Performance of Superior Silica Sands

To begin we are extremely disappointed with the performance of Superior Silica Sands in the first quarter. The energy services market dislocation is near an all time high was significant overcapacity flagging the frac sand sector at these very depress levels of demand.

We expect the drilling rebound to occur at some point but unfortunately we cannot predict exactly when that will happen. In the mean time we are pushing hard to reduce our cost and innovate through this downturn.

Our total volumes sold declined from 581,000 tons in the fourth quarter of 2015 to 439,000 tons in the first quarter of 2016 which was a 24% sequential decline that maps the 29% sequential drop an average U.S. land rig count during the quarter.

Our reluctance [ph] to follow the Q1 [ph] market pricing downwards spiral and the increase market gains by regional sand producers contributed to our reduced sales this quarter. Our volume sold in basin totaled 61% during the quarter versus 51% in the fourth quarter of 2015.

At this point there is reason to believe that our sales and the overall industry sales have reached this low watermark in this historic down cycle.

The frac sand industry continues to experience intense pricing pressure as we’ve been forced to follow some of our competitors aggressive pricing tactics to hold market share. While we continue to see our average selling price remain above the market averages, our ASP on an FOB plant-equivalent basis fell by approximately 6%, which we believe is roughly in line with the industry.

We are remaining disciplined about who we conduct business with given credit concerns from several current and potential customers. While we have not been completely immune to receivable write-offs, we have fared better than some of our competitors who have been left with very large unpaid balances following recent bankruptcies in the pressure pumping industry.

You may notice in our financials how we do not breakout the standalone sand division results since the fuel division is now classified as discontinued operations. Almost all of our previously reported corporate overhead is now shown in the SG&A line of continuing operations.

Deb will have more detail in her remarks about the financials. But we experienced lower profitability in Superior Silica given the volume and pricing pressure in addition to the cost overhang from our excess railcars and a $5.4 million write-down of our sand inventories. The number of railcars and storage peak turnaround 3,000 during the quarter, which penalized us by approximately $2.5 million per month.

Let us now turn to an update on our cost reduction efforts. We disclosed on the February earnings call how mitigating our railcar overhang was the top priority for the sand business and we are proud to announce considerable progress achieved on this front over the last three months.

In early March, we finalized an agreement with one of our largest railcar lessors to cancel significant order of new cars originally scheduled for delivery in 2016 and we received flexibility on the lease rate of our existing cars and exchange for $4 million termination charge.

Additionally, we anticipate a deal in the near future with our largest railcar lessor to deferral their delivery of a significant order of new railcars and temporarily reduce the cash payments on our existing leases by substantial amount.

In order to achieve a positive outcome for both parties, we made certain long term concessions but we are confident the short term relief gain will position our business for the eventual market recovery.

We also finalized the sub-leasing arrangement for 174 railcars during the quarter, reducing the total cars and storage to below 3,000 and we have engaged the other six lessors of our railcar fleet for rate reductions.

Next we have been successful in reducing logistics costs other than in the railcar area. Our partners at the railroads have cooperated by lowering freight rates to key destinations enabling us to better compete within basin sands and other Northern White producers.

We are reviewing all transload provider agreements and are starting to see some healthful concessions here as well. The most recent decline in drilling activity has forced us once again to evaluate our production footprint and needs. We idled the new barren plant in April and our costly plants production schedule has been scaled back significantly.

Unfortunately, this has been a third round of layoffs since early 2015. Our current headcount at Superior Silica is down by over 50% since the peak in May of 2015, and we plan on operating our Wisconsin mines at low levels this season so we can work down our stock piles and preserve cash. We now estimate that the sand industry has idled approximately 25 million to 30 million tons of capacity to cope with the market conditions.

I'm proud of our team, not only on the cost reduction efforts but also on the development and marketing of our two new technologically driven proppants. We gained some nice orders of our dustless SandGuard products towards the beginning of Q1. But OSHA recently disappointed us with a regulation that delays the reduction of dust thresholds at the well site.

Although SandGuard performed in the field as we expected, the regulatory influence will likely impair our ability to sell the product in the near term until standards are enforced.

Now turning to SandMaxx, our self-suspending proppant. We are more excited than ever about the potential to bring significant value to our customers and our stakeholders through this technology. As you may recall from previous discussions, we acquired 11 patents of an advanced polymer coding technology that enables this proppant to flow further down hall and open up more features than hydraulic fracturing with regular sand.

Further refinements of this technology around handling and use in brackish water down hall have since been done by our SandMaxx technical team. These improvements have led to the issuance of two additional patent applications.

Because SandMaxx can increase well production by an estimated 20% to 40% based on laboratory and competing product results, the pricing and margins on SandMaxx are significantly higher than regular sand. We continue to believe that SandMaxx can be a game changer in this industry.

Our product development and marketing efforts which just began this past December have paid off handsomely. Our first SandMaxx order was a small but highly successful launch during March as the product handled efficiently and was pumped seamlessly in two wells.

Our second order was our first big win, a £33 million order for a four wells trial that begins this week. Now the word is out in the industry, several other new and existing customers have indicated an interest in trialing this product. Our team is working closely with the operators and service companies during these trials so we can capture key data points and share the success with other customers.

This is clearly an exciting and promising product launch. If the field results prove out with the anticipated production gains, then our empirical data should help us secure regular SandMaxx buying customers in the near future.

Our current production capacity of SandMaxx is limited to a pilot plant at our Barron, Wisconsin site with an annual capacity of 175,000 tons. We expect the field trials to conclude around the end of the summer and if customers agree that the product is performed as expected, we will pursue a full scale commercial facility that could produce over 1.5 million tons per year of SandMaxx product.

To wrap up the sand side, I'm proud of our Company's response to these tough times and I think some of our best work has been done in the past six months. Our entire team has done an extraordinary job managing the many challenges in this difficult time. We are optimistic that our future is bright. We believe that we will come out of this down term stronger than ever based on several metrics including and perhaps especially by the Company's technology driven proppant strategy led by SandMaxx.

Several customers and operators agree that this is the next frontier of the hydraulic fracturing industry. During our next Investor's Call about our Q2 results, we hope to share more concrete data points on SandMaxx's strong results from the field.