Qwest Energy Canadian Resource Class

Transcription

1 2015 Semi-Annual Financial Statements

2 Statements of Financial Position June 30, 2015 December 31, 2014 Assets Cash 507, ,084 Dividends receivable 16,575 57,705 Due from related parties (note 8) Investments - at fair value (note 10) 6,318,313 10,973,675 Prepaid expenses 14,927 13,655 6,857,842 11,438,406 Liabilities Accounts payable and accrued liabilities 54,850 65,311 Redemptions payable 16,499 - Due to related parties (note 8) - 21 Management fee payable (notes 7 and 8) 17,202 29,489 88,551 94,821 Net assets attributable to holders of redeemable shares 6,769,291 11,343,585 Series net assets attributable to holders of redeemable shares Series A 6,376,322 10,966,407 Series F 392, ,178 6,769,291 11,343,585 Shares outstanding (note 3) Series A 6,541,555 10,421,880 Series F 143, ,194 Net assets attributable to holders of redeemable shares per share (note 2) Series A Series F Approved on behalf of the Board of Directors of Qwest Funds Corp. Maurice Levesque Chris Harrison Director Director The accompanying notes are an integral part of these financial statements.

3 Statements of Comprehensive (Loss) Income For the six-month period ended and Income Class action proceeds - 54,552 Early redemption fees Other changes in fair value of investments Dividend income 68, ,978 Net realized loss on sale of investments (2,344,465) (342,814) Change in unrealized (depreciation) appreciation 1,950,530 1,856,265 Total income - net (325,242) 1,701,478 Expenses Management fee (notes 7 and 8) 117, ,367 Shareholder recordkeeping and fund accounting fees (note 9) 54,497 46,838 Transaction costs (note 6) 30,387 34,934 Audit 25,692 24,353 Independent review committee fees 9,097 6,055 Filing fees 8,526 8,562 Custodial fees 6,919 6,654 FundSERV 6,627 8,748 Legal 6,015 22,588 Bank charges 2,761 1,680 Tax review 2,496 2,203 Securityholder reports 1,384 4,608 Translation fees Total expenses 273, ,036 (Decrease) increase in net assets attributable to holders of redeemable shares from operations (598,301) 1,369,442 (Decrease) increase in net assets attributable to holders of redeemable shares from operations Series A shares (567,189) 1,279,578 (Decrease) increase in net assets attributable to holders of redeemable shares from operation Series F shares (31,112) 89,864 (Decrease) increase in net assets attributable to holders of redeemable shares from operations per Series A shares (note 2) (0.07) 0.19 (Decrease) increase in net assets attributable to holders of redeemable shares from operations per Series F shares (note 2) (0.23) 0.65 The accompanying notes are an integral part of these financial statements.

4 Statements of Changes in Net Assets Attributable to Holders of Redeemable Shares For the six-month period ended and 2014 Net assets attributable to holders of redeemable shares - Beginning of period Series A shares 10,966,407 11,239,942 Series F shares 377, , ,343,585 11,770,895 Decrease in net assets attributable to holders of redeemable shares from operations Series A shares (567,189) 1,279,578 Series F shares (31,112) 89,864 (598,301) 1,369,442 Shareholder transactions (note 3) Net assets received from issuance of Series A shares to limited partnerships (note 1) - 8,980,415 Proceeds from issuance of Series A shares 12, ,700 Proceeds from issuance of Series F shares 50, ,593 Payment for Series A shares (4,035,198) (6,352,245) Payment for Series F shares (3,884) (53,557) (3,975,993) 3,053,906 Net (decrease) increase in net assets attributable to holders of redeemable shares (4,574,294) 4,423,348 Net assets attributable to holders of redeemable shares End of period 6,769,291 16,194,243 Net assets attributable to holders of redeemable shares End of period Series A shares 6,376,322 15,287,390 Net assets attributable to holders of redeemable shares End of period Series F shares 392, ,853 The accompanying notes are an integral part of these financial statements.

5 Statements of Cash Flows For the six-month period ended and Cash flows from operating activities (Decrease) increase in net assets attributable to holders of redeemable shares from operations (598,301) 1,369,442 Adjustments to determine net cash used in operating activities Change in unrealized appreciation of investments (1,950,530) (1,856,265) Net realized loss on sale of investments 2,344, ,814 Accounts payable and accrued liabilities (14,527) (12,838) Management fees payable (8,221) 9,846 Due from related parties (4) 208 Interest income - (126) Due to related parties (21) (4,284) Prepaid expenses (1,272) (31,151) Redemptions payable 16,499 8,528 Dividend income (68,510) (132,978) Purchase of investment securities (560,400) (2,818,455) Proceeds from sale of investment securities 4,821,826 4,138,656 Interest received Dividends received 109, ,676 Net cash from operating activities 4,090,645 1,140,199 Cash flows from financing activities Payment for Series A shares (4,035,198) (6,352,245) Payment for Series F shares (3,884) (53,557) Proceeds from issuance of Series A shares 12, ,700 Proceeds from issuance of Series F shares 50, ,593 Cash received on roll-over from limited partnerships (note 1) - 8,118,836 Net cash (used-in) from financing activities (3,975,993) 2,192,327 Increase in cash 114,652 3,332,526 Cash - Beginning of period 393,084 1,511,105 Cash - End of period 507,736 4,843,631 Non-cash transactions Exchange of net assets per Series A shares (note 1) The accompanying notes are an integral part of these financial statements.

6 Schedule of Investment Portfolio As at Number of shares Average cost Fair Value Net assets % Canadian equities Energy Spartan Energy Corp. 250, , , Kelt Exploration Ltd. 76, , , Crew Energy Inc. 100, , , Whitecap Resources Inc. 31, , , Gear Energy Ltd. 200, , , Storm Resources Ltd. 75, , , Strad Energy Services Ltd. 125, , , Leucrotta Exploration Inc. 300, , , Tamarack Valley Energy Ltd. 97, , , Bernum Petroleum Ltd. (1) 250, , , Crescent Point Energy Corp. 11, , , Blackbird Energy Inc. 1,224, , , Yangarra Resources Ltd. 157, , , TimberRock Energy Corp. (1) 1,227,000 1,019, , Nordegg Resources Inc. (1) 466, , , CWC Energy Services Corp. 600, , , Chinook Energy Inc. 150, , , Delphi Energy Corp. 100, , , Boulder Energy Ltd. 11, ,890 95, Stonepoint Energy Inc. 1,000, ,000 60, Value Creation Inc. (1) 265,969 2,011,272 53, Granite Oil Corp. 7,632 49,848 48, Miramar Hydrocarbons Ltd. (1) 2,500, ,000 12, Virginia Hills Oil Corp , ,594,286 6,311, The accompanying notes are an integral part of these financial statements.

7 Schedule of Investment Portfolio continued As at Number of shares Average cost Fair Value Net assets % Warrants Miramar Hydrocarbons Ltd. (1) (January 21, 2016, strike price 0.50) 2,500, Northern Frontier Corp. (February 28, 2016, strike price 3.40) 235,800 7,074 1, Valeura Energy Inc. (February 28, 2016, strike price 5.50) 4,615, , Virginia Hills Oil Corp. (April 27, 2018, strike price 0.50) 41,040-5, ,063 6, Total portfolio of investments 12,751,349 6,318, Cash 507, Other assets net of liabilities (56,758) (0.83) Net assets attributable to holders of redeemable shares 6,769, (1) Private corporation As of, there are several investments in companies that were not reported on the Schedule of Investment Portfolio. The fair value of these investments was written off to zero in prior years. The Manager does not expect the fair value of these investments to be greater than zero at any time in the future. The accompanying notes are an integral part of these financial statements.

8 1 General Qwest Funds Corp. (the Corporation ) is a mutual fund corporation incorporated under the laws of Canada on March 8, The address of the Corporation s registered office is Suite 310, 650 West Georgia Street, Vancouver, British Columbia. The authorized capital of the Corporation consists of an unlimited number of Class A shares, Class B shares and special shares. Currently, there are three classes of special shares that are in issue the AlphaDelta Canadian Prosperity Class (the ADCP Class), AlphaDelta Growth of Dividend Income Class (the ADGDI Class) and Qwest Energy Canadian Resource Class (the Fund ); however, the Corporation may offer additional classes of special shares in the future. The Fund currently only offers Series A, Series F and Series I shares. The Corporation s ultimate controlling party is Qwest Investment Management Corp. ( QIM ) which owns 51% of Class A voting shares and 100% of Class B voting shares of the Corporation. Switching shares of one series to shares of another series of a Fund, or switching shares of one Class for the other Class, is not considered a disposition for tax purposes. The Corporation appointed Qwest Investment Fund Management Ltd. (the Manager ), whose ultimate parent is QIM, as the manager of the Fund. The Manager is responsible for providing or arranging for the provision of administrative services required by the Fund and also serves as a portfolio adviser to the Fund. The Manager also provides key management personnel to the Fund. The fundamental investment objective of the Fund is to provide long-term capital appreciation by investing primarily in equity securities of Canadian companies involved in the energy and natural resource sector. Each year, the Manager offers for sale a limited number of units in one or more limited partnerships ( Partnerships ). The objective of the Partnerships is to invest in the flow-through securities of resource companies. Investors in the Partnerships are entitled to claim certain deductions and credits for income tax purposes. In the second or third year following their establishment, the Partnerships transfer net assets to the Fund at fair value determined under the Partnerships prospectus and the Partnership is dissolved ( Mutual Fund Rollover Transaction ). The Partnerships investors receive shares in the Fund in exchange for their Partnership units on a pro-rata basis on the date of transfer. The Fund did not issue any Series A shares in exchange for net assets transferred to the Fund during the period ended. The Fund issued Series A shares in exchange for net assets transferred to the Fund during the year ended December 31, 2014 as follows: Six-month period ended June 30, 2014 Net assets received Shares issued Partnership Date May 14, 2014 Qwest 2012 Oil & Gas Flow-Through Limited Partnership 7,301,234 3,861,247 June 18, 2014 Qwest 2013 Oil & Gas Exploration and Development Flow- Through Limited Partnership 1,679, ,713 8,980,415 4,732,960 The financial statements were authorized for issue by the Board of Directors of the Corporation on August 26,

9 2 Summary of significant accounting policies Basis of preparation These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) as published by the International Accounting Standards Board ( IASB ). The following is a summary of significant accounting policies used by the Fund: Financial instruments The Fund recognizes financial instruments at fair value upon initial recognition, plus transaction costs in the case of financial instruments not measured at fair value through profit or loss ("FVTPL"). The Fund s investments have been designated at FVTPL, except for derivatives which are FVTPL because they are held for trading. The Fund s obligation for net assets attributable to holders of redeemable shares is presented as a liability at the redemption amount. All other financial assets and liabilities are measured at amortized cost. Under this method, financial assets and liabilities reflect the amount expected to be received or required to be paid, discounted, when appropriate, at the contract s original effective interest rate. The calculation includes all fees and amounts paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Dividend income is recognized at the ex-dividend date. Realized gains and losses on disposal of investments and derivatives and unrealized gains and losses in the value of investments and derivatives are reflected in the statements of comprehensive (loss) income and calculated on an average cost basis, where applicable. Upon disposal of an investment or derivative, previously recognized unrealized gains and losses are reversed so as to recognize the full realized gain or loss in the period of disposition. Interest is recorded on an accrual basis. All costs directly attributable to operating activities are expensed as incurred. Regular way purchases and sales of financial assets are accounted for on a trade date basis. Financial assets and liabilities are offset and the net amount reported in the statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Allocation of income and expenses, and realized and unrealized capital gains and losses Income and expenses incurred in connection with the Funds operations and realized and unrealized gains or losses that not directly attributable to a particular series of shares are allocated between Series A and Series F shares using the weighted average net asset value of Series A and F shares. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fund s policy is to recognize transfers within, into and out of the fair value hierarchy as of the beginning of the period of the transfer. Investments in publicly traded equity securities The fair value of equity securities that are traded in an active market is measured using the last traded price at the period-end date where such price falls within the bid-ask spread. In circumstances where the last traded price is not 2

10 within the bid-ask spread, the Manager determines the point within the bid-ask spread which is most representative of fair value based on specific facts and circumstances. When current prices or quotations are not readily available, valuations are established based upon a valuation technique in order to estimate what the fair value would be in an arm s length transaction motivated by normal business considerations. These may include use of the most recent publicly traded price or a price established by the Manager in accordance with its valuation policy. The amounts at which publicly traded investments could be disposed of currently may differ from the carrying value based on the last traded price, as the value at which significant ownership positions are sold is often different than the quoted price due to a variety of factors such as premiums paid for large blocks or discounts due to illiquidity. Investments in privately held equity securities For financial instruments not traded in an active market, the Fund establishes fair value by using a valuation technique in order to estimate what the transaction price would have been on the measurement date in an orderly transaction between market participants. The initial transaction price is generally considered to be fair value on the date of the purchase transaction. The Manager emphasizes the principle of using a reasonable estimable exit price in prevailing market conditions at the period-end date. The Manager places significant emphasis on the valuation process and controls that are in place throughout the period and seeks to incorporate all the factors that market participants would reasonably consider in estimating the fair value of private investments. Where a valuation takes into account probable and proved reserves or significant market transaction events, the Manager periodically makes adjustments to take into account current market prices. Where a significant financing is taken into account, the Manager considers the transaction size relative to the overall investment and the potential motivation of the parties involved. The Manager seeks to make maximum use of market prices and other available information such as reserve reports in its estimate of fair value. In applying a discounted cash flow or use of industry benchmarks approach, the Manager makes maximum use of third party information in determining likely cash flows and market discount rates. Given the inherent complexity in establishing fair value, the Manager applies two valuation techniques, where possible, to the valuation of these investments in order to determine an appropriate overall estimated fair value. Management assesses estimated fair value at each reporting date. In applying any valuation technique, the greatest emphasis is placed on the most observable and objective information available with lesser emphasis placed on subjective or management-determined inputs. The resulting values for non-publicly traded investments may differ from values that would be determined had an active market existed. In addition, the amounts at which the Fund s privately held investments could be disposed of currently may differ from the carrying values assigned, and the differences could be material. Warrants Warrants are recorded at their estimated fair value using the Black-Scholes valuation model. For private company warrants, management makes maximum use of publicly available inputs; this includes comparable companies with appropriate adjustments to reflect the individual company circumstances, volatility and other inputs to the model. Cash Cash consists of cash and deposits with original maturities of three months or less and is held with a Canadian chartered bank. Income taxes The Corporation qualifies as a mutual fund corporation as defined in the Income Tax Act (Canada). A mutual fund corporation is subject to a special 33-1/3% tax on taxable dividends received from corporations resident in Canada and to tax at a normal corporate rate on other income and net taxable realized capital gains for the year. The special 33-1/3% tax is refundable at the rate of 1 for every 3 of ordinary dividends paid. All the tax on net taxable realized 3

11 capital gains is refundable on a formula basis when shares are redeemed or capital gains dividends are paid. As a result of these refund mechanisms, the Fund is in effect not taxable with respect to dividends received from corporations resident in Canada and net taxable realized capital gains. The Fund is not taxable as all the Fund s net income for tax purposes and sufficient net capital gains realized in the period, will be distributed to Unitholders such that no income tax is payable by the Fund with respect to taxable realized capital gains and dividends received from corporations resident in Canada. Therefore the Fund does not recognize current or deferred income taxes with respect to these types of income. Foreign currency translation The functional and presentation currency of the Fund is the Canadian dollar. The fair value of foreign investments and other assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing at 12:00 pm Eastern Standard Time (the noon rate ) on each valuation day. Purchases and sales of foreign securities denominated in foreign currencies and the related income are translated into Canadian dollars at rates of exchange prevailing on the respective dates of such transactions. Increase (decrease) in net assets attributable to holders of redeemable shares from operations per share Increase (decrease) in net assets attributable to holders of redeemable shares from operations per share is determined by dividing the increase (decrease) in net assets attributable to holders of redeemable shares from operations by the weighted average number of shares outstanding during the reporting period (see note 13). Critical accounting estimates and judgments The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses during the reporting period. Actual results could differ from those reported and the differences could be material. Significant areas involving the use of estimates include determining the estimated fair value of private investments, illiquid securities and the fair value of warrants. In calculating estimated fair value, the Manager makes maximum use of publicly available market-based inputs. The following discusses the most significant accounting estimates and judgments that the Fund has made in preparing its financial statements. Fair value measurement of securities not quoted in an active market The valuation techniques used for private equity securities are primarily a combination of calculated net asset value and other valuation methods such as enterprise value and recent transactions. Both valuation techniques use observable data, to the extent practicable. The implementation of the net asset value technique requires the Manager to make estimates of land prices and estimate changes to oil and gas reserve values resulting from current pricing information. In addition, the Manager is required to make judgment on the ability of an investee company to continue as a going concern and any discounts to the valuation that may be appropriate (see note 10). Classification and measurement of investments and application of the fair value option In classifying and measuring financial instruments held by the Fund, the Manager is required to make significant judgments about whether or not the business of the Fund is to invest on a total return basis for the purpose of applying the fair value option for financial assets under IAS 39, Financial Instruments Recognition and Measurement (IAS 39). The most significant judgments made include the determination that certain investments are held for trading and that the fair value option can be applied to those which are not. 4

12 Financial statements reporting entity If the Corporation cannot pay the expenses attributable to one class using the proportionate share of the Corporation s assets attributable to that class, the Corporation could be required to pay those expenses out of the Fund s proportionate share of the Corporation s assets. The most significant judgment made in preparing the financial statements is the determination by management that the risk of such cross class liability is remote and therefore each class may be considered a separate reporting entity. Future accounting changes IFRS 9 - Financial Instruments The final version of IFRS 9, Financial Instruments, was issued by the IASB in July 2014 and will replace International Accounting Standards ("IAS") 39, Financial Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018; however, it is available for early adoption. In addition, the own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The Fund is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 3 Shareholder transactions The Fund is divided into Series A, F and O, and the number of shares of each series that may be issued is unlimited. Currently, only Series A and F shares of the Fund are offered in all provinces and territories in Canada. Series A shares are available to all investors and may be purchased, switched or redeemed through authorized dealers. Series F shares are available to investors who have fee-based accounts with their dealer for investment advice and other services. Series F shares may only be purchased, switched or redeemed through authorized dealers, and not directly through the Manager. Shares may be redeemed at their net asset value ( NAV ) per share on any valuation day. If the shares are redeemed or switched within 90 days of purchase, the shareholder may be charged a short-term trading fee of 2% of the value of the shares redeemed. 5

13 The numbers of Series A and F shares issued and redeemed at net asset value for the period ended and June 30, 2014 are summarized as follows: Series A Shares issued and outstanding - Beginning of period 10,421,880 6,614,867 Shares issued during the period for rollover from limited partnerships - 4,732,960 Shares issued during the period 12,205 74,494 Shares redeemed during the period (3,892,530) (3,451,706) Shares issued and outstanding - End of period 6,541,555 7,970,615 Series F Shares issued and outstanding - Beginning of period 128, ,218 Shares issued during the period 16,604 67,619 Shares redeemed during the period (1,405) (10,561) Shares issued and outstanding - End of period 143, ,276 Classification of shares IAS 32 requires that units or shares of an entity would include a contractual obligation for the issuer to repurchase them for cash or another financial asset be classified as a liability. The Class A shares of the Corporation are not redeemable and holders are entitled to receive the remaining property of the Corporation upon liquidation, dissolution, winding-up or other distribution of assets. As a result, the Class A shares of the Corporation are subordinate to all other classes of shares, including the Fund, and thus the condition in paragraph IAS 32.16A(b) is not met. The redeemable shares of the Fund are therefore classified as financial liabilities. The Class A shares of the Corporation are not presented in the financial statements of the Fund. 4 Distributions The Corporation may pay annually to shareholders ordinary dividends and capital gains dividends. Ordinary dividends will generally be paid in December and capital gains dividends will generally be paid in February. Dividends may be paid at other times determined by the Manager. In line with the terms of the prospectus, distributions are automatically reinvested in the Fund unless otherwise determined by the Manager. 5 Income taxes As of the last taxation year-end, the Corporation has unrecognized non-capital losses of approximately 2,199,000 available for utilization against taxable income in future years. 1,086,000 of the losses expires in 2032 and 723,000 of the losses expires in The Corporation has unrecognized capital losses available at of approximately 5,910, Expenses The Fund is responsible for all charges and expenses incurred in connection with its operations, including regulatory, printing, legal and audit expenses. Brokerage commissions paid by the Fund with respect to security transactions for the period ended are 30,387 (June 30, ,934). For the periods ended and 2014, there were no soft dollar amounts paid. 6

14 7 Management fee The management fee is calculated at 2.5% per annum of the daily net asset value of Series A shares and 1.5% per annum of the net asset value of Series F shares plus applicable sales taxes, and is paid monthly. The fees are payable to the Manager (see notes 1 and 8). 8 Related party balances and transactions The Manager has retained Heritage Bancorp Ltd. ( Heritage ), a company related to the Manager by common ownership and directors, to perform certain administrative functions on behalf of the Manager. Balances and transactions are as follows: For the six-month period ended June 30, Heritage Reimbursement for the Fund s expenses paid by Heritage - 2,302 Qwest Investment Management Corp. ( QIM ) Reimbursement for the Fund s expenses paid by QIM Qwest Investment Fund Management Ltd. ( QIFM ) Management fee 117, ,367 Reimbursement for the Fund s expenses paid by QIFM 1,000 - Qwest Energy Growth & Income Class ( G&I ) Reimbursement for G&I expenses paid by the Fund - 1,070 AlphaDelta Canadian Prosperity Class ( ADCP ) Reimbursement from CPC expenses paid by the Fund 1,390 - AlphaDelta Growth of Dividend Income Class ( ADGDI ) Reimbursement from GoDIC expenses paid by the Fund Qwest 2013 Oil & Gas Flow-Through Limited Partnership ( Q2013 LP ) Reimbursement for Q2013 LP expenses paid by the Fund Qwest 2014 Oil & Gas Exploration and Development Flow-Through Limited Partnership ( Q2014 LP ) Reimbursement for Q2014 LP expenses paid by the Fund 2,518 - Qwest 2015 Oil & Gas Flow-Through Limited Partnership ( Q2015 LP ) Reimbursement for Q2015 LP expenses paid by the Fund 52-7

15 As of June 30, 2015 December 31, 2014 QIFM Management fee payable 17,202 29,489 QIM Accounts payable - 21 Accounts receivable Q2014 LP Accounts receivable Q2015 LP Accounts receivable 26 - All amounts payable are due on demand and non-interest bearing. The terms of transactions with the Manager are disclosed in note 7. The general partner of the Q2013 LP and Q2014 LP are related to the Manager by common ownership and directors. G&I was one of the classes of special shares of the Corporation which was terminated in ADCP and ADGDI are the other two classes of special shares of the Corporation. 9 Shareholder recordkeeping and fund accounting fees The Fund has engaged the services of SGGG Fund Services Inc. ( SGGG ) to provide shareholder recordkeeping and fund accounting services. Shareholder recordkeeping and fund accounting fees incurred by the Fund for the period ended are 54,497 (June 30, ,838). 10 Fair value measurement The following table illustrates the classification of the Fund s financial instruments within the fair value hierarchy as at and December 31, The three levels of the fair value hierarchy are: Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and Level 3 - Inputs that are not based on observable market data. Level 1 Financial assets at fair value at Level 2 Level 3 Total Equities 5,546, ,062 6,311,478 Warrants - 1,179 5,656 6,835 5,546,416 1, ,718 6,318,313 8

16 Level 1 Financial assets at fair value at December 31, 2014 Level 2 Level 3 Total Equities 9,896,607-1,075,695 10,972,302 Warrants - 1, ,373 9,896,607 1,179 1,075,889 10,973,675 All fair value measurements above are recurring. The carrying values of other financial instruments approximate their fair values due to their short-term nature. The Manager is responsible for performing the fair value measurements included in the financial statements of the Fund, including Level 3 measurements. The Manager has engaged SGGG to value the net assets of the Fund on a daily basis. SGGG obtains pricing from a third party pricing vendor. At each financial reporting date, the Manager calculates and approves all Level 3 fair value measurements. The Fund s overall market positions are monitored on a daily basis by the Manager and are reviewed on a quarterly basis by the board of directors. The Manager ensures the accuracy of the calculation of net asset value prepared by SGGG by reviewing the net asset value calculation on a weekly basis. The Fund s equity positions are classified as Level 1 when the security is actively traded and reliable price is observable. Certain of the Fund s equities do not trade frequently and therefore observable prices may not be available. In such cases, fair value is determined using observable market data (e.g., transactions for similar securities of the same issuer) and the fair value is classified as Level 2, unless the determination of fair value requires significant unobservable data, in which case the measurement is classified as Level 3. In determining the valuation of private company investments classified as level 3 in the fair value hierarchy, the Manager employs two valuation techniques including a combination of calculated net asset value and other valuation methods such as enterprise value and recent transactions. The primary technique used will be determined by the nature of investment and the information available. For each valuation the Manager will prepare both a primary and secondary valuation model. When using the calculated net asset value model, the manger will calculate an adjusted net asset value for each investment considering the value of oil and gas reserves as per the latest available reserve report and, the value of undeveloped land and working capital levels based on the latest available financial information. The latest available reserve report may often be greater than three months old and in such cases an appropriate pricing adjustment is applied to reflect the age of the report. The enterprise value model utilizes comparable enterprise value multiples in arriving at the valuation. The Manager determines appropriate comparable public companies based on size, geography and reserve mix. The components of the calculated net asset value model or enterprise value model may then be adjusted for qualitative factors such as liquidity discounts. Due to the nature of the unique business risks associated with each of the private companies any qualitative discount/premium applied may vary across the portfolio. The tables below present investments whose fair values are recognized using valuation techniques based on inputs that are not supported by prices or other inputs from observable current market transactions in the same instrument. The effect of changing one or more of those inputs behind the valuation techniques adopted are based on reasonable possible alternative assumptions. 9

17 Fair value Valuation technique Unobservable inputs Inputs Reasonable possible shift +/- value % Change in valuation +/- Securities Bernum Petroleum Ltd. 335,000 Enterprise value Enterprise value ,750 (16,750) Miramar Hydrocarbons 12,500 Calculated net asset value Discount for going concern 80% 5 3,750 (3,750) Ltd. Nordegg Resources Inc. 168,048 Enterprise value Enterprise value ,402 (8,402) Timberock Energy 196,320 Enterprise value Enterprise value ,816 (9,816) Corp. Value Creation Inc. 53,194 Calculated net asset value Discount for realization of 75% 5 2,409 (2,409) reserves Discount for reliability of contingency reserves 99% 0.5 1,261 (1,261) As at December 31, 2014 Fair value Valuation technique Unobservable inputs Input % Reasonable possible shift +/- value % Change in valuation +/- Securities Bernum Petroleum 460,000 Calculated net asset value Market climate discount ,500 (22,500) Ltd. Dolomite Energy Inc. 72,000 Calculated net asset value Discount for realization of ,500 (13,500) reserves Market climate discount ,500 (4,500) Miramar Hydrocarbons 25,000 Calculated net asset value Discount for going concern 80 4 Negligible Ltd. Nordegg Resources 233,400 Enterprise value Market climate discount ,336 (9,336) Inc. Timberock Energy 245,400 Enterprise Value Market climate discount ,270 (12,270) Corp. Value Creation Inc. 39,895 Calculated net asset value Discount for age and reliability ,255 (29,255) of reserve report Market climate discount ,659 (2,659) The change in valuation disclosed in the above table shows the relative increase or decrease in the input variables deemed to be subjected to the most judgment and estimate and the respective impact on the fair value presented in these financial statements. No interrelationships between unobservable inputs used in the Fund s valuation of its level 3 equity investments have been identified. The Level 3 warrants of 5,656 as at were valued using the Black-Scholes model (December 31, ). The following table reconciles the Fund s Level 3 fair value measurements from December 31, 2014 to. 10

18 Equities Warrants Total Balance as at December 31, ,075, ,075,889 Sales* (218,750) - (218,750) Unrealized net (loss) gain (91,883) 5,462 (86,421) Balance as at 765,062 5, ,718 The following table reconciles the Fund s Level 3 fair value measurements from December 31, 2013 to December 31, Equities Warrants Total Balance as at December 31, ,529, ,530,252 Purchase - 702, ,438 Warrants exercised - (702,438) (702,438) Unrealized net loss (453,589) (774) (454,363) Balance as at December 31, ,075, ,075,889 *During the period ended, Dolomite Energy Inc. amalgamated into Virginia Hills Inc. common shares and warrants. Virginia Hills Inc. common shares are listed on the TSX Venture Exchange under the symbol VHO.V. The cost of Dolomite Energy Inc. was transferred to Virginia Hills Inc. common shares. During the year ended December 31, 2014, warrants with a carrying value of 702,438 were exercised, resulting in Level 1 common shares. Transfers between levels of the fair value hierarchy are deemed to have occurred at the date of the event or change in circumstances that caused the transfer. Change in unrealized loss for Level 3 securities during the period ended of 91,883 for equities (December 31, ,589) and 5,462 for warrants (December 31, ) are included in the change in net unrealized appreciation (depreciation) of investments as stated in the statements of comprehensive (loss) income. The following table reconciles the Fund s equities which are classified as held for trading and FVTPL: June 30, 2015 December Held for trading 6,835 1,372 Fair value through profit or loss 6,311,478 10,972,303 Investments - at fair value 6,318,313 10,973,675 11

19 The following table presents the net (loss) gain on the fair value of investments by category for the periods ended June 30, 2015 and Net (losses) gains June 30, 2015 June 30, 2014 Category Financial assets at FVTPL Held for trading 4,169 1,487 Fair value through profit or loss (329,594) 1,644,942 Net (loss) gain on fair value of investments (325,425) 1,646, Financial instruments risk management The Fund s activities expose it to a variety of financial instrument risks: market risk (including price risk, interest rate risk and currency risk), credit risk, concentration risk and liquidity risk. The Fund s overall risk management strategy focuses on the unpredictability of performance of early stage public and private resource investments and seeks to minimize potential adverse effects on the Fund s financial performance. The Fund uses diversification to moderate risk exposures associated with a concentration of investments. The Fund s investment objective is to provide shareholders of the Fund with an investment in a diversified portfolio of shares of resource issuers with a view to achieving capital appreciation and profits. The principal businesses of the resource issuers are mineral, oil or gas exploration, development or production, and projects in renewable energy and the development of energy efficiency technologies. The Fund may take small positions in other securities, such as convertible securities, high-yield debt securities and derivative instruments, and invest in foreign resource companies listed on major stock exchanges. The Fund will use derivatives for hedging purposes only. The Fund may hold a portion of its assets in cash or short-term money market securities while seeking investment opportunities or for defensive purposes to reflect adverse market, economic, political or other conditions. The Fund acquires a substantial portion of assets from certain limited partnerships organized by companies that are related to the Manager or former limited partners of such limited partnerships. These assets are transferred to the Fund on a tax-deferred basis in exchange for shares of the Fund. Proceeds from the sale of flow-through shares may be invested in other flow-through shares, in equity securities of senior listed issuers, in bonds and debentures issued by senior listed issuers and government issuers or in index-based securities, or may be used to exercise warrants. Market risk a) Price risk The Fund s investments are exposed to market price risk due to changing market conditions for equities as well as specific industry changes in the energy sector such as changes in commodity prices and the level of market demand as well as any changes to the tax environment in which the investee entities operate. The privately held investments may be early stage investments with unproven mineral, oil or gas reserves. All investments in equity securities have inherent risk of a loss of capital. The maximum risk resulting from financial instrument investments is determined by the fair value of the financial instruments. The Manager seeks to manage market risks by careful selection of securities prior to making an investment in an early stage company and by regular ongoing monitoring of the investment performance of the individual investee companies. The Manager also sets 12

20 thresholds on individual investments to mitigate the risk of exposure to any one investment. The Fund s overall market positions are monitored on a daily basis by the Manager and are reviewed on a quarterly basis by the board of directors. At, the Fund s market risk is impacted directly by changes in equity prices and indirectly by changes in oil and gas and other commodity prices. The immediate impact on equities of a 5% increase or decrease in the fair value of investments assuming all other variables remain constant would be approximately 316,000 (December 31, ,000). b) Interest rate risk The Fund s interest bearing financial assets and liabilities expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rate on its financial position and cash flows. The substantial majority of the Fund s financial assets and liabilities are non-interest bearing. As a result, the Fund is not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. Any excess cash and cash equivalents are invested at short-term market interest rates. c) Currency risk The monetary financial assets and liabilities of the Fund are all denominated in Canadian dollars. Consequently, the Fund has no significant direct exposure to currency risk. Credit risk The Fund is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Credit risk associated with cash is minimized by ensuring that these balances are held by high-quality financial institutions. When the Fund trades in listed or unlisted securities that are settled upon delivery using approved brokers, the risk of default is considered minimal since delivery of securities is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The Fund only transacts with reputable brokers with a high credit rating. The Manager monitors the Fund s credit position regularly, and the board of directors reviews it on a periodic basis. The Fund has not identified any past due assets or receivables as at or December 31, Concentration risk Concentration risk arises as a result of the concentration of exposures within the same category, whether it is geographical location, product type, industry sector or counterparty type. The Fund s concentration risk is in the Energy sector, the percentage of net assets in the Energy sector as at, 93.33% (December 31, 2014 is 96.74%). Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with its financial liabilities. The Fund is exposed to daily cash redemptions of redeemable shares and liabilities when they become due. Liquidity risk is managed by holding cash balances and investing the majority of the Fund s assets in investments that are traded in an active market and can be readily disposed of when liabilities come due. All liabilities are due within 30 days of the statement of financial position date, except for net assets attributable to holders of redeemable shares which are due on demand. 13

21 12 Corporation capital management Shares of the Fund issued and outstanding represent the capital of the Fund. The Manager manages the capital of the Fund in accordance with the investment objectives of the Fund. There are no externally imposed restrictions on the Fund s capital other than certain minimum subscription requirements. 13 (Decrease) Increase in net assets attributable to redeemable shares per share (Decrease) Increase in net assets attributable to redeemable shares per share for the periods ended and June 30, 2014 are calculated as follows: Series A (Decrease) increase in net assets attributable to holders of redeemable shares (567,189) 1,279,578 Weighted average units outstanding during the period 8,123,977 6,613,837 (Decrease) increase in net assets attributable to holders of redeemable shares per share (0.07) 0.19 Series F (Decrease) increase in net assets attributable to holders of redeemable shares (31,112) 89,864 Weighted average units outstanding during the period 134, ,922 (Decrease) increase in net assets attributable to holders of redeemable shares per share (0.23)