Source Energy Services Ltd. — Interim / Quarterly Report 2021

Nov 4, 2021

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CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

UNAUDITED

www.sourceenergyservices.com 500, 1060 – 7th Street SW, Calgary, AB Canada T2R 0C4 | Telephone 403-262-1312

SOURCE ENERGY SERVICES LTD.

Condensed Consolidated Interim Statements of Financial Position - Unaudited

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

			September 30,		December 31,
As at September 30,	Note		2021		2020
Assets
Current assets
Cash		$	1,400	$	—
Accounts receivable	4(c)		44,666		33,644
Prepaid expenses			3,396		4,436
Derivative asset	4(b)		105		—
Inventories	6		48,122		53,467
Total current assets			97,689		91,547
Derivative asset	4(b)		315		—
Property, plant and equipment	7		132,586		140,927
Right-of-use assets	8		29,495		33,787
Total assets		$	260,085	$	266,261
Liabilities and equity
Current liabilities
Accounts payable and accruals	4(d)	$	36,014	$	33,219
Contract liabilities	16		—		776
Lease liabilities	11		10,921		11,036
Current portion of long-term debt	10		7,500		—
Decommissioning provision	12		247		1,006
Total current liabilities			54,682		46,037
Lease liabilities	11		28,186		31,293
Long-term debt	10		149,499		147,281
Decommissioning provision	12		6,793		8,963
Total long-term liabilities			184,478		187,537
Total liabilities		$	239,160	$	233,574
Shareholders' equity
Shareholders' equity	13(a)	$	410,632	$	410,632
Contributed surplus			2,459		2,459
Accumulated deficit			(398,459)		(388,622)
Cumulative translation adjustment			6,293		8,218
Total equity		$	20,925	$	32,687
Total liabilities and equity		$	260,085	$	266,261

See accompanying notes to the condensed consolidated interim financial statements.

Commitments and contingencies (Note 18)

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Page 1

SOURCE ENERGY SERVICES LTD.

Condensed Consolidated Interim Statements of Operations and Comprehensive Loss - Unaudited

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

			For the three	For the three	months ended		For the	nine	months ended
					September 30,				September 30,
	Note		2021		2020		2021		2020
Sales
Sand revenue	16	$	79,343	$	65,240	$	203,556	$	161,085
Wellsite solutions	16		17,554		12,636		45,708		27,062
Terminal services	16		789		669		3,047		2,762
Total sales			97,686		78,545		252,311		190,909
Cost of sales	17	$	79,994	$	61,242	$	200,139	$	150,383
Cost of sales - depreciation			4,921		10,264		17,031		26,935
Gross margin		$	12,771	$	7,039	$	35,141	$	13,591
Operating expense	17	$	4,606	$	2,753	$	12,372	$	9,287
General & administrative expense	17		2,299		2,220		7,293		8,176
Depreciation			2,336		3,158		7,447		11,213
Income (loss) from operations		$	3,530	$	(1,092)	$	8,029	$	(15,085)
Other expense (income):
Finance expense	19	$	7,638	$	7,651	$	22,511	$	21,942
Share-based compensation expense (recovery)	14		(3)		(22)		167		(91)
Gain on asset disposal			(54)		(155)		(63)		(150)
Gain on derivative asset	4(b)		—		—		(420)		—
Other income	10(d)		(169)		(127)		(3,091)		(1,853)
Other expense	18		51		66		95		186
Impairment expense	7		—		—		—		143,656
Foreign exchangegain			(354)		(562)		(1,333)		(644)
Total other expense			7,109		6,851		17,866		163,046
Loss before income taxes		$	(3,579)	$	(7,943)	$	(9,837)	$	(178,131)
Income taxes
Deferred tax expense	9	$	—	$	—	$	—	$	31,350
Total income taxes			—		—		—		31,350
Net loss		$	(3,579)	$	(7,943)	$	(9,837)	$	(209,481)
Net loss attributable to shareholders			(3,579)		(7,595)		(9,837)		(206,784)
Net loss attributable to non-controllinginterests	13(a)		—		(348)		—		(2,697)
Total net loss		$	(3,579)	$	(7,943)	$	(9,837)	$	(209,481)
Other comprehensive income (loss)
Foreign currency translation adjustment (subject to
recycling)			2,364		(3,001)		(1,925)		10,034
Consolidated comprehensive loss		$	(1,215)	$	(10,944)	$	(11,762)	$	(199,447)
Loss per share (in dollars)
Basic	15	$	(0.26)	$	(1.53)	$	(0.73)	$	(41.60)
Diluted	15	$	(0.26)	$	(1.53)	$	(0.73)	$	(41.60)

See accompanying notes to the condensed consolidated interim financial statements.

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Page 2

SOURCE ENERGY SERVICES LTD.

Condensed Consolidated Interim Statements of Changes in Equity - Unaudited

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

	Common share capital Contributed Surplus Cumulative Translation Adjustment Accumulated Deficit Number of Shares Total Equity $
Balance at December 31, 2020 Net loss Unrealized foreign exchange loss	13,545,055 $ 410,632 $ 2,459 $ 8,218 $ (388,622) $ 32,687 (9,837) (9,837) (1,925) (1,925)
Balance at September 30, 2021	13,545,055 $ 410,632 $ 2,459 $ 6,293 $ (398,459) $ 20,925

	Common share capital Contributed Surplus Cumulative Translation Adjustment Accumulated Deficit Non- controlling interests Number of Shares Total Equity $
Balance at December 31, 2019 Net loss Unrealized foreign exchange income	5,079,388 $ 397,911 $ 7,910 $ 2,004 $ (205,947) $ (2,569) $ 199,309 (206,784) (2,697) (209,481) 10,034 10,034
Balance at September 30, 2020	5,079,388 $ 397,911 $ 7,910 $ 12,038 $ (412,731) $ (5,266) $ (138)

See accompanying notes to the condensed consolidated interim financial statements.

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Page 3

SOURCE ENERGY SERVICES LTD.

Condensed Consolidated Interim Statements of Cash Flows - Unaudited

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

		For the three	For the three	months ended		For the	nine	months ended
				September 30,				September 30,
	Note	2021		2020		2021		2020
Cash Flows Provided by Operating Activities
Net loss	$	(3,579)	$	(7,943)	$	(9,837)	$	(209,481)
Adjusted for the following:
Depreciation		7,257		13,422		24,478		38,148
Share-based compensation	14	(3)		(22)		167		(91)
Gain on asset disposal		(54)		(155)		(63)		(150)
Finance expense	19	7,638		7,651		22,511		21,942
Impairment	7	—		—		—		143,656
Deferred income taxes	9	—		—		—		31,350
Unrealized gain on derivative liability		—		—		(420)		—
Loss on lease modifications		—		—		6		—
Satisfaction of performance obligations, net of
proceeds on contract liabilities	16	—		(83)		(842)		(1,452)
Payments for share-based compensation		—		—		(32)		(14)
Payments made for decommissioning
provision	12	(521)		—		(1,342)		(535)
Net changes in non-cash workingcapital	5	(5,521)		(19,120)		(7,803)		1,602
Cash flowsprovided by (used in)operatingactivities	$	5,217	$	(6,250)	$	26,823	$	24,975
Investing Activities
Capital expenditures		(1,895)		(386)		(4,518)		(2,545)
Proceeds on disposal of property, plant and
equipment		66		155		75		155
Net changes in non-cash workingcapital	5	213		(341)		167		(2,463)
Cash flows used in investingactivities	$	(1,616)	$	(572)	$	(4,276)	$	(4,853)
Financing Activities
Proceeds on long-term debt	5	35,493		18,669		68,544		27,829
Repayments on long-term debt	5	(35,715)		(5,954)		(74,045)		(31,839)
Proceeds from the US Paycheck Protection
Program		—		—		—		2,931
Repayment of lease obligations	11	(3,149)		(3,640)		(9,637)		(12,229)
Financingexpensepaid		(1,857)		(2,253)		(6,009)		(6,814)
Cash flowsprovided by (used in)financingactivities	$	(5,228)	$	6,822	$	(21,147)	$	(20,122)
Increase (decrease) in cash	$	(1,627)	$	—	$	1,400	$	—
Cash and cash equivalents,beginningofperiod		3,027		—		—		—
Cash and cash equivalents, end ofperiod	$	1,400	$	—	$	1,400	$	—
Supplementary information for cash flows from operating activities
Interest paid		(1,691)		(2,062)		(5,533)		(6,386)

See accompanying notes to the condensed consolidated interim financial statements.

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Page 4

SOURCE ENERGY SERVICES LTD. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

1. GENERAL DESCRIPTION OF BUSINESS

Source Energy Services Ltd. and its subsidiaries (“Source” or the “Company”) is a company that focuses on the integrated production and distribution of high quality Northern White frac sand, as well as the distribution of other bulk completion materials not produced by Source. Source provides its customers with an end-to-end solution for frac sand supported by its Wisconsin mines and processing facilities, its Western Canadian terminal network and its “last mile” logistics capabilities. Source also provides storage and logistics services for other bulk oil and gas well completion materials and has developed Sahara, a proprietary wellsite mobile sand storage and handling system.

The Company’s head and principal office is located at 500, 1060 - 7th Street SW, Calgary, Alberta, T2R 0C4.

2. BASIS OF PRESENTATION

Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards (“IAS”) 34, Interim Financial Reporting, as at and for the three and nine months ended September 30, 2021, and do not include all the information required for full annual financial statements. As such, they should be read in conjunction with the December 31, 2020 annual consolidated audited financial statements which are available on SEDAR.

These condensed consolidated interim financial statements were authorized for issuance by the board of directors (the “Board”) as at November 4, 2021.

Use of estimates and judgments

The preparation of these condensed consolidated interim financial statements in conformity with International Financial Reporting Standards (“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. These estimates are further described in the Company’s December 31, 2020 annual consolidated audited financial statements which can be found on SEDAR.

Impact of COVID-19

In March 2020, the coronavirus (“COVID-19”) outbreak was declared a global pandemic by the World Health Organization. Measures enacted to prevent the spread of the virus resulted in global business disruption with significant economic repercussions and caused uncertainty and extraordinary volatility in the oil and gas industry, particularly in the Western Canadian Sedimentary Basin.

In 2020, Source undertook numerous initiatives to enhance liquidity and address the challenges resulting from the significant downturn in the Western Canadian oil industry, further impacted by COVID-19. Source completed its Recapitalization Transaction (as defined in Note 13) and implemented operational cost reduction measures to mitigate the impact of the volatile operating environment. The extent to which COVID-19 will impact the Company’s operating environment remains uncertain and cannot be predicted, but adverse impacts may result in decreased revenues, increased counterparty credit risk and uncertainties with respect to debt covenant compliance and liquidity. Source continues to assess the potential impact of COVID-19 on the estimates and judgements used in determining the value of its assets, liabilities and equity.

Significant accounting policies

The accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Company’s consolidated audited financial statements as at and for the year ended December 31, 2020, except as noted below:

Standards and interpretations adopted during the period

The following amendments have been issued by the International Accounting Standards Board and were adopted by the Company effective for the fiscal year beginning January 1, 2021:

effective for the fiscal year beginning January 1,	2021:
Standard	Description of change
Interest rate benchmark reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)	The amendments introduce a practical expedient to account for a change in the basis for determining the contractual cash flows of financial instruments that are affected byIBOR reform.
COVID-19 related rent concessions (Amendment to IFRS 16)	The amendment provides a practical expedient that relieves a lessee from determiningwhether a COVID-19 rent-related concession is a lease modification.

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Page 5

SOURCE ENERGY SERVICES LTD. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

The Company completed its assessment of the impact of the amendments and concluded that they do not have a material impact on the condensed consolidated interim financial statements.

Comparative figures

Prior year share and per share amounts reflect the consolidation of outstanding common shares on a twelve-for-one basis, pursuant to the Recapitalization Transaction completed in 2020.

3. SEASONALITY OF OPERATIONS

The Company’s business is seasonal in nature with the majority of activity normally being in the first and third quarters. Lower activity levels are usually realized in the fourth quarter, as exploration and production (“E&P”) companies evaluate remaining capital spend for the year, and in the second quarter due to spring break-up. Spring break-up occurs for a period of approximately eight weeks between March and June as the frost comes out of the roads in Western Canada and hauling weight restrictions are put in place. The severity of the winter snowfalls and the amount of moisture received during this period impact the length of spring break-up. As a result, the Company’s operating results may vary on a quarterly basis. There are other factors that will impact the Company’s activities quarter-to-quarter including commodity prices and E&P companies’ completion activity levels.

4. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

(a) Risk management overview

The Company’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 condensed consolidated interim financial statements. The Company employs risk management strategies and polices to ensure that any exposures to risk are in compliance with the Company’s business objectives and risk tolerance levels. While the Board has the overall responsibility for the Company’s risk management framework, the Company’s management has the responsibility to administer and monitor these risks.

(b) Fair value of financial instruments

The fair values of cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of those instruments. The fair value of the credit facilities approximate their carrying values as they bear interest at floating market rates consistent with market rates for similar debt.

The Company 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).

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.

unobservable nature of the inputs, there may be uncertainty about the value of Level 3 financial instruments.	unobservable nature of the inputs, there may be uncertainty about the value of Level 3 financial instruments.
Carrying amount Fair Value September 30, 2021 Level 1 Level 2 Level 3
Financial assets at fair value through profit and loss: Derivative asset(1)(2) $ (1,891) Financial liabilities at amortized cost: Senior secured notes(1) $ 141,582 Lease liabilities $ 39,107	$ — $ — $ (1,891) $ — $ 58,377 $ — $ — $ 39,107 $ —

Notes:

(1) The senior secured notes contain prepayment options that have been classified as a derivative asset and have been presented on a net basis in the condensed consolidated interim statements of financial position.

(2) In June 2021, the Company entered into a customer contract, ending in 2022, which contains an embedded derivative and has been classified as a derivative asset. The fair value was determined using various inputs including the timing of estimated sales volumes related to the contract.

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Page 6

SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

		Carrying				Fair Value
December 31, 2020		amount		Level 1		Level 2	Level 3
Financial assets at fair value through profit and loss:
Derivative asset	$	(1,471)	$		— $	— $	(1,471)
Financial liabilities at amortized cost:
Senior secured notes	$	125,493	$		— $	— $	126,044
Lease liabilities	$	42,329	$		— $	42,329 $	—

(c) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Substantially all of the Company’s accounts receivable are due from purchasers of proppants and logistics services and are subject to normal industry credit risk.

The Company’s revenues are generally derived from a group of large and reputable oilfield E&P companies and oilfield services customers. Orders for proppants are subject to the Company’s credit and collection programs. Source’s five largest customers account for 85% of the revenue for the three months ended September 30, 2021, with the three largest making up 69% (three months ended September 30, 2020, five customers accounted for 98%, three customers accounted for 89%). The Company’s five largest customers account for 83% of the revenue for the nine months ended September 30, 2021, with the three largest making up 69% of revenue (nine months ended September 30, 2020, five customers accounted for 87%, three customers accounted for 72%). Two of those customers (three for the nine months ended September 30, 2020) account for 10% or more of total revenue individually in the nine months ended September 30, 2021.

Significant changes in industry conditions will increase the risk of not collecting receivables. Management believes the risk is materially mitigated by the size and reputation of the companies to which they extend credit. As at September 30, 2021, the Company’s trade and accrued receivables, net of loss allowances, were comprised of the following:

As at		September 30, 2021		December 31, 2020
Not yet due	$	37,092	$	19,712
0 – 30 days		7,561		13,891
31 – 60 days		5		40
61 – 90 days		6		1
91+ days		2		—
Total trade and other receivables	$	44,666	$	33,644

The Company’s maximum exposure to credit risk is the fair value of accounts receivable on the balance sheet. The Company performs ongoing credit evaluations of its customers and establishes an allowance for doubtful accounts based on the lifetime expected credit loss provision. The Company uses an allowance matrix to estimate the credit losses of trade receivables which considers historical default rates as well as the days past due.

A loss allowance of $89 was recorded as at September 30, 2021:

A loss allowance of $89 was recorded as at September 30, 2021:
As at		September 30, 2021		December 31, 2020
Balance, beginning of period		272	$	80
Increase (decrease) in loss allowance recognized in the statement of operations during the
period		26		(17)
Specificprovision for receivables deemed uncollectible		(209)		209
Balance, end ofperiod	$	89	$	272

(d) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s approach to managing liquidity risk includes preparing operating and capital budgets and forecasts and monitoring performance against the budgets and forecasts. The Company may seek additional financing based on the results of these processes. The Company’s ongoing liquidity is impacted by various external events and conditions, including foreign currency fluctuations and commodity price fluctuations as well as global economic conditions.

The financial liabilities on the condensed consolidated interim statements of financial position consist of accounts payable and accrued liabilities, lease liabilities, credit facilities and senior secured notes. The Company manages this risk through detailed monitoring of budgeted and projected operating results and cash requirements.

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Page 7

SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

The Company expects to repay its financial liabilities in the normal course of operations and to fund future operational and capital requirements through operating cash flow, as well as future debt and equity financings. The Company has an amended and restated credit facility to facilitate the management of liquidity risk.

The Company’s contractual cash outflows relating to financial liabilities are outlined in the table below:

								2026 and
As at September 30, 2021		Total	2021	2022	2023	2024	2025	beyond
Accounts payable and accruals	$	36,014 $	36,014 $	— $	— $	— $	— $	—
Lease liabilities(1)	$	41,618 $	3,534 $	11,743 $	8,890 $	7,347 $	4,531 $	5,573
Credit facilities(2)	$	18,000 $	— $	7,500 $	10,500 $	— $	— $	—
Notespayable(3)	$	216,264 $	— $	15,047 $	17,160 $	17,169 $	166,888 $	—

Notes:

(1) Includes interest for future periods.

(2) The timing and amount of interest payments on such balances will fluctuate depending on balances outstanding and applicable interest rates.

(3) Includes interest for future periods and assumes the Company will elect to pay interest in kind at a rate of 12.5% through February 15, 2022 and subsequently pay interest in cash at 10.5% (refer to Note 10 for additional information).

(e) Market risk

Market risk is the risk that changes in market prices, foreign exchange rates and interest rates will affect the Company’s net earnings or the value of financial instruments and are largely outside the control of the Company. The objective of the Company is to manage and mitigate market risk exposures within acceptable limits while maximizing returns. Primary market risks are as follows:

Foreign currency risk

The Company is exposed to currency price risk on sales denominated in United States (“US”) dollars to the extent that the receipt of payment of the US denominated accounts receivable are subject to fluctuations in the related foreign exchange rate. In addition, foreign currency risk exists on the cost of manufacturing of inventory for sale to the extent that the payment of those costs are foreign denominated accounts payable and are subject to fluctuations in the foreign exchange rate. Included in accounts receivable and accounts payable and accrued liabilities at September 30, 2021 are $16,947 (December 31, 2020 - $18,490) and $16,226 (December 31, 2020 - $14,924) denominated in foreign currency, respectively. The net effect of each 1% change in foreign exchange would impact net income (loss) by $343 for the three months ended September 30, 2021 ($190 in 2020) and $1,055 for the nine months ended September 30, 2021 ($537 in 2020).

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 Company is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the floating rate credit facility and the senior secured term loan. The Company is exposed to interest rate price risk on the long-term debt that bears interest at floating rates. The net effect of each 1% change in market interest rates would impact the related interest expense (income) for the Company’s floating rate borrowings by $180 at September 30, 2021 ($236 at December 31, 2020). The Company had no interest rate swaps or financial contracts in place as at or during the periods ended September 30, 2021 and December 31, 2020.

(f) Capital management

The Company’s capital management policy is to maintain a strong capital base that optimizes the Company’s ability to grow, maintain shareholder and creditor confidence and to provide a platform to create value for its common shareholders. The Company’s management is responsible for managing the Company’s capital and does so through regular reviews of financial information including budgets and forecasts. The Company’s directors are responsible for overseeing this process. The Company considers its capital structure to include equity, senior secured notes, credit facilities and leases.

The Company 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 Company prepares annual capital expenditure and operating budgets, which are updated as necessary. The annual and updated budgets are prepared by the Company’s management and approved by the Company’s Board.

In order to maintain or adjust the capital structure, the Company may issue share capital, seek debt financing and adjust its capital spending to manage its current and projected capital structure. The Company’s ability to raise additional debt or equity financing is impacted by external conditions, including global economic conditions. The Company continually monitors economic and general business conditions.

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Page 8

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

SOURCE ENERGY SERVICES LTD.

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

The Company’s share capital is not subject to external restrictions; however, the amount of the bank operating facility available for use is determined by levels of accounts receivable and inventory. Pursuant to the amended and restated credit agreement, the Company is subject to externally imposed capital requirements for the asset backed loan (“ABL”) facility as follows:

• a minimum level of excess availability of $5,000;

• a minimum level of the average of the prior three months trailing twelve months of earnings before interest, tax, depreciation and amortization ending at predetermined dates through December 31, 2022 and calculated at each fiscal calendar month, equal to a range of $8,500 to $12,000 for 2021 and $12,000 to $25,000 for 2022;

• maximum capital expenditures totaling $6,000 for each of the fiscal calendar years ended 2021 and 2022 and increased to $8,000 for 2023, plus permitted capital expenditures of $2,000 for any one of the years;

• payment of interest in kind for the Notes until after February 15, 2022; and

• commencing June 30, 2022, a springing fixed charge ratio of 1.10:1 which shall increase to 1.25:1 on September 30, 2022 and all time thereafter. The fixed charge coverage ratio is defined as the ratio of (i) earnings before interest, tax, depreciation and amortization for the twelve calendar months ending at each fiscal calendar month end less unfinanced capital expenditures, cash taxes and distributions to shareholders and (ii) the interest expense paid in cash plus accrued and unpaid interest related to the senior secured notes for the twelve calendar months ending at such fiscal calendar month.

The Company’s capital management policy has not changed during the periods ended September 30, 2021 or December 31, 2020.

5. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash operating assets and liabilities for the three and nine months ended September 30, 2021 and 2020 were as follows:

As at September 30,	Three	months ended	months ended	September 30,		Nine months ended	Nine months ended	September 30,
		2021		2020		2021		2020
Accounts receivable	$	(11,483)	$	(35,841)	$	(11,036)	$	(2,014)
Prepaid expenses and deposits		(377)		(1,023)		1,021		(1,332)
Inventory		3,861		5,822		684		10,529
Accountspayable and accrued liabilities		2,478		11,922		1,528		(5,581)
Changes in non-cash working capital	$	(5,521)	$	(19,120)	$	(7,803)	$	1,602

Changes in non-cash investing assets and liabilities for the three and nine months ended September 30, 2021 and 2020 were as follows:

follows:
As at September 30,	Three	months ended		September 30,		Nine months ended		September 30,
		2021		2020		2021		2020
Accountspayable and accrued liabilities	$	213	$	(341)	$	167	$	(2,463)
Changes in non-cash working capital	$	213	$	(341)	$	167	$	(2,463)

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Page 9

SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

				ABL facility and
		Senior secured		senior secured
		notes		term loan
As at December 31, 2019	$	150,028	$	28,657
Cash changes:
Proceeds		—		61,031
Repayments		—		(66,644)
Non-cash and other changes:
Extinguishment of debt		(29,100)		—
Interest paid in kind(1)		97		—
Accretion		3,655		365
Unrealized foreign exchange (gain) loss		—		303
Financingcosts incurred		(658)		(1,546)
As at December 31, 2020	$	124,022	$	22,166
Cash changes:
Proceeds		—		68,544
Repayments		—		(74,045)
Non-cash and other changes:
Interest paid in kind(1)		13,762		—
Accretion		2,371		466
Unrealized foreign exchange (gain) loss		—		(234)
Financingcosts incurred		(44)		(141)
As at September 30, 2021	$	140,111	$	16,756

Note:

(1) Under the terms of the senior secured notes, Source has the option to pay interest in kind, at a rate of 12.5%, for all quarterly interest payments through February 15, 2022. Refer to Note 10 for additional information.

6. INVENTORIES

Inventory consists of three main classifications:

Inventory consists of three main classifications:
As at		September 30, 2021		December 31, 2020
Unprocessed sand and work in progress	$	29,277	$	28,519
Sand available for shipment		15,506		21,706
Spareparts and supplies		3,339		3,242
Total inventories	$	48,122	$	53,467

Spare parts and supplies are for routine facilities maintenance. Included in the inventory balance is depreciation expense related to sand-producing properties of $7,306 as at September 30, 2021 (December 31, 2020 - $10,021). The total amount of inventory expensed through cost of sales during the three and nine months ended September 30, 2021 was $64,401 and $159,317, respectively (three and nine months ended September 30, 2020 - $50,454 and $124,863, respectively). Under the normal course of operations, no inventory write-downs or reversals of prior write-downs were recorded during the three and nine months ended September 30, 2021 and 2020.

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Page 10

SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

7.	PROPERTY, PLANT AND EQUIPMENT	PROPERTY, PLANT AND EQUIPMENT
							Mine
			Land &	Equipment &		Construction	Preparation
			Building	Vehicles	Other	in Progress	Costs	Total
Cost
Balance as at December 31, 2019		$	205,901 $	197,016 $	6,287 $	22,586 $	13,287 $	445,077
	Additions		559	150	—	2,256	1,341	4,306
	Disposals		—	(268)	(4)	(248)	—	(520)
	Completed construction in progress		4	1,930	137	(2,071)	—	—
	Transfers		—	(1,171)	—	—	—	(1,171)
	Exchange differences		(3,167)	(2,807)	(74)	(119)	(331)	(6,498)
Balance as at December 31, 2020		$	203,297 $	194,850 $	6,346 $	22,404 $	14,297 $	441,194
	Additions(1)		(1,664)	77	—	1,901	2,540	2,854
	Disposals		(34)	(138)	—	—	—	(172)
	Completed construction in progress		214	1,032	19	(1,265)	—	—
	Exchange differences		95	95	2	17	54	263
Balance as at September 30, 2021			$201,908	$195,916	$6,367	$23,057	$16,891	$444,139
Note :
(1)	Includes changes in estimates for the decommissioning provision due to an increase in risk-free				rates (refer to Note 12 for additional information).
Accumulated depreciation
Balance as at December 31, 2019		$	(58,101) $	(73,363) $	(5,365) $	— $	(11,315) $	(148,144)
	Depreciation		(8,029)	(9,497)	(448)	—	(3,144)	(21,118)
	Impairment		(75,371)	(67,565)	(409)	—	—	(143,345)
	Disposals		—	263	2	—	—	265
	Transfers		—	166	—	—	—	166
	Exchange differences		5,844	5,598	83	—	384	11,909
Balance as at December 31, 2020		$	(135,657) $	(144,398) $	(6,137) $	— $	(14,075) $	(300,267)
	Depreciation		(4,054)	(5,304)	(84)	—	(1,697)	(11,139)
	Disposals		30	130	—	—	—	160
	Exchange differences		(124)	(137)	(3)	—	(43)	(307)
Balance as at September 30, 2021		$	(139,805) $	(149,709) $	(6,224) $	— $	(15,815) $	(311,553)
Carrying amounts
December 31, 2020		$	67,640 $	50,452 $	209 $	22,404 $	222 $	140,927
September 30, 2021		$	62,103 $	46,207 $	143 $	23,057 $	1,076 $	132,586

Assets under construction represent facilities that are being built at period end and 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. No indicators of impairment were noted as at September 30, 2021.

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Page 11

SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

8. RIGHT-OF-USE ASSETS

8. RIGHT-OF-USE ASSETS
		Land &	Equipment &
		Building		Vehicles		Rail cars		Total
Cost
Balance as at December 31, 2019	$	8,168	$	14,520	$	54,650	$	77,338
Additions		1,126		7,748		(11,117)		(2,243)
Expired leases		(772)		(5,781)		(1,358)		(7,911)
Transfers		—		1,171		—		1,171
Exchange differences		(12)		(393)		(521)		(926)
Balance as at December 31, 2020	$	8,510	$	17,265	$	41,654	$	67,429
Additions		1,451		4,477		494		6,422
Expired leases		(699)		(609)		(189)		(1,497)
Exchange differences		—		46		26		72
Balance as at September 30, 2021	$	9,262	$	21,179	$	41,985	$	72,426
Accumulated depreciation
Balance as at December 31, 2019	$	(1,583)	$	(7,279)	$	(12,340)	$	(21,202)
Depreciation		(2,638)		(7,285)		(11,186)		(21,109)
Expired leases		772		5,781		1,358		7,911
Transfers		—		(166)		—		(166)
Exchange differences		9		188		727		924
Balance as at December 31, 2020		(3,440)		(8,761)		(21,441)		(33,642)
Depreciation		(1,668)		(4,093)		(4,884)		(10,645)
Expired leases		699		609		189		1,497
Exchange differences		(2)		(52)		(87)		(141)
Balance as at September 30, 2021	$	(4,411)	$	(12,297)	$	(26,223)	$	(42,931)
Carrying amounts
December 31, 2020	$	5,070	$	8,504	$	20,213	$	33,787
September 30, 2021	$	4,851	$	8,882	$	15,762	$	29,495

9. INCOME TAXES

During 2020, the Government of Alberta enacted new legislation to accelerate the reduction of the provincial corporate income tax rate from 12% to 8%, resulting in a combined federal and provincial corporate tax rate of 23% in 2021. Deferred income tax benefits have not been recognized in respect of temporary differences.

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Page 12

SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

The following table reconciles the Company's expected income tax expense relative to the current effective Canadian statutory rate of 23% (2020 - 25%) for the periods indicated:

	Three	months ended	months ended	September 30,		Nine months ended	Nine months ended	September 30,
		2021		2020		2021		2020
Loss before income taxes	$	(3,579)	$	(7,943)	$	(9,837)	$	(178,131)
Statutoryincome tax rate		23.00 %		25.00 %		23.00 %		25.00 %
Expected income taxes		(823)		(1,986)		(2,263)		(44,533)
Increase (decrease) in taxes from:
Non-deductible expenses		113		131		327		370
Share-based compensation		—		—		—		3
Prior period adjustments		(1,693)		—		(1,693)		—
Unrecognized deferred tax assets		1,733		(2,442)		2,663		75,150
Provincial tax rate change		—		152		—		1,009
Rate differential on foreign activities		323		4,855		914		(891)
Other		347		(710)		52		242
Total income tax expense	$	—	$	—	$	—	$	31,350

The Company has Canadian and foreign non-capital losses as at September 30, 2021 of $98,770 (September 30, 2020 - $93,139) and $16,919 (September 30, 2020 - $23,960), respectively. Canadian and foreign losses begin to expire in 2037.

10. LONG-TERM DEBT

10. LONG-TERM DEBT
As at		September 30, 2021		December 31, 2020
Senior secured notes, due March 15, 2025, bearing interest at 10.5% per annum (a)	$	141,582	$	125,493
Derivative asset for senior secured notes prepayment options (a)		(1,471)		(1,471)
ABL facility maturing September 2023. Interest is based on floating rates dependent
upon the form of advance drawn (b)		—		3,736
Senior secured term loan due September 2023, bearing interest at prime plus 6.0% per
annum (c)		18,000		20,000
Unamortized debt issuance costs for the credit facilities (b)		(1,244)		(1,570)
Other long-term debt(d)		132		1,093
Total long-term debt	$	156,999	$	147,281
Less: currentportion		(7,500)		—
Long-termportion	$	149,499	$	147,281

(a) Senior secured notes

• i. Senior secured notes due 2025

On December 30, 2020, as part of the Recapitalization Transaction, Source issued $142,238 in aggregate principal of new senior secured notes (the “Notes”), which bear interest at 10.5% and mature March 15, 2025. The Company has the option to defer payment of interest owed in cash and pay interest in kind, at a rate of 12.5%, for all quarterly interest payments due on or before February 15, 2022, through the issuance of additional notes. For the three and nine months ended September 30, 2021, the Company elected to pay interest in kind resulting in $4,692 and $11,387, respectively, of additional Notes issued. The Notes are secured by a fixed and floating charge over all assets of the business, except for an amount up to a maximum of amounts committed under the senior secured term loan, as outlined below, plus accrued interest and fees. The Notes also have a second charge on accounts receivable and inventory.

The Notes contain prepayment options, whereby the Company may redeem all or a part of the Notes at any time at the applicable percentage (2021 - 102%, 2022 - 101%, 2023 and thereafter - 100%), plus accrued and unpaid interest. The prepayment options have been classified as a derivative asset which is measured at fair value through profit and loss. At September 30, 2021, the fair value of the derivative asset was $1,471. The derivative asset has been presented with the Notes on a net basis in the condensed consolidated interim statements of financial position.

The Notes also contain a mandatory redemption feature for each fiscal year commencing December 31, 2021, whereby Source shall redeem the portion of outstanding principal and accrued interest for the Notes that equals 50% of excess cash flows greater than $10,000 in the applicable fiscal year. Excess cash flows are defined as cash flows provided by operating activities, less

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Page 13

SOURCE ENERGY SERVICES LTD. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

maintenance capital expenditures, amounts paid for lease obligations, taxes and amounts of interest or principal prepayments on the credit facilities or Notes incurred in the applicable fiscal year.

Interest on the Notes was $4,768 and $13,762, respectively, for the three and nine months ended September 30, 2021.

ii. Senior secured notes due 2021

In December 2016, the Company issued $130,000 senior secured notes and an additional $50,000 senior secured notes in May 2018 (collectively, the “Old Notes”), which bore interest at 10.5% per annum and would have matured December 15, 2021. The Old Notes were secured by a fixed and floating charge over all assets of the business except accounts receivable and inventory, over which the Old Notes had a second charge. Pursuant to the terms of the Recapitalization Transaction, the Old Notes were extinguished and exchanged for the Notes and new common shares of Source.

Interest on the Old Notes was $4,163 and $12,397, respectively, for the three and nine months ended September 30, 2020.

(b) ABL facility

On December 30, 2020, as part of the Recapitalization Transaction, the Company’s ABL facility was amended to extend the term to mature on September 30, 2023. The facilities bear interest based on the bank’s prime lending rate and CDOR or LIBOR rates, plus an applicable margin. The ABL is secured by a floating first lien charge on the accounts receivable and inventory of the Company 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. At September 30, 2021, $nil was drawn under the ABL facility (less unamortized finance costs of $1,244 for a net balance of $(1,244)) (December 31, 2020 - $2,166). Any excess cash on hand is applied against amounts drawn on the ABL.

The ABL facility includes a US$5,000 standby letter of credit facility that does not affect the facility’s borrowing base. In March 2021, the standby letter of credit facility was increased to US$8,500, thereby reducing amounts committed to supporting letters of credit under the ABL facility by US$3,500. As per the terms of the senior secured term loan and concurrent with the increase to the standby letter of credit facility, a $2,000 repayment was completed on the senior secured term loan, as noted below. The amount committed to supporting letters of credit under the facility was $9,912 at September 30, 2021 (December 31, 2020 - $14,560). The borrowing base is updated monthly, with $34,570 of availability at September 30, 2021 (December 31, 2020 - $17,302).

The revised ABL facility includes the following key financial covenants:

• a minimum level of excess availability of $5,000;

• a minimum level of the average of the prior three months trailing twelve months of earnings before interest, tax, depreciation and amortization ending at predetermined dates through December 31, 2022 and calculated at each fiscal calendar month, equal to a range of $8,500 to $12,000 for 2021 and $12,000 to $25,000 for 2022;

• maximum capital expenditures totaling $6,000 for each of the fiscal calendar years ended 2021 and 2022 and increased to $8,000 for 2023, plus permitted capital expenditures of $2,000 for any one of the years;

• payment of interest in kind for the Notes until after February 15, 2022; and

• commencing June 30, 2022, a springing fixed charge ratio of 1.10:1 which shall increase to 1.25:1 on September 30, 2022 and all time thereafter. The fixed charge coverage ratio is defined as the ratio of (i) earnings before interest, tax, depreciation and amortization for the twelve calendar months ending at each fiscal calendar month end less unfinanced capital expenditures, cash taxes and distributions to shareholders and (ii) the interest expense paid in cash plus accrued and unpaid interest related to the senior secured notes for the twelve calendar months ending at such fiscal calendar month.

As of September 30, 2021, Source was in compliance with all of its covenants. Interest on the above facility amounted to $572 and $1,932, respectively, for the three and nine months ended September 30, 2021 (September 30, 2020 - $930 and $2,877, respectively).

(c) Senior secured term loan

As part of the Recapitalization Transaction, Source obtained access to an additional credit facility in the form of a senior secured term loan (the “Term Loan”) with an initial principal amount of up to $20,000. The Term Loan bears interest at Canadian prime plus 6% and matures on September 30, 2023, provided that the Term Loan shall be reduced to $10,500 on March 31, 2022 and further reduced to $5,000 on March 31, 2023. The Term Loan is secured by a fixed and floating first charge over all assets of the business. In March 2021, a $2,000 repayment was completed, as noted above, reducing the amount drawn on this facility to $18,000. As at September 30, 2021, $7,500 is presented as a current liability.

Interest on the Term Loan was $383 and $1,174, respectively, for the three and nine months ended September 30, 2021.

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Page 14

SOURCE ENERGY SERVICES LTD. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

(d) Other long-term debt

In April 2020, the Company applied for the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act (the “PPP Loan”), administered by the US Small Business Administration. Under the PPP Loan the Company received US$2,097 on April 28, 2020, which bore interest at a rate of 1.00% per annum and matured on April 18, 2022. In June 2021, the Company was approved for forgiveness for the full amount of the outstanding obligation. During the period, a recovery of US$2,097 was recognized in other income. Other long-term debt includes amounts related to the Company’s share-based compensation plan.

The effective interest rate realized on long-term debt for the nine months ended September 30, 2021 was 13.4% (December 31, 2020 - 12.1%).

11. LEASE LIABILITIES

11. LEASE LIABILITIES
As at		September 30, 2021		December 31, 2020
Balance, beginning of period	$	42,329	$	60,025
Additions during the period		4,139		10,960
Lease modifications		2,313		(12,774)
Lease payments		(9,637)		(15,526)
Exchange differences		(37)		(356)
Balance, end of period	$	39,107	$	42,329
Less: currentportion		(10,921)		(11,036)
Long-termportion	$	28,186	$	31,293

The Company incurs lease payments related to rail cars, equipment and vehicles, office buildings and surface leases. Lease liabilities are measured at the present value of the remaining lease payments at the incremental borrowing rate of 8%. Leases with a lease term of twelve months or less for certain classes of assets and low-value assets of $58 and $121, respectively, were expensed to cost of sales or operating expense in the three and nine months ended September 30, 2021 (September 30, 2020 - $43 and $252, respectively). The Company recognized $691 and $2,119, respectively, of interest on lease payments for the three and nine months ended September 30, 2021 (September 30, 2020 - $1,260 and $3,268, respectively).

12. DECOMMISSIONING PROVISION

12. DECOMMISSIONING PROVISION
As at		September 30, 2021		December 31, 2020
Balance, beginning of period	$	9,969	$	11,249
Liabilities incurred		663		548
Liabilities settled		(1,342)		(1,575)
Accretion		108		108
Changes in estimate		(2,340)		(143)
Exchange differences		(18)		(218)
Balance, end of period	$	7,040	$	9,969
Less: currentportion		(247)		(1,006)
Long-termportion	$	6,793	$	8,963

The Company’s decommissioning provision relates to reclamation of land and facilities where its mines operate. Management estimates the costs to abandon and reclaim 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 provision has been discounted using risk-free rates of 1.51% and 1.92% at September 30, 2021 (December 31, 2020 - 0.70% and 1.13%), for obligations to be settled based on the economic lives of the underlying assets, currently estimated to be between 8 and 38 years.

13. SHAREHOLDERS' EQUITY

(a) Share capital

The Company is authorized to issue an unlimited number of common shares.

During 2020, 1,300,154 Class B shares outstanding were held by SES Sand Holdings US, a subsidiary of TriWest Capital Partners (“TriWest”) which is a related party, who owned 3.74% of the shares of Source Energy Services Canada LP, a subsidiary of Source.

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Page 15

SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

In October 2020, the Class B shares were converted into common shares of Source on a one-for-one basis and SES Sand Holdings US became a wholly-owned subsidiary of Source.

The following table outlines the issued and outstanding common shares as at September 30, 2021:

(stated in thousands, except share amounts)	Number of shares		Amount
Balance as at December 31, 2019	5,079,388	$	397,911
Class B shares converted to common shares	—		91
Shares issued(1)	8,465,667		12,630
Balance as at December 31, 2020 and September 30, 2021	13,545,055	$	410,632

Note:

(1) Pursuant to the Recapitalization Transaction, 8,465,667 common shares were issued at $1.50 per share, net of $69 of issue costs.

(b) Recapitalization Transaction

In December 2020 Source completed a comprehensive process, undertaken in response to the ongoing downturn in the Western Canadian oil and gas industry, to improve the Company’s capital structure and better position the Company for future growth (the “Recapitalization Transaction”). The Recapitalization Transaction was completed through a plan of arrangement under the Canada Business Corporations Act, and achieved the following:

• immediately prior to the closing of the Recapitalization Transaction, the consolidation of outstanding common shares of Source on a twelve-for-one basis;

• a reduction of Source’s principal obligations through the extinguishment of outstanding Old Notes in exchange for the Notes in the aggregate principal amount of $142,238, which mature March 15, 2025, and the issuance of new common shares of Source;

• an amendment of the ABL facility which extended the maturity of the facility to September 30, 2023;

• access to incremental liquidity under the Term Loan in an amount of $20,000 (refer to Note 10 for additional information related to the new and revised debt commitments); and

• the reconstitution of Source’s Board through the appointment of two new directors.

The Recapitalization Transaction resulted in a net gain on extinguishment of debt comprised of the difference between the carrying value of the Old Notes and the Notes, offset in part by the fair value of the equity issuance and net of transaction costs recognized as expense.

14. SHARE-BASED COMPENSATION

The Company’s share-based compensation plan (the “Plan”), renewed as of March 18, 2021, is available to directors, officers and certain employees as determined by the Company’s Board. The Plan allows for the granting of options to purchase common shares to a maximum number equal to 10% of the issued and outstanding common shares of the Company. The price of each share purchase option granted is set by the Company’s Board based on the market value of the Company’s shares on the date of the grant. Options vest over three years and expire after five years. As at September 30, 2021, no options are outstanding under the Plan.

The liability-settled compensation plans include RSUs, PSUs and DSUs. The following table provides a summary of the status of the Company’s liability-settled compensation plans and changes during the nine months ended September 30, 2021:

(number of units)	RSU	PSU	DSU
Balance as at December 31, 2019	80,515	36,178	38,187
Granted	93,757	51,894	46,302
Exercised	(30,317)	(1,799)	—
Forfeited	(7,099)	(12,659)	—
Balance as at December 31, 2020	136,856	73,614	84,489
Granted	174,666	392,500	60,000
Exercised	(57,700)	(3,449)	(14,493)
Forfeited	(3,636)	(22,017)	—
Balance as at September 30, 2021	250,186	440,648	129,996
Vested as at September 30, 2021	—	3,114	14,493

The RSUs will vest 1/3 on the anniversary date of the grant over a three-year period and expire five years from issue date. Subject to achievement of performance criteria set out by the Board, the PSUs awarded will vest 1/3 on the anniversary date of the grant

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Page 16

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited As at and for the three and nine months ended September 30, 2021 and 2020

SOURCE ENERGY SERVICES LTD.

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

over a three-year period and expire five years from the issue date. The RSUs and PSUs may be settled in cash or shares and accordingly are considered a liability-settled award for accounting purposes.

The DSUs vest and are expensed over the earlier of three years or when a director or other participant ceases in their role and are payable only when a director or participant leaves the Company. The DSUs are expected to be settled for cash payment and accordingly are considered a liability-settled award for accounting purposes.

Total share-based compensation expense (recovery) for the share-based payment plans for the three and nine months ended September 30, 2021 was $(3) and $167, respectively (September 30, 2020 - $(22) and $(91), respectively).

15. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share

The calculation of basic earnings (loss) per share for the three and nine months ended September 30, 2021 was based on the losses available to holders of common shares of $(3,579) and $(9,837), respectively (September 30, 2020 - $(7,595) and $(206,784), respectively), and a weighted average number of common shares outstanding for the three and nine months ended September 30, 2021 of 13,545,055 (September 30, 2020 - 4,971,042).

	Three months ended	September 30,	Nine months ended	September 30,
	2021	2020	2021	2020
Common shares outstanding, beginning of period	13,545,055	4,971,042	13,545,055	4,971,042
Weighted average common shares outstanding, end
ofperiod	13,545,055	4,971,042	13,545,055	4,971,042

Diluted earnings (loss) per share

Diluted earnings per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential shares. The effects of anti-dilutive options as well as exchangeable shares are ignored in calculating diluted earnings per share. As at September 30, 2021, no options remain outstanding and all issued and outstanding Class B shares were converted to common shares in October 2020. At September 30, 2020, the exchangeable shares were not considered dilutive as the Company was in a loss position.

16. REVENUE

The following table presents the Company’s sales, disaggregated by revenue source:

	Three	months ended	months ended	September 30,		Nine months ended	Nine months ended	September 30,
		2021		2020		2021		2020
Revenue from contracts with customers:
Sand revenue	$	79,343	$	65,240	$	203,556	$	161,085
Wellsite solutions		17,179		12,261		44,583		25,937
Terminal services		550		426		2,272		1,975
Total revenue from contracts with customers	$	97,072	$	77,927	$	250,411	$	188,997
Storage facilities(1)		614		618		1,900		1,912
Total revenue	$	97,686	$	78,545	$	252,311	$	190,909

Note:

(1) Storage facilities includes revenue for proppant storage at terminals as well as longer term Sahara rentals.

Contract Liabilities

The Company entered into an agreement with a customer, effective January 1, 2018, where the Company received $14,761 (US$11,505) as a prepayment for future purchases of proppant. In consideration of the prepayment, the price per metric tonne to the customer was reduced for each tonne of sand sold to the customer. As at September 30, 2021, all promised goods have been transferred to the customer and no performance obligations remain.

In December 2020, the Company entered into a sale with a customer where the completion of promised services had not been fulfilled. Source recognized deferred revenue for the value of the services which were performed during the nine months ended September 30, 2021.

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SOURCE ENERGY SERVICES LTD.

Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

The following table provides a summary of the contract liabilities as of September 30, 2021:

As at		September 30, 2021		December 31, 2020
Balance, beginning of period	$	776	$	3,160
Cash proceeds		25		536
Satisfaction of performance obligations		(867)		(2,617)
Non-cash interest income		(35)		(303)
Exchange differences		101		—
Balance, end of period	$	—	$	776
Less: currentportion		—		(776)
Long-termportion	$	—	$	—

17. OPERATING AND GENERAL & ADMINISTRATIVE COSTS

The Company presents its expenses on the condensed consolidated interim statements of operations and comprehensive income (loss) using the function of expense method whereby expenses are classified according to their function within the Company. This method was selected as it is more closely aligned with the Company’s business structure. The Company’s functions under IFRS are as follows:

• Cost of sales;

• Operating; and

• General & 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:

Three months ended September 30,			2021	2021					2020	2020
	COS		OPEX		G&A	Total	COS		OPEX		G&A	Total
Direct material	$ 64,401	$	—	$	—	$ 64,401	$ 50,448	$	—	$	—	$ 50,448
Salary costs(1)	2,870		2,296		1,346	6,512	1,672		1,102		1,159	3,933
Equipment costs	518		353		1	872	427		125		—	552
Transportation costs	11,969		—		—	11,969	8,649		—		—	8,649
Facility costs	236		354		20	610	46		289		25	360
Selling costs	—		1,603		21	1,624	—		1,237		39	1,276
Administration costs	—		—		911	911	—		—		997	997
Total	$ 79,994	$	4,606	$	2,299	$ 86,899	$ 61,242	$	2,753	$	2,220	$ 66,215

Note:

(1) Included in 2021 cost of sales, operating and general & administrative salary costs are wage subsidies of $501 received as part of the Canada Emergency Wage Subsidy (“CEWS”) program (September 30, 2020 - $1,092).

Nine months ended September 30,			2021	2021					2020	2020
	COS		OPEX		G&A	Total	COS		OPEX		G&A	Total
Direct material	$ 159,311	$	—	$	—	$ 159,311	$ 124,863	$	—	$	—	$ 124,863
Salary costs(1)	7,899		6,620		4,996	19,515	5,343		3,832		3,924	13,099
Equipment costs	1,704		1,037		1	2,742	1,482		778		1	2,261
Transportation costs	30,859		—		—	30,859	18,020		—		—	18,020
Facility costs	366		1,011		19	1,396	675		978		50	1,703
Selling costs	—		3,704		(136)	3,568	—		3,699		1,570	5,269
Administration costs	—		—		2,413	2,413	—		—		2,631	2,631
Total	$ 200,139	$	12,372	$	7,293	$ 219,804	$ 150,383	$	9,287	$	8,176	$ 167,846

Note:

(1) Included in 2021 cost of sales, operating and general & administrative salary costs are wage subsidies of $1,287 received as part of the CEWS program (September 30, 2020 - $2,200).

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Notes to the Condensed Consolidated Interim Financial Statements - Unaudited

SOURCE ENERGY SERVICES LTD.

As at and for the three and nine months ended September 30, 2021 and 2020

(All amounts are in thousands of Canadian dollars, unless otherwise noted)

18. COMMITMENTS AND CONTINGENCIES

The Company has commitments regarding physical natural gas contracts which expire in March 2023 as well as annual software subscriptions through 2023. Estimated annual commitments are as follows:

2021	$	321
2022		1,237
2023		359
Total	$	1,917

In the ordinary course of conducting business, the Company occasionally becomes involved in legal proceedings relating to contracts, environmental issues or other matters. While the amount of any proceeding or litigation is inherently uncertain, management of the Company 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 Company, except as noted below:

The Company is currently pursuing claims against certain organizations in respect of damages related to the structural failure of assets at its Fox Creek terminal facility. In relation to these claims, other expense of $51 and $95, respectively, have been incurred for the three and nine months ended September 30, 2021 (September 30, 2020 - $66 and $186, respectively). The Company intends to pursue this matter for which the damages, if awarded to the Company in their entirety, could be a material amount. However, litigation is inherently uncertain and a favourable outcome cannot be assured.

19. FINANCE EXPENSE

19. FINANCE EXPENSE
	Three	months ended		September 30,		Nine months ended		September 30,
		2021		2020		2021		2020
Interest expense	$	6,456	$	6,373	$	19,083	$	18,436
Accretion		1,016		1,067		2,945		3,035
Finance expense		166		211		483		471
Total	$	7,638	$	7,651	$	22,511	$	21,942

20. OPERATING SEGMENTS

The Company has operations in both the US and Canada; the two geographic segments are summarized in the table below:

		Canadian
Sales for the three months ended September 30,		Operations	US Operations	Corporate(1)	Total
2021	$	97,436 $	250 $	— $	97,686
2020	$	78,240 $	305 $	— $	78,545
		Canadian
Sales for the nine months ended September 30,		Operations	US Operations	Corporate(1)	Total
2021	$	252,017 $	294 $	— $	252,311
2020	$	190,604 $	305 $	— $	190,909
		Canadian
Total Assets		Operations	US Operations	Corporate(1)	Total
September 30, 2021	$	105,544 $	148,832 $	5,709 $	260,085
December 31, 2020	$	102,068 $	158,803 $	5,390 $	266,261

Note:

(1) The Corporate segment does not represent an operating segment and is included for informational purposes only.

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