1.	Basis of Presentation

The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc. have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year. The consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements at that date. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the annual report on Form 10-K of CARBO Ceramics Inc. for the year ended December 31, 2015.

The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries (the “Company”). All significant intercompany transactions have been eliminated.

In late 2014 and early 2015, a severe decline in oil and natural gas prices led to a significant decline in oil and natural gas industry drilling activities and capital spending. Beginning in early 2015, the Company implemented a number of initiatives to preserve cash and lower costs, including: (1) reducing workforce across the organization, (2) lowering production output levels in order to align with lower demand, (3) limiting capital expenditures and (4) eliminating dividends. As a result of these measures, the Company temporarily idled production and furloughed employees at alternating manufacturing plants. The Company’s facilities in McIntyre and Millen, Georgia remained idled due to market conditions, however the Company recently restarted its Marshfield, Wisconsin sand processing facility. The Company continues to depreciate these assets. During 2016, the Company also implemented programs that further reduced cash compensation paid to employees. In 2016, the Company idled the majority of the production activities at its New Iberia, Louisiana plant and its Toomsboro, Georgia facility until such time as market conditions warrant bringing them back online. The Company continues to assess liquidity needs and manage cash flows and, if industry conditions do not improve and/or demand for its products does not otherwise increase, the Company would expect to temporarily idle all or a portion of our currently active facilities in the short term. Given continuing uncertainties with regards to the length of the industry downturn, the Company raised additional capital through the sale of common stock (See Note 8) and through issuance of related parties notes payable (See Note 7), and continues to consider alternative sources of capital. As a result of the steps the Company has taken to enhance its liquidity, the Company currently believes that cash on hand, cash flow from operations, and cash flow from other liquidity-generating transactions will enable the Company to maintain covenant compliance and meet its working capital, capital expenditure, debt service, and other funding requirements for the next twelve months.

Additionally, the construction projects relating to the second production line at Millen, Georgia and the second phase of the retrofit of an existing plant with the new KRYPTOSPHERE® technology remain suspended. As of September 30, 2016, the value of the temporarily suspended projects relating to these two projects totaled approximately 92% of the Company’s total construction in progress, and both projects are over 90% complete.

Lower of Cost or Market Adjustments

As of September 30, 2016, the Company reviewed the carrying values of all inventories and concluded that certain sand inventories were impacted by changes in market conditions. Current market prices had fallen below carrying costs for certain of these sand inventories. Consequently, during the three-month period ended September 30, 2016, the Company recognized a $115 loss in cost of sales to adjust the carrying value to the lower market prices on certain sand inventories. There was no such adjustment during the same period in 2015. During the nine-month period ended September 30, 2016 and 2015, the Company recognized a $115 and $4,372 loss, respectively, in cost of sales, primarily to adjust the carrying values to the lower market prices. The adjustments were based on current market prices for these or similar products, as determined by actual sales, bids, and/or quotes from third parties.

Manufacturing Production Levels Below Normal Capacity

As a result of the Company substantially reducing manufacturing production levels, including by idling certain facilities, certain production costs have been expensed instead of being capitalized into inventory. The Company expenses fixed production overhead amounts in excess of amounts that would have been allocated to each unit of production at normal production levels. For the three months ended September 30, 2016 and 2015, the Company expensed $12,845 and $5,528, respectively, in production costs. For the nine months ended September 30, 2016 and 2015, the Company expensed $36,067 and $25,157, respectively, in production costs.

Long-lived and other noncurrent assets impairment considerations

As noted, the Company has temporarily idled production at various manufacturing facilities throughout 2016. The Company does not necessarily assess temporarily idled assets for impairment unless events or circumstances indicate that the carrying amounts of those assets may not be recoverable. Short-term stoppages of production for less than one year do not generally significantly impact the long-term expected cash flows of the idled facility. As of March 31, 2016, as a result of changes in the planned usage of certain long-term bauxite raw materials, the Company evaluated the carrying value of those bauxite raw materials. Based upon this evaluation, during the three months ended March 31, 2016, the Company recognized an impairment charge of $1,065 on these bauxite raw material inventories. As of September 30, 2016, the Company concluded that there were no events or circumstances that would indicate that carrying amounts of other long-lived and other noncurrent assets might be further impaired. However, the Company continues to monitor market conditions closely. Further deterioration of market conditions could result in impairment charges being taken on these and/or other long-lived and other noncurrent assets, including the Company’s manufacturing plants, goodwill and intangible assets. The Company will evaluate long-lived and other noncurrent assets for impairment at such time that events or circumstances indicate that carrying amounts might be impaired.