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1 2014 Annual Report

2 Kennady Diamonds

3 Management s Discussion and Analysis Financial Statements 2014 Annual Report

4 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2014 This Management s Discussion and Analysis ( MD&A ) provides a review of the financial performance of Kennady Diamonds Inc. (the Company or Kennady Diamonds or KDI ) and should be read in conjunction with the audited financial statements for the years ended December 31, 2014 and Financial filings and additional information relevant to the Company s activities can be found on SEDAR at or at the Company s website, The Company s audited financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). All amounts are expressed in Canadian dollars unless otherwise stated. Technical information included in this MD&A regarding the Company s mineral projects has been reviewed by Carl Verley, a Director of the Company and a Qualified Person as defined by National Instrument Standards of Disclosure for Mineral Properties ( NI ). COMPANY HIGHLIGHTS On March 10, 2015, the Company closed the third tranche of a non brokered private placement and issued 651,312 common shares at a price of $3.55 per share for gross proceeds of $2,312,158. The shares are subject to a four month hold period, expiring on July 10, The Company has issued 4,405,947 common shares and 600,000 flow through shares for aggregate gross proceeds of $18,641,112. The Company paid a cash finder s fee of $34,826 on a portion of the offering. On January 26, 2015, the Company announced further diamond recovery results from the Kelvin 2014 summer/fall mini bulk sample program. The mini bulk sample was recovered by drilling along the north lobe of the Kelvin kimberlite. Approximately tonnes of kimberlite was processed by dense media separation ( DMS ) at the Geoanalytical Laboratories Diamond Services of the Saskatchewan Research Council ( SRC ) and a further 5 tonnes was processed by caustic fusion, with 3.77 tonnes being processed at the SRC and 1.23 tonnes being processed at the Rio Tinto diamond laboratory in Thunder Bay, Ontario. On December 24, 2014, the Company announced the diamond recovery results from the Kelvin summer/fall mini bulk sample program. The 2014 summer/fall mini bulk sample grade of 2.59 carats per tonne is approximately 40 percent higher than the 25 tonne mini bulk sample recovered last winter/spring. The summer/fall mini bulk sample was recovered from the north lobe of the Kelvin kimberlite, while the winter/spring sample was recovered from the shallower and partly outcropping southeast lobe. On October 14, 2014, the Company announced the results from the 2014 summer/fall drill program at the Company s 100 percent controlled Kennady North diamond project located in Canada s Northwest Territories that commenced in July To date, approximately 16,600 meters has been drilled at the Kelvin kimberlite as part of the 2014 summer/fall drill program. Based on the continuing success, the Company s target has now been increased to 18,000 meters. In addition, approximately 28.7 tonnes of kimberlite has been recovered from Kelvin and the Company has now increased its target to 30 tonnes. During the summer/fall Kelvin drill program, approximately 4.5 tonnes of kimberlite was been recovered by NQ drilling. Most of the Kelvin mini bulk sample has been recovered by larger diameter HQ drilling. While 1

5 mini bulk sample drilling at Kelvin continues, the approx. 4.5 tonne NQ sample is being prepared for shipment to SRC for processing by caustic fusion. The diamond recovery results from this sample are expected before the end of the year. On October 6, 2014, the Company announced the diamond recovery results from the Kelvin 25 tonne minibulk sample from the winter/spring drill program completed on May 27, The sample was processed by dense media separation at the SRC. Approximately 10,200 meters of drilling was completed, resulting in the recovery of over 25 tonnes of kimberlite from Kelvin and over 1 tonne of kimberlite from Faraday. On October 1, 2014, the Company announced the closing of the non brokered private placement of common shares for gross proceeds of $5,001,750. The Company issued 769,500 common shares at a price of $6.50 per share. The shares are subject to a four month hold period, expiring on February 2, Proceeds of the private placement will be used primarily for the Company s 2014 fall/winter exploration program at the Kennady North project and for general working capital. On March 10, 2014, the Company announced the appointment to the board of Mr. Robert Parsons who is a chartered accountant and a retired Partner from PricewaterhouseCoopers. On February 17, 2014, the Company announced that the two exploration camps at Kennady North (Bob Camp and Kelvin Camp) opened on February 7, 2014, with geophysics crews mobilized to site shortly afterwards. A range of geophysics programs, including ground penetrating radar and Ohmmapper, are currently underway at both the Kelvin and Faraday kimberlites aimed at better defining the extent of the kimberlite emplacement prior to the start of the 2014 drill program. The geophysics crews will move to new kimberlite targets as soon as the Kelvin/Faraday geophysics program is completed. All the planned geophysics at the Kelvin Faraday kimberlite corridor was completed in March. The Company also announced that it has acquired 100 percent control over an additional 59 leases and claims to the west and south of the Kennady North project, thereby increasing the Company s diamond exploration land position in the Kennady district to approximately 61,000 hectares. Two diamond bearing kimberlites, the Doyle kimberlite and MZ kimberlite, are located within the newly acquired exploration ground, which also hosts numerous untested kimberlite targets. COMPANY OVERVIEW Kennady Diamonds is a Canadian diamond exploration Company that has its exploration activities in the Northwest Territories ( NWT ) of Canada. The Company was incorporated on February 27, KENNADY NORTH DIAMOND PROJECT OVERVIEW The Kennady North diamond project comprises 16 federal leases and 58 claims located to the west, south and north of the four leases controlled by the Gahcho Kué Joint Venture ( Gahcho Kué JV ) between De Beers Canada (51%) and Mountain Province Diamonds Inc. ( Mountain Province ) (49%) located approximately 300 kilometers northeast of Yellowknife in Canada s Northwest Territories. The Kennady North diamond district has an area of approximately 61,000 hectares. Exploration at Kennady North commenced in the late 1990 s and resulted in the discovery of the diamond bearing Kelvin, Faraday and Hobbes kimberlites. It has since been established that the Hobbes kimberlite is an extension of the Kelvin kimberlite. The number of diamonds recovered from these kimberlites and the size frequency distribution indicated that they may be of comparable grade to the 5034 (1.77 carats per tonne) and Hearne (2.10 carats per tonne) kimberlites at the Gahcho Kué JV. 2

6 The known kimberlites at Kennady North do not explain all the kimberlitic indicators previously recovered from glacial till sampling. Mountain Province recommenced exploration at Kennady North in 2011 with a 50 meter linespacing airborne gravity gradiometer ( AGG ) survey over the entire square kilometer project area. Exploration drilling conducted in 2012 and 2013 confirmed that the Kelvin and Faraday kimberlites have the potential to host high grade diamond resources. Ground geophysics and delineation drilling conducted in 2013 and 2014 also confirmed the tonnage potential of the Kelvin kimberlite. EXPLORATION In October 2011, Mountain Province announced that the AGG survey was successfully completed, and included a total of 2,793 line kilometres flown over the Kennady North diamond project. In February 2012, Mountain Province announced that the final analysis of the AGG survey resulted in the identification of 106 geophysical targets, and that a 560 line kilometre total magnetic field ground survey was commencing over the geophysical targets identified by the AGG survey. The MAG survey was conducted at 20 metre line spacing, and the results enabled Mountain Province to prioritize the geophysical targets for drilling. The MAG survey was managed by Aurora Geosciences Ltd. ( Aurora ) and was completed in April In June 2012, Mountain Province announced that Kennady Diamonds, its wholly owned subsidiary at the time, had received a Type A Land Use Permit from the Mackenzie Valley Land and Water Board in respect of the Kennady North diamond project, which cleared the way for Kennady Diamonds to commence a summer drill program at the Kennady North diamond project. Summer Drill Program 2012 In July 2012, the Company announced that drilling had commenced at the Company s 100% controlled Kennady North diamond project. In late July, 2012, the Company announced that it had entered into an Exploration Agreement with the Lutsel K e Dene First Nation ( Lutsel K e ). The Exploration Agreement established the basis for Kennady Diamonds and Lutsel K e to work collaboratively to advance exploration at Kennady North. The Company announced that the Chief and Elders of Lutsel K e visited Kennady North on July 25, 2012 to gain an insight into the current work program and future prospects for the Kennady North project. Mr. Evans commented within the news release: Our success at Kennady North is dependent upon a mutually beneficial and respectful relationship. We are committed to working in partnership with the Lutsel K e. Kimberlite recovered during the Kennady North summer drill program 2012 was sent to the the Geoanalytical Laboratories Diamond Services at the SRC, which is accredited to the ISO/IEC standard by the Standards Council of Canada as a testing laboratory for diamond analysis using caustic fusion. In October, 2012, the Company announced the diamond recovery results from samples of drill core from the Kelvin Faraday kimberlite cluster. The combined caustic fusion diamond results for samples taken from the Faraday, Faraday South and Kelvin kimberlites are summarized below in Table 1. Table 1 Kelvin/Faraday 2012 Summer Diamond Recovery Results Total Numbers of Diamonds According to Sieve Size Fraction (mm) Total Weight (Kg) Diamonds ,889 *Total carat weight of the sample is

7 The above results compared favorably with results from earlier drilling at Kennady North when 444 diamonds were recovered from a 184 kg sample taken from Kelvin and 74 diamonds were recovered from a 40 kg sample taken from Faraday. Besides the high diamond count, approximately 70 percent of the recovered diamonds were classified as white and transparent. Almost all the white diamonds had either no inclusions or only minor inclusions. In addition, approximately five percent of the diamonds were classified as yellow and transparent with either no or only minor inclusions. Together with grade, these characteristics are key value drivers. Based on these encouraging results, Kennady Diamonds commenced planning for a significantly larger 5,000 meter 2013 winter drill program at Kennady North. The program focused on infill drilling at the Kelvin Faraday kimberlite cluster as well as testing of newly discovered kimberlite targets. Winter Drill Program 2013 Following the completion of the 2012 summer drill program, the Company s geological and geophysical consultant, Aurora Geosciences, completed a comprehensive review and analysis of the exploration data for the Kennady North Project, which guided preparations for the Company s planned 5,000 meter winter drill program. Mobilization to a satellite exploration camp at Kennady North commenced in early February to complete ground geophysics, including ground gravity and horizontal loop electromagnetic (HLEM) surveys over the Kelvin Faraday kimberlite corridor. Data from these surveys assisted the Company in selecting final drill targets for the winter drill program. On May 28, 2013, the Company announced the successful completion of the 5,000 meter Kennady North 2013 winter drill program that commenced on March 26, Kimberlite was intersected in 24 out of 26 drill holes completed at the Kelvin and Faraday kimberlites with most intercepts ranging from a few meters to approximately 100 meters. A preliminary interpretation of the drill results suggested the Kelvin kimberlite body and the Faraday kimberlite body should be treated separately. Both the Kelvin and Faraday kimberlites each have a strike of over 1 kilometer, trending southwest to the northeast, and appeared to be shallow dipping dyke structures. Of significance in the main Kelvin kimberlite area were the broad intersections of meters, meters and 51.6 meters in three different holes (KDI , KDI and KDI , respectively). The geometry of this area had yet to be confirmed, but indications were that the wide intersections were due to possible blows along the dyke system or the main Kelvin kimberlite may be coincident with a small kimberlite pipe. The Faraday kimberlite contained two reasonable intersections of meters and 6.43 meters in KDI and KDI , respectively, both in the same central section. The geometry of the Faraday kimberlite was not yet as well understood as the Kelvin kimberlite. The full strike length of both the Kelvin and Faraday kimberlites has yet to be determined, but the results of the winter drill program aided in defining the strike length to a higher degree of confidence. Kimberlite recovered from the 2013 winter drill program was dispatched to the SRC for the recovery of diamonds by caustic fusion. The results of the analysis are summarized in tables 2 and 3 below. Table 2 Kelvin/Faraday 2013 Winter Diamond Recovery Results Total Weight (Kg) Number of Diamonds According to Sieve Size Fraction (mm) Total Diamonds 1,103 3,139 2,285 1, ,

8 Diamond recoveries for each of the kimberlites are provided in Table 3 below. Table 3 Kelvin/Faraday 2013 Winter Diamond Recovery Results Kimberlite Sample Weight (Kg) Macro Diamonds Recovered (>500 microns) Micro Diamonds Recovered (<500 microns) Macro Diamonds Weight (carats) Sample Grade (carats/tonne) Kelvin , Faraday , Total 1, , * 8.44 *Total weight of the sample is carats Summer Drill Program 2013 In July 2013 the Company commenced a 2,500 meter drill program focussing on land based drilling at the northwest lobe of the Kelvin kimberlite. Approximately 3,454 kilograms of kimberlite was recovered from 21 holes drilled at the northwest lobe. The kimberlite was processed at the Geoanalytical Laboratories Diamond Services at the SRC. The 2013 Kelvin summer drill program, with results summarized in Table 4 below, returned an average sample grade of 4.56 carats per tonne. Table 4 Kelvin 2013 Summer Diamond Recovery Results Number of Diamonds According to Sieve Size Fraction (mm) Total Weight (Kg) Total Diamonds ,314 3,753 3,219 1,996 1, ,824 *Total weight of sample carats *Sample grade: 4.56 carats per tonne A total of 4.3 tonnes of kimberlite was recovered from Kelvin in 2013 containing more than 16,000 diamonds of which 474 are commercial size diamonds. Diamonds larger than 0.85mm can be sorted into categories with different price points and are considered, under Canadian Institute of Mining ( CIM ) guidelines, to have commercial characteristics. These results confirm that the Kelvin kimberlite has both a coarse diamond size distribution as well as the potential to host a high grade diamond resource. Table 5 below provides details of the number and weight of the plus 0.85mm commercial size diamonds recovered from the Kelvin summer drill program. Table 5 Kelvin 2013 Summer Commercial Diamond Recovery Results Number of Diamonds Sieve Size Fraction (mm) Total Sample Grade (carats/ tonne) Weight (ct.) *Total sample weight 3,314kg *Total sample grade 4.56 carats/tonne A total of 362 commercial size diamonds were extracted from 3,314 kilograms of kimberlite from the Kelvin 2013 summer drill program. By comparison, 112 commercial size diamonds were recovered from approximately 1,000 kilograms from the Kelvin 2013 winter drill program. This illustrates a high degree of consistency between the 2013 summer and winter samples of approximately one commercial size diamond for every nine kilograms of kimberlite. 5

9 While the 362 commercial size diamonds from the 2013 Kelvin summer drill program were recovered from the northwest of the Kelvin kimberlite, the 110 commercial size diamonds recovered from the 2013 winter program came from sixteen different drill holes across the approximate one kilometer strike of the Kelvin kimberlite. Based on this, it is apparent that the Kelvin kimberlite hosts commercial size diamonds across the length and breadth of the kimberlite. As announced on August 6, 2013, the 2013 Kelvin winter drill program (summarized in Table 6 below) returned a sample grade of 8.13 carats per tonne, which included a 2.48 carat diamond. Table 6 Kelvin 2013 Winter Diamond Recovery Results Number of Diamonds According to Sieve Size Fraction (mm) Total Weight (Kg) Total Diamonds 987 1,590 1, ,297 *Total weight of the sample 8.02 carats *Sample grade 8.13 carats/tonne Table 7 below provides details of the number and weight of the plus 0.85mm commercial size diamonds recovered from the 2013 Kelvin winter drill program. Table 7 Kelvin 2013 Winter Commercial Diamond Recovery Results Number of Diamonds Sieve Size Fraction (mm) Total Sample Grade (carats/ tonne) Weight (ct) *Total sample weight 987kg *Total sample grade 8.13 carats/tonne Table 8 below summarizes the total 2013 Kelvin diamond recovery results, combining the 2013 winter and summer results. Table 8 Kelvin 2014 Diamond Recovery Results *Total weight of sample carats *Total sample grade 5.38 carats/tonne Table 9 below provides details of the total number and weight of the plus 0.85mm commercial size diamonds recovered in total during Table 9 Kelvin 2013 Commercial Diamond Recovery Results Sieve Size Fraction (mm) Number of Diamonds Number of Diamonds According to Sieve Size Fraction (mm) Total Total Diamonds Weight (Kg) ,301 5,343 4,262 2,664 1, , Total Sample Grade (carats/tonne) Weight (ct) *Total sample weight 4,301kg *Total sample grade 5.38 carats/tonne 6

10 Approximately 60 percent of the diamonds recovered from Kelvin during 2013 are classified as white and transparent. Most of the white diamonds have either no inclusions or only minor inclusions. Approximately 2 percent of the diamonds are classified as yellow and transparent with either no or only minor inclusions. The bulk of the remaining diamonds are classified as off white and transparent. Winter Drill Program 2014 On February 7, 2014, the Company commenced its 2014 winter exploration program, which was completed on May 27, A range of geophysics programs, including ground penetrating radar and Ohmmapper was completed at both the Kelvin and Faraday kimberlites, which better defined the extent of the kimberlite emplacement, prior to commencing the delineation and infill drill program at the Kelvin kimberlite. A total of approximately 10,200 meters of drilling was completed, resulting in the recovery of over 25 tonnes of kimberlite from Kelvin and over 1 tonne of kimberlite from Faraday. The Faraday one tonne kimberlite sample was sent to the Geoanalytical Laboratories Diamond Services at the SRC for processing. On August , the Company announced the results of the diamond recoveries from the Faraday kimberlite, which are summarized in Table 10 below. Table 10 Faraday 2014 Winter Diamonds Recovery Results Number of Diamonds According to Sieve Size Fraction (mm) Total Weight (Kg) Total Diamonds ,879 1, ,628 *Total weight of sample 4.76 carats *Sample grade: 5.10 carats per tonne Table 11 below summarized the commercial size diamond recoveries from the Faraday 2014 winter drill program Table 11 Faraday 2014 Winter Commercial Diamonds Recovery Results Sieve Size Fraction (mm) Total Sample Grade (carats/tonne) Number of Diamonds Weight (ct.) The Kelvin 25 tonne mini bulk sample was shipped to Yellowknife where detailed logging and analysis took place prior to dispatch to the SRC for processing. Four distinct kimberlite phases were identified in the mini bulk sample core, which are described in Table 12 below. Table 12 Kelvin Kimberlite Phases Zone 1 Coherent pyroclastic kimberlite (PK) Zone 2 Pyroclastic kimberlite with small (1 3cm) and medium (1 8cm) xenoliths Zone 3 Pyroclastic kimberlite with rock flour and large (+10cm) xenoliths Zone 4 Coherent transitional pyroclastic kimberlite On October 6, 2014, the Company announced the diamond recovery results from the Kelvin 25 tonne mini bulk sample from the winter/spring drill program. The sample was processed by dense media separation at the SRC. Table 13 below summarizes the diamond recovery results from the four Kelvin kimberlite phases and provides details of the total sample grade. 7

11 Table 13 Kelvin 2014 Winter/Spring Diamond Recovery Results Batch Sample Number of Diamonds According to Sieve Size Fraction (mm) Total Carats Sample Weight (tonnes) Grade (c/t) Zone Zone Zone Zone Total* ** Sample TOTAL , *Includes DMS and recovery cleanup **2013 sample processed by caustic fusion at the SRC. Results reported December 16, 2013 The three largest diamonds recovered from the Kelvin mini bulk sample are described by the SRC as: 1.27 carat off white, transparent, broken, irregular with inclusions; 1.00 carat white/colorless, transparent, dodecahedron, twin with minor inclusions; and 0.70 carat white/colorless, transparent, dodecahedron, twin with minor inclusions. Kelvin Summer/Fall Program mini bulk sample program 2014 On December 24, 2014, the Company announced the diamond recovery results from the Kelvin summer/fall minibulk sample program. The mini bulk sample was recovered by drilling at the north lobe of the Kelvin kimberlite and was processed by dense media separation at the SRC. Under the guidance of SRK Consultants, Vancouver, B.C., three zones of kimberlite were defined at the Kelvin kimberlite, described as zones A, B and C. Zone B was further subdivided. The thickness of the zones is variable along strike. Each of the zones was processed separately in order to understand the variability in diamond size and grade. The 2014 summer/fall mini bulk sample grade of 2.59 carats per tonne was approximately 40 percent higher than the 25 tonne mini bulk sample recovered in winter/spring of The summer/fall mini bulk sample was recovered from the north lobe of the Kelvin kimberlite, while the winter/spring sample was recovered from the shallower and partly outcropping southeast lobe. Table 14 below summarizes the diamond recovery results from the summer/fall mini bulk sample. Table 14 Kelvin 2014 Summer/Fall Diamond Recovery Results Batch Sample Weight Number of Diamonds According to Sieve Size Fraction (mm) (dry tonnes) Total Diamonds Carats Sample Grade (c/t) +0.85m m Zone A Zone B Zone B1(a) Zone B Zone B Zone B3(a) Zone C TOTAL *Includes DMS recovery cleanup 8

12 Table 15 below describes the kimberlite zones present in the Kelvin kimberlite. Table 15 Kelvin kimberlite zones Zone Kimberlite textural classification Comments A Hypabyssal kimberlite with less common pyroclastic kimberlite B1 Pyroclastic kimberlite Less than 50% dilution B2/3 Pyroclastic kimberlite More than 50% dilution C Hypabyssal kimberlite and pyroclastic kimberlite The four largest diamonds recovered from the Kelvin mini bulk sample are described by the SRC as: 1.11 carat off white, transparent, aggregate with inclusions; 1.10 carat white/colorless, transparent, irregular with inclusions; 0.95 carat off white, transparent, octahedral, no inclusions; and 0.90 carat white/colorless, transparent, dodecahedron, no inclusions. A total of approx. 27,200 meters was drilled at the Kelvin Faraday kimberlite corridor in 2014, resulting in the recovery of approx. 55 tonnes of kimberlite. In addition to the results from the mini bulk sample detailed above, approximately five tonnes of kimberlite from Kelvin has been processed by caustic fusion at the SRC, and approximately one tonne has been processed by caustic fusion at the Rio Tinto diamond laboratory in Thunder Bay, Ontario. Table 16 below summarizes the caustic fusion diamond recovery results from the Kelvin 2014 summer/fall mini bulk sample. Table 16 Kelvin 2014 Summer/Fall Diamond Recovery Results Number and Weight of Diamonds According to Sieve Size Fraction (mm) Number of 4,556 3,176 2,041 1, ,633 Diamonds Weight (carats) *Total sample weight tonnes *Total weight of recovered diamonds greater than 0.85mm: carats *Sample grade of diamonds greater than 0.85mm: 2.57 carats per tonne Table 17 below summarizes the DMS diamond recovery results from the summer/fall mini bulk sample, which were announced on December 24, Totals Table 17 Kelvin 2014 Summer/Fall Diamond Recovery Results Sample Number of Diamonds According to Sieve Size Fraction (mm) Weight (Tonnes) Total Diamonds *Total weight of recovered diamonds greater than 0.85 mm: carats *Sample grade: 2.59 carats per tonne The three largest diamonds recovered from the Kelvin caustic fusion sample are described as: 0.73 carat off white, transparent, octahedral with minor inclusions; 0.61 carat white/colorless, transparent, octahedral with minor inclusions; and 0.48 carat white/colorless, transparent, octahedral with minor inclusions. 9

13 Up to the end of 2014 Kennady Diamonds had recovered a total of tonnes of kimberlite from Kelvin by drilling. Processing of that kimberlite by DMS and caustic fusion methods yielded carats greater than 0.85mm for a total Kelvin commercial sample grade of 2.35 carats per tonne. The largest diamond recovered from that sample weighed 2.48 carats. OUTLOOK In January 2015 the Company commenced a 500 tonne bulk sample from Kelvin and continues delineation drilling at the Kelvin and Faraday kimberlites. During the Winter/Spring 2015 program the Company intends to commence an exploration drill program at the diamond bearing MZ and Doyle kimberlites as well as a number of new exploration targets. FINANCIAL REVIEW For the three months and year ended December 31, 2014 compared to the three months and year ended December 31, 2013 For the three months and year ended December 31, 2014, the Company recorded a net loss of $4,112,267 or $0.18 and $18,067,681 or $0.78 per share, respectively, compared to a net loss of $800,489 or $0.04 and $5,847,499 or $0.30 per share for the same period in Quarterly financial information for the past 8 quarters is shown in Table 1. SUMMARY OF QUARTERLY RESULTS Table 1 Quarterly Financial Data Three months ended December 31 September 30 June 30 March 31 Unaudited $ $ $ $ Earnings and Cash Flow Interest and other income (9,304) 153, , ,443 Expenses (4,102,643) (5,787,313) (4,740,481) (4,707,140) Net loss for period (4,112,267) (5,634,538) (4,097,865) (4,223,011) Cash flow from operations (10,660,686) 1,249,998 (5,428,543) (2,435,136) Basic and diluted loss per share (0.78) (0.25) (0.18) (0.18) Investing activities 1,473,149 3,245,687 5,440,374 5,368 Financing activities 4,954,297 Balance Sheet Total assets 4,511,282 9,229,376 7,882,198 13,187,213 10

14 Three months ended December 31 September 30 June 30 March 31 Unaudited $ $ $ $ Earnings and Cash Flow Interest and other income 24,237 11,852 5,943 69,193 Expenses (824,617) (2,041,124) (2,364,205) (728,561) Net loss for period (800,489) (2,029,380) (2,358,262) (659,368) Cash flow from operations (1,516,238) (868,669) (3,063,944) (575,744) Basic and diluted loss per share (0.04) (0.11) (0.13) (0.04) Investing activities (11,959,075) (156,466) 2,780, ,476 Financing activities 15,797,584 1,480,255 Balance Sheet Total assets 15,516,089 1,243,526 1,158,088 3,479,997 COSTS AND EXPENSES The costs and expenses for the three months and year ended December 31, 2014 compared to the three months and year ended December 31, 2013 are similar except for the following: Exploration and evaluation expenses Exploration and evaluation expenses for the three months and year ended December 31, 2014 were $3,842,968 and $17,415,440, respectively, compared to $621,761 and $5,307,526 for the same period in The increased in exploration and evaluation expenses is a result of an extensive winter and summer/fall drilling programs that took place during the year on the Kennady North Project. Management fees Management fees for the three months and year ended December 31, 2014 were $22,500 and $90,000, respectively, compared to $22,500 and $152,500 for the same period in Effective, June 1, 2013, management fees were reduced as it was felt that certain costs should be charged directly to the Company and not indirectly through the management fee. Professional fees Professional fees for the three months and year ended December 31, 2014 were $24,543 and $59,374, respectively, compared to $3,651 and $52,732 for the same period in This is mainly due to audit and legal fees incurred and are consistent with the prior period. Share-based payment expense Share based payment expense for the three months and year ended December 31, 2014 were $6,353 and $1,200,381, respectively, compared to $19,061 and $116,479 for the same period in During the first quarter of 2014, 350,000 options were granted which vested immediately compared to 150,000 options granted in the same period in 2013 which vested one third immediately, one third on the first anniversary and the balance vests on the second anniversary. Interest and other income Interest and other income for the three months and year ended December 31, 2014 were ($9,304) and $1,271,167, respectively, compared to $24,237 and $111,225 for the same period in The increase is a result of funds raised in 2013 which were invested in guaranteed investment certificates and also, during the period ended December 31, 2014, exploration expenditures were renounced relating to the flow through common shares from the October

15 and December 2013 private placements and as a result, the flow through premiums were recognized in the statement of comprehensive loss as other income totaling $1,163,492 compared to $72,420 for the same period in INCOME AND RESOURCE TAXES The Company is subject to mining and income taxes in Canada with the statutory income tax rate at 26.50%. No deferred tax asset has been recorded in the financial statements as a result of the uncertainty associated with the ultimate realization of these tax assets. The Company is subject to assessment by Canadian authorities, which may interpret tax legislation in a manner different from the Company. These differences may affect the final amount or the timing of the payment of taxes. When such differences arise the Company makes provision for such items based on management s best estimate of the final outcome of these matters. FINANCIAL POSITION AND LIQUIDITY Operating Cash Use Cash used in operations for the year ended December 31, 2014 were $17,274,367 compared with $6,024,367 for the comparative period for This is a result of increased exploration and evaluation activities in Investing Activities Investing activities for the year ended December 31, 2014 amounted to $10,164,578 compared to ($9,044,361) for the comparative period in During the period ended December 31, 2014, reclamation deposits of $295,000 were made to the Mackenzie Valley Land and Water Board. Offsetting this was $10,351,903 of redemption of shortterm investments to fund operating expenditures and $107,675 of income received from short term investments. In the same period in 2013, $8,851,577 of investment in short term investments were made, $201,589 of capital expenditures were incurred to acquire additional leases for the Kennady North Project, $30,000 of reclamation deposit was made to the Mackenzie Valley Land and Water Board and $38,805 of income received from short term investments. Financing Activities Financing activities for the year ended December 31, 2014 amounted to $4,954,297 compared to $17,277,839 for the comparative period in In 2013, shares were issued to raise capital to fund the exploration and evaluation activities of the Company. During the year ended December 31, 2014 the Company issued by way of a private placement 769,500 common shares for net proceeds of $4,954,297. In 2013, the Company issued by way of a private placement 4,157,206 common shares for net proceeds of $17,277,839. Cash Resources and Liquidity At December 31, 2014, the Company reported working capital of $1,641,205 ($13,847,937 working capital as at December 31, 2013), including cash and short term investments of $2,510,570 ($15,017,965 at December 31, 2013). The short term investments reflected in the December 31, 2014 and December 31, 2013 figures were guaranteed investment certificates held with a major Canadian financial institution with nominal counter party credit risk associated with the bank. At December 31, 2014 and December 31, 2013, the Company had no long term debt. In August 2013, the Company closed a non brokered private placement of flow through common shares and common shares, at the prices of $1.80 per share and $1.50 per share respectively. The Company issued 34,300 flowthrough common shares for gross proceeds of $61,740, and 958,840 common shares for gross proceeds of $1,438,260. In October 2013, the Company, by way of a non brokered and brokered private placement, raised gross proceeds of $14 million. The Company issued 1,157,100 flow through common shares for gross proceeds of $6,364,050, and 1,608,621 non flow through common shares for gross proceeds of $7,640,

16 In December 2013, the Company closed a non brokered private placement of flow through common shares for gross proceeds of $2,290,484. Subsequent to the year ended December 31, 2014, the Company announced the closing of a non brokered private placement and the Company issued 4,405,947 common shares at a price of $3.55 per common share for gross proceeds of approximately $15.6 million and 600,000 flow through common shares at a price of $5.00 per common share for gross proceeds of $3 million. The Company s budgeted expenditures for the winter/spring 2015 programs is approximately $18 million to $19 million. The recently completed financing plus the available cash at December 31, 2014 will be sufficient to settle all liabilities at December 31, 2014 and all the budgeted winter/spring 2015 exploration program, but will not be sufficient to cover general and administration costs for the next 12 months. Dependent on the exploration results of the winter/spring 2015 program the Company intends to raise additional funds for the planned summer/fall 2015 program. The Company s primary mineral asset is in the exploration stage and, as a result, the Company has no source of revenues. As at December 31, 2014, the Company has not achieved profitable operations and is dependent upon its ability to obtain external financing to meet the Company s liabilities as they become payable. The Company s ability to continue operations beyond the next twelve months is dependent on the discovery of economically recoverable mineral reserves, the ability of the Company to obtain necessary financing to fund its operations, and the future production or proceeds from developed properties. In the year ended December 31, 2014, the Company incurred a loss of $18,067,681, and had negative cash flow from operating activities of $17,274,367, and will be required to obtain additional sources of financing to complete its business plans going into the future. Although the Company had working capital of $1,641,205 at December 31, 2014, including $2,510,570 of cash and cash equivalents and short term investments, the Company has insufficient capital to finance its operations over the next twelve months. Subsequent to the year end, the Company raised $18,641,112 by issuing 4,405,947 common shares and 600,000 flow through shares and is currently investigating various sources of additional funding to increase the cash balances required for ongoing operations over the foreseeable future. These additional sources include, but are not limited to, share offerings, private placements, and the exercise of outstanding options. However, there is no certainty that the Company will be able to obtain financing from any of those sources. These conditions indicate the existence of a material uncertainty that may cast significant doubt as to the Company s ability to continue as a going concern. These financial statements have been prepared on the basis that the company will continue as a going concern, and do not reflect adjustments to assets and liabilities that would be necessary if the going concern assumption was not appropriate, which may be material. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off balance sheet arrangements. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Company s audited financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. The audited financial statements include estimates, which, by their nature, are uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions, and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 13

17 i) Significant Judgments in Applying Accounting Policies The areas which require management to make significant judgments in applying the Company s accounting policies in determining carrying values include, but are not limited to: a) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. IFRS 6 Exploration for and evaluation of mineral resources requires the Company to make certain judgments in respect of such events and changes in circumstances, and in assessing their impact on the valuations of the affected assets. The Company s assessment is that as at December 31, 2014 and 2013, no indicators of an impairment in the carrying value of its mineral properties had occurred. ii) Significant Accounting Estimates and Assumptions The areas which require management to make significant estimates and assumptions in determining carrying values include, but are not limited to: a) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. If indicators of impairment are identified, management will perform an impairment test in accordance with IAS 36 Impairment of assets ( IAS 36 ). IAS 36 requires the Company to make certain judgments, assumptions, and estimates in determining the estimate of the net recoverable amount. Impairments are recognized when the carrying values exceed management s estimate of the net recoverable amounts associated with the affected assets. The values shown on the balance sheet for Mineral Properties represents the Company s assumption that the amounts are recoverable. As a result of the numerous variables associated with the Company s judgments and assumptions, the precision and accuracy of estimates of recoverable amount is subject to significant uncertainties, and may change significantly as additional information becomes known. b) Stock options The stock option pricing model requires the input of highly subjective assumptions including the expected life and volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. c) Provision for decommissioning and restoration The decommissioning and restoration liability and the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions regarding timing. The estimates are subject to change and the actual costs for the decommissioning and restoration liability may change significantly. d) Deferred taxes Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and on unused losses carried forward, and are measured using the substantively enacted tax rates that are expected to be in effect when the differences are expected to reverse or losses are expected to be utilized. Deferred tax assets are recorded to recognize tax benefits only to the extent that, based on available evidence, including forecasts, it is probable that they will be realized. The Company has not recorded the benefit of any tax losses or deductible temporary differences. STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE COMPANY At the date of this MD&A, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Company. The Company anticipates that all of the relevant pronouncements will be adopted in the Company s accounting policy for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Company s financial statements is provided 14

18 below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company s financial statements and are therefore not discussed below. Financial instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments ( IFRS 9 ) bringing together the classification and measurement, impairment and hedge accounting phases of the IASB s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The extent of the impact of adoption of IFRS 9 has not yet been determined. FINANCIAL INSTRUMENTS The Company s financial instruments are described in Note 4 to the Company s 2014 audited financial statements. RELATED PARTY TRANSACTIONS In accordance with IAS 24 Related Parties, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non executive) of the Company. The Company s related parties include its key management, the Company s directors, and their close family members. Mountain Province and the Gahcho Kué Joint Venture, in which Mountain Province holds an interest, are also related parties since the Company and Mountain Province have common members of key management and certain directors. None of the transactions with related parties incorporate special terms and conditions, and no guarantees were given or received. Related party transactions are recorded at their exchange amount, being the amount agreed to by the parties. Outstanding balances are generally settled in cash. The Company had the following transactions and balances with its related parties including key management personnel, and Mountain Province which includes the monthly management fee charged by Mountain Province for the reimbursement of expenses incurred on the Company s behalf by Mountain Province. The transactions with key management personnel are in the nature of remuneration which are paid directly by the Company and are not included in the monthly management fee charged by Mountain Province. December 31, December 31, The total of the transactions: Management fee and reimburseable expenses charged by Mountain Province $ 90,000 $ 152,500 Remuneration of key management personnel 1,457, ,684 Payable to key management personnel 100,000 41,520 The remuneration expense of directors and other members of key management personnel for the years ended December 31, 2014 and 2013 were as follows: December 31, December 31, Consulting fees $ 257,506 $ 117,205 Share based payments 1,200, ,479 $ 1,457,887 $ 233,684 CONTRACTUAL OBLIGATIONS The Company has no contractual obligations at December 31, 2014 other than a management services agreement with Mountain Province, for an annual amount of approximately $90,000. The contract can be terminated at any time by either party without penalty. 15

19 SUBSEQUENT EVENTS On March 10, 2015, the Company closed the third and final tranche of a non brokered private placement. Together with the first and second tranches, the Company has issued 4,405,947 common shares and 600,000 flow through shares for aggregate gross proceeds of $18,641,112 subsequent to December 31, The Company paid a cash finder s fee of $34,826 on a portion of the offering. Subsequent to the year end, as detailed in the table below, stock options were granted by the Board of Directors. The fair values of the stock options have been estimated on the date of grant using the Black Scholes option pricing model, using the assumptions below, and total $1,899,505. These stock options vested immediately. The expected volatility is calculated by reference to the weekly closing price for a period that reflects the expected life of the options. Date of grant March 13, 2015 Number of options granted 685,000 Fair value per option $ Fair value total for grant $ 1,899,505 Term of option 10 years Exercise price $ 3.61 Expected volatility 72.76% Expected option life 10 years Expected forfeiture none Expected dividend yield 0% Risk free interest rate 1.48% OTHER MANAGEMENT DISCUSSION AND ANALYSIS REQUIREMENTS RISKS Kennady Diamond s business of exploring and developing mineral resources involves a variety of operational, financial and regulatory risks that are typical in the mining industry. The Company attempts to mitigate these risks and minimize their effect on its financial performance, but there is no guarantee that the Company will be profitable in the future, and investing in the Company s common shares should be considered speculative. Kennady Diamond s business of exploring and developing mineral properties is subject to a variety of risks and uncertainties, including, without limitation: risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of mineral deposits; mining exploration risks, including risks related to accidents, equipment breakdowns or other unanticipated difficulties with or interruptions in production; the potential for delays in exploration activities or the completion of studies; risks related to the inherent uncertainty of exploration and cost estimates and the potential for unexpected costs and expenses; risks related to foreign exchange fluctuations and prices of diamonds; risks related to commodity price fluctuations; the uncertainty of profitability based upon the Company's limited life and resultant losses; risks related to failure of the Company to obtain adequate financing on a timely basis and on acceptable terms, particularly given recent volatility in the global financial markets; risks related to environmental regulation, permitting and liability; political and regulatory risks associated with mining and exploration; aboriginal rights and title; failure of plant, equipment, processes and transportation services to operate as anticipated; possible variations in ore grade or recovery rates, permitting timelines, capital expenditures, reclamation activities, land titles, and social and political developments, and other risks of the mining industry; and other risks and uncertainties related to the Company's prospects, properties and business strategy. 16

20 As well, there can be no assurance that any further funding required by the Company will become available to it, and if so, that it will be offered on reasonable terms, or that the Company will be able to secure such funding. Furthermore, there is no assurance that the Company will be able to secure new mineral properties or projects, or that they can be secured on competitive terms. DISCLOSURE OF OUTSTANDING SHARE DATA The Company s common shares are listed on the TSX Venture Exchange under the symbol KDI. There are an unlimited number of common shares without par value authorized to be issued by the Company. At April 9, 2015, there are 28,633,122 shares outstanding, and 1,785,000 options granted by the Company. DISCLOSURE CONTROLS AND PROCEDURES Management has established processes to provide sufficient knowledge to support representations that it has exercised reasonable diligence that (i) the financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the periods presented by the financial statements, and (ii) the financial statements fairly present in all material respects the financial condition, results of operations and cash flow of the Company, as of the date of and for the periods presented. In contrast to the certificate required for non venture issuers under National Instrument , Certification of Disclosure in Issuers' Annual and Interim Filings ("NI "), the Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR"), as defined in NI In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of: (i) (ii) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP. The issuer's certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in the certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation. 17

21 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS Certain of the statements made and information contained herein is forward looking information within the meaning of the Ontario Securities Act. Forward looking information may include, but is not limited to, statements with respect to the success of exploration activities, future mineral exploration, permitting time lines, requirements for additional capital, sources and uses of funds, the estimation of mineral reserves and mineral resources, the realization of mineral reserve and mineral resource estimates, future remediation and reclamation activities, the timing of activities and the amount of estimated revenues and expenses. Forward looking information is based on various assumptions including, without limitation, the expectations and beliefs of management, the assumed long term price of diamonds; that the Company can access financing, appropriate equipment and sufficient labour and that the political environment where the Company operates will continue to support the development and operation of mining projects. Should underlying assumptions prove incorrect, or one or more of the risks and uncertainties described below materialize, actual results may vary materially from those described in forward looking statements. Accordingly, readers are advised not to place undue reliance on forward looking statements. Forward looking information is subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward looking information, including, without limitation, risks and uncertainties relating to foreign currency fluctuations; risks inherent in mining including environmental hazards, industrial accidents, unusual or unexpected geological formations, ground control problems and flooding; delays or the inability to obtain necessary governmental permits or financing; risks associated with the estimation of mineral resources and reserves and the geology, grade and continuity of mineral deposits; the possibility that future exploration, development or mining results will not be consistent with the Company s expectations; the potential for and effects of labor disputes or other unanticipated difficulties with or shortages of labor or interruptions in production; failure of plant, equipment or processes to operate as anticipated; actual ore mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses, diamond price fluctuations; uncertain political and economic environments; changes in laws or policies, and other risks and uncertainties, including those described under Risks. Historical results of operations and trends that may be inferred from the following discussions and analysis may not necessarily indicate future results from operations. The Company undertakes no obligation to publicly update or review the forward looking statements whether as a result of new information, future events or otherwise, other than as required under applicable securities laws. 18

22 Cautionary Note to U.S. Investors Information Concerning Preparation of Resource Estimates This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of United States securities laws. Unless otherwise indicated, all resource and reserve estimates included in this MD&A have been prepared in accordance with NI and the Canadian Institute of Mining and Metallurgy Classification System. NI is a rule developed by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Canadian standards, including NI , differ significantly from the requirements of Industry Guide 7 promulgated by the United States Securities and Exchange Commission ( SEC ) under the United States Securities Act of 1933, as amended, and resource and reserve information contained herein may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting the generality of the foregoing, the term resource does not equate to the term reserves. Under U.S. standards, mineralization may not be classified as a reserve unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. The SEC's disclosure standards under Industry Guide 7 do not define the terms and normally do not permit the inclusion of information concerning measured mineral resources, indicated mineral resources or inferred mineral resources or other descriptions of the amount of mineralization in mineral deposits that do not constitute reserves by U.S. standards in documents filed with the SEC. U.S. Investors should also understand that inferred mineral resources have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimated inferred mineral resources may not form the basis of feasibility or pre feasibility studies except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of contained ounces (or contained carats ) in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute reserves by SEC standards as in place tonnage and grade without reference to unit measures. The requirements of NI for identification of reserves are also not the same as those of the SEC s Industry Guide 7, and reserves reported by the Company in compliance with NI may not qualify as reserves under Industry Guide 7 standards. Accordingly, information concerning mineral deposits set forth herein may not be comparable with information made public by companies that report in accordance with U. S. standards. On behalf of the Board of Directors, Patrick Evans Patrick Evans President & CEO April 9,

23 KENNADY DIAMONDS INC. RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying financial statements of Kennady Diamonds Inc. ( Kennady Diamonds or the Company ) are the responsibility of the Board of Directors. The financial statements have been prepared by management, on behalf of the Board of Directors, in accordance with the accounting policies disclosed in the notes to these financial statements. Where necessary, management has made informed judgments and estimates in accounting for transactions which were not complete at the balance sheet date. In the opinion of management, the financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) appropriate in the circumstances. Management has established processes, which are in place to provide sufficient knowledge to support management representations that it has exercised reasonable diligence that the financial statements fairly present in all material respects the financial condition, results of operations and cash flows of the Company, as of the date of and for the periods presented by the financial statements. The Board of Directors is responsible for reviewing and approving the financial statements together with other financial information of the Company and for ensuring that management fulfills its financial reporting responsibilities. The Audit Committee assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management to review the financial reporting process and financial statements together with other financial information of the Company. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the financial statements together with other financial information of the Company for issuance to the shareholders. Management recognizes its responsibility for conducting the Company s affairs in compliance with IFRS as issued by the IASB, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities. Patrick C. Evans Patrick C. Evans President and Chief Executive Officer Bruce Ramsden Bruce Ramsden VP Finance and Chief Financial Officer Toronto, Canada April 9,

24 KENNADY DIAMONDS INC. INDEPENDENT AUDITORS REPORT To the Shareholders of Kennady Diamonds Inc. We have audited the accompanying financial statements of Kennady Diamonds Inc., which comprise the statements of financial position as at December 31, 2014 and December 31, 2013, the statements of comprehensive loss, equity and cash flows for the years ended December 31, 2014 and December 31, 2013, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements 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. Auditors Responsibility Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the 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 financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Kennady Diamonds as at December 31, 2014 and December 31, 2013, and its financial performance and its cash flows for the years ended December 31, 2014 and December 31, 2013 in accordance with International Financial Reporting Standards. Emphasis of Matter Without modifying our opinion, we draw attention to Note 1 in the consolidated financial statements which describes that the Company expects to require additional capital resources to meet planned expenditures beyond the next 12 months. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the Company s ability to continue as a going concern. Chartered Professional Accountants, Licensed Public Accountants April 9, 2015 Toronto, Canada 21

25 KENNADY DIAMONDS INC. Statements of Financial Position In Canadian dollars Notes December 31, 2014 December 31, 2013 ASSETS Current assets Cash 4 $ 507,808 $ 2,663,300 Short term investments 4 2,002,762 12,354,665 Amounts receivable 4 266,695 97,778 Prepaid expenses 5 1,026,662 21,292 3,803,927 15,137,035 Reclamation deposit 6 325,000 30,000 Mineral properties 7 382, ,054 Total assets $ 4,511,282 $ 15,516,089 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities 4 $ 2,162,722 $ 125,606 Deferred premium on flow through shares 8, 10(ii) 1,163,492 2,162,722 1,289,098 Decommissioning and restoration liability 9 147, ,444 Shareholders' equity: Share capital 10 26,969,543 22,015,246 Share based payments reserve 10 1,904, ,879 Deficit (26,672,259) (8,604,578) Total shareholders' equity 2,201,544 14,114,547 Total liabilities and shareholders' equity $ 4,511,282 $ 15,516,089 Going concern 1 Subsequent events 10(iv), 16 The notes to the financial statements are an integral part of these statements. On behalf of the Board: Patrick Evans Director Jonathan Comerford Director 22

26 KENNADY DIAMONDS INC. Statements of Comprehensive Loss In Canadian dollars Year ended Year ended Notes December 31, 2014 December 31, 2013 Expenses Exploration and evaluation expenses 12 $ (17,415,440) $ (5,307,526) Management fees 11 (90,000) (152,500) Share based payment expense 10, 11 (1,200,381) (116,479) Professional fees (59,374) (52,786) Promotion and investor relations (134,554) (79,287) Director fees 11 (38,965) Transfer agent & regulatory fees (68,529) (45,732) Finance expenses (16,513) Consulting fees 11 (274,090) (185,369) Office expenses (32,094) (18,828) Travel expenses (7,637) Total expenses (19,337,577) (5,958,507) Accretion expense on decommissioning and restoration liability 9 (1,271) (217) Interest income 107,675 38,805 Other income flow through shares 8 1,163,492 72,420 Net loss and comprehensive loss for the year $ (18,067,681) $ (5,847,499) Basic and diluted loss per share 10 (iii) $ (0.78) $ (0.30) Weighted average number of shares outstanding 23,049,523 19,643,642 The notes to the financial statements are an integral part of these statements. 23

27 KENNADY DIAMONDS INC. Statements of Equity In Canadian dollars Share based Notes Number of shares Share capital payments reserve Deficit Total Balance, January 1, ,700,469 $ 5,914,281 $ 587,400 $ (2,757,079) $ 3,744,602 Net loss for the year (5,847,499) (5,847,499) Issuance of common shares private placement 10 4,157,206 16,618,610 16,618,610 Share issue costs (517,645) (517,645) Share based payment expense , ,479 Balance, December 31, ,857,675 $ 22,015,246 $ 703,879 $ (8,604,578) $ 14,114,547 Net loss for the year (18,067,681) (18,067,681) Issuance of common shares private placement ,500 5,001,750 5,001,750 Share issue costs (47,453) (47,453) Share based payment expense 1,200,381 1,200,381 Balance, December 31, ,627,175 $ 26,969,543 $ 1,904,260 $ (26,672,259) $ 2,201,544 The notes to the financial statements are an integral part of these statements. 24

28 KENNADY DIAMONDS INC. Statements of Cash Flows In Canadian dollars Year ended Year ended Notes December 31, 2014 December 31, 2013 Cash provided by (used in): Operating activities: Net loss for the year $ (18,067,681) $ (5,847,499) Adjustments: Accretion expense on decomminissioning and restoration liability 1, Interest income (107,675) (38,805) Other income flow through premium (1,163,492) (72,420) Share based payment expense 1,200, ,479 Changes in non cash operating working capital: Amounts receivable (168,917) 13,582 Prepaid expenses (1,005,370) (7,662) Accounts payable and accrued liabilities 2,037,116 (188,487) (17,274,367) (6,024,595) Investing activities: Interest income 107,675 38,805 Reclamation deposit (295,000) (30,000) Mineral properties (201,589) Redeemption (purchase) of short term investments 10,351,903 (8,851,577) 10,164,578 (9,044,361) Financing activities: Issuance of shares, net of share issue costs 10 4,954,297 17,277,839 4,954,297 17,277,839 (Decrease) increase in cash (2,155,492) 2,208,883 Cash, beginning of year 2,663, ,417 Cash, end of year $ 507,808 $ 2,663,300 The notes to the financial statements are an integral part of these statements. 25

29 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars 1. NATURE OF OPERATIONS AND GOING CONCERN Kennady Diamonds Inc. ( Kennady Diamonds or the Company ) was incorporated on February 27, 2012 under the Ontario Business Corporation Act to effect the transfer of Mountain Province Diamonds Inc. s ( Mountain Province ) Kennady North Project assets and operations to a new company as contemplated under a Mountain Province plan of arrangement (Note 6). Until the closing of the plan of arrangement, Kennady Diamonds was a wholly owned subsidiary of Mountain Province. The address of the Company s registered office and its principal place of business is 161 Bay Street, Suite 2315, PO Box 216, Toronto, ON, Canada, M5J 2S1. The Company s shares are listed on the TSX Venture Exchange under the symbol KDI. Kennady Diamonds is involved in the exploration, discovery and development of diamond properties in Canada s Northwest Territories. The underlying value and recoverability of amounts shown as Mineral Properties is dependent upon the ability of the Company to discover economically recoverable reserves, to have successful exploration, permitting and development, and upon future profitable production or proceeds from disposition of the Company s mineral properties. Failure to discover and develop economically recoverable reserves will require the Company to write off costs capitalized to date. The Company s primary mineral asset is in the exploration stage and, as a result, the Company has no source of revenues. As at December 31, 2014, the Company has not achieved profitable operations and is dependent upon its ability to obtain external financing to meet the Company s liabilities as they become payable. The Company s ability to continue operations beyond the next twelve months is dependent on the discovery of economically recoverable mineral reserves, the ability of the Company to obtain necessary financing to fund its operations, and the future production or proceeds from developed properties. In the year ended December 31, 2014, the Company incurred a loss of $18,067,681, and had negative cash flow from operating activities of $17,274,367, and will be required to obtain additional sources of financing to complete its business plans going into the future. Although the Company had working capital of $1,641,205 at December 31, 2014, including $2,510,570 of cash and cash equivalents and short term investments, the Company has insufficient capital to finance its operations over the next twelve months. Subsequent to the year end, the Company raised $18,641,112 by issuing 4,405,947 common shares and 600,000 flow through shares and is currently investigating various sources of additional funding to increase the cash balances required for ongoing operations over the foreseeable future. These additional sources include, but are not limited to, share offerings, private placements, and the exercise of outstanding options. However, there is no certainty that the Company will be able to obtain financing from any of those sources. These conditions indicate the existence of a material uncertainty that may cast significant doubt as to the Company s ability to continue as a going concern. These financial statements have been prepared on the basis that the company will continue as a going concern, and do not reflect adjustments to assets and liabilities that would be necessary if the going concern assumption was not appropriate, which may be material. Authorization of Financial Statements The audited financial statements for the year ended December 31, 2014 (including comparatives) were approved by the Board of Directors on April 9, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The policies set out below were consistently applied to the comparative period presented. 26

30 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars (i) Basis of Preparation These financial statements have been prepared on a historical cost basis except for cash which has been measured at fair value. The Company has elected to present the Statement of Comprehensive Loss as a single financial statement with its Statement of Income, titled Statement of Comprehensive Loss. The significant accounting policies adopted in the preparation of these financial statements are set out below. (ii) Interest income Interest income from financial assets is recognized when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on the basis of time that has passed by reference to the principal outstanding and at the effective interest rate. (iii) Mineral properties and exploration and evaluation costs Exploration and evaluation ( E&E ) costs are those costs required to find a mineral property and determine technical feasibility and commercial viability. E&E costs include costs to establish an initial mineral resource and determine whether inferred mineral resources can be upgraded to measured and indicated mineral resources, and whether measured and indicated mineral resources can be converted to proven and probable reserves. E&E costs consist of: gathering exploration data through topographical and geological studies; exploratory drilling, trenching and sampling; determining the volume and grade of the resource; test work on geology, metallurgy, mining, geotechnical and environmental; and conducting engineering, marketing and financial studies. Costs in relation to these activities are expensed as incurred until such time that technical feasibility and commercial viability are demonstrable. At such time, mineral properties are assessed for impairment, and an impairment loss, if any, is recognized. Capitalized acquisition costs included in Mineral Properties are transferred to capitalized costs within property, plant and equipment, or intangible assets, as appropriate. Determination of technical feasibility and commercial viability require management s judgment and include assessment of legal, environmental, social and governmental factors. The Company recognizes E&E costs as assets when acquired as part of a business combination, or asset purchase, or as a result of rights acquired relating to a mineral property. These assets are recognized at fair value or relative fair value if applicable. Acquired capitalized E&E consists of: interest in exploration properties, and amounts paid for acquired rights associated with exploration properties. (iv) Provisions A provision is recognized in the statements of financial position when the Company has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expected expenditures to settle the obligation, applying a risk free interest rate. The increase in the provision due to passage of time is recognized as accretion expense. The Company does not have any provisions as at December 31, 2014 other than the provision for decommissioning and restoration (Note 8) associated with its mineral properties. The Company s decommissioning and restoration liability arise from its obligations to undertake site reclamation and remediation in connection with its mineral properties. The estimated costs of reclamation are based management s best estimates of costs to date. Future changes to any regulations and standards, as well as changes resulting from operations may result in actual reclamation costs differing from the estimate. 27

31 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars (v) Financial instruments Financial instruments are classified into one of the following four categories: loans and receivables; fair value through profit or loss; held to maturity; and available for sale. Financial assets are initially measured at fair value. Subsequent measurement and recognition of the changes in fair value of financial instruments depends upon their initial classifications, as follows: Financial assets and financial liabilities at fair value through profit and loss include financial assets and financial liabilities that are held for trading or designated upon initial recognition as at fair value through profit and loss. These financial instruments are measured at fair value with changes in fair values recognized in the Statement of Comprehensive Loss. Financial assets classified as available for sale are measured at fair value, with changes in fair values recognized as other comprehensive income ( OCI ) in the Statement of Comprehensive Loss, except when there is objective evidence that the asset is impaired, at which point the cumulative loss that had been previously recognized in OCI is recognized within the Statement of Comprehensive Loss. Financial assets classified as held to maturity and loans and receivables are measured subsequent to initial recognition at amortized cost using the effective interest method. Financial liabilities, other than financial liabilities classified as fair value through profit and loss, are measured in subsequent periods at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or where appropriate, a short period, to the net carrying amount on initial recognition. The Company has classified its financial instruments as follows: Asset/Liability Classification Measurement Cash Fair Value through Profit and Loss Fair Value Short term investments Fair Value through Profit and Loss Fair Value Amounts receivable Loans and Receivables Amortized Cost Accounts payable and accrued liabilities Other Liabilities Amortized Cost The Company s cash consists of balances with banks. Short term investments are investments with original maturities of greater than three months when acquired (Note 4). The fair values of the Company's amounts receivable, and accounts payable and accrued liabilities approximate their carrying values because of the immediate or short term to maturity of these financial instruments. (vi) Flow through shares Under Canadian income tax legislation, a company is permitted to issue flow through shares whereby the Company agrees to incur qualifying expenditures and renounce the related income tax deductions to the investors. The proceeds from issuance of these shares are allocated between the offering of shares and the sale of tax benefits. The allocation is made based on the difference between the quoted price of the existing shares and the amount the investor pays for the flowthrough shares. A deferred premium liability is recognized for this difference. The Company renounces the deductions for tax purposes related to the eligible exploration and evaluation expenditures on the date the flow through shares are issued. 28

32 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars The premium liability is reduced on a pro rata basis and recorded in other income based on the corresponding eligible expenditures that have been incurred. Where the Company has unused tax benefits on loss carry forwards and tax pools in excess of book value available for deduction against which a valuation allowance has been provided, the Company reduces its valuation allowance to offset the increase in deferred tax liabilities resulting in an offsetting recovery of deferred income taxes being recognized through profit or loss in the reporting period. (vii) Share based payments Equity settled share based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity settled share based payment transactions are set out in Note 10. The fair value determined at the grant date of the equity settled share based payments is expensed to the Statement of Comprehensive Loss over the vesting period, if any, which is the period during which the employee becomes unconditionally entitled to equity instruments. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest, if any. Equity settled share based payment transactions with parties other than employees, if any, are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. (viii) Loss per share Basic loss or earnings per share is calculated by dividing loss or earnings attributable to common shares by the weighted average number of shares outstanding during the year. Diluted loss or earnings per share is calculated using the denominator of the basic loss or earnings calculation described above adjusted to include the potentially dilutive effect of outstanding stock options. The denominator is increased by the total number of additional common shares that would have been issued by the Company assuming exercise of all stock options with exercise prices below the average market price for the year. (ix) Income Taxes and Deferred Taxes The income tax expense or benefit for the period consists of two components: current and deferred. Income tax expense or benefit is recognized in the Statement of Comprehensive Loss except to the extent it relates to a business combination or items recognized directly in equity. Current tax is the expected tax payable or receivable on the taxable profit or loss for the year. Current tax is calculated using tax rates and laws that were enacted or substantively enacted at the balance sheet date in each of the jurisdictions and includes any adjustments for taxes payable or recovery in respect of prior periods. Taxable profit or loss differs from profit or loss as reported in the Statement of Comprehensive Loss because of items of income or expense that are taxable or deductible in other years, and items that are never taxable or deductible. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, loss carryforwards and tax credit carryforwards to the extent that it is probable that taxable profits will be available against which they can be utilized. To the extent that the Company does not consider it to be probable that taxable 29

33 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars profits will be available against which deductible temporary differences, loss carryforwards, and tax credit carryforwards can be utilized, a deferred tax asset is not recognized. Deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly into equity, in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity respectively. (x) New accounting policy The Company adopted the following new standards and interpretations issues by the IASB as of January 1, IFRIC 21 Levies IFRIC 21 Levies ( IFRC 21 ) was issued in May 2003 and is an interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets ( IAS 37 ), on the accounting for levies imposed by governments. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event. IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. The adoption of IFRIC 21 did not have a material effect on the financial statements. IAS 32 Offsetting Financial Assets and Liabilities IAS 32 Financial Instruments: Presentation was amended to clarify that an entity currently has a legally enforceable right to set off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. This amendment also clarifies when a settlement mechanism provides for net settlement or gross settlement that is equivalent to net settlement. The adoption of the amended standard did not have an impact on the financial statements. (xi) Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company At the date of authorization of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Company. The Company anticipates that all of the relevant pronouncements will be adopted in the Company s accounting policy for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Company s financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company s financial statements and are therefore not discussed below. 30

34 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars Financial instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments ( IFRS 9 ) bringing together the classification and measurement, impairment and hedge accounting phases of the IASB s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The extent of the impact of adoption of IFRS 9 has not yet been determined. 3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Company s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These financial statements include estimates, which, by their nature, are uncertain and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions, and other factors, including expectations of future events that are believed to be reasonable under the circumstances. i) Significant Judgments in Applying Accounting Policies The areas which require management to make significant judgments in applying the Company s accounting policies in determining carrying values include, but are not limited to: a) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. IFRS 6 Exploration for and evaluation of mineral resources requires the Company to make certain judgments in respect of such events and changes in circumstances, and in assessing their impact on the valuations of the affected assets. The Company s assessment is that as at December 31, 2014 and 2013, no indicators of an impairment in the carrying value of its mineral properties had occurred. ii) Significant Accounting Estimates and Assumptions The areas which require management to make significant estimates and assumptions in determining carrying values include, but are not limited to: a) Impairment analysis Mineral Properties The Company reviews its mineral properties for impairment based on results to date and when events and changes in circumstances indicate that the carrying value of the assets may not be recoverable. If indicators of impairment are identified, management will perform an impairment test in accordance with IAS 36 Impairment of assets ( IAS 36 ). IAS 36 requires the Company to make certain judgments, assumptions, and estimates in determining the estimate of the net recoverable amount. Impairments are recognized when the carrying values exceed management s estimate of the net recoverable amounts associated with the affected assets. The values shown on the balance sheet for Mineral Properties represents the Company s assumption that the amounts are recoverable. As a result of the numerous variables associated with the Company s judgments and assumptions, the precision and accuracy of estimates of the recoverable amount is subject to significant uncertainties, and may change significantly as additional information becomes known. 31

35 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars b) Stock options The stock option pricing model requires the input of highly subjective assumptions including the expected life and volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. c) Provision for decommissioning and restoration The decommissioning and restoration liability and the accretion recorded are based on estimates of future cash flows, discount rates, and assumptions regarding timing. The estimates are subject to change and the actual costs for the decommissioning and restoration liability may change significantly. d) Deferred taxes Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and on unused losses carried forward, and are measured using the substantively enacted tax rates that are expected to be in effect when the differences are expected to reverse or losses are expected to be utilized. Deferred tax assets are recorded to recognize tax benefits only to the extent that, based on available evidence, including forecasts, it is probable that they will be realized. The Company has not recorded the benefit of tax losses or deductible temporary differences. 4. FAIR VALUE MEASUREMENT For financial instruments recorded at fair value, the Company categorizes each of its fair value measurements in accordance with a fair value hierarchy. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. The Company s financial assets are measured at fair value are summarized in the following table: December 31, 2014 Level 1 Level 2 Level 3 Cash $ 507,808 $ $ Short term investments 2,002,762 December 31, 2013 Level 1 Level 2 Level 3 Cash $ 2,663,300 $ $ Short term investments 12,354,665 The short term investments at December 31, 2014 and December 31, 2013 are cashable guaranteed investment certificates ( GICs ) held with a major Canadian financial institution. GICs are measured using a discounted cash flow model, the future value of the GIC is discounted to the reporting period using the market interest rate. The short term investments at December 31, 2014 and December 31, 2013 were purchased with original maturities of less than one year. There is no restriction on the use of the short term investments. 32

36 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars The fair values of the amounts receivable, and accounts payable and accrued liabilities approximate their carrying values due to the relatively short term maturity of these financial instruments. The carrying amounts by classification are: Financial assets December 31, December 31, Fair Value Through Profit or Loss Cash $ 507,808 $ 2,663,300 Short term investments 2,002,762 12,354,665 Loans and receivables Amounts receivable 266,695 97,778 Financial liabilities Financial liabilities measured at amortized cost Accounts payable and accrued liabilities 2,162, ,606 The Company s interest income on its bank balances carried at fair value is presented on the Statements of Comprehensive Loss in the interest and other income line. Financial Instruments Risks The Company thoroughly examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, market risk, foreign currency risk and interest rate risk. 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 obligations. At December 31, 2014, the Company does not have any allowance for doubtful accounts, and does not consider that any such allowance is necessary. (December 31, 2013 Nil) All of the Company s cash and short term investments are held with a major Canadian financial institution and thus the exposure to credit risk is considered insignificant. The short term investments are in the form of GICs and are cashable in whole or in part, with interest, at any time to maturity. Management actively monitors the Company s exposure to credit risk under its financial instruments, including with respect to amounts receivable. The Company considers the risk of loss for its amounts receivable to be remote and significantly mitigated due to the financial strength of the party from whom the receivables are due the Canadian government for harmonized sales tax ( HST ) refunds receivable in the amount of $266,695 (December 31, 2013 $97,778). The Company s current policy is to invest excess cash in GICs. It periodically monitors the investments it makes and is satisfied with the credit ratings of its bank. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company has a planning and budgeting process in place by which it anticipates and determines the funds required to support its operating requirements. The Company coordinates this planning and budgeting process with its financing 33

37 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars activities through its capital management process. The Company s financial liabilities comprise its accounts payable and accrued liabilities, all of which are due within the next 12 month period. There are no operating lease commitments. Refer to Note 1 with respect to the ability of the Company to continue as a going concern. Interest rate sensitivity The Company has no significant exposure at December 31, 2014 to interest rate risk through its financial instruments. The short term investments are at fixed rates of interest that do not fluctuate during the remaining term. The Company has no interest bearing debt. 5. PREPAID EXPENSES December 31, December 31, Prepaid insurance $ 26,662 $ 21,292 Prepaid drilling expense 1,000,000 $ 1,026,662 $ 21, RECLAMATION DEPOSIT At December 31, 2014, the Company had provided a total reclamation deposit of $325,000 (December 31, 2013 $30,000) to the Mackenzie Valley Land and Water Board for its mining project to secure clean up costs if the project is abandoned or closed (Note 9). 7. MINERAL PROPERTIES On March 12, 2012, Kennady Diamonds and Mountain Province entered into an arrangement agreement (the Arrangement ) pursuant to which Mountain Province would transfer its interest in the Kennady North Project, including permits, mining claims, rights and title, in the Northwest Territories in Canada, to Kennady Diamonds in exchange for one common share of Kennady Diamonds for every five common shares of Mountain Province outstanding, which would then be distributed to Mountain Province common shareholders. The transactions contemplated by the Arrangement were completed on July 6, Kennady Diamonds began trading on the TSX Venture Exchange on July 10, 2012 under the ticker symbol KDI. Upon completion of the Arrangement on July 6, 2012, the Company issued 16,143,111 Kennady Diamonds shares to Mountain Province which were distributed, along with the one share held by Mountain Province, to the Mountain Province shareholders, and the Company recorded receipt of the rights to the Kennady North Project and capitalized $35,238 as acquired mineral properties. The Company also received $3,000,000 of cash, as contemplated by the Arrangement. In 2013, the Company acquired additional mining leases and capitalized $149,999 as acquired mineral rights and claims. In addition, the Company staked grounds around the Kennady North Project and capitalized $51,590 to mineral properties. 34

38 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars The continuity of the Mineral Properties is as follows: Balance, January 1, 2013 $ 35,238 Acquired mineral rights and claims 201,589 Change in expected decommissioning and restoration liability 112,227 Balance, December 31, 2013 $ 349,054 Change in expected decommissioning and restoration liability 33,301 Balance, December 31, 2014 $ 382, DEFERRED PREMIUM ON FLOW-THROUGH SHARES The premium paid for flow through shares in excess of the fair value of common shares is initially recognized as a liability. The liability is reduced on a pro rata basis and recorded in other income based on the corresponding eligible expenditures that have been incurred. The value of flow through shares issued exceeded the fair value of the Company's common shares and therefore the deferred premium liability of $Nil (2013 $1,163,492) on the flow through shares was recognized. $1,163,492 (2013 $72,420) has been recognized in other income based on the corresponding eligible expenditures that have been incurred in the period. 9. DECOMMISSIONING AND RESTORATION LIABILITY The decommissioning and restoration liability was calculated using the following assumptions as at December 31, 2014 and 2013: December 31, December 31, Expected undiscounted cash flows $ 150,000 $ 115,000 Discount rate 1.01% 1.13% Periods between 2016 and 2017 between 2014 and 2015 The continuity of the decommissioning and restoration liability at December 31, 2014 and 2013 is follows: December 31, December 31, Balance, beginning of year $ 112,444 $ Change in estimate of discounted cash flows for the year 33, ,227 Accretion recorded in the year 1, Balance, end of the year $ 147,016 $ 112, SHAREHOLDERS EQUITY i. Authorized share capital Unlimited common shares, without par value. Each common share entitles the holder to one shareholder vote. There is no other class of shares in the Company. ii. Share capital The number of shares issued and fully paid as at December 31, 2014 is 23,627,175. There are no shares issued but not fully paid. 35

39 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars On October 1, 2014, the Company issued 769,500 common shares at a price of $6.50 per share, for aggregate gross proceeds of $5,001,750. On December 27, 2013, the Company issued 398,345 flow through common shares at a price of $5.75 per share, for aggregate gross proceeds of $2,290,484. A finder s fee equal to 5 percent of the proceeds was paid to the underwriters. An amount of $298,759 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was recognized as a liability. On October 25, 2013, the Company issued 910,000 flow through common shares at a price of $5.50 per share, for gross proceeds of $5 million. The underwriters received a cash commission of 5% of the gross proceeds. An amount of $682,500 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was recognized as a liability. On October 22, 2013, the Company issued 247,100 flow through common shares at a price of $5.50 per share and 1,608,621 non flow through common shares at a price of $4.75 per share, for gross proceeds of $9 million. An amount of $185,325 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was recognized as a liability. On August 2013, the Company issued 34,300 flow through common shares at a price of $1.80 per share and 958,840 nonflow through common shares at a price of $1.50 per share, for gross proceeds of $1.5 million. An amount of $10,290 was recognized as the premium paid for flow through shares in excess of the fair value of the common shares was initially recognized as a liability. iii. Loss or earnings per share The following table sets forth the computation of basic and diluted loss or earnings per share: Year ended Year ended December 31, 2014 December 31, 2013 Numerator Net loss for the year $ (18,067,681) $ (5,847,499) Denominator For basic weighted average number of shares outstanding 23,049,523 19,643,642 Effect of dilutive securities For diluted adjusted weighted average number of shares outstanding 23,049,523 19,643,642 Loss Per Share Basic Diluted $ (0.78) $ (0.30) (0.78) (0.30) The calculation for the weighted average number of shares outstanding is based on the number of shares outstanding on a daily basis in the years ended December 31, 2014, and Shares issuable on exercise of stock options totaling 1,050,000 on December 31, 2014 (650,000 December 31, 2013) were not included in the computation of diluted loss per share because the effect would have been anti dilutive. iv. Stock Options and Share based Payments Reserve The Company, through its Board of Directors and shareholders, adopted a stock option plan (the Plan ) which, among other things, allows for the maximum number of shares that may be reserved for issuance under the Plan to be 10% of the 36

40 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars Company s issued and outstanding shares at the time of the grant. The Board of Directors has the authority and discretion to grant stock option awards within the limits identified in the Plan, which includes provisions limiting the issuance of options to insiders and significant shareholders to maximums identified in the Plan. The following table summarizes information about the stock options outstanding and exercisable at December 31, 2014 and December 31, 2013: December 31, 2014 Weighted average Number of options exercise price Balance at beginning of year 750, Granted during the year 350, Balance at end of the year 1,100,000 $ 2.23 Options exercisable at the end of the year 1,050,000 December 31, 2013 Weighted average Number of options exercise price Balance at beginning of year 600,000 $ 1.27 Granted during the year 150, Balance at end of the year 750,000 $ 1.28 Options exercisable at the end of the year 650,000 The fair value of the 350,000 (150,000 December 31, 2013) stock options granted in the year ended December 31, 2014 has been estimated on the date of grant using the Black Scholes option pricing model, using the assumptions below, and total $1,168,800 ($151,250 December 31, 2013). The stock options granted in the year ended December 31, 2014 vested immediately. The options granted in the year ended December 31, 2013 vested one third immediately, one third on the first anniversary of the grant date, and the balance vests on the second anniversary of the grant date. Expected volatility is calculated by reference to the weekly closing share price of similar companies in a similar stage of exploration for a period that reflects the expected life of the options (10 years). December 31, December 31, Exercise price $ $ Expected volatility 72.76% 72.76% Expected option life 10 years 10 years Expected forfeiture none none Expected dividend yield 0% 0% Risk free interest rate 2.45% 2.52% 1.89% 1.99% The following tables reflect the Black Scholes values, the number of stock options outstanding, the weighted average of options outstanding, and the exercise price of stock options outstanding at December 31, 2014 and December 31,

41 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars At December 31, 2014 Black Scholes Number of Exercise Expiry Date Value Options Price November 6, 2022 $ 587, , January 31, , , March 17, ,550 50, February 13, , , March 9, , , $ 1,907,450 1,100, At December 31, 2013 Black Scholes Number of Exercise Expiry Date Value Options Price November 6, 2022 $ 587, , January 31, , , March 17, ,550 50, $ 738, , The weighted average remaining contractual life of the options outstanding at December 31, 2014 is 8.30 years (December 31, years). Subsequent to the year end, as detailed in the table below, stock options were granted by the Board of Directors. The fair values of the stock options have been estimated on the date of grant using the Black Scholes option pricing model, using the assumptions below, and total $1,899,505. These stock options vested immediately. The expected volatility is calculated by reference to the weekly closing price for a period that reflects the expected life of the options. Date of grant March 13, 2015 Number of options granted 685,000 Fair value per option $ Fair value total for grant $ 1,899,505 Term of option 10 years Exercise price $ 3.61 Expected volatility 72.76% Expected option life 10 years Expected forfeiture none Expected dividend yield 0% Risk free interest rate 1.48% 11. RELATED PARTIES In accordance with IAS 24 Related Parties, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non executive) of the Company. 38

42 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars The Company s related parties include its key management, the Company s directors, and their close family members. Mountain Province and the Gahcho Kué Joint Venture, in which Mountain Province holds an interest, are also related parties since the Company and Mountain Province have common members of key management and certain directors. None of the transactions with related parties incorporate special terms and conditions, and no guarantees were given or received. Related party transactions are recorded at their exchange amount, being the amount agreed to by the parties. Outstanding balances are generally settled in cash. The Company had the following transactions and balances with its related parties including key management personnel, and Mountain Province which includes the monthly management fee charged by Mountain Province for the reimbursement of expenses incurred on the Company s behalf by Mountain Province. The transactions with key management personnel are in the nature of remuneration which are paid directly by the Company and are not included in the monthly management fee charged by Mountain Province. December 31, December 31, The total of the transactions: Management fee and reimburseable expenses charged by Mountain Province $ 90,000 $ 152,500 Remuneration of key management personnel 1,457, ,684 Payable to key management personnel 100,000 The remuneration expense of key management personnel for the year ended December 31, 2014 and 2013 were as follows: December 31, December 31, Consulting fees $ 257,506 $ 117,205 Share based payments 1,200, ,479 $ 1,457,887 $ 233, EXPLORATION AND EVALUATION EXPENSES December 31, 2014 December 31, 2013 Lease payments $ 27,949 $ 27,404 Aircraft support 3,424,624 1,175,452 Fuel 1,027, ,429 Geophysics 523, ,498 Drilling support 1,268,492 3,850 Exploration personnel and program support 1,512, ,072 Camp construction, mobilization, general costs 3,394, ,635 Drilling 5,390,558 1,528,884 Technical consultant 35,427 Laboratory analysis 809, ,302 $ 17,415,440 $ 5,307,526 39

43 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars 13. INCOME TAXES Rate Reconciliation The provision for income tax differs from the amount that would have resulted by applying the combined Canadian statutory income tax rates of approximately 26.5% ( %): December 31, 2014 December 31, 2013 Loss before income taxes $ (18,067,681) $ (5,847,499) 26.5% 26.5% Tax recovery calculated using statutory rates (4,787,935) (1,549,587) Expenses not deductible 9,776 11,676 Change in tax benefits not recognized 4,778,159 1,537,911 Income tax expenses (recovery) $ $ Unrecognized deferred tax assets Deductible temporary differences for which no deferred tax assets have been recognized are attributable to the following: December 31, 2014 December 31, 2013 Mineral properties $ 15,571,832 $ 6,796,791 Decommissionning and restoration liability 147, ,444 Loss carryforwards 1,560, ,518 Share issuance costs 373, ,267 Investment tax credits 436, ,854 As at December 31, 2014, the Company had the following non capital losses available for carryforward and certain other tax attributes as follows: Amounts Expiry Date Non capital losses $ 1,560, Investment tax credits 437, Tax basis of mineral properties 15,954,000 indefinite Share issuance cost 373,000 indefinite 40

44 KENNADY DIAMONDS INC. Notes to Financial Statements For the years ended December 31, 2014 and 2013 In Canadian Dollars 14. CAPITAL MANAGEMENT The capital of Kennady Diamonds consists of its Shareholders Equity. The Company s objectives when managing capital are to safeguard Kennady Diamonds ability to continue to pursue the exploration and evaluation of its mineral properties and to maintain optimal returns to shareholders and benefits for other stakeholders. The Company manages its capital structure and makes adjustments to it, in order to have the funds available to support the exploration of its mineral properties. The Company s main property, Kennady North, is in the exploration stage, and as such the Company is dependent on external equity financing to fund its activities. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company s management to sustain future development of the business. The Company s capital consists of: December 31, December 31, Share capital $ 26,969,543 $ 22,015,246 Share based payments reserve 1,904, ,879 Deficit (26,672,259) (8,604,578) $ 2,201,544 $ 14,114,547 In order to carry out the planned management of the Company s properties and to pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an on going basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company s approach to capital management during the year ended December 31, SEGMENTED REPORTING The Company has determined that it has only one operating segment. 16. SUBSEQUENT EVENT On March 10, 2015, the Company closed the third and final tranche of a non brokered private placement. Together with the first and second tranches, the Company has issued 4,405,947 common shares and 600,000 flow through shares subsequent to December 31, 2014 for aggregate gross proceeds of $18,641,112. The Company paid a cash finder s fee of $34,826 on a portion of the offering. 41

45 Kennady Diamonds

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