Hemisphere Energy : Q2 - 2022

22 MANAGEMENT'S REPORT

MANAGEMENT'S REPORT

To the Shareholders of Hemisphere Energy Corporation:

Management is responsible for the preparation of the financial statements and the consistent presentation of all other financial information that is publicly disclosed. The financial statements have been prepared in accordance with the accounting policies detailed in the notes to the financial statements and in accordance with IFRS and include estimates and assumptions based on management's best judgment. Management maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and that relevant and reliable financial information is produced in a timely manner.

The accompanying unaudited condensed interim financial statements have not been reviewed by the Company's auditors.

The Audit Committee, consisting of independent members of the Board of Directors, has reviewed financial statements with management. The Board of Directors has approved the financial statements on the recommendation of the Audit Committee.

Vancouver, British Columbia

August 17, 2022

(signed) "Don Simmons"		(signed) "Dorlyn Evancic"
Don Simmons, President & CEO		Dorlyn Evancic, Chief Financial Officer

Q2 2022 CONDENSED INTERIM FINANCIAL STATEMENTS
23

CONDENSED STATEMENTS OF FIANCIAL POSITION

(Expressed in Canadian dollars)
(Unaudited)	Note	June 30, 2022	December 31, 2021
	($000s)
	Assets
	Current assets	$	88
	Cash and cash equivalents	$	-
	Accounts receivable	3(a)	7,904		4,221
	Prepaid expenses		914		592
	Fair value of financial instruments	3(c)	-		433
	Non-current assets		8,906		5,246
		116
	Reclamation deposits	8		116
	Exploration and evaluation assets	6	1,088		568
	Property and equipment	7	64,604		61,189
	Total assets	$	74,714	$	67,119
	Liabilities
	Current liabilities	$	8,067
	Accounts payable and accrued liabilities	$	7,223
	Current tax provision		972		-
	Current portion of lease liabilities	12	109		403
	Warrant liability	11	-		5,145
	Fair value of financial instruments	3(c)	3,110		1,782
	Non-current liabilities		12,258		14,553
		3,529
	Bank debt	10		15,505
	Lease liabilities	12	4,129		2,182
	Deferred tax liability		3,807		-
	Decommissioning obligations	8	7,005		9,070
			30,728		41,310
	Shareholders' Equity		68,248
	Share capital	13		56,500
	Contributed surplus		2,870		2,634
	Deficit		(27,132)		(33,325)
	Total shareholders' equity		43,986		25,809
	Total liabilities and shareholders' equity	$	74,714	$	67,119
Commitments	Note 14
Subsequent events	Note 16

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

	Approved by the Board of Directors
	(signed) "Bruce McIntyre"		(signed) "Don Simmons"
	Bruce McIntyre, Director		Don Simmons, Director
	Hemisphere Energy Corporation

24 Q2 2022 CONDENSED INTERIM FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Expressed in Canadian dollars) (Unaudited)

			Three Months Ended June 30		Six Months Ended June 30
($000s, except per share amounts)	Note		2022		2021		2022		2021
Revenue		$	30,608			$	53,463
Oil and natural gas revenue	5	$	10,087	$	17,976
Royalties			(8,957)		(1,745)		(13,676)		(2,672)
			21,651		8,342		39,787		15,304
Realized loss on financial instruments			(2,548)		(795)		(6,010)		(896)
Unrealized gain (loss) on financial instruments	3(c)		425		(3,246)		(1,762)		(3,266)
Net revenue			19,528		4,301		32,015		11,142
Expenses			2,956				5,631
Production and operating				1,967			3,531
Exploration and evaluation	6		20		13		43		30
Depletion and depreciation	7		1,995		1,077		3,785		2,024
General and administrative			867		789		1,525		1,466
Share-based payments	13(b)		-		-		64		-
			5,838		3,846		11,048		7,050
Results from operating activities			13,690		455		20,967		4,092
Finance expense	9		(4,755)		(4,347)		(7,402)		(6,519)
Foreign exchange gain (loss)			(25)		298		(37)		601
Net income (loss) before tax			8,910		(3,594)		13,528		(1,826)
Current income tax provision			(972)		-		(972)		-
Deferred income tax expense			(3,807)		-		(3,807)		-
Net income (loss) and comprehensive income		$	4,131	$	(3,594)	$	8,749	$	(1,826)
(loss) for the period
Net income (loss) per share, basic and diluted	13(c)	$	0.04	$	(0.04)	$	0.09	$	(0.02)

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

Q2 2022 CONDENSED INTERIM FINANCIAL STATEMENTS
25

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Expressed in Canadian dollars) (Unaudited)

		Number		Share		Contributed
		common
($000s, except share amounts)	Note	shares		Capital		Surplus		Deficit		Total Equity
Balance, December 31, 2021		91,289,653	$	56,500	$	2,634	$	(33,325)	$	25,809
Stock option exercise	13(b)	3,579,000		902		-		-		902
Share-based compensation	13(b)	-		-		236		-		236
Shares repurchased under NCIB	13(a)	(712,400)		(1,082)		-		-		(1,082)
Warrant exercise - cashless	13	8,302,686		11,928		-				11,928
Dividends	13(d)	-		-		-		(2,556)		(2,556)
Net income for the period		-		-		-		8,749		8,749
Balance, June 30, 2022		102,458,939	$	68,248	$	2,870	$	(27,132)	$	43,986

Comparison with six months ended June 30, 2021:

		Number
		common		Share		Contributed
($000s, except share amounts)	Note	shares		Capital		Surplus		Deficit		Total Equity
Balance, December 31, 2020		86,782,302	$	54,342	$	1,209	$	(39,243)	$	16,308
Stock option exercise	13(b)	1,670,000		134		-		-		134
Shares repurchased under NCIB	13(a)	(537,500)		(164)		-		-		(164)
Net income for the period		-		-		-		(1,826)		(1,826)
Balance, June 30, 2021		87,914,802	$	54,312	$	1,209	$	(41,069)	$	14,452

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

Hemisphere Energy Corporation

26 Q2 2022 CONDENSED INTERIM FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF CASH FLOWS

(Expressed in Canadian dollars) (Unaudited)

		Three Months Ended June 30		Six Months Ended June 30
($000s)	Note	2022		2021		2022		2021
Operating activities	$	4,131			$	8,749
Net income (loss) for the period	$	(3,594)	$	(1,826)
Items not affecting cash:		-		55		-		110
Accretion of debt issuance costs	9
Accretion of decommissioning costs	9	39		26		77		51
Amortization of deferred charges	9	-		49		-		98
Deferred tax expense		3,807		-		3,807		-
Change in fair value of warrant liability	9	4,464		3,694		6,783		5,181
Depletion and depreciation	7	1,995		1,077		3,785		2,024
Exploration and evaluation expense	6	20		12		43		30
Share-based payments		-		-		64		-
Unrealized loss (gain) on financial		(425)		3,246		1,762		3,266
Instruments	3(c)
-				-
Unrealized gain on foreign exchange	3(c)		(335)			(661)
		14,031		4,230		25,070		8,272
Decommissioning obligation expenditures	8	(11)		(1)		(115)		(38)
Changes in non-cash working capital	15	906		512		(1,819)		(290)
Cash provided by operating activities		14,926		4,741		23,136		7,944
Investing activities		(115)				(594)
Exploration and evaluation expenditures	6		(63)			(144)
Property and equipment expenditures	7	(5,667)		(1,811)		(6,983)		(2,812)
Changes in non-cash working capital	15	3,150		53		(371)		104
Cash used in investing activities		(2,632)		(1,821)		(7,948)		(2,851)
Financing activities		612				902
Shares issued for stock options, cash exercise	13(b)		-			134
Shares repurchased under NCIB	13(a)	(984)		(117)		(1,082)		(164)
Dividends	13(d)	(2,556)		-		(2,556)		-
Change in bank debt	10	(8,985)		-		(11,976)		-
Repayment of term loan		-		(1,826)		-		(3,405)
Payment of lease liabilities, net		(293)		(20)		(388)		(40)
Cash used in financing activities		(12,206)		(1,963)		(15,100)		(3,476)
Net change in cash		88		957		88		1,617
Cash, beginning of period		-		1,095		-		435
Cash, end of period	$	88	$	2,052	$	88	$	2,052
Supplemental cash flow information	(Note 15)

The accompanying notes are an integral part of these unaudited condensed interim financial statements.