Deans Knight Income Corporation

Deans Knight Income Corporation

August 12, 2016 16:04 ET

Deans Knight Income Corporation Releases Interim Financial Statements and Management Report of Fund Performance for the Period Ended June 30, 2016

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug. 12, 2016) - Deans Knight Income Corporation (the "Company") is pleased to release its Interim Management Report of Fund Performance and Financial Statements for the period ended June 30, 2016.

These documents can be found on SEDAR at www.sedar.com or the Company's website: www.dkincomecorp.com.

Forward-Looking Statements

This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking information or statements. More particularly and without limitation, this press release contains forward-looking statements and forward-looking information concerning the Company's investment strategy, the availability and use of the tax attributes of the Company, the resolution and disposition of the CRA Matter (as defined herein) including the extent of the Potential Tax Liability (as defined herein) and the Company's expectations regarding the results of operations and performance of the Company and its investments.

The forward-looking statements and forward-looking information are based on certain key expectations and assumptions made by the Company. Although the Company believes that the expectations and assumptions on which such forward‐looking statements and information are based are reasonable, undue reliance should not be placed on the forward‐looking statements and forward-looking information because the Company can give no assurance that they will prove to be correct.

Since forward-looking statements and forward-looking information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with potential changes in legislation and administrative policy, changes in tax laws, closing risks, general economic, political and market conditions, interest rate fluctuations and other risks as set forth in the Company's annual information form dated March 29, 2016 on file with the securities regulatory authorities at www.sedar.com.

The Company assumes no obligation to update forward-looking statements or information except as may be required by applicable securities laws.

This interim management report of fund performance (the "Report") contains financial highlights of Deans Knight Income Corporation (the "Company"). This Report should be read in conjunction with the financial statements of the Company for the six month period ending June 30, 2016 (the "Financial Statements"), which, if not included with this Report, can be obtained at your request, at no cost by emailing info@dkincomecorp.com, visiting our website at www.dkincomecorp.com for contact details or on SEDAR at www.sedar.com. Readers may also contact us to request a free copy of the Company's proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure.

A NOTE ON FORWARD-LOOKING STATEMENTS

This Report contains certain forward-looking statements. In particular, this Report contains forward-looking statements in respect of the Company's investment strategy, the availability and use of the tax attributes of the Company, the resolution and disposition of the CRA Matter (as defined herein) including the extent of the Potential Tax Liability (as defined herein), and reflects the Company's expectations regarding the results of operations and performance of the Company and its investments. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue" or the negative of these terms or other comparable terminology. Such forward-looking statements reflect the Company's current beliefs and are based on information currently available to the Company. With respect to such forward-looking statements, the Company has made assumptions regarding, among other things, the liquidity and potential proceeds to be realized from the Remaining Investments (as defined herein), currency, exchange and interest rates and concerning the disposition of the CRA Matter, assumptions based on the amount of time it has taken other companies to conclude similar matters in the past. A number of factors could cause actual events or results to differ materially from the results discussed in the forward-looking statements. In evaluating these statements, prospective investors should specifically consider various factors, including global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events and the risks outlined under "Risk Factors" in the AIF (as defined herein), which may cause actual results to differ materially from any forward-looking statement. Although the forward-looking statements contained in this Report are based upon what the Company believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. Forward-looking statements are made as of the date of this Report and, other than as required by applicable law, the Company assumes no obligation to update or revise them to reflect new events or circumstances.

This Report also contains certain financial and operational information obtained from public sources in respect of certain companies included in the Company's investment portfolio. While management believes this data to be reliable, such information is subject to variations and may not be able to be verified due to limits on the availability and reliability of data inputs, the nature of the data gathering process and other limitations and uncertainties inherent in such information. Accordingly, the accuracy, currency and completeness of this information cannot be guaranteed. The Company has not independently verified any of the data from third party sources referred to in this Report or ascertained the underlying assumptions relied upon by such sources.

Investment Objectives and Strategies

The Company is a closed-end, non-redeemable investment company that, prior to April 30, 2014, was focused on investing in corporate debt securities. The Company's assets are managed by Deans Knight Capital Management Ltd. ("Deans Knight"), a respected British Columbia-based investment firm focused on managing high income and growth mandates for high net worth individuals, foundations, endowments and pension funds.

Since making a special cash distribution to shareholders of the Company ("Cash Distribution") on April 30, 2014, the Company has ceased all investing and portfolio activities, other than in connection with the Modified Business Objectives (as defined below). As such, the Company's business now consists of: (i) attending to and litigating the CRA Matter; (ii) divesting of the securities held in the Company's portfolio that were not liquidated prior to the Cash Distribution (the "Remaining Investments"); (iii) attending to any additional distributions to shareholders of any surplus cash and the eventual wind-up and termination of the Company thereafter; and (iv) attending to any ancillary matters related to any of the foregoing (collectively, the "Modified Business Objectives").

Risk

The overall risks of the Company are as described in the annual information form of the Company dated March 29, 2016 (the "AIF").

Prior to the reorganization and change in the Company's business that occurred in 2008, as discussed in Note 1 of the Financial Statements, the Company had generated significant tax losses and other tax attributes as a result of its prior business activities. In its tax filings since the reorganization, the Company has taken the position that these losses and other tax attributes could be used to offset taxable income generated by the Company, thereby reducing its taxes payable.

In July 2014, the Company received Notices of Reassessment ("NORAs") from the Canada Revenue Agency (the "CRA") for the taxation years 2009 to 2012, inclusive. In the NORAs, the CRA denied the use of the losses and other tax attributes by the Company on the basis that an acquisition of control of the Company occurred, as a result of the 2008 reorganization, and on the basis of the General Anti-Avoidance Rule in the Income Tax Act (Canada) (the "CRA Matter"). The Company, in consultation with its legal advisors, remains of the view that its tax filing position is appropriate, and is vigorously defending its position.

The NORAs indicate that the Company's tax liability for the 2009 to 2012 taxation years is approximately $22.7 million or $2.15 per share ("Disputed Amount"), including arrears interest and penalties. Given the Company's financial results for 2013 through 2016 to date, the Company estimates its overall potential net tax liability ("Potential Tax Liability") for the years 2009 through 2016 to date inclusive to be, as of the date hereof, approximately $21.5 million, or $2.04 per common voting share and per common non-voting share (collectively, the "Common Shares"). The Company prepaid $21.6 million to the CRA in 2014, which was equal to the Potential Tax Liability at that time, to limit any future interest from being incurred. The Company intends to reassess its Potential Tax Liability at regular intervals and prepay any additional amount, if necessary, to limit any future interest from being incurred.

Should the Company be successful in defending its tax filing position, the amount prepaid to the CRA will be refunded to the Company with interest. However, if the Company is unsuccessful, the recorded amount of the deferred tax assets, if any, as well as such amounts claimed to date would be recorded as a charge to income, and the Potential Tax Liability would be forfeited to the CRA.

In late 2014, the Company filed its Notice of Appeal to the Tax Court of Canada, appealing the NORAs and the Company is now attending to normal pre-trial processes, including discovery of documents and examinations for discovery with the Crown. The Company anticipates that legal proceedings through the Tax Court of Canada to resolve the CRA Matter will take considerable time.

The Company's common voting shares ("Voting Shares") were delisted from trading on the Toronto Stock Exchange on April 15, 2014 and are no longer traded in a public market. The non-voting common shares of the Company ("Non-Voting Shares") are also not traded in a public market. As a result, there is no active market through which the Common Shares may be traded and there is also no guarantee that an active trading market will develop. The lack of a market for the Common Shares may affect the price of the shares in any secondary market that may develop; however, there can be no assurance that an active trading market or secondary market will develop, or if developed, that such a market will be sustained at the price level of the net asset value per share.

Given the majority of the Company's business is now limited to attending to the CRA Matter, the resolution and disposition of this matter which is uncertain at this time, an investment in the Company may be considered to be speculative. Therefore, an investment in the Company is only suitable for investors who are looking for potential capital appreciation and are willing to tolerate potentially significant volatility in the value of their investment.

Results of Operations

The net assets of the Company consisted of the following components for the periods indicated:

June 30, 2016
Per
Common
$ Share(1) %
Remaining Investments(2) 77,729 0.01 0.3
Cash and short-term deposits 1,673,994 0.16 7.2
Prepaid tax asset(3) 21,662,136 2.06 92.6
Accrued liabilities less prepaid assets (14,739 ) (0.01 ) (0.1 )
23,399,120 2.22 100.0
(1) Based on 10,537,263 Common Shares, including 10,191,592 Voting Shares and 345,671 Non- Voting Shares, as outlined in the notes to the Financial Statements.
(2) The details of the Remaining Investments are outlined in the Summary of Investment Portfolio below.
(3) Details of the prepaid tax asset are outlined in the Risk section above. Further, refer to the Note 6 - Taxation in the Financial Statements for more detail.
December 31, 2015
Per
Common
$ Share(1) %
Remaining Investments(2) 282,020 0.03 1.2
Cash and short-term deposits 1,924,070 0.18 8.1
Prepaid tax asset(3) 21,662,136 2.06 91.4
Accrued liabilities less prepaid assets (154,979 ) (0.02 ) (0.7 )
23,713,247 2.25 100.0
(1) Based on 10,537,263 Common Shares, including 10,191,592 Voting Shares and 345,671 Non- Voting Shares, as outlined in the notes to the Financial Statements.
(2) The details of the Remaining Investments are outlined in the Summary of Investment Portfolio below.
(3) Details of the prepaid tax asset are outlined in the Risk section above. Further, refer to the Note 6 - Taxation in the Financial Statements for more detail.

The majority of the decrease in the net asset value of the Company at June 30, 2016, compared to December 31, 2015, is due to the decrease in value of the common shares of Mirabela Nickel Limited ("Mirabela"). The investment was written down to nil on February 19, 2016 as a result of Mirabela announcing that its Santa Rita mine had been placed on care and maintenance as a result of reductions in the price of nickel, difficulties in obtaining additional funding and unsustainable levels of cash outflows from its wholly-owned subsidiary. In addition, cash and short-term deposits have decreased by approximately $0.25 million as a result of general operating expenditure.

The Company's comprehensive (loss) income for the six-month period to June 30, 2016 was approximately $(0.314) million ($(0.03) per Common Share) versus $0.626 million ($0.06 per Common Share) for the six-month period to June 30, 2015. The decrease is the result of the Company having liquidated the majority of income generating investments by December 31, 2015. In the six-month period to June 30, 2016, the Company generated $0.204 million of unrealized capital losses due to the common shares of Mirabela being written down to nil.

Recent Developments

Going forward, because the majority of the Company's income generating investments have been liquidated, the Company is expected to continue to generate a comprehensive loss.

See also the section titled "Risk" in this Report for recent developments regarding the CRA Matter and a description of the Modified Business Objectives.

Related Party Transactions

The Officers and Directors of the Company are also employees of Deans Knight, the Company's investment advisor and manager. These Officers and Directors are not paid by the Company. Deans Knight provides administration, financial reporting and other ancillary services required by a public company, as well as investment management services related to the Remaining Investments, all as more particularly set forth in the Services Agreement between the Company and Deans Knight dated May 20, 2014 and available for review on SEDAR at www.sedar.com.

Deans Knight is paid a nominal fee of $10 per month plus G.S.T. for the services it provides to the Company under the Services Agreement.

For the six month period ending June 30, 2016, management fees totaled $63 (2015 - $63). At June 30, 2016, $nil (December 31, 2015 - $189) was owed to Deans Knight, which was unsecured and included in accounts payable and accrued liabilities in the statement of financial position, and is payable immediately.

Financial Highlights

The following tables show selected key financial information about the Company and are intended to help you understand the Company's financial performance for the past 5 years.

The Company's Net Assets per Common Share(1)
Six months Year ended December 31,
ended June 30,
2016 2015 2014 2013 2012 2011
$ $ $ $ $ $
Net assets, beginning of period 2.25 2.50 12.37 13.58 13.43 13.60
Increase from operations
Total revenue 0.00 0.01 0.14 0.96 1.10 1.10
Total expenses (0.01 ) (0.04 ) (0.09 ) (0.29 ) (0.26 ) (0.26 )
Realized gains (losses) - 0.22 (0.37 ) (0.50 ) 0.44 0.36
Unrealized gains (losses) (0.02 ) (0.24 ) 0.32 (0.47 ) (0.19 ) (0.52 )
Future income taxes - - (0.02 ) (0.21 ) (0.24 ) (0.15 )
Total (decrease) increase from operations(2) (0.03 ) (0.05 ) (0.02 ) (0.51 ) 0.85 0.53
Return of capital(2)(3) - - (9.75 ) - - -
Dividends(2)(3) - (0.20 ) (0.10 ) (0.70 ) (0.70 ) (0.70 )
Net assets, end of period 2.22 2.25 2.50 12.37 13.58 13.43
(1) The information is derived from the Company's audited annual and unaudited interim financial statements. Common Shares outstanding are 10,537,263, including 10,191,592 Voting Shares and 345,671 Non-Voting Shares.
(2) Net assets, return of capital and dividends are based on the actual number of Common Shares outstanding at the relevant time. The increase / (decrease) from operations is based on the weighted average number of Common Shares outstanding over the period.
(3) Return of capital and dividends were paid in cash.
Ratios and Supplemental Data(1)
Six months Year ended December 31,
ended June 30,
2016 2015 2014 2013 2012 2011
Net asset value (000's) $23,399 $23,713 $26,375 $130,367 $143,065 $142,178
Number of common shares outstanding 10,537 10,537 10,537 10,537 10,537 10,537
(000's)
Management expense ratio(2) 0.47 % 1.53 % 1.09 % 2.21 % 1.96 % 1.90 %
Portfolio turnover rate(3) 0.00 % 0.00 % 0.20 % 25.23 % 14.79 % 79.90 %
Trading expense ratio(4) 0.00 % 0.00 % 0.03 % 0.03 % 0.01 % 0.00 %
Net asset value per common share $2.22 $2.25 $2.50 $12.37 $13.58 $13.49
Closing market price - common share(5) n/a(5) n/a(5) n/a(5) $10.01 $12.69 $11.84
(1) This information is provided as at December 31 of the years shown, except for the information pertaining to the six months ended June 30, 2016.
(2) Management expense ratio is based on total expenses for the period and is expressed as a percentage of weekly average net asset values over the period. See "Related Party Transactions" and "Management Fees" in this Report for a description of and structure of the nominal monthly fee to be paid to Deans Knight under the Services Agreement which was amended on May 20, 2014. As a result of the amendment to the Services Agreement, Deans Knight is paid a fee of $10.00 per month and is entitled to be reimbursed for any expenses incurred by it on behalf of the Company.
(3) The Company's portfolio turnover rate indicates how actively the Company manages its portfolio investments. It is calculated as a ratio of investments purchased or sold over the average value of the portfolio securities. A portfolio turnover rate of 100% is equivalent to the Company buying and selling all of the securities in its portfolio once in the course of the year. The higher a portfolio turnover-rate in a year, the greater the trading costs payable by the Company in the year. There is not necessarily a relationship between a high turnover rate and the performance of the investment portfolio.
(4) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the year. This trading expense is insignificant, as the purchasing and selling of bonds do not generally attract a commission from the buying or selling party.
(5) On April 15, 2014, the Voting Shares were delisted from trading on the Toronto Stock Exchange. As a result, the Company's Voting Shares are no longer traded on a public market. Additionally, the Non-Voting Shares are not traded on a public market. As a result, a closing market price is not available for either the Voting Shares or Non-Voting Shares.

Management Fees

Deans Knight provides administration, financial reporting and other ancillary services required by a publicly listed company, as well as investment management services related to the Remaining Investments, all as more particularly set forth in the Services Agreement between the Company and Deans Knight dated May 20, 2014 and available for review on SEDAR at www.sedar.com. Deans Knight is paid a nominal fee of $10 per month for the services it provides to the Company under the Services Agreement.

Past Performance

This section shows the Company's past performance, since it began operating its business as an investment fund. The past performance information includes changes in net asset value and assumes the reinvestment of all dividends paid to holders of Common Shares. The performance information presented is after the deduction of performance fees and expenses paid or payable by the Company to Deans Knight, its investment fund advisor and manager. It is also important to note that the past performance will not necessarily indicate what performance in the future will be.

Following the completion of the Cash Distribution on April 30, 2014, the Company's investment portfolio is comprised solely of the Remaining Investments. Additionally, the Voting Shares were delisted from the Toronto Stock Exchange on April 15, 2014. As a result of these significant changes, it is anticipated that the future performance of the Company will not be reflective of or comparable to the past performance of the Company.

Year-by-year Returns

The accompanying bar chart (http://media3.marketwire.com/docs/DeansKnight_aug12_2016_graph01.pdf) shows the Company's performance for the years shown and illustrates how the Company's performance has changed from year to year. The bar chart shows, in percentage terms, how much an investment made from when the Company began its operation as an investment fund on March 17, 2009 to December 31, 2009, and how much an investment made for the years ending December 31, 2010 through to 2015, and how much an investment made for the six-month period ended June 30, 2016. Given the Company has ceased all investing activities, other than liquidating the Remaining Investments, the returns provided below for the six-month period ended June 30, 2016 and for the year ended December 31, 2015 are not necessarily indicative of what the returns would have been for the periods if the Company had continued to actively manage the investment portfolio.

Summary of Investment Portfolio

The following is a summary of the Company's investment portfolio as at June 30, 2016. This is a summary only and will change as the Company divests the Remaining Investments. A quarterly update is available at www.dkincomecorp.com.

Summary of Investment Portfolio
Investments % of Net Portfolio Composition % of Net
Asset Value Asset Value
SKYLINK AVIATION INC 10.00% Nov 9 16 0.3 Fixed Income
SKYLINK AVIATION INC 12.25% May 10 18 0.0 Canadian denominated in USD 0.3
SKYLINK AVIATION INC COMMON SHARES 0.0
MIRABELA NICKEL LTD COMMON SHARES 0.0
MIRABELA NICKEL LTD 1.00% Sep 10 44 0.0
Investment Portfolio 0.3
Cash & Short-term Deposits 7.2
Other Net Assets 92.5
100.0
Sector Breakdown
Services 0.3
Investment Portfolio 0.3
Cash & Short-term Deposits 7.2
Other Net Assets 92.5
100.0

Notice of No Auditor Review of Interim Financial Statements

The accompanying unaudited interim financial statements of the Company have been prepared in compliance with International Financial Reporting Standards and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements. The Company's auditor will perform an audit of the December 31, 2016 financial statements.

Deans Knight Income Corporation
Interim Statements of Financial Position
(Unaudited)
June 30, 2016 December 31,
$ 2015
$
Assets
Current Assets
Investments - at fair value * 77,729 282,020
Cash and cash equivalents 1,673,994 1,924,070
Prepaid expenses 42,188 11,400
1,793,911 2,217,490
Non-current Assets
Prepaid tax asset (note 6) 21,662,136 21,662,136
23,456,047 23,879,626
Liabilities
Current Liabilities
Accounts payable and accrued liabilities (note 4) 56,927 166,379
Net Assets 23,399,120 23,713,247
Shareholders' Equity
Common shares (note 3) 17,724,189 17,724,189
Contributed surplus (note 3) 9,904,504 9,904,504
Deficit (4,229,573 ) (3,915,446 )
23,399,120 23,713,247
Number of common shares outstanding (note 3) 10,537,263 10,537,263
Net assets per common share (note 6) 2.22 2.25
*Investments - at average cost 2,104,497 2,104,497
Contingencies (notes 1 and 6)
Commitments (notes 1 and 8)
Going concern (note 1)

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

Deans Knight Income Corporation
Interim Statements of Comprehensive (Loss) Income
For the six-month period ended June 30, 2016 and 2015
(Unaudited)
2016 2015
$ $
Investment income
Interest income 1,003 90,824
Royalty income - 162,095
Net realized gain on investments sold (note 5) - 93,268
Change in unrealized (depreciation) appreciation on investments (204,291 ) 541,896
(203,288 ) 888,083
Expenses
Public company reporting costs 45,443 65,277
Legal fees 28,183 143,337
Audit, accounting and tax fees 21,562 38,443
Custodial fees 7,975 7,965
Independent Review Committee fees 7,613 7,125
Management fees (note 4) 63 63
110,839 262,210
Comprehensive (loss) income (314,127 ) 625,873
Comprehensive (loss) income per weighted average common share (note 2) (0.03 ) 0.06

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

Deans Knight Income Corporation
Interim Statements of Changes in Equity
For the six-month period ended June 30, 2016 and 2015
(Unaudited)
Common Contributed (Deficit) Total
shares surplus shareholders'
equity
$ $ $ $
At January 1, 2015 17,724,189 9,904,504 (1,254,149 ) 26,374,544
Comprehensive income - - 625,873 625,873
At June 30, 2015 17,724,189 9,904,504 (628,276 ) 27,000,417
At January 1, 2016 17,724,189 9,904,504 (3,915,446 ) 23,713,247
Comprehensive loss - - (314,127 ) (314,127 )
At June 30, 2016 17,724,189 9,904,504 (4,229,573 ) 23,399,120

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

Deans Knight Income Corporation
Interim Statements of Cash Flows
For the six-month period ended June 30, 2016 and 2015
(Unaudited)
2016 2015
$ $
Cash flows from operating activities
Comprehensive (loss) income (314,127 ) 625,873
Items not affecting cash
Net realized gain on investments sold - (93,268 )
Change in unrealized depreciation (appreciation) on investments
204,291 (541,896 )
Interest income (1,003 ) (90,824 )
Royalty income - (162,095 )
(110,839 ) (262,210 )
Proceeds from investments sold (note 5) - 502,087
Interest received 1,003 43,107
Royalty received - 215,700
Prepaid expenses (30,788 ) (29,794 )
Prepaid tax asset - (55,500 )
Change in accounts payable and accrued liabilities (109,452 ) 53,130
(250,076 ) 466,520
Net (decrease) increase in cash and cash equivalents during the period (250,076 ) 466,520
Cash and cash equivalents - Beginning of period 1,924,070 1,399,985
Cash and cash equivalents - End of period 1,673,994 1,866,505

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

Deans Knight Income Corporation
Interim Schedule of Investment Portfolio
As at June 30, 2016
(Unaudited)
Par value1 Average cost2 Fair value2 Percentage of total fair value3
$ $ $ %
Fixed income
Denominated in Canadian dollars
Skylink Aviation Inc. 12.25% 05-10-2018 592,183 592,183 - 0.0
Denominated in United States dollars
Mirabela Nickel Ltd. 1.00% 09-10-2044 117,532 124,999 - 0.0
Skylink Aviation Inc. 10.00% 11-09-20164 563,770 574,172 77,729 100.0
699,171 77,729 100.0
Total fixed income 1,291,354 77,729 100.0
Equities - Australia
Mirabela Nickel Ltd. - common shares 20,231,470 813,143 - 0.0
Equities - Canada
Skylink Aviation Inc. - common shares 33,765 - - 0.0
Total equities 813,143 - 0.0
Total investments 2,104,497 77,729 100.0
1 Par values are presented in their source currency
2 All amounts are shown in Canadian dollars
3 Percentages are shown as a percentage of total investments
4 This investment represents a loan receivable

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

Deans Knight Income Corporation
Notes to Interim Financial Statements
June 30, 2016
(Unaudited)

1. Nature of operations and going concern

Deans Knight Income Corporation (the "Company") is a corporation continued under the laws of Canada on April 11, 2001. The Company is a public closed-end, non-redeemable investment company, which prior to April 15, 2014 was listed on the Toronto Stock Exchange. The address of the Company's registered office, and its principal place of business, is 1500 - 999 West Hastings Street, Vancouver, British Columbia.

In April 2014, the Company's shareholders voted in favour of the special resolution authorizing: (i) an extension of the termination date of the Company until such time as reasonably practicable following the conclusion of the Canada Revenue Agency ("CRA") tax matter (note 6); and (ii) the removal of the restrictions on business that the Company can carry on. Going forward, the Company's business will comprise (i) divesting of any remaining investments held; (ii) attending to, and if necessary, litigating, the CRA audit and related tax appeal (note 6); and (iii) attending to any distributions to shareholders of surplus cash and the eventual wind-up and termination of the Company thereafter.

Prior to April 30, 2014, the Company's investment objectives were to: (i) maximize the total return for shareholders, consisting of dividend income and capital appreciation; and (ii) provide shareholders with monthly dividends targeted to pay out a minimum of 75% of net investment income annually. The Company did this through investing primarily in corporate debt rated BBB or below by recognized credit rating organizations. Prior to its reorganization in May 2008, the Company was a life sciences company involved in the research, development and commercialization of innovative products for the prevention and treatment of life-threatening diseases.

As per the Company's Articles of Incorporation, the common shares of the Company are to be redeemed at such time as is reasonably practicable following the resolution of the CRA tax audit and related tax appeal (note 6), or such other date as the Company deems appropriate, on not less than 30 days notice to shareholders. The common shares are presented as equity because they meet the criteria in paragraphs 16C - D of International Accounting Standard ("IAS") 32 'Financial instruments: presentation' for such classification.

The Company does not anticipate that there will be a resolution to the CRA tax dispute in the next 12 months, and accordingly is not anticipating winding up in that period. Therefore, these financial statements have been prepared on a going concern basis. If a resolution to the CRA tax dispute is achieved, or the Company deems it appropriate to wind up, then the Company would settle all outstanding liabilities, including obtaining a tax clearance certificate, and redeem the common shares of the Company.

2. Summary of significant accounting policies

The following is a summary of significant accounting policies followed by the Company.

Basis of preparation

These financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS") applicable to the preparation of interim financial statements, including IAS 34 'Interim financial reporting'.

The policies applied in these financial statements are based on IFRS issued and outstanding as of August 11, 2016, which is the date on which the interim financial statements were authorized for issue by the Board of Directors. Any subsequent changes to IFRS that are given effect in the Company's annual financial statements for the year ending December 31, 2016 could result in restatement of these financial statements.

Financial instruments

a) Classification

The Company classifies its investments in debt and equity securities, and derivatives, as financial assets or financial liabilities at fair value through profit or loss ("FVTPL"). All other financial assets and liabilities are measured at amortized cost.

The FVTPL category has two sub-categories: financial assets or financial liabilities held for trading; and those designated at FVTPL at inception.

(i) Financial assets and liabilities held for trading

A financial asset or financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if on initial recognition is part of a portfolio of identifiable financial investments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. Derivatives are also categorized as held for trading. The Company does not classify any derivatives as hedges in a hedging relationship.

(ii) Financial assets and liabilities designated at FVTPL at inception

Financial assets and financial liabilities designated at FVTPL at inception are financial instruments that are not classified as held for trading but are managed, and their performance is evaluated, on a fair value basis in accordance with the Company's documented investment strategy. The Company evaluates the information about these financial assets and liabilities on a fair value basis together with other related financial information.

Unlisted or non-exchange traded investments, or investments where a last bid, sale or close price is unavailable, or investments for which market quotations are, in the Company's opinion, inaccurate, unreliable, or not reflective of all available material information, are valued at their fair value as determined by the Company using appropriate and accepted industry valuation techniques including valuation models. The fair value determined using valuation models requires the use of inputs and assumptions based on observable market data including volatility and other applicable rates or prices. In certain circumstances, the fair value may be determined using valuation techniques that are not supported by observable market data.

The resulting values for investments not traded in an active market may differ from values that would be determined had a ready market existed, and the difference could be significant.

(b) Recognition, de-recognition and measurement

Regular way purchases and sales of investments are recognized on the trade date - the date on which the Company commits to purchase or sell the investment. Financial assets are de-recognized when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.

Financial assets and financial liabilities at FVTPL are initially recognized at fair value. Transaction costs are expensed as incurred. Subsequent to initial recognition, all financial assets and financial liabilities at FVTPL are measured at fair value. Gains and losses arising from changes in the fair value of the 'financial assets or financial liabilities at FVTPL' category are included in the statements of comprehensive loss in the period in which they arise.

Under the amortized cost method, financial assets and liabilities reflect the amount required to be received or paid, discounted, when appropriate, at the contract's effective interest rate. The calculation includes all fees 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.

At each reporting date, the Company assesses whether there is objective evidence that a financial asset at amortized cost is impaired. If such evidence exists, the Company recognizes an impairment loss as the difference between the amortized cost of the financial asset and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate. Impairment losses on financial assets at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.

The interest for distribution purposes shown on the statements of comprehensive loss represents the coupon interest received by the Company accounted for on an accrual basis. The Company does not amortize premiums paid or discounts received on the purchase of fixed income securities except for zero coupon bonds, which are amortized on a straight-line basis.

Realized gain/loss on sale of investments and unrealized appreciation/depreciation in investments are determined on an average cost basis. Average cost does not include amortization of premiums or discounts on fixed income securities with the exception of zero coupon bonds. Royalty income is recognized on an accrual basis as earned. Dividend income is recognized at the ex-dividend date.

Transaction costs are any costs that can be directly attributable to the acquisition and disposal of an investment, which include fees and commissions paid to agents, advisors, brokers and dealers; levies by regulatory agencies and securities exchanges; and transfer taxes and duties.

(c) Presentation

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. In the normal course of business, the Company may enter into master netting arrangements or similar agreements that do not meet the criteria for offsetting in the statements of financial position, but still allow for the related amounts to be offset in certain circumstances, such as bankruptcy or termination of the contracts. The Company has not offset any material financial instruments as at June 30, 2016 or December 31, 2015.

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 fair values of financial assets and liabilities traded in active markets (such as publicly traded derivatives and marketable securities) are based on quoted market prices at the close of trading on the reporting date. The Company uses the last traded market price for both financial assets and financial liabilities where the last traded price falls within that day's bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, management determines the point within the bid-ask spread that is most representative of fair value based on the specific facts and circumstances. The Company's policy is to recognize transfers into and out of the fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer.

The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques. The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques include the use of comparable recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and others commonly used by market participants and which make the maximum use of observable inputs. In certain circumstances, the fair value may be determined using valuation techniques that are not supported by observable market data.

The resulting values for investments not traded in an active market may differ from values that would be determined had a ready market existed, and the difference could be significant.

Specifically, financial assets and liabilities that are classified as held for trading are recorded at fair values determined as follows:

Foreign currency contracts

Foreign currency contracts (note 7) entered into by the Company are valued at an amount that is equal to the gain or loss that would be realized if the position were transferred, which is equivalent to the difference between the deliverable asset and the value of the asset to be received.

Financial assets and liabilities that are designated at FVTPL at inception are recorded at fair values determined as follows:

Equities

Publicly traded equities are recorded at closing prices as quoted on recognized stock exchanges.

The amounts at which the Company's publicly traded investments could be disposed of currently may differ from the carrying value based on market quotes, as the value at which significant ownership positions are sold is often different than the quoted market price due to a variety of factors such as premiums paid for large blocks or discounts due to illiquidity.

Fixed income investments and convertible debentures

Fixed income investments traded on a public securities exchange or traded on an over-the-counter market are valued at the closing price. Where no closing price is available, the last sale price is used where, in management's opinion, this provides the best estimate of fair value.

Fixed income investments not traded on a public securities exchange or over-the-counter market are valued by considering data inputs such as the last price the security was traded at, most recent bid/ask information, prices of similar securities with available prices, and comparison of yields of comparable investments.

Royalties

Royalty investments are measured on a discounted cash flow basis, where the value is imputed through forecasting cash flows using an appropriate discount rate.

Cash and cash equivalents

Cash and cash equivalents represent cash and short-term deposits with original maturities of less than 90 days held with a Tier 1 Canadian financial institution.

Foreign exchange

Assets and liabilities denominated in foreign currencies are translated into Canadian dollars, which is also the Company's functional and presentation currency, at the exchange rate applicable on the valuation date. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates that transactions occur. Foreign currency assets and liabilities denominated in a foreign currency are translated into the functional currency using the exchange rate prevailing at the measurement date. Foreign exchange gains and losses relating to cash are presented as 'Foreign exchange gain (loss) on cash' and those relating to other financial assets and liabilities are presented within 'Net realized (loss) gain on investments sold' and 'Change in unrealized (depreciation) appreciation on investments' in the statements of comprehensive loss.

Income taxes

The Company follows the balance sheet liability method of accounting for income taxes. Future income tax assets and liabilities are measured using rates expected to apply to the taxable income in the years in which the temporary differences are expected to be settled. The Company accounts for uncertain tax positions using the contingent liability model, whereby a provision is established only where it is probable that a payment will be required to be made.

Management has estimated the income tax provision and future income tax balances taking into account its expectation of deferred taxable income and an interpretation of the various income tax laws and regulations. It is possible, due to the complexity inherent in estimating income taxes, that the tax provision and deferred tax balances could change (note 6 and note 9), and the change could be significant.

Current income taxes are the expected taxes payable on the taxable income for the year using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustments to tax payable in respect of previous years.

Net assets per common share

The net assets per common share are computed by dividing the net assets of the Company by the total number of common shares outstanding on the statements of financial position.

Comprehensive (loss) income per weighted average common share

The comprehensive (loss) income per weighted average common share represents comprehensive (loss) income divided by the weighted average number of common shares outstanding during the period.

The weighted average number of shares outstanding during the period ended June 30, 2016 was 10,537,263 (2015 - 10,537,263). This weighted average includes both the voting common shares and non-voting common shares of the Company.

3. Capital stock

The Company is authorized to issue an unlimited number of voting common shares without par value, and an unlimited number of non-voting common shares without par value. The holders of the voting common shares have one vote for each share held. The holders of non-voting common shares have no such right to vote.

The holders of both the voting common shares and the non-voting common shares are entitled to receive dividends, which must be declared and paid in an equal amount per share and at the same time without preference or distinction.

In the event of the liquidation, dissolution or winding up of the Company whether voluntary or involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of the voting common shares and the holders of the non-voting common shares rank equally and are entitled to share and receive the remaining property of the Company.

There were no changes in the number of voting and non-voting common shares during the periods ended June 30, 2016 and 2015. The total shares outstanding at June 30, 2016 and December 31, 2015 are summarized as follows:

Number of
shares
Voting common shares 10,191,592
Non-voting common shares 345,671
Total common shares outstanding 10,537,263

Contributed surplus

The contributed surplus balance did not change during the periods ended June 30, 2016 and 2015. The balance at June 30, 2016 and December 31, 2015 consists of:

$
Surplus related to stock compensation, warrants and options associated with common shares 8,030,295
Surplus relating to warrants associated with previously issued preferred shares 1,874,209
9,904,504

4. Related party transactions and balances

The Officers and Directors of the Company are also employees of Deans Knight Capital Management Ltd. ("Deans Knight"), the Company's investment advisor and manager. These Officers and Directors are not paid by the Company. Deans Knight provides administration, financial reporting and other ancillary services required by a public company, as well as investment management services related to the remaining investments, all as more particularly set forth in the Services Agreement between the Company and Deans Knight dated May 20, 2014 and available for review on SEDAR. Deans Knight is paid a nominal fee of $10 per month plus G.S.T. for the services it provides to the Company under the Services Agreement.

For the six-month period ending June 30, 2016, management fees totaled $63 (2015 - $63). At June 30, 2016, $nil (December 31, 2015 - $189) was owed to Deans Knight, which was unsecured and included in accounts payable and accrued liabilities in the statements of financial position, and is payable immediately.

5. Net realized gain on investments sold

The net realized gain on investments sold for the six-month periods ended June 30 was as follows:

2016 2015
$ $
Proceeds from sale of investments - 502,087
Investments at cost - Beginning of period 2,104,497 2,513,316
Add: Cost of investments purchased - 36,271
2,104,497 2,549,587
Less: Investments at cost - End of period 2,104,497 2,140,768
Cost of investments sold - 408,819
Net realized gain on investments sold - 93,268

6. Taxation

Uncertainty of deductibility of tax losses

Prior to the reorganization and change in the Company's business that occurred in 2008, as discussed in note 1, the Company had generated significant tax losses and other tax attributes as a result of its prior business activities. In its tax filings since the reorganization, the Company has taken the position that these losses and other tax attributes could be used to offset taxable income generated by the Company, thereby reducing its taxes payable.

In July 2014, the Company received Notices of Reassessment ("NORAs") from the CRA for the taxation years 2009 to 2012, inclusive. In the NORAs, the CRA denied the use of the losses and other tax attributes by the Company on the basis that an acquisition of control of the Company occurred, as a result of the 2008 reorganization, and on the basis of the General Anti-Avoidance Rule in the Income Tax Act (Canada) (the "CRA Matter"). The Company, in consultation with its legal advisors, remains of the view that its tax filing position is appropriate, and is vigorously defending its position.

The NORAs indicate that the Company's tax liability for the 2009 to 2012 taxation years is approximately $22.7 million or $2.15 per share ("Disputed Amount"), including arrears interest and penalties. Given the Company's financial results for 2013 through 2016 to date, the Company estimates its overall potential net tax liability ("Potential Tax Liability") for the years 2009 through 2016 to date inclusive to be, as of the date hereof, approximately $21.5 million, or $2.04 per common voting share and per common non-voting share (collectively, the "Common Shares"). The Company prepaid $21.6 million to the CRA in 2014, which was equal to the Potential Tax Liability at that time, to limit any future interest from being incurred. The Company intends to reassess its Potential Tax Liability at regular intervals and prepay any additional amount, if necessary, to limit any future interest from being incurred.

Should the Company be successful in defending its tax filing position, the amount prepaid to the CRA will be refunded to the Company with interest. However, if the Company is unsuccessful, the recorded amount of the deferred tax assets, if any, as well as such amounts claimed to date would be recorded as a charge to income, and the Potential Tax Liability would be forfeited to the CRA.

In late 2014, the Company filed its Notice of Appeal to the Tax Court of Canada, appealing the NORAs and the Company is now attending to normal pre-trial processes, including discovery of documents and examinations for discovery with the Crown. The Company anticipates that legal proceedings through the Tax Court of Canada to resolve the CRA Matter will take considerable time.

Tax pools available to offset future tax expense and payable

As at June 30, 2016, the Company has accumulated non-capital losses of approximately $4.4 million. The benefit of these losses has been recorded as a reduction of the prepaid tax asset. If the Company is successful in defending its tax filing position, these losses would be reinstated for carry forward and will expire in 2033. In addition, the Company has scientific research and experimental development ("SR&ED") expenditures of $18.1 million, which do not expire, available to offset future taxable income and $7.1 million of unclaimed federal investment tax credits ("ITCs"), which expire from 2018 to 2025, available to offset future taxes payable. The benefit of the SR&ED expenditures and ITCs has not been recognized in the financial statements based on management's assessment that it is not probable that these tax attributes will be realized in the future.

Reconciliation of income tax expense

The reconciliation of income tax computed at the statutory tax rate to income tax expense at June 30, using a 26.00 % statutory tax rate (2015 - 26.00%), is:

2016 2015
$ $
Comprehensive (loss) income before tax (314,127 ) 625,873
Statutory tax rate 26.00 % 26.00 %
Income tax (recovery) expense at statutory rates (81,673 ) 162,727
SR&ED credit utilized - (162,727 )
Non-capital loss carry forward (81,673 ) -
Provision for deferred income tax - -

7. Financial instruments

The following tables present the carrying amounts of the Company's financial instruments by category as at June 30, 2016:

Financial instruments by category
Assets/liabilities
Amortized cost at FVTPL Total
$ $ $
Assets as per statements of financial position
Designated as FVTPL:
Investments - 77,729 77,729
Other financial assets:
Cash and cash equivalents 1,673,994 - 1,673,994
1,673,994 77,729 1,751,723
Liabilities as per statements of financial position
Other financial liabilities:
Accounts payable and accrued liabilities 56,927 - 56,927
56,927 - 56,927

The following tables present the carrying amounts of the Company's financial instruments by category as at December 31, 2015:

Financial instruments by category
Assets/liabilities
Amortized cost at FVTPL Total
$ $ $
Assets as per statements of financial position
Designated as FVTPL:
Investments - 282,020 282,020
Other financial assets:
Cash and cash equivalents 1,924,070 - 1,924,070
1,924,070 282,020 2,206,090
Liabilities as per statements of financial position
Other financial liabilities:
Accounts payable and accrued liabilities 166,379 - 166,379
166,379 - 166,379

Fair value measurement

Financial instruments are classified in a hierarchy that prioritizes the inputs to fair value measurement. Each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities. The three levels of the fair value hierarchy are:

Level 1 - inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - inputs that reflect other than quoted prices that are observable for the assets or liabilities either directly or indirectly;

Level 3 - inputs that are not based on observable market data.

If inputs of different levels are used to measure an asset's or liability's fair value, the classification within the hierarchy is based on the lowest level input that is significant to the fair value measurement.

The following tables illustrate the classification of the Company's financial instruments within the fair value hierarchy:

Financial assets at fair value - June 30, 2016
Level 3
$
Corporate debt 77,729
Equity -
77,729
Financial assets at fair value - December 31, 2015
Level 3
$
Corporate debt 78,026
Equity 203,994
282,020

There were no transfers between levels in the period ending June 30, 2016. There was one transfer from Level 2 to Level 1 in the period ending June 30, 2015. This transfer occurred as the security, which had its trading halted at December 31, 2014, was once again actively trading.

All fair value measurements above are recurring.

The following tables reconcile the Company's Level 3 fair value measurements:

Corporate
debt Equities Royalty Total
$ $ $ $
Balance - January 1, 2015 1,588,228 - 1,122,481 2,710,709
Sales (502,087 ) - - (502,087 )
Realized and unrealized depreciation (942,512 ) - (65,556 ) (1,008,068 )
Balance - June 30, 2015 143,629 - 1,056,925 1,200,554
Unrealized depreciation (849,304 ) - (65,556 ) (914,860 )
Balance - January 1, 2016 78,026 203,994 - 282,020
Unrealized depreciation (297 ) (203,994 ) - (204,291 )
Balance - June 30, 2016 77,729 - - 77,729

Level 3 fair value measurements have predominantly been valued by considering data inputs such as the last price the security was traded at, most recent bid/ask information, prices of similar securities with available prices, and comparison of yields of comparable investments. Any reasonably possible alternative assumptions, except as noted below, would result in immaterial changes to total net assets.

Management of financial risks

In the normal course of business, the Company is exposed to various financial risks, including credit risk, liquidity risk and market risk (consisting of interest rate risk, currency risk and other price risk). The Company's overall risk management program seeks to minimize potentially adverse effects of these risks on the Company's financial performance by employing a professional, experienced portfolio advisor, monitoring daily the Company's positions and market events, diversifying the investment portfolio within the constraints of the investment guidelines and periodically using derivatives to hedge certain risk exposures. Further, the Company monitors the portfolio to ensure compliance with its investment strategy, investment guidelines and securities regulations.

Fair value risk

The Company's investments are exposed to market price risk and this risk affects the fair value of the investments. All investments have an inherent risk of loss of capital. The maximum risk resulting from investments is determined by their fair value. The Company seeks to manage valuation risks by regular ongoing monitoring of the investment performance of the individual investee companies. A 10% change in the value of the Company's equity investments would have a $nil (December 31, 2015 - $20,399) impact on comprehensive loss.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.

All transactions executed by the Company in listed securities are settled/paid for upon delivery using approved brokers. The risk of this settlement not occurring is considered minimal, as delivery of securities sold 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 trade will fail if either party fails to meet its obligation. Since the Company invests primarily in high-yield debt instruments and derivatives, this represents the main concentration of credit risk. The fair value of debt securities includes consideration of the creditworthiness of the debt issuer. The maximum credit exposure of these assets is represented by their carrying amounts. However, this maximum exposure is mitigated to varying degrees in each investment, based on the collateral held, if any. Collateral may include such things as a general security agreement over all assets, or specific security over specific assets. It may also entitle the debt holder to take over the overall business through restructuring of the investment.

At June 30, 2016 and December 31, 2015, all remaining investments held by the Company were unrated by the various credit rating agencies. The Company's credit risk exposure by sector at June 30, 2016 is limited to investments valued at 0.3% of net assets (December 31, 2015 - 0.3%), which are in the service sector.

Credit risk associated with the Company's cash and cash equivalents is not considered significant, as they are held with Tier 1 Canadian financial institutions.

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments.

The Company's investments include interest-bearing financial instruments. Accordingly, the Company is exposed to the risk that the value of such financial instruments will fluctuate due to changes in the prevailing levels of market interest rates. The table below summarizes the Company's exposure to interest rate risk by term to maturity on its investments:

Fair value
June 30, December 31,
2016 2015
$ $
Maturity
Less than 1 year 77,729 78,026

As at June 30, 2016, if the prevailing interest rates had been raised or lowered by 1%, assuming a parallel shift in the yield curve, with all other factors remaining constant, net assets could possibly have decreased or increased by approximately $0, or approximately 0% of net assets (December 31, 2015 - $618, or approximately 0% of net assets).

Liquidity risk

As the Company is a closed-end investment company with a fixed number of common shares outstanding, unlike an open-ended mutual fund, it is not exposed to the liquidity risk associated with daily cash redemptions of securities.

The Company's remaining investments may not be able to be liquidated quickly at an amount close to their fair value to respond to specific events such as deterioration in the creditworthiness of any particular issuer. Investments held by the Company may be subject to resale restrictions such as hold periods. The resulting values for the Company's remaining investments may differ from values that would be realized if a ready market exists.

The Company reviews its investment portfolio to assess liquidity risk on its holdings.

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company's remaining investments include securities that are denominated in a currency other than the Canadian dollar, which represents the functional currency of the Company. Consequently, the Company is exposed to currency risk as the value of the portfolio securities denominated in currencies other than the Canadian dollar will vary due to changes in foreign currency exchange rates.

The potential impact to net assets of a 5% change in foreign currency rates against the Canadian dollar, assuming all other variables remain constant, would be $4,000 at June 30, 2016 (December 31, 2015 - $14,000).

8. Capital management

The capital of the Company is divided into voting and non-voting common shares, each having an unlimited authorized amount. The number of voting and non-voting shares outstanding and changes thereto, are outlined in note 3.

The Company manages its capital in accordance with the Company's amended business objectives, as approved by shareholders at a meeting held in April 2014. The objectives include: (i) divesting of any remaining investments held; (ii) attending to, and if necessary, litigating, the CRA Matter and related tax appeal (note 6); and, (iii) attending to any distributions to shareholders of surplus cash and the eventual wind-up and termination of the Company thereafter.

The Company intends to pay cash dividends to shareholders as any remaining investments are liquidated, resulting in surplus cash in the Company. On October 15, 2015, the Company declared a cash dividend of $0.20 per share.

9. Critical accounting estimates and judgments

The preparation of financial statements requires management to use judgment in applying its accounting policies and to make estimates and assumptions about the future. The following discusses the most significant accounting judgments and estimates that the Company has made in preparing the financial statements:

Fair value measurement of derivatives and securities not quoted in an active market

The Company holds financial instruments that are not quoted in active markets. Fair values of such instruments are determined using valuation techniques and may be determined using reputable pricing sources (such as pricing agencies) or indicative prices from market makers. Broker quotes, as obtained from the pricing sources, may be indicative and not executable or binding. Where no market data is available, the Company may value positions using its own models, which are usually based on valuation methods and techniques generally recognized as standard within the industry. Models use observable data, to the extent practicable. However, areas such as credit risk (both own and counterparty), volatilities and correlations require the Company to make estimates. Changes in assumptions about these factors could affect the reported fair values of financial instruments. The Company considers observable data to be market data that is readily available, regularly distributed and updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. Refer to note 2 for further information about the fair value measurement of the Company's financial instruments and to note 7 for further information about Level 3 investments.

Income taxes

The tax balances and income tax expense recognized by the Company are based on management's interpretation of the tax laws. Due to the complexity inherent in tax interpretations, regulations and legislation, there are significant estimates required to compute income tax balances. It is possible that some or all of the Company's significant components of the tax attributes may not be available for tax purposes and, accordingly, the amount of the prepaid tax assets and provision for income taxes recorded in the financial statements could change by a material amount (note 6).

10. Future accounting changes

At June 30, 2016, a number of standards and interpretations, and amendments thereto, had been issued by the International Accounting Standards Board ("IASB"), which are not effective for these financial statements. Those which are expected to have an effect on the Company's financial statements are discussed below:

IFRS 9 'Financial instruments' addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 establishes three primary measurement categories for financial assets: amortized cost, fair value through other comprehensive income and FVTPL. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at FVTPL with the irrevocable option to recognize changes in fair value with no recycling of gains or loss to the statements of comprehensive loss. IFRS 9 requires credit losses to be recognized on an expected loss basis rather than using an incurred loss model. For financial liabilities, there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. The standard is effective for accounting periods beginning on or after January 1, 2018. The Company is assessing the impact of IFRS 9.

IFRS 15 'Revenue from contracts with customers' deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The standard is effective for annual periods beginning on or after January 1, 2018. The Company is assessing the impact of IFRS 15.

IAS 7 'Statement of cash flows' requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Cash flows are classified and presented into operating activities, either using the 'direct' or 'indirect' method, and investing activities or financing activities. Amendments to IAS 7 include further clarity around providing disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. These amendments to IAS 7 come into effect for annual periods beginning on or after January 1, 2017. The Company is assessing the impact of IAS 7.

IAS 12 'Income taxes' recognizes both the current tax consequences of transactions and events, and the future tax consequences of the future recovery or settlement of the carrying amount of an entity's assets and liabilities. Differences between the carrying amount and tax base of assets and liabilities, and carried forward tax losses and credits, are recognized as deferred tax liabilities or deferred tax assets. Amendments to IAS 12 come into effect for annual periods beginning on or after January 1, 2017. The Company is assessing the impact of IAS 12.

Contact Information

  • Deans Knight Income Corporation
    Craig Langdon
    Chief Executive Officer and Director
    (604) 669-0212

    Deans Knight Income Corporation
    Kelsey Dunwoodie
    Chief Financial Officer
    (604) 669-0212