b) 2011: Initial auger drill testing on CSP-1, CSP-2, CSP-3, CSP-4 and CSP-5 parcels to ascertain the top of the Wonewoc Formation and conduct initial test work on the silica sand. These auger holes typically penetrated to depths of 52.5 to 88.5 feet (16 to 27 m); (c) 2012: Minimal auger drilling to test and initiate groundwater monitoring holes on CSP-1 and CSP-4. This auger work was significantly deeper (up to 279 feet or 85 m deep) and represents the deepest sub-surface work on the Sumner Facility; (d) 2013: A small auger drill program (n=three groundwater monitoring holes) tested areas northeast of the original CSP parcels coincident with an expansion of the Sumner Facility (to its current land package); (e) 2014: An extensive infill auger drill program was conducted to define the present Sumner Open Pit Mine area (on the CSP parcels); in addition the program tested the Wonewoc Formation with large-scale drill-spacing in other parts of the Sumner Facility; and (f) 2015: An infill auger drill program focused on the Vincent parcel, which is directly east of the current Sumner Open Pit Mine area. Another objective of Source s auger work was to create groundwater monitoring wells that provide access to Cambrian aquifers for mine operations and to enable Source to monitor the groundwater table and conditions on the Sumner Facility. The groundwater monitoring holes, which interactively satisfy the criteria of the auger test holes (i.e., provide additional stratigraphic information and sample material for grain-size testing), have defined a mean water table elevation of approximately 1140 feet (347.5 m) above mean sea level (amsl) on the Sumner Facility. The groundwater elevation of 1140 feet (347.5 m) establishes the lowermost mining extents as defined by the Conditional Use Permit, which states that mining operations shall maintain a minimum of five feet (1.5 m) separation from groundwater table, and accordingly, Source has not drill tested below this depth with regularity. A-12

186 The groundwater monitoring holes are constructed by drilling enlarged (upper) and reduced (lower) hole diameters of 12 and 8 (30 and 20 cm), respectively, and then securing access to the well with 8 (20 cm) steel pipe casing and screens. The monitoring holes are measured regularly (once a month) to record the depth to the groundwater table. No diamond drillhole coring has been conducted on the Sumner Facility. Alternatively, the auger returns and clippings are extensively relied on to provide: (a) the lithological contact information; and (b) the lateral and vertical grain-size distribution of the Wonewoc Formation. To test the viability of using auger returns to model the Sumner Facility subsurface, the QP, extensively reviewed archived sample material that is stored on-site and consist of a representative archive sample for every sample that has been taken and analyzed on the Sumner Facility to date. The geological lithologies and contacts associated with the Pleistocene surficial deposits, Tunnel City Formation and Wonewoc Formation are straightforward, and hence the uppermost sub-surface at the Sumner Facility is well mapped. The lower contact between the Wonewoc Formation and the underlying Eau Claire and/or Mount Simon formations is not well understood as the auger test holes have generally not penetrated deep enough through the groundwater table to fully understand or map this contact. This uncertainty about the lower Wonewoc Formation contact does not detract from this resource evaluation as the authors have estimated the resource by using only the Wonewoc Formation information that is available (i.e., we have not extrapolated the Wonewoc to an estimated stratigraphic depth). Sampling, Analysis, and Data Verification Sample Preparation, Analyses and Security Auger returns, or clippings, from the 2011 to 2015 auger test hole programs (all auger holes) and from some of the groundwater monitoring holes (MW-4, MW-5 and MW-6) were analyzed for particle size/gradation analysis. The drill cutting samples were recovered from the auger rigs air discharge exhaust by bagging representative handfuls of auger returns for every 5 feet (1.5 m) of auger drilling. The samples were hand-mixed and split into at least two separate sample splits: one for particle size/gradation analysis; and one for archival at the on-site laboratory located on the Sumner Facility. In some instances, a third sample split was taken for proppant test work characterization. A total of 891 samples were analyzed for particle size/gradation analysis and form the main assay database for the resource estimation presented in the Sumner APEX Report. With the exception of samples from the 2011 CSP-1 to CSP-8 auger holes, the particle size/gradation analyses was conducted by third-party consultants: SEH Inc., FracTal LLC (associated with Summit) and Foth; in conjunction with their respective handling of the auger drill programs. The 2011 CSP-1 to CSP-8 particle size/gradation analysis was completed in-house at Source s laboratory facility located on the Sumner Facility. The particle size/gradation analysis followed analytical procedures that generally included: drying the sample; sieving out the >8 mesh fraction; washing and drying the sample; and sieving the resulting sample using the sieve test procedure outlined in ASTM E11 (ASTM, 1995). The resulting sieve results are reported in the following mesh size fractions: 12 (1.820 mm), 16 (1.270 mm), 18 (1.080 mm), 20 (925 μm), 25 (775 μm), 30 (660 μm), 35 (550 μm), 40 (471 μm), 45 (396 μm), 50 (337 μm), 60 (283 μm) 70 (242 μm), 100 (174 μm), 140 (126 μm), 200 (91 μm), and Pan (or <91 μm). Note that the 140 mesh fraction was not analyzed or recorded for 200 of the 891 samples from 17 auger holes (STB-, STB-22, HO-1 to HO-11, and BR-TB1 to BR-TB3). In addition to the particle size/gradation analyses, a smaller subset of samples and their respective size fractions (n=12) was analyzed for proppant test work following the specifications of ISO :2006/ Amd.1:2009E (International Standards, 2009). This test work is described Mineral Processing and Metallurgical Testing. Proppant characterization test work was completed at Stim-Lab Inc. in Duncan, OK. The proppant test work samples were dried, weighed and washed through a 200 mesh sieve. The sample retained on the sieve was then dried and reweighed. The percent loss was calculated from the material that washed through the sieve. The 20/40, 30/50 and 40/70 size fractions were isolated for testing, which includes: (a) Bulk density: The unit mass of an untapped or unsettled proppant that will occupy a specific known volume; e.g., how many grams per cubic centimeter. Bulk Density includes both the mass of the proppant and the mass of air occupying the interstitial spaces between proppant particles; (b) Sphericity and Roundness (Krumbein Shape Factors): Sphericity is the measure of how spherical a given proppant particle is. Roundness is the measure of the lack of sharp edges or angularity. Proppants must be highly spherical and well-rounded in order to maximize interstitial space between adjacent proppant particles A-13

187 to allow passage of oil, gas, condensate, etc., through the proppant pack in the frac width; (c) Acid Solubility: A mass loss (gravimetric) test method that determines the degree of solubility of natural sand in a 12:3 blend of Hydrochloric and Hydrofluoric acids. The technique effectively measures the resistance of proppants to acid attack, which is an indication of the presence of contaminants that may negatively affect proppant performance; (d) Turbidity: A method using transmittance or reflectance of light to measure the amount of fines that are <200 mesh in diameter, including clay, silt, proppant fines, etc. A fixed mass of proppant is added to a fixed mass of deionized water, agitated, and the water is drawn off and measured in a turbidity meter; and (e) Crush Resistance: A measurement of the strength of a mass of screened, fines-free dry proppant to force applied over a fixed cross-sectional area, providing an equivalent stress to the proppant under test. The mass of proppant introduced to the crush cylinder is a function of its bulk density and the specified loading of 4.0 pounds per cubic foot. The load is applied in a controlled rate and held at the final test stress level for 2.0 minutes. The mass is rescreened to determine the amount of fines generated by the applied stress, and the highest stress attained without producing more than 10.0% fines is the K Number. For example, if Crush Resistance of a proppant yielded 9.78% fines at 10,000 psi and 10.44% fines at 11,000 psi, the K Number (K=1000) of that proppant would be 10K, because the generated fines were below 10.0% at 10,000 psi (10K psi) and exceeded 10% at 11,000 psi. The laboratory selected by Source is an independent laboratory. The analytical methods carried out by the laboratory is standard and routine in the field of silica sand and proppant characterization test work, and are pursuant to International Standard ISO Data Verification The drilling, logging, sampling and test work processes employed during the auger test drilling and sampling programs was conducted by independent, recognized and established third-party consultants, including SEH, Summit and Foth. The resulting auger specifications, drill logs, sample collection and analytical test methods applied by these firms meets industry standards for accuracy and reliability. With respect to particle size/gradation analyses, the Lab Manager at FracTAL (subsidiary of Summit), was asked if the particle size/gradation analyses conducted at various laboratories was compatible and valid for use in NI resource estimation. FracTAL used a Camsizer to complete the gradation analysis. In contrast, the other labs (Source, SEH and Foth) used the ASTM standardized particle size distribution or gradation method using a sieve stack. FracTAL feels the standardized method is not as accurate as the Camsizer, but is still used widely because most labs do not have access to a Camsizer. Importantly, the resulting breakdown of the gradation analysis still follows the ASTM E11 specification. FracTAL s Lab Manager concluded that while the methodologies used to sieve-out the samples are not identical, the results are still reported using the same mesh increments, and therefore, yield a valid combined dataset that is representative of the particle size/gradation distribution at the Sumner Facility (personal communication, FracTAL LLC, 2015). With respect to proppant characterization, Stim-Lab Inc. is an independent laboratory and accredited to ISO 17025:2005 in North America offering all ISO , ISO , API RP19C, and API RP56 tests for sand, resincoated sand, and engineered ceramic proppants. The QPs reviewed all geotechnical and geochemical data and taken the necessary steps to understand the analytical methodologies that were conducted by the independent laboratory. The QP, has found no significant issues or inconsistencies that would cause one to question the validity of the data and is satisfied to include these data in resource modelling, evaluation and estimations as part of Sumner Indicated and Inferred Silica (Frac) Sand Resource estimate presented in the Sumner APEX Report. Mineral Processing and Metallurgical Testing International Standards ISO :2006/Amd.1:2009E provides the specifications for the measurement of properties of proppants used in hydraulic fracturing operations. Source has conducted proppant test work on nine separate samples, which includes derivate size fractions from individual samples. The analytical test work was conducted at Stim-Lab Inc. in Duncan, OK, an independent laboratory offering ISO tests for sand proppant. The size fractions tested includes: 20/40, 30/50, 40/70 and 50/140. The results of the test work are presented in Table 10 and summarized in the following text. A-14

188 Fracturing Proppant Sizes ISO :2006/Amd.1:2009E states that a minimum of 90% of the tested proppant sample shall pass the coarse designated (or first primary) sieve and be retained on the fine designated (or second primary) sieve (i.e., 12/20, 20/40, 40/60, etc.). For 20/40 sieve sizes, a minimum of 90% of the tested proppant sample shall pass the 20 mesh sieve and be retained on the 40 mesh sieve. Not over 0.1 % of the total tested proppant sample shall be larger than the first sieve size in the sieve stack specified in ASTM E11, and not over 1.0% of the total tested proppant sample shall be smaller than the last designated sieve size. All Source samples met the ISO :2006 proppant size specification. Table 10. Summary of proppant characterization test work conducted by Source. Sample ID Grain size fraction Date Received by lab Bulk density (g/cm 3 ) Apparent density oil (g/cm 3 ) Krumbein shape factor (roundness) Krumbein shape factor (sphericity) Mean partical diameter (mm) Crush resistance (to 10% psi) (psi) 5000 (psi) 6000 (psi) 7000 (psi) 8000 (psi) 9000 (psi) Acid solubility (psi) (12:3 HCl:HF) SES 20/40 20/40 5-Nov / / / / St Louis Prop 15# composite 20/40 4-Sep / / / / SES 30/50 30/50 29-Jan / / / / SES 30/50 30/50 5-Nov / / / / St Louis Prop 15# composite 30/50 4-Sep / / / / SES 40/70 40/70 22-Aug-14 / 2.63 / / / / / / / / / / / 52 CSP 40/70 40/70 11-Oct / / 3.90 / / / 1.4 / St Louis Prop 15# composite 40/70 4-Sep / 2.50 / / / SES 50/140 50/ Jan / 3.40 / / / psi is pounds per square inch 2 NTU = nephelometric turbidity unit; FTU = formazine turbidity Unit Highest stress level in which the proppant generates no more than 10% crushed material, rounded to the nearest 1,000 psi (or K-value) International standards for proppant specification (ISO ; ): - Average sphericity of 0.6 or greater - Average roundness of 0.6 or greater - Maximum acid solubility of grains <30/50 is 3.0% and for grains 30/50 is 2.0% - Turbidly shall not exceed 250 NTU (FTU) Silt and fines: turbidity (NTU) 2 Sphericity and roundness Sphericity is a measure of how close the grain is to a sphere, and roundness is a measure of the relative sharpness of grain corners. ISO :2006/Amd.1:2009E states that sphericity and roundness for proppant is 0.6 or greater, and the recommended sphericity and roundness for high-strength proppant is 0.7 or greater. Table 10 shows that all of the samples sent to Stim-Lab have sphericity shapes of greater than 0.7 meeting the criteria for high-strength proppant. With the exception of one 50/140 size fraction all of the roundness results were 0.7 meeting the criteria for high-strength proppant. Acid Solubility Acid Solubility provides an indication of the amount of undesirable contaminants in a sand sample by determining its solubility when soaked in a hydrochloric-hydrofluoric acid (HCL-HFL) solution. ISO :2006/Amd.1:2009E states that the acid soluble material in proppants shall not exceed 2.0 and 3.0 for proppant larger than or equal to the 30/50 and smaller than 30/50 mesh fractions, respectively. Table 10 shows that all of the samples measured with smaller than 30/50 size fractions (two 20/40 fractions) have acid solubility s of less than 1.2%, which is below the specification of 3.0%. With respect to the larger than or equal to 30/50, the 30/50 and 40/70 fractions have acid solubility s of less than 1.5%, which is below the specification of 2.0%. The 50/140 fraction has an acid solubility of 3.4%, which is above the specification of 2.0%. A-15

189 Maximum Proppant Turbidity Turbidity is the measurement of the amount of clay and silt sized particles contained in sand sample by placing it in water and measuring the overall turbidity of the liquid. ISO :2006/Amd.1:2009E states that the turbidity of all fracturing proppants shall not exceed 250 nephelometric turbidity units (NTU). All of the Source samples easily satisfy this specification with turbidity s of <57 NTU (Table 10). Maximum Crush Material Crush resistance is determined by subjecting a sand sample to specific pressures for a designated amount of time and measuring the resulting amount of fines (percent by weight). As per ISO :2006/Amd.1:2009E, determination of the highest stress level at which proppant generates no more than 10% crushed material, rounded down to the nearest 6.9 MPa (1,000 psi), represents the maximum stress that the material can withstand without exceeding 10% crush (International Standards, 2009). The crush resistance, k value for the various size fractions include: (a) three 20/40 fractions resulted in 5k, 6k and 7k crush resistance; (b) four 30/50 fractions resulted in 6k, 7k (n=2) and 8k crush resistance; (c) three 40/70 fractions resulted in 7k and 8k 9n=2) crush resistance; and (d) a single 50/140 fraction resulted in a 9k crush resistance (Table 10). These k values are typical for Cambrian Wonewoc sandstone in western Wisconsin. For example, Brown (2012) cited 20/40, 30/50 and 40/70 crush resistance values of 6k, 7k and 10k, respectively. To conclude, the published specifications and standards for industrial minerals should be used primarily as a screening mechanism to establish the marketability of an industrial mineral. The suitability of an industrial mineral for use in specific applications can only be determined through detailed market investigations and discussions with potential consumers. In Source s case, the proppant test work results show that the Sumner Facility Wonewoc Formation silica sand meets the recommendations set forth in International Standards ISO :2006/Amd.1:2009E for sieve size fractions, sphericity, roundness, acid solubility, turbidity and crush classification. Accordingly and with respect to reporting a resource estimate that abides by NI , the Source proppant test work results show that the Wonewoc Formation silica sand from the Sumner Facility has demonstrated prospects of economic viability for an industrial mineral deposit. This fact is clearly demonstrated in that Source is mining, processing, transporting and selling its silica sand to North America markets. Mineral Resource Estimate The resource has been estimated within three-dimensional solids that were created from cross sectional interpretation. The upper contact of Wonewoc Formation is either in contact with the overlying Tunnel City Group or Pleistocene surficial deposits, or has been cut by the topography surface using a combination of 1 m resolution LiDar survey and STRM data. The sizing percent was estimated into a block model with parent block size of 164 feet East x 164 feet North x 10 feet Elevation (50 m x 50 m x 3 m) with sub-blocking down to 33 feet East x 33 feet North x 3.3 feet Elevation (10 m x 10 m x 1 m). A nominal density of 1.57 g/cm3 was applied to all blocks, which was based on thirteen representative density samples. The percent concentrations for the grain sieve size fraction estimation were performed using inverse distance squared methodology. Indicated Mineral Resource and the Inferred Mineral Resource is constrained within the Wonewoc Formation, and to a depth of 82 m below surface. The Indicated Mineral Resource has been constrained around the highest density of drilling and in and around the Sumner Facility. The remainder of the resource was classified as Inferred Mineral Resource. Using a lower cutoff of +70 sand fractions being greater than 60% in total abundance, this Sumner Indicated and Inferred Silica (Frac) Sand Resource estimate predicts total (i.e., global) resources of: million short tons (21.53 million metric tonnes) of silica sand of indicated; and million short tons (94.10 million metric tonnes) of silica sand of inferred classification is present at Sumner Facility (Tables 21 and 22). The Sumner Indicated and Inferred Resource in Tables 21 and 22 is also presented in selected proppant size fraction distributions of 20/40, 30/50, 40/70 and 50/140 (or 100 ) mesh, and estimated tonnages of the individual fractions are as follows: Indicated Mineral Resource: (a) 20/40 mesh fraction: 5,530,000 short tons (5,010,000 metric tonnes); (b) 30/50 mesh fraction: 11,430,000 short tons (10,370,000 metric tonnes); (c) 40/70 mesh fraction: 11,830,000 short tons (10,730,000 metric tonnes); and (d) 50/140 mesh fraction: 7,730,000 short tons (7,020,000 metric tonnes). A-16

190 Inferred Mineral Resource: (a) 20/40 mesh fraction: 23,950,000 short tons (21,730,000 metric tonnes); (b) 30/50 mesh fraction: 43,540,000 short tons (39,500,000 metric tonnes); (c) 40/70 mesh fraction: 44,680,000 short tons (40,540,000 metric tonnes); and (d) 50/140 mesh fraction: 34,230,000 short tons (31,060,000 metric tonnes). The Sumner Open Pit Mine is located within the Indicated Mineral Resource area, which lends credibility to its economic viability. The Indicated Mineral Resource presented in the Sumner APEX Report has compensated for the mined out section of Wonewoc Formation silica (frac) sand, the open pit boundaries of which were mapped by Source in the summer 2015 using an unmanned aerial vehicle (i.e., a drone). Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the Mineral Resource will be converted into a Mineral Reserve. Table 1. The Sumner Indicated Silica (Frac) Sand Resource estimate as of December 16, The highlighted main indicated resource is reported from the Wonewoc Formation as a total (global) volume and tonnage using a nominal bulk density of 1.57 g/cm 3 and a lower reporting cutoff of the sum of the +70 sand fractions being greater than 60% total abundance. The Table also presents selected proppant size distributions of 20/40, 30/50, 40/70 and 50/140 (or 100 ) mesh. Note 1: Note 2: Note 3: Note 4: Note 5: Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the Mineral Resource will be converted into a Mineral Reserve. The estimate of Mineral Resources may be materially affected by geology, environment, permitting, legal, title, taxation, socio-political, marketing or other relevant issues. Source has not based its production decisions and ongoing mine production on Mineral Reserve estimates, preliminary economic assessments, pre- feasibility studies or feasibility studies. As a result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery and historically projects without any Mineral Reserves have increased uncertainty and risk of failure. The weights are reported in metric tonnes (1,000 kg or 2,204.6 lbs) and United States short tons (2,000 lbs or kg). Numbers may not add up due to rounding of the resource values percentages (rounded to the nearest 10,000 unit). The Total volume and weights are estimated on a global basis and represent the main Sumner Indicated Silica (Frac) Sand Resource. The estimation of the individual sieve size fractions was completed using no cutoff, however, the Sumner indicated and inferred resource is reported using a lower reporting cutoff of the sum of the +70 sand fractions being greater than 60%. Wonewoc formation indicated mineral resource total (global) resource and selected size fractions volume (m3) tones (T) tons (t) total 13,710,000 21,530,000 23,730,000 20/40 3,190,000 5,010,000 5,530,000 30/50 6,600,000 10,370,000 11,430,000 40/70 6,830,000 10,730,000 11,830,000 50/140 4,470,000 7,020,000 7,730,000 A-17

191 Table 2. The Sumner Inferred Silica (Frac) Sand Resource estimate as of December 16, The highlighted main inferred resource is reported from the Wonewoc Formation as a total (global) volume and tonnage using a nominal bulk density of 1.57 g/cm3 and a lower reporting cutoff of the sum of the +70 sand fractions being greater than 60% in total abundance. The Table also presents selected proppant size distributions of 20/40, 30/50, 40/70 and 50/140 (or 100 ) mesh. Note 1: Note 2: Note 3: Note 4: Note 5: Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the Mineral Resource will be converted into a Mineral Reserve. The estimate of Mineral Resources may be materially affected by geology, environment, permitting, legal, title, taxation, socio-political, marketing or other relevant issues. Source has not based its production decisions and ongoing mine production on Mineral Reserve estimates, preliminary economic assessments, pre- feasibility studies or feasibility studies. As a result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery and historically projects without any Mineral Reserves have increased uncertainty and risk of failure. The weights are reported in metric tonnes (1,000 kg or 2,204.6 lbs) and United States short tons (2,000 lbs or kg). Numbers may not add up due to rounding of the resource values percentages (rounded to the nearest 10,000 unit). The Total volume and weights are estimated on a global basis and represent the main Sumner Inferred Silica (Frac) Sand Resource. The estimation of the individual sieve size fractions was completed using no cutoff, however, the Sumner indicated and inferred resource is reported using a lower reporting cutoff of the sum of the +70 sand fractions being greater than 60%. The Sumner Indicated Silica (Frac) Sand Resource, which is situated in the Wonewoc Formation, is overlain by, or intercalated withy: 3.22 million short tons (2.92 million metric tonnes) of Pleistocene surficial deposits; 1.83 million short tons (1.66 million metric tonnes) of Tunnel City Group sedimentary rock; and 6.33 million short tons (5.74 million metric tonnes) of waste Wonewoc Formation, defined as Wonewoc sand that did not satisfy the cutoff of +70 sand fractions being greater than 60% in total abundance. The Sumner Inferred Silica (Frac) Sand Resource, which is focused solely on the Wonewoc Formation, is overlain by, or intercalated with: million short tons (15.16 million metric tonnes) of Pleistocene surficial deposits; million short tons (17.08 million metric tonnes) of Tunnel City Group sedimentary rock; and million short tons (25.53 million metric tonnes) of waste Wonewoc Formation, defined as Wonewoc sand that did not satisfy the cutoff of +70 sand fractions being greater than 60% in total abundance. The waste material tonnages were calculated using densities of 1.37 g/cm3 for the overburden, and 1.57 g/cm3 for the Tunnel City Group and waste Wonewoc Formation. The overburden bulk density value of 1.37 g/cm3 is based on three till samples that were analyzed for bulk density by the senior author during and Wonewoc bulk density analytical work. There is currently no known density information for the Tunnel City Group; hence, we used the same bulk density value as the Wonewoc Formation. Exploration and Development Source has no current intentions of undertaking a preliminary economic analysis or any additional drilling or exploration activities as the Sumner Facility is currently sufficiently producing to support Source s operations. Wonewoc formation inferred mineral resource total (global) resource and selected size fractions volume (m3) tonnes (T) tons (t) total 59,930,000 94,100, ,720,000 20/40 13,840,000 21,730,000 23,950,000 30/50 25,160,000 39,500,000 43,540,000 40/70 25,820,000 40,540,000 44,680,000 50/140 19,780,000 31,060,000 34,230,000 A-18

192 DESCRIPTION OF THE BLAIR FACILITY AND THE D95 NORTH PROPERTY Current Technical Report The information in this section of the prospectus related to the Blair Facility and the D95 North Property is based upon the Blair APEX Report authored by the QPs. The QPs have verified the data disclosed, including sampling, analytical, and test data underlying the information contained in the prospectus. Any reference to figures, tables or citations below correspond to such items in the Blair APEX Report. For an explanation of certain technical terms used in this prospectus, see Scientific and Technical Information. Portions of the following information are based on assumptions, qualifications and procedures which are not fully described herein. Reference should be made to the full text of the Blair APEX Report, which is available for review under the Company s profile on the SEDAR website at The D95 North Property is incorporated in the Blair APEX Report, but does not have the same amount of subsurface drilling information as the Blair Facility. Accordingly, a Mineral Resource estimate has not been prepared for the D95 North Property, but rather, the QPs evaluated the D95 North Property as a potential target for future exploration. See Accessibility, Climate, Local Resources, Infrastructure and Physiography for information regarding access to the these properties. Project Description, Location, and Access Introduction to the Blair Facility and the D95 North Properties Source US LP has entered into the Blair Purchase Agreement to acquire 100% of the membership interests of Sand Products. Sand Products has two subsidiaries that, by virtue of the Blair Purchase Agreement, will also be fully owned by Source: Spartan Sand LLC, and Sand Products Rail LLC. Sand Products has a land lease for silica sand properties at the Blair Facility that are situated within Trempealeau County in west-central Wisconsin. Spartan Sand LLC has a land lease for silica sand properties at the D95 North Property that are situated within Trempealeau County in west-central Wisconsin. The ownership and leases of both the Blair Facility and the D95 North Property are summarized as follows: Blair Facility Ownership History Private (deeded) land owners within the boundaries of the Blair Facility formed a coalition group entitled the Highway 53 Group LLC. Highway 53 Group LLC executed a Mining Option and Lease Agreement with Sand Products, with an effective date of November 28, D95 North Property Ownership History Private (deeded) land owners within the boundaries of the D95 North Property formed a coalition group entitled the FTBB Holdings LLC. FTBB Holdings LLC executed a Mining Option and Lease Agreement with Spartan Sand LLC (a subsidiary of Sand Products), with an effective date of November 21, Closing of the Blair Facility Acquisition is pending at the effective date of the Blair APEX Report. Per the Blair Purchase Agreement, Source will own 100% of the membership interests of Sand Products; all agreements pertaining to Sand Products (i.e. leases, royalties, permits, etc.) will transfer to the benefit of Source. A summary of the agreements for both the Blair Facility and D95 North Property are discussed in the text that follows. The Blair Facility includes 25 contiguous parcels totalling acres ( hectares; Table 3). The parcels range in size from 0.05 acres to acres. Within the Blair Facility, Sand Products has constructed an open pit to access Wonewoc Formation silica sand, a wet-processing plant adjacent to the open pit, and a dry processing plant and rail-loading terminal situated on CN s Whitehall subdivision. This rail line links with rail lines associated with the Weyerhaeuser Facility, which is also on CN s Barron subdivision. A-19

193 The D95 North Property includes 17 contiguous parcels totalling acres ( hectares; Table 3; Figure 4). The parcels range in size from 0.16 acres to acres (Note: 40 acres represents a quarter-quarter section). The Blair Facility and the D95 North Property are not contiguous, and are separated by a distance of approximately 4 km. Table 3. Permit descriptions and status for the Blair Facility and D95 North Property. A) Blair Facility Parcel # Public Land Survey System (township-range-section-quarter section-quarter quarter section) Area (acres) Area (hectares) Private (deeded) land owner T21N-R7W-S6-NW-SW Thompsand Farms LLC T21N-R7W-S6-NW-NW Thompsand Farms LLC T21N-R7W-S6-SW-NE Thompsand Farms LLC T21N-R7W-S6-SW-NW Thompsand Farms LLC T21N-R7W-S6-SW-SW Thompsand Farms LLC T21N-R7W-S6-SW-SE Thompsand Farms LLC T21N-R8W-S1-NE-NE Kulig Estenson, Kimarie Lynn T21N-R8W-S1-NE-NE Thompsand Farms LLC T21N-R8W-S1-NE-NW,NE Kulig, Kevin J & Tanya M T21N-R8W-S1-NE-NW Kulig Estenson, Kimarie Lynn T21N-R8W-S1-NE-SW Osgood Family LLP T21N-R8W-S1-NE-SE Osgood Family LLP T21N-R8W-S1-NW-NE Kulig Estenson, Kimarie Lynn T21N-R8W-S1-NW-NW Jones Revocable Trust, Richard Y & H T21N-R8W-S1-NW-SW Pederson, Kermit E & Sharon J T21N-R8W-S1-NW-SW Sand Products Wisconsin LLC T21N-R8W-S1-NW-SE Osgood Family LLP T21N-R8W-S1-SW-NE Osgood Family LLP T21N-R8W-S1-SW-NW Pederson, Kermit E & Sharon J T21N-R8W-S1-SW-SW Pederson, Kermit E & Sharon J T21N-R8W-S1-SW-SE Kindschy, Eugene W & Tammy T21N-R8W-S1-SE-NE,NW Kindschy, Eugene W & Tammy T21N-R8W-S1-SE-NW,SW Kindschy, Eugene W & Tammy T21N-R8W-S1-SE-NW,SW,NE Green Acre Investments LLC T21N-R8W-S2-SW-NE Pederson, Kermit E & Sharon J Totals B) D95 North Property Parcel # Public Land Survey System (township-range-section-quarter section-quarter quarter section) Area (acres) Area (hectares) Private (deeded) land owner T21N-R08W-S22-SW-NE Flaten Land Company LLC T21N-R08W-S22-SE-NE Flaten Land Company LLC T21N-R08W-S22-SE-NE Flaten Land Company LLC T21N-R08W-S22-NE-SE Flaten Land Company LLC T21N-R08W-S22-NE-SW Robert & Lorna Tenneson T21N-R08W-S22-NE-SW Flaten Land Company LLC T21N-R08W-S22-SE-SW Robert & Lorna Tenneson T21N-R08W-S22-SE-SW Flaten Land Company LLC T21N-R08W-S22-NE-SE Flaten Land Company LLC T21N-R08W-S22-NW-SE Robert & Lorna Tenneson T21N-R08W-S22-NW-SE Flaten Land Company LLC T21N-R08W-S Robert & Lorna Tenneson T21N-R08W-S22-SE-SE Robert & Lorna Tenneson T21N-R08W-S22-SE-SE Flaten Land Company LLC T21N-R08W-S27-NE-NE Flaten Land Company LLC T21N-R08W-S Robert & Lorna Tenneson T21N-R08W-S27-NE-NW Robert & Lorna Tenneson Totals A-20

194 Figure 3. The Blair Facility is comprised of 25 separate parcels (to accompany Table 3). Figure 4. Source Energy Services D95 North Property is comprised of 17 separate parcels (to accompany Table 3). A-21

195 Property Location The Blair Facility and the D95 North Property are located near the Town of Preston, Trempealeau County in westcentral Wisconsin. The Blair Facility is located between the cities of Whitehall and Blair and is transected by Highway 53 (4.5 km south of Whitehall and 5.2 km northwest of Blair). The approximate center of the Blair Facility, in Universal Transverse Mercator coordinates is: m Easting, m Northing, Zone 15, North American Datum 83. Using the Public Land Survey System, the property is located in Section 1 of Township 21, Range and 8W and section 6 of Township 21, Range 7W. The D95 North Property is located approximately 4 km to the southwest of the Blair Facility and about 7.5 km east-southeast of the City of Blair. The approximate center of the D95 North Facility, in Universal Transverse Mercator coordinates is: m Easting, m Northing, Zone 15, North American Datum 83. Using the Public Land Survey System, the property is located in Section 2 of Township 21, Range and 8W. Nature and Extent of Sand Products Land Titles Two agreements form the basis of the land titles for the Blair Facility: (a) an Annexation Agreement with the City of Blair; and (b) a Mining Option and Lease Agreement. The Annexation Agreement was signed on March 27, 2014 between the City of Blair and Sand Products, and provides Sand Products approval to engage in mining operations from Trempealeau County, subject to Sand Products meeting certain conditions imposed by Trempealeau County. As per the Annexation Agreement, a summary of the obligations of Sand Products include: 1. Compliance with State and Federal laws; 2. Property tax payments paid annually to the Town of Preston and pursuant to Wisconsin Statutes; this includes an Annexation Payment for a five year term, and for an additional 15 years, or at the cessation of mining operations, whichever occurs first. 3. Property value guarantee paid to all residential property owners. 4. Sand Products shall not operate any commercial vehicles used for the purpose of transporting non-metallic minerals. 5. Annual inspection and regulation costs, including Sand Products paying to the city a fee of US$0.25 cents per ton of non-metallic minerals processed and shipped from the Blair Facility. 6. Sand Products will provide a minimum royalty payment of US$100,000 to be paid the year the construction commences on the annexed property and the first year thereafter. 7. All reasonable consulting, inspection and engineering fees incurred for the City of Blair s administration of the Annexation Agreement. A reclamation plan was devised and approved by the City of Blair; the plan is consistent with the terms of Chapter 295 of the Wisconsin Statutes, N.R. 135 of the Wisconsin Administrative Code, and Chapter 52 of the City Code of Ordinances for the City of Blair. The Mining Option and Lease Agreement (effective date of January 28, 2012) binds a formal agreement between the Blair Facility land holders and Sand Products. A due diligence period (four months) included the payment of the sum of US$115,000 by Sand Products to the Blair Facility land owners upon the execution of the Mining Option and Lease Agreement. In addition to due diligence rights, Sand Products exercised the option to the Mining Option and Lease Agreement by paying US$575,000 to the Blair Facility land owners to lease the Sand Rights (as defined herein). This granting rights permits Sand Products exclusive right to mine in, on and under the Blair Facility, which includes, without limitation, entering upon exploring, drilling, developing, surface or open pit or strip mining, auger mining, or, mining sand by any other method (whether now or hereafter known), using all water rights appurtenant to the Blair Facility, and producing, processing, drying, removing, loading, transporting, and marketing sand from the Blair Facility for Sand Products own account (collectively the Sand Rights ). The Sand Rights include full and complete rights of ingress to and egress from and over the Blair Facility and the right to blast, excavate, remove, pile up and dispose of overburden and waste. The rights include the ability to erect use and maintain on the Blair Facility such buildings, A-22

196 plants, equipment, machinery, offices, shops, tracts, storerooms, tipples, scale houses, pump houses, drainage ditches, power and telephone lines, haul roads and any other improvement as may be necessary or desirable in performing the mining operations and removing sand. The Mining Option and Lease Agreement is for a term of 10 years, beginning on the commencement date, and shall automatically be extended for two additional 10-year terms so long as no less than the Minimum Production Royalty is paid. The Production Royalty schedule is presented in Table 4. Table 4. Blair Facility Royalty schedule. The rate is determined for each month, based on the average of: (a) prior 6-months average sand shipped; and (b) the prior 6-month West Texas Intermediate index. Monthly tons of Blair Facility sand shipped (6-month rolling average) West Texas Intermediate (WTI; 6-month rolling average) Royalty per tone 0-10, $1.00 >10, $1.10 >20, $1.20 >30, $1.30 >40, $1.40 >50, $1.50 >60, $1.65 >70, $1.80 >80, $2.00 >90, $2.20 >100, $ $ $3.00 In the event Sand Products constructs a processing plant on the Blair Facility, Sand Products shall pay an annual Siting Fee of US$1,000 per acre. The Siting Fee has been paid and shall not be applied to the Minimum Production Royalty. In addition to the Siting Fee, Sand Products shall pay a Wheel Tax Royalty of US$0.50 per ton of sand processed on the Blair Facility; provided, however, that Sand Products shall not be obligated to pay any Wheel Tax Royalty amounts on sand processed on the Blair Facility, but which was extracted from the Blair Facility. The Wheel Tax Royalty shall not be applied to the Minimum Production Royalty. The tons of sand to which the Wheel Tax at the Blair Facility apply shall not exceed 50% of the gross tons shipped by Sand Products from its collective Wisconsin Mining Operations unless Sand Products shall have mined all of the available sand from the Blair Facility. The Wheel Tax shall be paid through the lifetime of the Blair Facility. Nature and Extent of the Land Titles: D95 North Property At present, the D95 North Property is bound by a single agreement, the Mining Option and Lease Agreement, as amended, which is effectively dated November 21, The agreement is signed by the land owners, FTBB Holdings LLC, and a 100% subsidiary of Sand Products, Spartan Sand LLC. Stipulations of the current agreement show that the Mining Option and Lease Agreement for the D95 North Property is currently suspended as summarized below: All terms, conditions and financial obligations of the 1 st,2 nd and 3 rd agreements are suspended. Spartan Sand LLC has until April 1, 2017 to provide written notice to FTBB Holdings LLC to restore the suspended terms, conditions and financial obligations of the Mining Option and Lease Agreement. Permitting and Environmental Approvals: Blair Facility and D95 North Property Sand Products has the following local, Trempealeau County, and Wisconsin State permits that will be transferred to Source with execution of the Blair Purchase Agreement: Conditional Use Permit: Available via the Department of Land Management, Trempealeau County Land and Water Plan and the Comprehensive Zoning Ordinance. The permit stipulates standard operation requirements (e.g., extraction and processing hours of operation; audible noise emissions; blasting hours; public road usage; etc.). A-23

197 With respect to groundwater, the Conditional Use Permit states that: Non-metallic mining operations must at all times remain at least 10 feet (3 m) above the water table level, unless an alternative level proposed by the applicant and established by water table elevation monitoring is approved by the county; The county may require monitoring wells to establish the groundwater level prior to the commencement of non-metallic mining operations on a site; Non-metallic mining within 10 feet (3 m) of the water table level or within the water table may be permitted provided the applicant receives a favorable letter from the town board regarding the mining proposal and receives the approval of the county; and Lastly, the applicant must demonstrate that the operation does not pose a legitimate risk as determined by the county to water table level or groundwater quality of the area. Non-metallic Mining Reclamation Ordinance: Chapter NR 135 of the Wisconsin Administrative Code requires counties to adopt and implement a Non-Metallic Mining Reclamation Ordinance to establish a local program to ensure the effective reclamation of non-metallic mining sites on which non-metallic mining takes place. Administration of the reclamation programs is conducted by either county or local regulatory authorities; Air Pollution Control Permit (Wisconsin Department of Natural Resources); Non-metallic Mining Operations General Permit (storm water; Wisconsin Department of Natural Resources); and High Capacity Well Permit (Wisconsin Department of Natural Resources). There are no federal permits required. With respect to environmental work conducted to meet the criteria of the permitting, an Endangered Resource Review was conducted prior to the issuance of new or revised permits by the Wisconsin Department of Natural Resources. There are no other significant factors or risks that may affect the access, land title, or the right or ability to perform work on the Blair Facility. History No historical resource estimates have been prepared by independent contractors on behalf of Sand Products. Accessibility, Climate, Local Resources, Infrastructure and Physiography The properties are located near the Town of Preston, Trempealeau County in west-central Wisconsin. The closest large cities are Eau Claire to the north and La Crosse to the south. Other nearby communities include: Taylor, Arcadia, Independence, Hixton, and Galesville. The Blair Facility is located between the cities of Whitehall and Blair and is transected by Highway 53 (4.5 km south of Whitehall and 5.2 km northwest of Blair). Whitehall represents the Trempealeau County seat. The D95 North Property is located approximately 4 km to the southwest of the Blair Facility and about 4 km east-southeast of the City of Blair. The Blair Facility and D95 North Property are landlocked, but are located adjacent to well-maintained, paved US highways. The driving distance from Eau Claire to the Blair Facility is approximately 43 miles (69 km) on paved double lane State Hwy 53. The D95 North Property, which is southwest of the Blair Facility, is accessed by continuing south on State Hwy 53, southwest on State Hwy 95 and west on Peterson Coulee Road to the D95 North Property. The driving distance between the Blair Facility and the D95 North Property is approximately 6.5 miles (10.5 km). Geological Setting and Mineralization Regional Geology, Local and Property Geology In the general Blair Facility and D95 North Property areas, silica sand units include the Cambrian Wonewoc and Jordan formations (Ostrom, 1966, 1970, 1987; Mudrey et al., 1987). These silica sand units are divided by the Eau Claire Formation and Tunnel City Group (also known as the Lone Rock Formation), which can be differentiated from the silica sand by their variable lithologies including: mudstone; intercalated mudstone and sandstone; very fine- to fine-grained sandstone; and cemented sandstone. A-24

198 Figure 10. Surface exposures of silica sand source units in the upper Midwest U.S. The polygons outline the Ordovician St. Peter sandstone (light yellow) and the combined Cambrian sandstone (green), which includes the Jordan, Wonewoc, and Mount Simon formations. The approximate positions of the Wisconsin Dome, Hollandale Embayment and the Driftless Area are also shown. Cambrian Mount Simon Formation In the northwest quadrant of Wisconsin, the Mount Simon Formation contains three informal quartzose sandstone sub-units (Mudrey et al., 1987), including: (a) an uppermost sandstone that is quartzose, feldspar-bearing, white to light gray to pale brown, medium to course grained, angular, medium bedded, locally lenticular bedded, and at least 170 feet (52 m) thick; (b) a second sandstone horizon that is quartzose, pale yellow orange to pale gray orange, very fine grained, thin to medium bedded, angular, limonite cemented, and 125 feet (38 m) thick, This unit is underlain by a 60 foot (18 m) thick, gray to pale-orange, silty shale; and (c) a basal sandstone unit that is quartzose, very pale orange, very fine to fine grained, subangular to subrounded, and at least 115 feet (35 m) thick; this sub-unit is known only in the northwestern Wisconsin subsurface. The unit is overlain by very fine to fine grained sandstone and shale of the Eau Claire Formation. Cambrian Wonewoc Formation The Wonewoc Sandstone, which is the subject of the Blair Apex Report, overlies the Eau Claire Formation and is observed in Wisconsin, Michigan, Illinois, Indiana, Minnesota, Iowa and in northeastern Nebraska (Clayton and Attig, 1990; Runkel et al., 1998); effectively throughout the area known as the Hollandale Embayment (see Figure 10). The reference section for the Wonewoc Sandstone is near the village of Wonewoc in Juneau County, Wisconsin. A-25

199 The Wonewoc Formation is characterized by a stratigraphically complex cratonic sheet of sandstone that was deposited from a continuously abundant supply of quartzose sand in a slowly and uniformly subsiding low-relief basin (Hollandale Embayment) under fluctuating sea level conditions during the Sauk II and Sauk III subsequences (Palmer, 1981; Runkel et al., 1998). The Wonewoc Formation sandstone varies in thickness from 50 to 150 feet (15 to 46 m) and is principally medium to coarse grained quartzose sandstone with high-angle cross-stratification. It is divided into two major lithofacies the Ironton Member and Galesville Member; however, the two members are commonly classified together as the Wonewoc Sandstone because lithostratigraphic studies have shown that it is difficult to consistently distinguish the two formations. Mudrey et al. (1987) characterized the two sub-members as the: (a) Ironton Member a quartzose, white to brown with iron staining, medium to coarse grained, subrounded, poorly sorted, wavy-bedded, vertically burrowed, calcite-cemented, feet (5 to 18 m) thick sandstone; and the underlying; and (b) Galesville Member a quartzose, white, fine-to medium grained, rounded to subrounded, well-sorted, thickbedded, cross-bedded, poorly cemented, feet (5 to 18 m) thick sandstone with bedding units feet (3 to 5 m) thick. The Wonewoc Formation is overlain by the Tunnel City Group (Ostrom, 1966, 1970, 1987), which varies in thickness from feet (43 to 55 m) and is divided into two sub-formations: the Mazomanie Formation and the Lone Rock Formation (Mossler, 2008). The Mazomanie Formation is dominantly white to yellowish-gray, fine- to medium-grained, cross-stratified, generally friable, quartz sandstone. Some beds contain brown, intergranular dolomite as cement. Skolithos burrows and sandstone intraclasts are common in discrete horizons. The Lone Rock Formation underlies the Mazomanie Formation. It consists of pale yellowish-green, very fine- to fine-grained glauconitic, feldspathic sandstone and siltstone, with thin, greenish-gray shale partings. Thin beds with dolomitic intraclasts are common. Cambrian Jordan Formation The Jordan Sandstone was named for the city of Jordan, WI and consists of two distinct, intercalated quartzose sandstone members that are summarized by Mudrey et al. (1987) as: (a) the uppermost Van Oser Member, which is a quartzose, white to brown to yellow or orange, fine to medium grained, poorly sorted, medium to thin bedded, cross bedded, with calcite-cemented nodules, is iron cemented in places, may be locally interbedded with the underlying unit, and is feet (9 to 15 m) thick; and (b) the lower Norwalk Member is a quartzose, white, fine-grained, rounded, moderately-sorted, medium-bedded sandstone with a trace of garnet, and a thickness of feet (15 to 18 m). In the western Wisconsin, the Norwalk is a fine- to very fine-grained feldspathic sandstone (Ostrom,1987; Runkel, 2000). The Van Oser and Norwalk members are characterized as the quartzose and feldspathic lithofacies, respectively, and as such, they are interpreted as high energy, marine intertidal sand deposited as the sea shallowed, and a low-energy, below wave base, marine deposits (Runkel, 1994). Pleistocene Surficial Geology The Blair Facility and the D95 North Property occur within an unglaciated region of west-central and southwestern Wisconsin that is referred to as the driftless area (see Figure 10). The thickness of the overburden at the Blair Facility and D95 North Property varies from as little as 5-10 ( m) to as much as 50. Auger drill programs show that the area is covered by a thin veneer of overburden that is characterized by brown clay to brown fine-grained clay-sand with traces of gravel. Property Geology Bedrock underlying Trempealeau County consists of Cambrian sandstone, shale and sandy dolomite, overlain by Ordovician dolomite and sandstone. Cambrian rock units include: Elk Mound Group (Mount Simon, Eau Claire and Wonewoc formations), the Tunnel City Group (undifferentiated) and the Trempealeau Group (St. Lawrence and Jordan formations). The lower Eau Claire-Wonewoc (Galesville Member) contact marks the end of one transgressive/regressive sequence and the beginning of a major transgressive sequence associated with the Wonewoc Formation. The Wonewoc transgression is defined by high-energy conditions with a noticeable lack of clay, silt, very fine sand and a total lack of fossils. Above the Galesville Member, the Wonewoc (Ironton Member) formed in an alternating high and low energy A-26

200 environment seaward of the beach front. Ironton Member sandstone is well sorted, clean, medium-to coarse-grained quartzarenite. The uppermost Ireton Member ends in a sharp contact with the Lone Rock Formation of the Tunnel City Group. The lithology of the Lone Rock Formation is easily distinguished from the underlying Wonewoc Formation in that the Lone Rock comprises fine-grained glauconitic, thin-bedded shaly units. Mineralization As per Trempealeau County Zoning Ordinance documentation, Industrial Sand is defined as a high purity silica sand or silicon dioxide (SiO2). It is nearly pure quartz, very well rounded, of uniform particle shape and size, having a high compressive strength, and meeting size gradation standards for its various uses. Industrial sand is sold for any of the following uses: glassmaking, metal casting, metal production, chemical production, paint and coatings, ceramics and refractories, moldings, abrasives, and otherwise preparing sand for uses other than construction. It is most commonly used by the oil and gas industry as a proppant for the hydraulic fracturing of shale for the exploration, drilling, production, and recovery of oil and gas (i.e. frac sand ). This sand is classified as Industrial Sand Mining according to the NAICS (North American Industry Classification System), and as 1446 Industrial Sand, and 1481 Non-metallic Mineral Services except fuels, according to the SIC (Standard Industrial Classification) System. Paleozoic age bedrock layers of quartzose sandstone in the central mid-continent of North America are known as some of the most mineralogically pure sandstone on Earth with greater than 95% of the sand grains consisting of silicon dioxide (SiO2). Whole rock chemical analysis (x-ray fluorescence) of the Wonewoc Formation sandstone, which was conducted by the Department of Natural Resources (Brown, 2012), shows that the Wonewoc silica sand consists of: (a) Silicon dioxide (SiO 2 ) %; (b) Aluminum oxide (Al 2 O 3 ) %; (c) Calcium oxide (CaO) %; (d) Iron oxide (Fe 2 O 3 ) %; (e) Potassium oxide (K 2 O) %; (f) Sodium oxide (Na 2 O) %; (g) Magnesium oxide (MgO) %; and (h) Titanium oxide (TiO 2 ) <0.01%. In addition to being composed mostly of quartz, a mineral known for being of high-strength and relatively inert, the grains are especially well-rounded, well-sorted, coarse-grained and poorly cemented. The advanced level of textural maturity in Cambrian quartz grains, including the Wonewoc Formation, remains more uncertain, but is believe to be related to chemical weathering that may have preferentially dissolved plagioclase and similarly unstable minerals, and a long history of abrasion in marine conditions and wind abrasion (Morey, 1972; Odom, 1975, 1978; Dott et al., 1986; Runkel, 1998; Dott, 2003; see Description of the Blair Facility and the D95 North Property Geological Setting and Mineralization Deposit Types ). Lastly, grain size is an important factor in determining the value of a silica sand deposit because, for example, the 20/40 mesh sand fraction typically has a relatively high value because of its demand for specific hydrofracturing procedures, and the 20/40 fraction is relative scarce in silica sand deposits elsewhere on the continent (Beckwith, 2011). Runkel and Steenberg (2012) synthesized grain size data from Ostrom (1971) and Thiel (1957) for the Jordan, Wonewoc, Mt. Simon and St. Peter formations from throughout Wisconsin; the histogram shows that: (a) St. Peter sandstone has a relatively small percentage of mesh sand and contains the highest proportion of sand finer than 100 mesh; (b) the Wonewoc and Mt. Simon sandstones generally have a diminished coarser fraction compared to the Jordan; and (c) the St. Peter, Jordan and Wonewoc have similar 40/70 mesh contents. Despite the relatively finer grain size in comparison to the Jordan Formation, the Wonewoc sandstone can be mined for multiple markets including those oil and gas hydrofracking plays that are asking for a smaller proportion of coarser grained silica sand (Brown, 2014). Deposit Types The best deposits of frac sand are characterized by super-mature marine shoreline sandstone deposits that have a long history of reworking, were never deeply buried, and underwent diagenesis that reduced or removed cements (Winfree, 1983; Dott et al., 1986; Dott, 2003). The depositional environment and factors to increase mineralogical maturity must include multiple cycles of mechanical reworking that enhance roundness, sphericity and sorting of grains (Benson and Wilson, 2015). The most prospective settings for the accumulation of mineralogical and mechanically competent frac sand, therefore, occur in marine shoreline, marine shoreface, marine intertidal and deltaic settings, and coastal aeolian environments (e.g., Winfree, 1983; Dott et al., 1986; Dott, 2003; Hickin et al., 2010). A well- A-27

201 documented example of a geological setting that has produced high-quality frac sand occurred during the Cambrian in central mid-continental North America (Minnesota, Wisconsin and Iowa). This setting coincides with the Blair Facility and the D95 North Property areas, which are the focus of the Blair APEX Report. The Cambrian Period was characterized by a major transgressive event that was bracketed between two ice ages, one during the late Proterozoic and the other during the Ordovician. With the retreat of Proterozoic ice, the sea level rose significantly and extensive sequences of Cambrian marine sedimentary rocks (sandstone, shale and fossil-bearing limestone) show that much of the world was covered by shallow epeiric seaways. The North America Craton was almost completely drowned in Late Cambrian time by what came to be known as the Sauk transgression, and subsequently, the central mid-continent is characterized by a series of sedimentary rock depositional cycles known as the Sauk sequence (Sloss, 1963; Palmer, 1981). The Precambrian surface had significant and variable relief prior to deposition of Sauk sedimentary rocks. In northern Wisconsin, the Wisconsin Dome (with its southward extending arch) and nearby regions of the Canadian Shield represented a vast upland area composed of Precambrian igneous and metamorphic rocks. In contrast to the Wisconsin dome upland, a broad lowland area named the Hollandale Embayment developed during the Upper Cambrian and extended across southeastern Minnesota and eastern Iowa, and was situated directly southwest of the Wisconsin Dome (Austin, 1969, 1970; see Figure 10). For long periods of time, broad positive features such as the Wisconsin Dome were subject to weathering and shed significant volumes of detrital sediment, including eroded Precambrian granite and metamorphic rock, and Late Precambrian Keweenawan volcanic rock to the Cambrian epeiric seaway and shorelines that covered the Hollandale Embayment. The sand, silt and clay sized particles were carried by wind and in rivers across the cratonic interior to the oceanic shoreline where shallow ocean currents formed a texturally graded shelf (Runkel, 1998, 2007). On this shelf the coarsest sand, composed mostly of quartz grains, was deposited in shoreface deposits where currents were strongest. Finer-grained, feldspathic sand, silt and clay sized particles were carried seaward to deeper water. Fluctuations in sea level caused the shoreface settings to relocate resulting in quartzose sand being deposited for hundreds of miles/ kilometres. While the shoreface setting naturally modifies the textural maturity of the quartz grains, an advanced level of the super-mature Cambrian quartz grains in central mid-continental North America remains uncertain. The physical maturity of the Cambrian sands could not been achieved solely by fluvial transport, but probably involves other factors such as: (a) a long history of abrasion in marine conditions (Odom, 1975, 1978) along with wind abrasion, which is far more effective at rounding grains than abrasion in water (Dott et al., 1986); and (b) chemical weathering in the cratonic interior, which is believed to have preferentially dissolved plagioclase and similarly unstable minerals, creating a source area that is dominated mineralogically by quartz (Morey, 1972; Runkel, 1998; Dott, 2003). Lastly, much of the silica (frac) sand mining in central mid-continental North America occurs in the driftless area (Syverson and Colgan, 2004), which is defined as an area of Wisconsin that was untouched by the advance of the Wisconsinan ice sheets (pre-35,000 to 10,000 years before present; Syverson and Colgan, 2004; Syverson and others, 2011; see Figure 10). Because the area is largely devoid of surficial deposits, the Cambrian silica sand strata is accessible to surface mining. In addition, post-glacial processes has resulted in the exposure of near-surface silica (frac) sand source units in incised terrains (e.g., rivers and hillsides) such that some silica sand deposits are amenable to surface and/or side-entry mining. Exploration As part of preparation for the Blair APEX Report, Source conducted sampling on an open pit/excavation at the Blair Facility, and on archival auger return material from both the Blair Facility (drillhole SEH-1) and the D95 North Property (drillhole SEH-3) properties for density and proppant characterization test work. The location and results of the bulk density sample test work is presented in Table 9. The location of the bulk density samples collected in the open pit/excavation at the Highway 53 Property is shown in Figure 16. A total of 12 samples were collected and analyzed for bulk density analysis at Stim-Lab. The results of the analysis yield minimum, maximum and average bulk density values of 1.50 g/cm 3, 1.64 g/cm 3 and 1.55 g/cm 3, respectively (Table 9). As any material taken from the Blair Facility would be bulk mined, the QPs have, therefore, selected a conservative bulk density value of 1.55 g/cm 3 for the conversion of volume to tonnes. A-28

202 In addition, a single sample from SEH-01 was collected for proppant characterization at Stim-Lab. The results of this sample analysis are presented in Description of the Blair Facility and the D95 North Property Mineral Processing and Metallurgical Testing. Table 9. Description of samples collected during the site inspection and analyzed for bulk density. Sample ID Property Latitude Longitude Elevation (feet above sea level) Collection location description Material (kg) Bulk density (g/cm 3 ) PHX-01-A BLAIR FACILITY N W 990 Open pit/excavation PHX-01-B BLAIR FACILITY N W 990 Open pit/excavation PHX-02-A BLAIR FACILITY N W 980 Open pit/excavation PHX-02-B BLAIR FACILITY N W 980 Open pit/excavation PHX-03-A BLAIR FACILITY N W 970 Open pit/excavation PHX-03-B BLAIR FACILITY N W 970 Open pit/excavation PHX-04-A BLAIR FACILITY N W 960 Open pit/excavation PHX-04-B BLAIR FACILITY N W 960 Open pit/excavation PHX-05-A BLAIR FACILITY N W 950 Open pit/excavation PHX-05-B BLAIR FACILITY N W 950 Open pit/excavation SEH-1 BLAIR FACILITY N W / Drillhole composite SEH-3 D95 North N W / Drillhole composite Minimum 1.50 Maximum 1.64 Average (all) 1.55 Average (Highway 43) 1.55 Drilling 2012, 2013 and 2015 auger drill programs at the Blair Facility and D95 North Property, and open pit excavation at the Blair Facility were conducted by Sand Products and Spartan Sand LLC are considered historical, and are therefore presented in Section 6, History. Sand Products has completed (within the boundaries of the Blair Facility): (a) a auger drillhole test program, which consists of 9 holes (TB-1 to TB-9) totalling (292.3 m) conducted by Summit on behalf of Sand Products. A 2015 auger drillhole test program, which consisted of one hole (SEH-01; ; 39.3 m) conducted by SEH on behalf of Sand Products. Total drilling is ten holes totalling 1,088.0 (331.6 m); (b) open pit excavations on the west side of the Blair Facility conducted by Sand Products; (c) construction of a wet-processing plant, which is located directly north of the open pit; (d) construction of a dry-processing plant on the east side of the Blair Facility; the dry processing plant was built adjacent to the railroad tracks; and (e) a rail terminal on the east side that is intended to ship product to the various sites and consists of 5.2 miles of track. The holes were collared at higher elevation ridge locations on the western side of the Blair Facility where Wonewoc Formation bedrock occurs. Example Wonewoc Formation intersections include: (a) Drillhole SEH-1 interested a (33.3 m) continuous section of light brown to orange, subrounded to well-rounded, moderately to well-sorted Wonewoc Formation sandstone. Sampling, Analysis, and Data Verification Sample Preparation, Analyses and Security Auger returns from the 2012, 2013 and 2015 auger test hole programs (all auger holes) were analyzed for particle size/gradation analysis. The drill cutting samples were recovered from the auger rigs air discharge exhaust by bagging representative handfuls of auger returns for every 5 feet (1.5 m) of auger drilling. The samples were hand-mixed and split into at least two separate sample splits: one for particle size/gradation analysis; and one for archival at Sand Products. In some instances, a third sample split was taken for proppant test work characterization. A total of 152 samples were analyzed for particle size/gradation analysis at the Blair Facility and the D95 North Property. These data were used to form the assay database for the resource estimation presented in the Blair APEX A-29

203 Report (see Description of the Blair Facility and the D95 North Property Mineral Resource Estimate for a statistical summary of the resulting gradation data). The particle size/gradation analyses were conducted by third-party consultants: FracTal and SEH; in conjunction with their respective handling of the auger drill programs (Summit and SEH). The particle size/gradation analysis followed analytical procedures that generally included: drying the sample; sieving out the >8 mesh fraction; washing and drying the sample; and sieving the resulting sample using the sieve test procedure outlined in ASTM E11 (ASTM, 1995). The resulting sieve results are reported in the following mesh size fractions: 12 (1.820 mm), 16 (1.270 mm), 18 (1.080 mm), 20 (925 μm), 25 (775 μm), 30 (660 μm), 35 (550 μm), 40 (471 μm), 45 (396 μm), 50 (337 μm), 60 (283 μm) 70 (242 μm), 100 (174 μm), 140 (126 μm), 200 (91 μm), and Pan (or <91 μm). Note that the 140 mesh fraction was not analyzed or recorded for 200 of the 891 samples from 17 auger holes (STB-, STB-22, HO-1 to HO-11, and BR-TB1 to BR-TB3). In addition to the particle size/gradation analyses, a smaller subset of samples and their respective size fractions (n=4) was analyzed for proppant test work following the specifications of ISO :2006/ Amd.1:2009E (International Standards, 2009). This test work is described in Description of the Blair Facility and the D95 North Property Mineral Processing and Metallurgical Testing. Proppant characterization test work was completed at PropTester and Stim-Lab Inc. The proppant test work samples were dried, weighed and washed through a 200 mesh sieve. The sample retained on the sieve was then dried and reweighed. The percent loss was calculated from the material that washed through the sieve. The 20/40, 30/50 and 40/70 size fractions were isolated for testing, which includes: (a) Bulk Density: the unit mass of an untapped or unsettled proppant that will occupy a specific known volume; e.g., how many grams per cubic centimeter. Bulk Density includes both the mass of the proppant and the mass of air occupying the interstitial spaces between proppant particles; (b) Sphericity and Roundness (Krumbein Shape Factors): sphericity is the measure of how spherical a given proppant particle is. Roundness is the measure of the lack of sharp edges or angularity. Proppants must be highly spherical and well-rounded in order to maximize interstitial space between adjacent proppant particles to allow passage of oil, gas, condensate, etc., through the proppant pack in the frac width; (c) Acid Solubility: a mass loss (gravimetric) test method that determines the degree of solubility of natural sand in a 12:3 blend of Hydrochloric and Hydrofluoric acids. The technique effectively measures the resistance of proppants to acid attack, which is an indication of the presence of contaminants that may negatively affect proppant performance; (d) Turbidity: a method using transmittance or reflectance of light to measure the amount of fines that are <200 mesh in diameter, including clay, silt, proppant fines, etc. A fixed mass of proppant is added to a fixed mass of deionized water, agitated, and the water is drawn off and measured in a turbidity meter; and (e) Crush Resistance: A measurement of the strength of a mass of screened, fines-free dry proppant to force applied over a fixed cross-sectional area, providing an equivalent stress to the proppant under test. The mass of proppant introduced to the crush cylinder is a function of its bulk density and the specified loading of 4.0 pounds per cubic foot. The load is applied in a controlled rate and held at the final test stress level for 2.0 minutes. The mass is rescreened to determine the amount of fines generated by the applied stress, and the highest stress attained without producing more than 10.0% fines is the K Number. For example, if Crush Resistance of a proppant yielded 9.78% fines at 10,000 psi and 10.44% fines at 11,000 psi, the K Number (K=1000) of that proppant would be 10K, because the generated fines were below 10.0% at 10,000 psi (10K psi) and exceeded 10% at 11,000 psi and the laboratories selected by Sand Products and Source are independent laboratories. The analytical methods carried out by the laboratory is standard and routine in the field of silica sand and proppant characterization test work, and are pursuant to International Standard ISO Data Verification The drilling, logging, sampling and test work processes employed during the 2012, 2013 and 2015 auger test drilling and sampling programs was conducted by independent, recognized and established third-party consultants, including Summit and SEH. Regardless of year or contractor, the auger programs generally adopted the same auger methodology. Truck mounted air rotary auger rigs were used to drill vertical (-90º) auger holes at zero orientation. The diameter of the auger stem was generally 6 inches (15 cm). The average depth of the auger test holes is 115 feet (35 m). With respect to particle size/gradation analyses, we have reviewed sieve data obtained from the auger programs using: (a) quantile-quantile plots of 20/40 and 40/70 fractions using the entire Blair Facility dataset (n=10 auger holes and 152 sieve analyses) in a comparison between those samples analyzed at FracTal versus SEH; and (b) swath plots comparing the abundance of 20/40 and 40/70 fractions from two neighboring auger drillholes (TB-2 and SEH-1, which are separated by 185 m). A-30

204 The quantile-quantile plots of 20/40 and 40/70 fractions show there is good agreement between the FracTAL and SEH sieve results, particularly for the 40/70 size fractions. The 20/40 comparison includes some stepping, which is attributed to a general lack of data from the single SEH auger drillhole used in the comparison (versus nine TB series holes, the samples of which were analyzed at FracTAL). With respect to proppant characterization (see Description of the Blair Facility and the D95 North Property Mineral Processing and Metallurgical Testing ), PropTester and Stim-Lab Inc. is an independent laboratory and accredited to ISO 17025:2005 in North America offering all ISO , ISO , API RP19C, and API RP56 tests for sand, resin-coated sand, and engineered ceramic proppants. The QPs have reviewed all geotechnical and geochemical data and found no significant issues or inconsistencies that would cause one to question the validity of the data and is satisfied to include these data in resource modelling, evaluation and estimations as part of Blair Facility Silica (Frac) Sand Resource estimate presented in this Blair APEX Report. Mineral Processing and Metallurgical Testing International Standards ISO :2006/Amd.1:2009E provides the specifications for the measurement of properties of proppants used in hydraulic fracturing operations. A total of 7 samples from the Blair Facility were analyzed at PropTester and FracTal laboratories, and a single sample from the D95 North Property was analyzed at PropTester. In addition, Source sent a single composite sample from drillhole SEH-1 at the Blair Facility to Stim-Lab. These independent laboratories offer ISO tests for sand proppant. The size fractions tested includes: 20/40, 30/50 and 40/70. The results of the test work are summarized in the following text. The results of the proppant pre-test sieve analysis and proppant characterization test work are presented in Table 11. Fracturing Proppant Sizes ISO :2006/Amd.1:2009E states that a minimum of 90% of the tested proppant sample shall pass the coarse designated (or first primary) sieve and be retained on the fine designated (or second primary) sieve (i.e., 12/20, 20/40, 40/60, etc.). For 20/40 sieve sizes, a minimum of 90% of the tested proppant sample shall pass the 20 mesh sieve and be retained on the 40 mesh sieve. Not over 0.1% of the total tested proppant sample shall be larger than the first sieve size in the sieve stack specified in ASTM E11, and not over 1.0% of the total tested proppant sample shall be smaller than the last designated sieve size. All samples met the ISO :2006 proppant size specification. A-31

205 Table 11. Summary of proppant characterization test work conducted by Source. A) Blair Facility Crush resistance (to 10% psi) 1 Sample ID Drillhole ID Laboratory Grain size fraction Date Received by lab Bulk density (g/cm 3 ) Krumbein shape factor (roundness) Krumbein shape factor (sphericity) Mean partical diameter (mm) Median partical diameter (mm) 4000 (psi) 5000 (psi) 6000 (psi) 7000 (psi) 8000 (psi) 9000 (psi) (psi) 2222 TB-4 PropTester 20/40 4-Mar-13 / / / / / / / / / / 2.4 / 2222 TB-4 PropTester 40/70 4-Mar-13 / / / / / / / / / / 2.1 / 2226 TB-5 PropTester 30/50 4-Mar-13 / / / / / / / / / / 1.9 / 2226 & 2227 Composite TB-5 Fractal 20/40 23-Jan / / / / / / / / / 2229 TB-6 Fractal 40/70 23-Jan / / / / / / / / / 1750 TB-1 Fractal SPC20/40 (Composite of 1752, 1768 & 1782) SPC30/50 (Composite of 1752, 1768 & 1782) TB-1, TB-2 & TB-3 Fractal 20/40 9-Nov / / / / / / / / / TB-1, TB-2 & TB-3 Fractal 30/50 9-Nov / / / / / / / / / SEH-1 SEH-1 Stim-Lab 20/40 28-Jan / / 2.60 / / / / SEH-1 SEH-1 Stim-Lab 30/50 28-Jan / / 1.50 / / / / SEH-1 SEH-1 Stim-Lab 40/70 28-Jan / / / 2.10 / / / Acid solubility (12:3 HCI:HF) Turbidity Test (FTU) 2 B) D95 North Crush resistance (to 10% psi) 1 Grain size fraction Date Received by lab Bulk density (g/cm 3 ) Krumbein shape factor (roundness) Krumbein shape factor (sphericity) Sample ID Drillhole ID Laboratory 1799 TB-1 PropTester 20/40 19-Feb / / / / / / Mean partical diameter (mm) Median partical diameter (mm) 4000 (psi) 5000 (psi) 6000 (psi) 7000 (psi) 8000 (psi) 9000 (psi) (psi) Acid solubility (12:3 HCI:HF) Turbidity Test (FTU) 2 1 psi is pounds per square inch 2 NTU = nephelometric turbidity unit FTU = formazine turbidity unit Highest stress level in which the proppant generates no more than 10% crushed material, rounded to the nearest 1,000 psi (or K-value) International standards for proppant specification (ISO ; ): - Average sphericity of 0.6 or greater - Average roundness of 0.6 or greater - Maximum acid solubility of grains <30/50 is 3.0% and for grains 30/50 is 2.0% - Turbidity shall not exceed 250 NTU (FTU) A-32

206 Sphericity and roundness Sphericity is a measure of how close the grain is to a sphere, and roundness is a measure of the relative sharpness of grain corners. ISO :2006/Amd.1:2009E states that sphericity and roundness for proppant is 0.6 or greater, and recommends sphericity and roundness for high-strength proppant is 0.7 or greater. A single sample from the Blair Facility drillhole SEH-1 was analyzed for Krumbein shape factors at Stim-Lab. The 20/40, 30/50 and 40/70 fractions all have sphericity shape factors of greater than 0.7 meeting the criteria for high-strength proppant; the 20/40 and 30/50 fractions from SEH-1 both have sphericities of 0.8. A single sample from the D95 North Property (from drillhole TB-1) was analyzed for Krumbein shape factors at PropTester. This sample has a 20/40 size fraction roundness of 0.8 and a sphericity of 0.7, respectively, both of which meet the criteria for high-strength proppant. Acid Solubility Acid Solubility provides an indication of the amount of undesirable contaminants in a sand sample by determining its solubility when soaked in a hydrochloric-hydrofluoric acid (HCL-HFL) solution. ISO :2006/Amd.1:2009E states that the acid soluble material in proppants shall not exceed 2.0 and 3.0 for proppant larger than or equal to the 30/50 and smaller than 30/50 mesh fractions, respectively. Three samples, which included various 20/40, 30/50 and 40/70 size fractions, from the Blair Facility were tested at PropTester and Stim-Lab (Table 11). Acid solubility results met the ISO specification for the: 2222 (20/40 fraction), 2226 (30/50), SEH-1 (20/40), SEH-1 (30/50) and SEH-1 (40/70) samples. A single PropTester test, sample 2222 (40/70), failed the ISO acid solubility specification. A single sample from the D95 North Property, TB-1 (20/40 fraction) satisfied the acid solubility ISO specification. Maximum Proppant Turbidity Turbidity is the measurement of the amount of clay and silt sized particles contained in sand sample by placing it in water and measuring the overall turbidity of the liquid. ISO :2006/Amd.1:2009E states that the turbidity of all fracturing proppants shall not exceed 250 nephelometric turbidity units (NTU). All of the samples (n=3 from the Blair Facility and n=1 from the D95 North Property) easily satisfy this specification with turbidity s of <9 NTU (Table 11). Maximum Crush Material Crush resistance is determined by subjecting a sand sample to specific pressures for a designated amount of time and measuring the resulting amount of fines (percent by weight). As per ISO :2006/Amd.1:2009E, determination of the highest stress level at which proppant generates no more than 10% crushed material, rounded down to the nearest 6.9 MPa (1,000 psi), represents the maximum stress that the material can withstand without exceeding 10% crush (International Standards, 2009). The crush resistance, k value for the various size fractions from the Blair Facility include: (a) four of four 20/40 fractions all resulted in 6k crush resistance; (b) three 30/50 fractions resulted in 6k (n=1 sample) and 7k (n=2 samples) crush resistance; and (c) three 40/70 fractions resulted in 6K, 7k and 9k crush resistance (Table 11). A single 20/40 sample from the D95 North Property yielded a crush resistance of 6K. These k values are typical for Cambrian Wonewoc sandstone in western Wisconsin. For example, Brown (2012) cited 20/40, 30/50 and 40/70 crush resistance values of 6k, 7k and 10k, respectively. All of the 20/40 fractions meet this general comparison. One the three samples from the 30/50 fraction yielded a low (6K) crush result. Two of the three 40/70 fractions yielded low (6K and 7k) crush results are considered to have low crushability in comparison to other western Wisconsin area Wonewoc fraction test results. To conclude, the published specifications and standards for industrial minerals should be used primarily as a screening mechanism to establish the marketability of an industrial mineral. The suitability of an industrial mineral for use in specific applications can only be determined through detailed market investigations and discussions with potential consumers. Albeit a limited number of samples, the proppant test work results show that Wonewoc Formation silica sand from the Blair Facility and the D95 North Property generally meets the recommendations set forth in International Standards ISO :2006/Amd.1:2009E for sieve size fractions, sphericity, roundness, acid solubility, turbidity and crush classification. A-33

207 Mineral Resource Estimate The resource has been estimated within three-dimensional solids that were created from cross sectional interpretation. The upper contact of Wonewoc Formation is either in contact with the overlying Tunnel City Group or Pleistocene surficial deposits, or has been cut by the topography surface using a combination of 1 m resolution LiDar survey and STRM data. The sizing percent was estimated into a block model with A parent block size of 328 feet x 328 feet x 10 feet (100 m x 100 m x 3 m) with sub-blocking down to 82 feet x 82 feet x 5 feet (25 m x 25 m x 1.5 m). A nominal density of 1.55 g/cm3 was applied to all blocks, which was based on 12 representative density samples of Wonewoc Formation from the Blair Facility. The percent concentrations for the grain sieve size fraction estimation were performed using inverse distance to the power of one methodology. The Inferred Mineral Resource is constrained within the Wonewoc Formation, and to a depth of 130 feet (39.6 m) below surface. The Blair Facility estimation of the individual sieve size fractions was completed and reported using a cutoff of the +70 sand fractions being greater than 60%. This Blair Facility Inferred Silica (Frac) Sand Resource estimate predicts total (i.e., global) resources of: million short tons (25.01 million metric tonnes) of silica sand of inferred classification is present at the Blair Facility (Table 20). The Blair Facility Inferred resource in Table 20 is also presented in selected proppant size fraction distributions of 20/40, 30/50, 40/70 and 50/100 mesh, and estimated tonnages of the individual fractions are as follows: (a) 20/40 mesh fraction: 8.93 million short tons (8.10 million metric tonnes); (b) 30/50 mesh fraction: million short tons (10.74 million metric tonnes); (c) 40/70 mesh fraction: million short tons (9.86 million metric tonnes); and (d) 50/100 mesh fraction: 7.95 million short tons (7.21 million metric tonnes). Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the Mineral Resource will be converted into a Mineral Reserve. Table 20. The Blair Facility Inferred Silica (Frac) Sand Resource estimate as of February 12, The highlighted main inferred resource is reported for the Wonewoc Formation as a total (global) volume and tonnage using a nominal bulk density of 1.55 g/cm3 and a cutoff of the +70 sand fractions being greater than 60%. The Table also presents selected proppant size distributions of 20/40, 30/50, 40/70 and 50/100 mesh. Note 1: Note 2: Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the Mineral Resource will be converted into a Mineral Reserve. The estimate of Mineral Resources may be materially affected by geology, environment, permitting, legal, title, taxation, socio-political, marketing or other relevant issues. The weights are reported in metric tonnes (1,000 kg or 2,204.6 lbs) and United States short tons (2,000 lbs or kg). Note 3: Numbers may not add up due to rounding of the resource values percentages (rounded to the nearest 10,000 unit). Total (global) resource and selected size fractions Volume (m3) Tonnes (t) Tons (t) Total 16,140,000 25,010,000 27,570,000 Wonewoc Formation Inferred Mineral Resource 20/40 5,230,000 8,100,000 8,930,000 30/50 6,930,000 10,740,000 11,840,000 40/70 6,360,000 9,860,000 10,860,000 50/100 4,650,000 7,210,000 7,950,000 A-34

208 Note 4: The Total volume and weights are estimated on a global basis and represent the Blair Facility Inferred Silica (Frac) Sand Resource. Note 5: The Highway 53 estimation of the individual sieve size fractions was completed and reported using a cutoff of the +70 sand fractions being greater than 60%. Note 6: Densities used: Wonewoc Formation (1.55 g/cm 3 ; this study); Surficial deposits (1.37 g/cm 3 ; from Eccles et al., 2015); Tunnel City Group (1.57 g/cm 3 ; from Eccles et al., 2015). Bulk densities are utilized to convert volume (cubic metres) to tonnages. Note 7: The 50/100 fraction is reported, rather than the 50/140 or the 70/140 fractions because of the analytical methodology used in the grain size distribution test work (i.e., variations in the selection of sieve mesh sizes). The Blair Facility Inferred Silica (Frac) Sand Resource, which is situated in the Wonewoc Formation, is overlain by, or intercalated with: (a) 1.71 million short tons (1.55 million metric tonnes) of Pleistocene surficial deposits; (b) 0.80 million short tons (0.73 million metric tonnes) of Tunnel City Group sedimentary rocks; and (c) 3.02 million short tons (2.74 million metric tonnes) of waste Wonewoc Formation, or Wonewoc sandstone that does not satisfy the cutoff (Table 20). The overlying material tonnages were calculated using densities of 1.37 g/cm 3 for the overburden and 1.57 g/cm 3 for the Tunnel City Group (values from Eccles et al., 2015). The combined Pleistocene surficial deposits and Tunnel City Group cover is thicker in the elevated western portions of the Blair Facility in comparison to the lower elevation area of the current open pit/excavation. Not all of the waste Wonewoc Formation material might end up being waste rock sensu stricto. That is, some of Wonewoc sandstone that does not make the cutoff may end up being mined; for example, islands of below cutoff Wonewoc may be mined based on the type of potential future mining method employed by Source. Evaluation of the D95 North Property as a Target for Further Exploration The D95 North Property has similar geology to that of the Blair Facility. The area is underlain by a thick sequence of Wonewoc Formation sandstone, which is in turn, is overlain in topographically elevated areas by the Tunnel City Group and Pleistocene surficial material. The D95 North Property, however, does not have the same amount of geological information as the Blair Facility. The D95 North Property s subsurface has been defined by four auger drillholes and a single sample was analyzed for proppant properties required to determine sand quality. Due to the tremendous horizontal continuity of the Wonewoc formation two additional drillholes located 3372 feet (1028 m) from the southern end of the claim were also utilised in the estimation process to support the geological information on the D95 North Property. A total of 69 sieve samples were used for the calculation, of which 44 samples were collected from the four holes on the D95 North Property claim. Consequently, the QPs have evaluated the D95 North Property as a target for future exploration. The range of tonnages at the D95 North Property was determined by estimating the interpreted three-dimensional wireframe volume multiplied by the nominal density of 1.55 g/cm 3 multiplied by the estimated percent sizing s using the same criteria as the Blair Facility Inferred Silica (Frac) Sand Resource estimate. This includes adopting a cutoff of the +70 sand size fraction being greater than 60% in total abundance. We have used plus or minus 30% to apply a range to the estimation. The D95 North Property Wonewoc Formation sand horizon has been classified as a potential target for future exploration and comprises between 29,818,000 and 55,369,000 short tons (27,050,000 and 50,230,000 metric tonnes). The Wonewoc is overlain by approximately 7,740,000 short tons (7,020,000 metric tonnes) of waste material including surficial material, Tunnel City Group and waste Wonewoc Formation that does not make the cutoff. The potential quantity and sizing is conceptual in nature as there has been insufficient exploration to define a mineral resource and it is uncertain if further exploration, including proppant quality testing, will result in the target being delineated as a mineral resource. Exploration and Development Source has no current intentions of undertaking a preliminary economic analysis or any additional drilling or exploration activities on the Blair Facility or the D95 North Property as the Blair Facility is currently sufficiently producing to support Source s operations. A-35

209 APPENDIX B MANDATE OF THE BOARD OF DIRECTORS The members of the board of directors (respectively, the Directors and the Board ) have the responsibility to oversee the conduct of the business of Source Energy Services Ltd. (the Company ) and to oversee the activities of management who are responsible for the day-to-day conduct of the business. Section 1 Composition The Board shall be comprised of at least three independent Directors. The definition of independence is as provided by applicable law and stock exchange listing standards. No Director will be considered independent unless the Director has no material relationship (as such term is defined in National Instrument of the Canadian Securities Administrators) with the Company, either directly or indirectly as a partner, shareholder or officer of an organization that has a relationship with the Company. The Board shall appoint a Chair from among its members. The role of the Chair is to act as the leader of the Board, to manage and coordinate the activities of the Board and to oversee execution by the Board of this written mandate. If the Chair is not independent, a majority of the Board s independent Directors shall appoint (and if the Chair is in a conflict of interest with respect to a particular matter or matters, a majority of the Board s independent Directors may appoint) an independent lead Director from among the Directors, who will be responsible for ensuring that the Directors who are independent (or non-conflicted) and management have opportunities to meet without management and non-independent (or conflicted, as applicable) Directors, as required, and will assume such other responsibilities as the independent Directors may designate in accordance with any applicable position descriptions or other applicable guidelines that may be adopted by the Board from time to time. The Board may, from time to time, engage consultants or members of the Company s management team that are not directors of the Company and these persons may attend meetings or portions of meetings as invited guests of the Board. Otherwise, the Board will consist only of Directors and only Directors and a Corporate Secretary, appointed by the Board, may attend meetings of the Board. Section 2 Operation The Board operates by delegating certain of its authorities to management and by reserving certain powers to itself. The Board retains the responsibility of managing its own affairs including selecting its Chair, nominating candidates for election to the Board, constituting Committees of the full Board and determining Director compensation. Subject to the Articles, By-Laws and the Business Corporations Act (Alberta), the Board may constitute, seek the advice of and delegate powers, duties and responsibilities to Committees of the Board. The full Board considers all major decisions of the Company, except that certain analyses and work of the Board will be performed by standing Committees empowered to act on behalf of the Board. The Company has a number of standing Committees, including the Audit Committee, the Compensation and Corporate Governance Committee and the Health, Safety and Environment Committee, and has the authority to appoint other committees to steward certain other matters. Each standing committee must have a mandate that has been approved by the Board. Each Committee shall operate according to the mandate approved by the Board and outlining its duties and responsibilities and the limits of authority delegated to it by the Board. The Board shall review and reassess the adequacy of the mandate of each Committee on a regular basis and, with respect to the Audit Committee, at least once a year. The Chair of the Board shall annually propose the leadership and membership of each Committee. In preparing recommendations, the Chair of the Board will take into account the preferences, skills and experience of each Director. Committee Chairs and members are appointed by the Board at the first Board meeting after the annual shareholder meeting or as needed to fill vacancies during the year. The Board will hold four regularly scheduled meetings each year. The Board shall meet at the end of its regular quarterly meetings without members of management being present. Special meetings will be called as necessary. Directors are expected to attend all Board meetings and all Board Committee meetings where such Director is a member of such Committee, although it is understood that conflicts may occasionally arise that prevent a Director from B-1

210 attending a meeting. Attendance at Board meetings and Board Committee meetings in person is preferred, but attendance by teleconference or other electronic communication established by the Board or such Board Committee is permitted. In advance of each regular Board and Committee meeting and, to the extent feasible each special meeting, information and presentation materials relating to matters to be addressed at the meeting will be distributed to each Director. It is expected that each Director will review presentation materials in advance of a meeting. The Chair of the Board presides at all meetings of the Board and shareholders. Minutes of each meeting shall be prepared by the Corporate Secretary (or in his or her absence a secretary who has been appointed for the purposes of the meeting). The Chief Executive Officer (the CEO ), if he or she is not a Director, shall be available to attend all meetings of the Board or Committees of the Board upon invitation by the Board or any such Committee. Members of management and such other staff as appropriate to provide information to the Board shall attend meetings at the invitation of the Board. Following each meeting, the Corporate Secretary will promptly report to the Board by way of providing draft copies of the minutes of the meetings. Supporting schedules and information reviewed by the Board at any meeting shall be available for examination by any Director upon request to the CEO or Corporate Secretary. Section 3 Responsibilities The Board is responsible under law to supervise the management of the business and affairs of the Company. In broad terms the stewardship of the Company involves the Board in strategic planning, risk identification, management and mitigation, senior management determination and succession planning, communication planning and internal control integrity. Section 4 Specific Duties Without limiting the foregoing, the Board shall have the following specific duties and responsibilities: (1) Legal Requirements (a) The Board has the oversight responsibility for meeting the Company s legal requirements and for approving and maintaining the Company s documents and records; (b) The Board has the statutory responsibility to: (i) manage or supervise the management of the business and affairs of the Company; (ii) act honestly and in good faith with a view to the best interests of the Company; (iii) exercise the care, diligence and skill that responsible, prudent people would exercise in comparable circumstances; and (iv) act in accordance with its obligations contained in the Business Corporations Act (Alberta) and the regulations thereto, the Company s Articles and other relevant legislation and regulations. (c) The Board has the statutory responsibility for considering the following matters as a full Board which in law may not be delegated to management or to a committee of the Board: (i) any submission to the shareholders of a question or matter requiring the approval of the shareholders; (ii) the filling of a vacancy among the Directors; (iii) the issuance of securities; (iv) the declaration of dividends; (v) the purchase, redemption or any other form of acquisition of shares issued by the Company; (vi) the payment of a commission to any person in consideration of his/her purchasing or agreeing to purchase shares of the Company from the Company or from any other person, or procuring or agreeing to procure purchasers for any such shares; (vii) the approval of management proxy circulars; (viii) the approval of any take-over bid circular or directors circular; and (ix) the approval of financial statements of the Company. B-2

211 (2) Strategy Determination The Board has the responsibility to adopt a strategic planning process for the Company and to participate with management directly or through its Committees in approving goals and the strategic plan for the Company by which the Company proposes to achieve its goals. The Board shall monitor the implementation and execution of the tasks constituent to the corporate strategy. To be effective, the strategy will result in creation of value over the long term while always preserving the Company s license to conduct its business among its various stakeholders. For the purpose of this clause, stakeholder will mean any party, group or institution whose reasonable approval is required for the Company to execute its Boardapproved strategy. (3) Managing Risk The Board has the responsibility to identify and understand the principal risks of the business in which the Company is engaged, to achieve a proper balance between risks incurred and the potential return to shareholders, and to establish systems to monitor and manage those risks with a view to the long-term viability of the Company. It is the responsibility of management to ensure that the Board and its Committees are kept well informed of changing risks. The principle mechanisms through which the Board reviews risks are through the execution of the duties of the Audit Committee, the Compensation and Corporate Governance Committee and the Health, Safety and Environment Committee and through the strategic planning process. It is important that the Board understands and supports the key risk decisions of management. (4) Appointment, Training and Monitoring Senior Management The Board has the responsibility: (a) (b) (c) to appoint the CEO and establish a description of the CEO s responsibilities and other senior management s responsibilities, to monitor and assess the CEO s performance, to determine the CEO s compensation, and to provide advice and counsel in the execution of the CEO s duties; to approve the appointment and remuneration of the Company s senior management; and to establish provisions for the training and development of management and for the orderly succession of management. (5) Reporting and Communication The Board has the responsibility: (a) (b) (c) (d) (e) (f) (g) to ensure compliance with the reporting obligations of the Company, including that the financial performance of the Company is properly reported to shareholders, other security holders and regulators on a timely and regular basis; to recommend to shareholders of the Company a firm of certified professional accountants to be appointed as the Company s auditors; to ensure that the financial results of the Company are reported fairly and in accordance with generally accepted accounting principles; to ensure the timely reporting of any change in the business, operations or capital of the Company that would reasonably be expected to have a significant effect on the market price or value of the common shares of the Company; to establish a process for direct communications with shareholders and other stakeholders through appropriate Directors, including through the Company s Whistleblower Policy; to ensure that the Company has in place a policy to enable the Company to communicate effectively with its shareholders and the public generally; and to report annually to shareholders on its stewardship of the affairs of the Company for the preceding year. B-3

212 (6) Monitoring and Acting The Board has the responsibility: (a) to establish policies and processes for the Company to operate at all times within applicable laws and regulations to the highest ethical and moral standards (advancing the interests of the Company, including the pursuit of differentiating performance in meeting the reasonable needs of all stakeholders of the Company); (b) to ensure that management has and implements procedures to comply with, and to monitor compliance with, significant policies and procedures by which the Company is operated; (c) to promote, and to ensure that management promotes, high environmental standards in the Company s operations in compliance with environmental laws and legislation; (d) to ensure that management establishes appropriate programs and policies for the health and safety of the Company s employees in the workplace; (e) to monitor the Company s progress towards its goals and objectives and to revise and alter its direction through management in response to changing circumstances; (f) to take action when performance falls short of its goals and objectives or when other special circumstances warrant or when changing circumstances in the business environment create risks or opportunities for the Company; (g) to approve annual (or more frequent as the Board feels to be prudent from time to time) operating and capital budgets and review and consider amendments or departures proposed by management from established strategy, capital and operating budgets or matters of policy which diverge from the ordinary course of business that may significantly impact the value of or opportunities available to the Company; and (h) to implement internal control and information systems and to monitor the effectiveness of same so as to allow the Board to conclude that management is discharging its responsibilities with a high degree of integrity and effectiveness. The confidence of the Board in the ability and integrity of management is the paramount control mechanism. (7) Governance The Board has the responsibility: (a) to develop a position description for the Chair of the Board; (b) to facilitate the continuity, effectiveness and independence of the Board by, among other things: (i) appointing from amongst the Directors an Audit Committee, a Compensation and Corporate Governance Committee, and a Health, Safety and Environment Committee and such other Committees of the Board as the Board deems appropriate; (ii) defining the mandate, including both responsibilities and delegated authorities, of each Committee of the Board; (iii) establishing a system to enable any Director to engage an outside adviser at the expense of the Company; (iv) ensuring that processes are in place and are utilized to assess the effectiveness of the Chair of the Board, the Board as a whole, each Director, each Committee of the Board and each Committee s Chair; (v) reviewing annually the composition of the Board and its Committees and assess Directors performance on an ongoing basis, and propose new members to the Board; and (vi) reviewing annually the adequacy and form of the compensation of the Directors. Section 5 New Director Orientation New Directors will be provided with an orientation which will include written information about the duties and obligations of Directors and the business and operations of the Company, documents from recent Board meetings and opportunities for meetings and discussion with senior management and other Directors. B-4

213 Section 6 Conflicts of Interest (a) Directors have a duty to act honestly and in good faith with a view to the best interests of the Company and to exercise the care, diligence and skill a reasonably prudent person would exercise in comparable circumstances. Each Director serves in his or her personal capacity and not as an employee, agent or representative of any other company, organization or institution, even if the Director is employed by a shareholder or any other entity which does business with the Company. In providing direction to the Company, Directors acknowledge that the wellbeing of the Company is their sole concern. Any Director must not be affected in his or her deliberations and decision making by any relationship with any outside person or party including any specific shareholder no matter which one and no matter what the relationship between the Director and that Shareholder. Directors shall not allow personal interests to conflict with their duties to the Company and shall avoid and refrain from involvement in situations of conflict of interest. (b) A Director shall disclose promptly any circumstances such as an office, property, a duty or an interest, which might create a conflict or perceived conflict with that Director s duty to the Company. (c) A Director shall disclose promptly any interest that Director may have in an existing or proposed contract or transaction of or with the Company. (d) The disclosures contemplated in paragraphs (b) and (c) above shall be immediate if the perception of a possible conflict of interest arises during a meeting of the Board or any Committee of the Board, or if the perception of a possible conflict arises at another time then the disclosure shall occur by to the other Directors immediately upon realization of the conflicting situation and then confirmed at the first Board and/ or Committee meeting after the Director becomes aware of the potential conflict of interest that is attended by the conflicted Director. (e) Each Director will on an annual basis disclose all entities to which it is related, affiliated or in which it holds a, direct or indirect, interest that may do business with the Company or operate in the same industry. (f) A Director s disclosure to the Board or a Committee of the Board shall disclose the full nature and extent of that Director s interest either in writing or by having the interest entered in the minutes of the meeting of the Board or such Committee of the Board. (g) A Director with a conflict of interest or who may be perceived as being in a conflict of interest with respect to the Company shall abstain from discussion and voting by the Board or any Committee of the Board on any motion to recommend or approve the subject matter of such conflict unless the matter relates primarily to the Director s remuneration or benefits or as otherwise permitted by applicable law or regulation. If the conflict of interest is obvious and direct, the Director shall withdraw while the item is being considered. (h) Without limiting the generality of conflict of interest, it shall be deemed a conflict of interest if a Director, a Director s relative, a member of the Director s household in which any relative or member of the household is involved has a direct or indirect financial interest in, or obligation to, or a party to a proposed or existing contract or transaction with the Company. (i) Directors shall not use information obtained as a result of acting as a Director for personal benefit or for the benefit of others. (j) Any Director shall not use or provide to the Company any information known by the Director that through a relationship with a third party the Director is not legally able to use or provide. (k) Directors shall maintain the confidentiality of all information and records obtained as a result of acting as a Director. Section 7 Mandate Review This Mandate shall be reviewed and approved by the Board each year after the annual general shareholder meeting of the Company. Section 8 General The Board may perform any other activities consistent with this Mandate, the Company s Articles and any governing laws as the Board deems necessary or appropriate. B-5

214 APPENDIX C AUDIT COMMITTEE MANDATE Section 1 Purpose The Audit Committee (the Committee ) is a committee of the board of directors (the Board ) of Source Energy Services Ltd. (the Company ). The primary function of the Committee is to assist the Board by: (a) working with the Chief Executive Officer to recruit persons to hold key positions in the financial management of the Company including the Chief Financial Officer, the Controller and any other persons hired to be the primary interface between the Company and its financial agents, lenders or shareholders; (b) recommending to the Board for consideration and further recommendation to the shareholders the appointment and compensation of the external auditor; (c) overseeing the work of the external auditor, including gaining an understanding of disagreements between the external auditor and management; (d) overseeing the assignment of non-audit services to the external auditor, including but not restricted to pre-approving all non-audit services (or delegating such pre-approval, if and to the extent permitted by law) to be provided to the Company or its subsidiary entities ( subsidiaries ) by the external auditor; (e) reviewing and approving any proposed hiring of any current or former partner or employee of the current or former external auditor of the Company or its subsidiaries; (f) establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and for anything that may be required beyond the Company s Whistleblower Policy for the confidential, anonymous submission by employees of the Company or its subsidiaries of concerns regarding questionable accounting or auditing matters; (g) reviewing and approving the quarterly financial statements, the related Management Discussion and Analysis ( MD&A ), and similar financial information provided by the Company to any governmental body, the shareholders of the Company or the public, including by way of press release; (h) reviewing and recommending that the Board approve annual financial statements, the related MD&A, and similar financial information provided by the Company to any governmental body, the shareholders of the Company or the public, including by way of press release; and (i) satisfying itself that adequate procedures are in place for the compilation, calculation and review of the Company s disclosure of financial information, other than as described in (g) above, extracted or derived from its financial statements, including periodically assessing the adequacy of such procedures. The Committee should primarily fulfill these roles by carrying out the activities enumerated in this Mandate. Section 2 Composition and Meetings (a) The Committee must be comprised of a minimum of three directors, as appointed by the Board, each of whom shall be independent within the meaning of National Instrument Audit Committees ( NI ) of the Canadian Securities Administrators unless the Board determines that an exemption contained in NI is available and determines to rely thereon, and free of any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. (b) All of the members of the Committee must be financially literate within the meaning of NI unless the Board has determined to rely on an exemption in NI Being financially literate means members have the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company s financial statements. (c) The members of the Committee and its Chair shall be elected by the Board on an annual basis, or until they are removed or their successors are duly appointed. C-1

215 (d) (e) (f) (g) (h) (i) (j) (k) (l) The members of the Committee may be removed or replaced by the Board at any time. The Chair of the Committee may be removed by the Board at any time. Any member shall automatically cease to be a member of the Committee on ceasing to be a director. The Board may fill vacancies on the Committee. If and whenever a vacancy shall exist on the Committee, the remaining members may exercise all of the powers of the Committee, so long as a quorum remains. The Committee shall meet at least four times annually, or more frequently as circumstances require. The Committee should meet within 42 days following the end of the first three financial quarters to review and discuss the unaudited financial results for the preceding quarter and the related MD&A, and should meet within 85 days following the end of the fiscal year end to review and discuss the audited financial results for the preceding quarter and year and the related MD&A. The Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. For purposes of performing their duties, members of the Committee shall have full access to all corporate information and any other information deemed appropriate by them, and shall be permitted to discuss such information and any other matters relating to the financial position of the Company with senior employees, officers and the external auditor, and others as they consider appropriate. For greater certainty, corporate information includes information relating to the Company s affiliates, subsidiaries and their respective operations. In order to foster open communication, the Committee or its Chair should meet at least annually with management and the external auditor in separate sessions to discuss any matters that the Committee or each of these groups believes should be discussed privately. In addition, the Committee or its Chair should meet with management quarterly in connection with the Company s interim financial statements and the Committee should meet not less than quarterly with the auditors, independent of the presence of management. At all meetings of the Committee every question shall be decided by a majority of the votes cast. In case of an equality of votes, the Chair of the meeting shall not be entitled to a second or casting vote and in such cases the undecided matter should be referred to the Board as a whole. A quorum for the transaction of business at any meeting of the Committee shall be a majority of the number of members of the Committee or such greater number as the Committee shall by resolution determine. Meetings of the Committee shall be held from time to time and at such place as any member of the Committee shall determine upon 48 hours notice to each of its members. The notice period may be waived by all members of the Committee. Each of the Chair of the Board, the external auditor, the Chief Executive Officer, the Chief Financial Officer or the Corporate Secretary shall also be entitled to call a meeting. Agendas shall be circulated to Committee members along with background information on a timely basis prior to the Committee meetings. Minutes of each meeting will be recorded and reviewed for errors or omissions and then filed with the Corporate Secretary and made available to any director at any time. The Committee should report on its activities at each quarterly meeting of the Board or more frequently as material issues are addressed by the Committee. It will be the responsibility of the Chair to report to the Board or delegate such reporting. Any issue arising from these meetings that bear on the relationship between the Board and management should be communicated to the Board by a member of the Committee, the Committee being responsible to designate the member responsible for such report. Section 3 Role In addition to the matters described in Section 1, and any other duties and authorities delegated to it by the Board from time to time, the role of the Committee is to: (1) General (a) Review and recommend to the Board changes to this Mandate, as considered appropriate from time to time. C-2

216 (b) Review any and all disclosure regarding the Committee as contemplated by NI (c) Oversee by direct involvement or by delegation to the Disclosure Committee of management the disclosure of the Company s quarterly and annual financial statements and related filings. (d) Summarize in the Company s disclosure materials the Committee s composition and activities, as required. (2) Internal Controls (a) Satisfy itself on behalf of the Board with respect to the Company s internal control systems, including in particular but not exclusively: (i) matters relating to derivative instruments; (ii) management s identification, monitoring and development of strategies to avoid and /or mitigate business risks; (iii) the adequacy of the security measures that are in place in respect of the Company s information systems and the information technology that is utilized by the Company; and (iv) ensuring compliance with legal and regulatory requirements. (3) Documents/Reports Review (a) (1) Review and recommend to the Board for approval the Company s annual financial statements, and (2) review and approve the Company s quarterly financial statements, including in each case any certification, report, opinion or review rendered by the external auditor, and related MD&A. The process of reviewing annual and quarterly financial statements should include but not be limited to: (i) reviewing changes in accounting principles, or in their application, which may have a material impact on the current or future years financial statements; (ii) reviewing significant accruals, reserves or other estimates; (iii) reviewing accounting treatment of unusual or non-recurring transactions; (iv) ascertaining compliance with covenants under loan agreements; (v) reviewing financial reporting relating to asset retirement obligations; (vi) reviewing disclosure requirements for commitments and contingencies; (vii) reviewing adjustments raised by the external auditors, whether or not included in the financial statements; (viii) reviewing unresolved differences between management and the external auditors; (ix) obtaining explanations of significant variances with comparative reporting periods; and (x) determining through inquiry if there are any related party transactions and ensure the nature and extent of such transactions are properly disclosed. (b) Review the financial statements, prospectuses, MD&A, annual information forms and all public disclosure containing financial information that is based upon the financial statements of the Company that has not previously been released, before release and prior to Board approval, if required. (c) Seek to ensure that adequate procedures are in place for the review of the Company s disclosure of financial information extracted or derived from the Company s financial statements and periodically assess the adequacy of those procedures. (4) External Auditor (a) Recommend to the Board the nomination of the external auditor for shareholder approval, considering independence and effectiveness, and review the fees and other compensation to be paid to the external auditor. Instruct the external auditor that its ultimate client is the shareholders of the Company as a group. C-3

217 (b) (c) (d) (e) (f) (g) (h) (i) (j) Advise the external auditor that it is required to report directly to the Committee, and not to management of the Company and, if it has any concerns regarding the conduct of the Committee or any member thereof, it should contact the Chair of the Board or any other director. Monitor the relationship between management and the external auditor including reviewing any management letters or other reports of the external auditor and discussing any material differences of opinion between management and the external auditor. Review and discuss, on an annual basis, with the external auditor all significant relationships they have with the Company, its management or employees to determine their independence. Review and approve requests for any material management consulting or other engagement to be performed by the external auditor and be advised of any other material study undertaken by the external auditor at the request of management that is beyond the scope of the audit engagement letter and related fees. Review the performance of the external auditor and any proposed dismissal or non-renewal of the external auditor when circumstances warrant. Periodically consult with the external auditor out of the presence of management about significant risks or exposures, internal controls and other steps that management has or has not taken to control such risks, and the fullness and accuracy of the financial statements, including the adequacy of internal controls to expose any payments, transactions or procedures that might be deemed illegal or otherwise improper. Review with external auditors (and internal auditor if one is appointed by the Company) their assessment of the internal controls of the Company, their written reports containing recommendations for improvement, and management s response and follow-up to any identified weaknesses. Communicate directly with the external auditor, and arrange for the external auditor to report directly to the Committee. Communicate directly with the external auditor, and arrange for the external auditor to be available to the Committee and the full Board as needed. (5) Financial Reporting Processes (a) (b) (c) (d) Review the integrity of the financial reporting processes, both internal and external, in consultation with the external auditor as the Committee sees fit. Consider the external auditor s judgments about the quality, transparency and appropriateness, not just the acceptability, of the Company s accounting principles and financial disclosure practices, as applied in its financial reporting, including the degree of aggressiveness or conservatism of its accounting principles and underlying estimates, and whether those principles are common practices or are minority practices relative to the Company s peers. Review all material balance sheet issues, material contingent obligations (including those associated with material acquisitions or dispositions) and material related party transactions. Consider proposed major changes to the Company s accounting principles and practices. (6) Reporting Process (a) (b) (c) (d) If considered appropriate, establish separate systems of reporting to the Committee by each of management and the external auditor. Review the scope and plans of the external auditor s audit and reviews. The Committee may authorize the external auditor to perform supplemental reviews or audits as the Committee may deem desirable. Review annually with the external auditors their plan for their audit and, upon completion of the audit, their reports upon the financial statements of the Company and its subsidiaries. Periodically consider the need for an internal audit function, if not present. C-4

218 (e) (f) (g) (h) (i) (j) Following completion of the annual audit and quarterly reviews, review separately with each of management and the external auditor any significant changes to planned procedures, any difficulties encountered during the course of the audit and, if applicable, reviews, including any restrictions on the scope of work or access to required information and the cooperation that the external auditor received during the course of the audit and, if applicable, reviews. Review any significant disagreements among management and the external auditor in connection with the preparation of the financial statements. Where there are significant unsettled issues between management and the external auditors that do not affect the audited financial statements, the Committee shall seek to ensure that there is an agreed course of action leading to the resolution of such matters. Review with the external auditor and management significant findings during the year and the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented. This review should be conducted at an appropriate time subsequent to implementation of changes or improvements, as decided by the Committee. Review the system in place to seek to ensure that the financial statements, related MD&A and other financial information disseminated to governmental organizations and the public satisfy applicable requirements. When there is to be a change in auditors, review the issues related to the change and the information to be included in the required notice to securities regulators of such change. (7) Risk Management (a) (b) (8) General (a) (b) Section 4 Review program of risk assessment and steps taken to address significant risks or exposures of all types, including insurance coverage and tax compliance. Review, not less than quarterly, a mark to market assessment of the Company s hedge positions and counterparty credit risk and exposure. If considered appropriate, conduct or authorize investigations into any matters within the Committee s scope of activities. The Committee is empowered to retain independent counsel, accountants and other professionals to assist it in the conduct of any such investigation or otherwise as it determines necessary to carry out its duties. The Committee may set and pay (at the expense of the Company) the compensation for any such advisors. Perform any other activities as the Committee deems necessary or appropriate. Complaint Procedures (1) Submitting a Complaint (a) (2) Procedures (a) (b) Anyone may submit a whistle blower notice or complaint regarding conduct by the Company or its subsidiaries or their respective employees or agents (including its independent auditors) reasonably believed to involve questionable accounting, internal accounting controls or auditing matters. The Chair or in his/her absence or by his/her delegation, any other member of the Committee should oversee the treatment of such complaints. The Chair of the Committee is designated to receive and administer or supervise the administration of employee complaints with respect to accounting or financial control matters. In order to preserve anonymity when submitting a complaint regarding questionable accounting or auditing matters, the employee may submit a complaint in accordance with the Company s Whistleblower Policy, and such complaint shall be address in accordance with that policy. C-5

219 (3) Records and Report The Chair of the Committee should maintain a log of complaints, tracking their receipt, investigation, findings and resolution, and should prepare a summary report for the Committee. C-6

220 CERTIFICATE OF THE COMPANY Dated: April 6, 2017 This prospectus (which includes the marketing materials included or incorporated by reference) constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by the securities legislation of each of the provinces and territories of Canada. (signed) BRAD THOMSON Chief Executive Officer (signed) DERREN NEWELL Chief Financial Officer On behalf of the Board of Directors: (signed) CODY CHURCH Director (signed) JEFF BELFORD Director CC-1

221 CERTIFICATE OF THE UNDERWRITERS Dated: April 6, 2017 To the best of our knowledge, information and belief, this prospectus (which includes the marketing materials included or incorporated by reference) constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by the securities legislation of each of the provinces and territories of Canada. Scotia Capital Inc. Morgan Stanley Canada Limited BMO Nesbitt Burns Inc. By: (signed) ANTHONY AULICINO By: (signed) PATRICK READ By: (signed) GREGORY STADNYK CIBC World Markets Inc. Goldman Sachs Canada Inc. Raymond James Ltd. By: (signed) CHRIS FOLAN By: (signed) KEN N. DAVIS By: (signed) JASON HOLTBY RBC Dominion Securities Inc. By: (signed) ANDREW MACNIVEN Canaccord Genuity Corp. By: (signed) ANDREW D. BIRKBY AltaCorp Capital Inc. GMP Securities L.P. Peters & Co. Limited By: (signed) J. CAMERON BAILEY By: (signed) DEAN M. WILLNER By: (signed) J.G. (JEFF) LAWSON CU-1

222 Drivers for Increasing Proppant Demand Established Industry Trends Result in Increased Proppant Demand Proppant Intensity in the Montney Has Doubled in Three Years 2,100 MT 4,200 MT (Proppant per well (top 25%), 2013 to 2016) Increasing Proppant per Stage Increased proppant intensity driving improved economics Tighter Stage Spacing Stages per well have increased >40% basin-wide since 2013 Longer Laterals Increasing Horizontal Well Count Industry moving to longer laterals to improve rate & recovery via increased reservoir contact Capex forecasted to increase by approximately 55% from for key Canadian resource plays

223 Investment Highlights Attractive Proppant Market Fundamentals Western Canada drilling activity expected to increase significantly, a positive indicator for proppant demand and pricing Market Leading Logistics Advantage Largest proppant terminal network in the WCSB with more than 50% of total throughput capacity in Montney, Duvernay and Deep Basin Integrated Business Model Enhances Margin Integrated proppant provider from mine to wellsite, enabling Source to capture margin across supply chain Strong Balance Sheet Strong capital position to weather the oilfield cycles and capitalize on strategic acquisitions as opportunities arise Proven Management and Board of Directors Over 75 years of collective experience at diversified energy companies with long- standing customer relationships CORPORATE HEADQUARTERS 100, Ave SE Calgary, AB Canada T2G 0Y4 P: sourceenergyservices.com