Form 6-K HEMISPHERE ENERGY CORP For: Jun 30

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

For the month of August, 2015.

Commission File Number: 000-55253

Hemisphere Energy Corporation
(Translation of registrant's name into English)

Suite 2000, 1055 West Hastings Street, Vancouver, British Columbia, Canada V6E 2E9
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  [ X ]             Form 40-F  [  ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1)  [  ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7)  [  ]

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DOCUMENTS FILED AS PART OF THIS FORM 6-K

See the Exhibit Index hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Hemisphere Energy Corporation
Date: August 19, 2015
	/S/ DORLYN EVANCIC
	Dorlyn Evancic
	Chief Financial Officer

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EXHIBIT INDEX

Exhibit	Description
99.1	News release, dated August 19, 2015
99.2	Q2 2015 Interim Condensed Financial Statements
99.3	Q2 2015 Management’s Discussion and Analysis
99.4	Form 52-109FV2 Certification of Interim Filings – CEO
99.5	Form 52-109FV2 Certification of Interim Filings – CFO

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HEMISPHERE ENERGY ANNOUNCES Q2 2015
FINANCIAL AND OPERATING RESULTS

TSX-V: HME

Vancouver, British Columbia, August 19, 2015 – Hemisphere Energy Corporation (TSX-V: HME) ("Hemisphere" or the "Company") is pleased to announce its financial and operating results for the three and six months ended June 30, 2015.

Despite a challenging market environment during the first half of 2015, Hemisphere has had strong year-to-date netbacks, positive funds flow from operations, and a solid balance sheet. The Company is committed to a disciplined approach to capital spending and the implementation of strategic projects that add low-cost production and reserves. With the successful execution of its Atlee Buffalo drilling programs in 2014, Hemisphere plans to implement three waterflood pilot programs by year-end to increase its reserves through enhanced oil recovery. The Company remains optimistic for the industry’s future and is committed to delivering value to its shareholders.

Q2 2015 Highlights

•	Achieved a 54% increase in production over the second quarter of 2014 to 849 boe/d (77% oil & NGL).
•	Increased revenue over the first quarter of 2015 by 12% to $3.3 million.
•	Generated $1.3 million in funds flow from operations, a 5% increase over the first quarter of 2015.
•	Decreased operating costs by 31% to $11.51/boe over the same period last year with the addition of lower cost wells in Atlee Buffalo.
•	Decreased transportation costs to $2.92/boe from $3.38/boe during the same quarter last year as a result of the Company’s voluntary shut-in of high water-cut wells requiring transportation to processing facilities.
•	Realized a $25.28/boe operating netback, a 24% increase over the first quarter of 2015.
•	Reduced net debt by $1.7 million to $9.9 million, a 15% decrease since December 31, 2014.
•	Completed a strategic tuck-in acquisition for the remaining 15% working interest in 1.75 sections of land in Atlee Buffalo to bring the Company’s total working interest to 100%.

Subsequent Achievements

•	Renewed existing $15.0 million credit facility.
•	Acquired two sections of land in Jenner through Crown landsales.
•	Received Alberta Energy Regulator approval for the Company’s first Atlee Buffalo waterflood pilot scheme.

Corporate Update

During the second quarter of 2015, the Company continued its conservative approach to capital spending. A strategic tuck-in acquisition was completed in Atlee Buffalo for $250,000, securing Hemisphere the remaining 15% working interest in 1.75 sections of land and bringing the Company’s total working interest in the area to 100%.

Hemisphere has been tactical in planning low-cost projects to increase production and add reserves, while providing long-term stability and increasing overall oil recovery in its assets. The Company has meticulously evaluated the performance of each well and has voluntarily shut-in certain wells with higher water-cuts which require trucking to facilities for processing and cause increased transportation costs.

Subsequent to the second quarter, the first of three planned waterflood pilot schemes in Atlee Buffalo was approved by the Alberta Energy Regulator with first injection expected by the end of the third quarter.

In Jenner, the Company recently acquired two sections of land through Crown landsales. By year-end, the Company plans to increase Jenner’s production capacity by adding an additional water disposal well to further optimize existing wells and provide room for future growth in the area.

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For the remainder of 2015, Hemisphere has budgeted $1.5 million in capital expenditures of which approximately $850,000 has been spent to-date toward the implementation of the three Atlee Buffalo waterflood pilots and the additional water disposal well in Jenner. These projects are expected to add oil production and reserves, and strategically position Hemisphere to react quickly when oil prices strengthen.

Following the annual review with its lender, Hemisphere’s credit facility was maintained at $15.0 million. The Company will continue to protect its financial flexibility during the current depressed market. As at June 30, 2015, the Company had $9.4 million drawn down on its existing line.

Selected financial and operational highlights should be read in conjunction with Hemisphere’s interim condensed financial statements and related Management’s Discussion and Analysis for the three and six months ended June 30, 2015. These reports are available on SEDAR at www.sedar.com and on Hemisphere’s website at www.hemisphereenergy.ca. All amounts are expressed in Canadian dollars.

Financial and Operating Summary

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
FINANCIAL
Petroleum and natural gas revenue	$	3,284,020		$	3,799,461		$	6,212,284		$	7,363,497
Petroleum and natural gas netback		1,954,246			2,011,113			3,782,232			3,889,115
Funds flow from operations(1)		1,314,073			1,550,661			2,563,214			3,058,768
Per share, basic and diluted		0.02			0.02			0.03			0.05
Income (loss) before tax(2)		(170,384	)		554,465			(816,730	)		1,180,484
Net income (loss)		(575,484	)		554,465			(1,221,830	)		1,180,484
Per share, basic and diluted		0.01			0.01			(0.02	)		0.02
Capital expenditures, including property acquisitions		829,495			3,515,191			962,783			7,882,507
Net debt(3)		9,938,019			1,911,603			9,938,019			1,991,603
Bank indebtedness	$	9,438,835		$	-		$	9,438,835		$	-
OPERATING
Average daily production
Oil (bbl/d)		655			454			743			471
Natural gas (Mcf/d)		1,149			584			1,055			529
NGL (bbl/d)		3			2			3			1
Combined (boe/d)		849			553			922			560
Oil and NGL weighting		77%			82%			81%			84%
Average sales prices
Oil ($/bbl)	$	50.49		$	85.72		$	42.43		$	81.17
Natural gas ($/Mcf)		2.57			4.64			2.60			4.54
NGL ($/bbl)		22.56			68.24			22.02			68.24
Combined ($/boe)	$	42.49		$	75.47		$	37.24		$	72.66
Operating netback ($/boe)
Petroleum and natural gas revenue	$	42.49		$	75.47		$	37.24		$	72.66
Royalties		2.77			15.41			2.73			13.10
Operating costs		11.51			16.70			8.98			17.90
Transportation costs		2.92			3.38			2.85			3.27
Operating netback(4)	$	25.28		$	39.98		$	22.67		$	38.39

Notes:
(1)	Funds flow from operations is a non-IFRS measure that represents cash generated by operating activities, before changes in non-cash working capital and may not be comparable to measures used by other companies.
(2)	Due to taxable income generated in excess of tax pools from lower capital expenditures, the Company utilized deferred tax assets resulting in a deferred tax expense of $405,100 for the second quarter of 2015.
(3)	Net debt is a non-IFRS measure calculated as current assets minus current liabilities including bank indebtedness and excluding flow- through premium.

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(4)	Operating netback is a non-IFRS measure calculated as the Company’s oil and gas sales, less royalties, operating expenses, and transportation costs per barrel of oil equivalent.

About Hemisphere Energy Corporation

Hemisphere Energy Corporation is a producing oil and gas company focused on developing conventional oil assets with low risk drilling opportunities. Hemisphere plans continual growth in production, reserves and cash flow by drilling existing projects and executing strategic acquisitions. Hemisphere trades on the TSX Venture Exchange as a Tier 1 issuer under the symbol "HME".

For further information, please contact:

Don Simmons, President & Chief Executive Officer
Telephone: (604) 685-9255
Email: [email protected]

Scott Koyich, Investor Relations
Telephone: (403) 619-2200
Email: [email protected]

Website: www.hemisphereenergy.ca

Forward-looking Statements

This news release contains "forward-looking statements" that are based on Hemisphere's current expectations, estimates, forecasts and projections. These forward-looking statements include statements regarding Hemisphere's outlook for our future operations, plans and timing for the commencement or advancement of exploration and development activities on our properties, and other expectations, intention and plans that are not historical fact. The words "estimates", "projects", "expects", "intends", "believes", "plans", or their negatives or other comparable words and phrases are intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Many of these factors are beyond the control of Hemisphere. Consequently, all forward-looking statements made in this news release are qualified by this cautionary statement and there can be no assurance that actual results or developments anticipated by Hemisphere will be realized. For the reasons set forth above, investors should not place undue reliance on such forward-looking statements. Hemisphere disclaims any intention or obligation to update or revise forward-looking information, whether as a result of new information, future events or otherwise.

A barrel of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Definitions and abbreviations

bbl/d	barrels per day	Mcf/d	thousand cubic feet per day
$/bbl	dollar per barrel	$/Mcf	dollar per thousand cubic feet
boe	barrel of oil equivalent	NGL	natural gas liquids
boe/d	barrel of oil equivalent per day
$/boe	dollar per barrel of oil equivalent	IFRS	International Financial Reporting Standards

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this news release.

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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 interim condensed 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 19, 2015

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

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2	Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF FINANCIAL POSITION
(Expressed in Canadian dollars)
(Unaudited)

	Note		June 30, 2015			December 31, 2014
Assets
Current assets
Accounts receivable	5 (a)	$	1,173,675		$	1,304,252
Prepaid expenses			89,696			132,929
			1,263,371			1,437,181
Non-current assets
Reclamation deposits	9		105,535			105,535
Exploration and evaluation assets	7, 12		2,932,939			2,896,887
Property and equipment	8, 12		40,732,074			42,870,113
Deferred tax asset			1,236,816			1,641,916
Total assets		$	46,270,734		$	48,951,632
Liabilities
Current liabilities
Accounts payable and accrued liabilities		$	1,762,556		$	5,897,643
Bank indebtedness	12		9,438,835			7,184,147
Total current liabilities			11,201,390			13,081,790
Non-current liabilities
Decommissioning obligations	9		5,268,435			5,177,607
			16,469,825			18,259,397
Shareholders’ Equity
Share capital	13		52,083,069			51,881,960
Share-based payment reserve	13 (b)		2,642,515			2,513,122
Deficit			(24,924,675	)		(23,702,847	)
Total shareholders’ equity			29,800,909			30,692,235
Total liabilities and shareholders’ equity		$	46,270,734		$	48,951,632

Commitment (Note 14)

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

On Behalf of the Board of Directors

(signed) “Bruce McIntyre”		(signed) “Don Simmons”
Bruce McIntyre, Director		Don Simmons, Director

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Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS

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CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Expressed in Canadian dollars)
(Unaudited)

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

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4	Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(Unaudited)

Supplemental cash flow information (Note 16)

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

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Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS

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CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Expressed in Canadian dollars)
(Unaudited)

			Number of						Share-based
			common						payment			Warrant
	Note		shares			Capital stock			reserve			reserve			Deficit			Total Equity
Balance, December 31, 2013	2 (e)		61,307,498		$	42,127,674		$	2,574,789		$	204,479		$	(22,568,372	)	$	22,338,570
Non-flow-through share issuance			13,333,500			10,000,125			-			-			-			10,000,125
Share-based payments			-			-			452,780			-			-			452,780
Share issuance costs, net of tax			-			(680,408	)		-			-			-			(680,408	)
Exercise of stock options			690,000			404,944			(184,094	)		-			-			220,850
Expiry of stock options			-			-			(1,159	)		-			1,159			-
Exercise of warrants			37,500			29,625			-			(1,500	)		-			28,125
Expiry of warrants			-			-			(329,194	)		(202,979	)		532,173			-
Net loss for the year			-			-			-			-			(1,667,807	)		(1,667,807	)
Balance, December 31, 2014			75,368,498		$	51,881,960		$	2,513,122		$	-		$	(23,702,847	)	$	30,692,235
Balance, December 31, 2014			75,368,498		$	51,881,960		$	2,513,122		$	-		$	(23,702,847	)	$	30,692,235
Exercise of stock options	13 (b)		435,000			201,109			(92,359	)		-			-			108,750
Share-based payments	13 (c)		-			-			221,752			-			-			221,752
Net loss for the period			-			-			-			-			(1,221,830	)		(1,221,830	)
Balance, June 30, 2015			75,803,498		$	52,083,069		$	2,642,515		$	-		$	(24,924,675	)	$	29,800,909

Comparison with six months ended June 30, 2014:

			Number of						Share-based
			common						payment			Warrant
	Note		shares			Capital stock			reserve			reserve			Deficit			Total Equity
Balance, December 31, 2013	2 (e)		61,307,498		$	42,127,674		$	2,574,789		$	204,479		$	(22,568,372	)	$	22,338,570
Non flow-through share issuance			13,333,500			10,000,125			-			-			-			10,000,125
Share issuance costs			-			(921,007	)		-			-			-			(921,007	)
Exercise of stock options			375,000			135,800			(111,100	)		-			111,100			135,800
Exercise of warrants			37,500			28,125			-			-			-			28,125
Expiry of warrants			-			-			(329,194	)		(120,828	)		450,022			-
Net income for the period	2 (e)		-			-			-			-			1,180,484			1,180,484
Balance, June 30, 2014	2 (e)		75,053,498		$	51,370,717		$	2,134,495		$	83,651		$	(20,826,766	)	$	32,762,097

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

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6	Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2015 and 2014
(Expressed in Canadian dollars)

1.	Nature of Business

Hemisphere Energy Corporation (the "Company") was incorporated under the laws of British Columbia on March 6, 1978. The Company’s principal business is the acquisition, exploration, development and production of petroleum and natural gas in Canada. It is a publicly traded company listed on the TSX Venture Exchange under the symbol "HME". The Company’s head office is located at Suite 2000, 1055 West Hastings Street, Vancouver, British Columbia, Canada V6E 2E9.

2.	Basis of Presentation

(a)

Statement of compliance

These unaudited interim condensed financial statements ("Financial Statements") have been prepared in accordance with International Accounting Standard 34 – Interim Financial Reporting using accounting policies consistent with the International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board. These Financial Statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company’s audited annual financial statements for the year ended December 31, 2014.

These financial statements were authorized for issuance by the Board of Directors on August 19, 2015.

(b)

Basis of presentation

These Financial Statements have been prepared on a historical cost basis, except for financial instruments and share-based payments, which are stated at their fair values. In addition, these Financial Statements have been prepared using the accrual basis of accounting, except for cash flow information.

(c)

Functional and presentation currency

These Financial Statements are presented in Canadian dollars which is the Company’s functional currency.

(d)

Use of estimates and judgments

The preparation of these Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may materially differ from these estimates. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.

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Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

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The following are the accounting policies that are subject to such judgments and the key sources of estimation uncertainty that the Company believes could have the most significant impact on the reported results and financial position.

Critical accounting judgments

Reserves

The estimate of oil and natural gas reserves is integral to the calculation of the amount of depletion charged to the statements of income (loss) and comprehensive income (loss) and is also a key determinant in assessing whether the carrying value of any of the Company’s development and production assets have been impaired. Changes in reported reserves can impact asset carrying values due to changes in expected future cash flows.

The Company’s Proved and Probable reserves are evaluated and reported on by independent reserve engineers at least annually in accordance with Canadian Securities Administrators’ National Instrument 51-101 Standards of Disclosure of Oil and Gas Activities. Proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is 90% likely that the actual remaining quantities recovered will exceed the estimated Proved reserves. Probable reserves are those additional reserves that are less certain to be recovered than Proved reserves. Reserve estimation is based on a variety of factors including engineering data, geological and geophysical data, projected future rates of production, commodity pricing and timing of future expenditures, all of which are subject to significant judgment and interpretation.

Identification of cash-generating units ("CGUs")

The Company’s assets are aggregated into CGUs for the purpose of calculating impairment. CGUs are based on an assessment of the unit’s ability to generate independent cash inflows. The determination of these CGUs was based on management’s judgment in regards to shared infrastructure, geographical proximity, petroleum type and similar exposure to market risk and materiality.

Recoverability of asset carrying values

At each reporting date, the Company assesses its petroleum and natural gas properties and exploration and evaluation assets for possible impairment, to determine if there is any indication that the carrying amounts of the assets may not be recoverable. An assessment is also made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. Determination as to whether and how much an asset is impaired, or no longer impaired, involves management estimates on highly uncertain matters such as future commodity prices, discount rates, production profiles, operating costs, future capital costs and reserves. Changes in circumstances may impact these estimates which may impact the recoverable amount of assets. Any change in the impairment loss or reversal of impairment loss could have a material financial impact in future periods but future depletion expense would be impacted as a result.

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8	Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

Critical accounting estimates

Decommissioning obligations

Decommissioning costs will be incurred by the Company many years into the future. Amounts recorded for decommissioning obligations require the use of management’s best estimates of future decommissioning expenditures, expected timing of expenditures and future inflation rates. The estimates are based on internal and third party information and calculations are subject to changes in laws and regulations, public expectations, prices, discovery and analysis of site conditions, and changes in clean up technology. Actual costs and outflows can differ from estimates and may have a material impact on earnings or financial position.

Business combination

Business combinations are accounted for using the acquisition method. Under this method, management makes estimates of the fair value of assets acquired and liabilities assumed which includes assessing the value of petroleum and natural gas properties based upon the estimation of recoverable quantities of Proved and Probable reserves being acquired.

Share-based payments

The Company measures the cost of its share-based payments to directors, officers, employees and consultants by reference to the fair value of the equity instruments using the Black-Scholes option pricing model at the date they are granted. The assumptions used in determining fair value include: expected life of the options, risk-free rates of return and stock price volatility. Changes to assumptions may have a material impact on the amounts presented.

Income tax

Related assets and liabilities are recognized for the estimated tax consequences between amounts included in the financial statements and their tax base using substantively enacted future income tax rates. Timing of future revenue streams and future capital spending changes can affect the timing of any temporary differences, and accordingly, affect the amount of the deferred tax asset or liability calculated at a point in time. These differences could materially impact earnings.

(e)

Change in accounting policy

The Company changed its accounting for depleting its petroleum and natural gas properties during the year ended December 31, 2014. The Company changed from using the unit-of-production method based on production volumes in relation to total estimated Proved reserves to total estimated Proved and Probable reserves. The change in policy was applied retrospectively, and the comparative figures for the three and six months ended June 30, 2014 have been adjusted to reflect this change.

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Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

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3.	Summary of Significant Accounting Policies

These financial statements have been prepared in accordance with IFRS and follow the same accounting policies as described in Note 3 of the Company’s audited annual financial statements for the year ended December 31, 2014. There have been no changes to the Company’s accounting policies since the Company’s audited annual financial statements for the year ended December 31, 2014 were issued.

4.	Financial Instruments

Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, changes in assumptions can significantly affect estimated fair values. At June 30, 2015, the Company's financial instruments include accounts receivable, reclamation deposits, bank indebtedness, and accounts payable and accrued liabilities.

The fair values of accounts receivable, reclamation deposits, accounts payable and accrued liabilities, and bank indebtedness approximate their carrying values due to the short-term maturity of these financial instruments.

5.	Financial Risk Management

The Company’s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production and financing activities such as credit risk, liquidity risk and market risk. This note presents information about the Company’s exposure to each of these risks. Management sets controls to manage such risks and monitors them on an ongoing basis pertaining to market conditions and the Company’s activities.

(a)

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its payment obligations. This risk arises principally from the Company’s receivables from joint operators and oil and natural gas marketers, and reclamation deposits. The credit risk associated with reclamation deposits is minimized substantially by ensuring this financial asset is placed with major financial institutions with strong investment-grade ratings by a primary ratings agency. The credit risk associated with accounts receivable is mitigated as the Company monitors monthly balances to limit the risk associated with collections. The Company does not anticipate any default. There are no balances past due or impaired.

The maximum exposure to credit risk is as follows:

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10	Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

The Company sells the majority of its oil production to a single oil marketer and, therefore, is subject to concentration risk which is mitigated by management’s policies and practices related to credit risk, as discussed above. The Company has not historically experienced any collection issues with its oil marketer.

(b)

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company.

At June 30, 2015, the Company had negative working capital of $9,938,019 (December 31, 2014 - $11,644,609) which included bank indebtedness of $9,438,835 (December 31, 2014 - $7,184,147). The Company funds its operations through production revenue and a demand operating credit facility (Note 12). All of the Company’s financial liabilities have contractual maturities of less than 90 days.

(c)

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, other prices and interest rates will affect the value of the financial instruments. Market risk is comprised of interest rate risk, foreign currency risk, commodity price risk and other price risk.

(i)

Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. Borrowings under the Company’s credit facilities are subject to variable interest rates. A one percent change in interest rates would not have a material effect on net income (loss) and comprehensive income (loss).

(ii)

Foreign currency risk

The Company’s functional and reporting currency is the Canadian dollar. The Company does not sell or transact in any foreign currency; however, commodity prices are largely denominated in United States dollars ("USD"), and as a result the prices that the Company receives are affected by fluctuations in the exchange rates between the USD and the Canadian dollar. The exchange rate effect cannot be quantified, but generally an increase in the value of the Canadian dollar compared to the USD will reduce the prices received by the Company for its crude oil and natural gas sales. The Company did not have any foreign exchange rate swaps or related contracts in place as at June 30, 2015.

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Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

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(iii)

Commodity price risk

Commodity prices for petroleum and natural gas are impacted by global economic events that dictate the levels of supply and demand, as well as the relationship between the Canadian dollar and the USD. Significant changes in commodity prices may materially impact the Company’s ability to raise capital. The Company has not entered into any commodity hedge contracts as at June 30, 2015.

(iv)

Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or foreign currency risk. The Company is not exposed to significant other price risk.

6.	Capital Management

The Company manages its capital with the following objectives:

	(a)	To ensure sufficient financial flexibility to achieve the Company’s ongoing business objectives including the replacement of production, funding of future growth opportunities and pursuit of accretive acquisitions; and
	(b)	To maximize shareholder return through enhancing the Company’s share value.

The Company monitors its capital structure and makes adjustments according to market conditions in an effort to meet its objectives given the current outlook of the Company and industry in general. The capital structure of the Company is composed of shareholders’ equity and the undrawn component of the Company’s credit facilities. The Company may manage its capital structure by issuing new shares, repurchasing outstanding shares, obtaining additional financing from the Company’s credit facilities, issuing new debt instruments or other financial or equity-based instruments, adjusting capital spending or disposing of assets. The capital structure is reviewed on an ongoing basis.

The Company’s capital structure as at June 30, 2015 and December 31, 2014 were as follows:

		June 30, 2015			December 31, 2014
Shareholders’ equity	$	29,800,909		$	30,692,235
Undrawn component of bank credit facilities		5,561,166			7,815,853
Total capital	$	35,362,075		$	38,508,088

As at June 30, 2015, the Company had total available credit facility of $15,000,000 (December 31, 2014 - $15,000,000) of which the Company had drawn $9,438,835 (December 31, 2014 - $7,184,147). The Company is subject to a financial covenant as described in Note 12.

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12	Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

7.	Exploration and Evaluation Assets

Exploration and evaluation assets consist of the Company’s exploration projects, which are pending the determination of Proved and Probable reserves. A transfer from exploration and evaluation assets to property and equipment is made when a well has come on production or an exploration project has been completed. As at June 30, 2015, the Company transferred $206,452 (December 31, 2014 - $993,271) to property and equipment.

Cost
Balance, December 31, 2013	$	2,000,613
Additions		2,080,432
Exploration and evaluation expense		(190,887	)
Transfer to property and equipment		(993,271	)
Balance, December 31, 2014	$	2,896,887
Additions		256,803
Exploration and evaluation expense		(14,300	)
Transfer to property and equipment		(206,452	)
Balance, June 30, 2015	$	2,932,939

8.	Property and Equipment

		Petroleum and
Cost		Natural Gas			Other Equipment			Total
Balance, December 31, 2013	$	39,119,038		$	67,522		$	39,186,560
Additions		22,482,341			46,970			22,529,311
Transfer from exploration and evaluation assets		993,271			-			993,271
Balance, December 31, 2014	$	62,594,650		$	114,492		$	62,709,142
Additions		751,567			-			751,567
Transfer from exploration and evaluation assets		206,452			-			206,452
Balance, June 30, 2015	$	63,552,668		$	114,492		$	63,667,161
Accumulated Depletion, Depreciation, Amortization
and Impairment Losses
Balance, December 31, 2013		11,720,611			54,504			11,775,115
Charge for the year		5,353,585			7,404			5,360,989
Impairment loss		2,702,925			-			2,702,925
Balance, December 31, 2014	$	19,777,121		$	61,908		$	19,839,029
Charge for the period		3,089,333			6,727			3,096,060
Balance, June 30, 2015	$	22,866,454		$	68,635		$	22,935,089
Net Book Value
December 31, 2014	$	42,817,529		$	52,584		$	42,870,113
June 30, 2015	$	40,686,215		$	45,857		$	40,732,074

9.	Decommissioning Obligation

The Company’s decommissioning obligation is estimated based on its net ownership interest in all wells and facilities, estimated costs to reclaim and abandon these wells and facilities, and the estimated timing of the costs to be incurred in future years. The Company uses Alberta Energy Regulator guidelines for determining abandonment and reclamation estimates.

The Company estimates the total undiscounted amount of cash flows required to settle its decommissioning obligations as at June 30, 2015 is $5,957,751 (December 31, 2014 - $5,923,892). These payments are expected to be made over the next 38 years with the majority of costs to be incurred between 2022 and 2038. The discount factor, being the risk-free rate related to the liability, is 2.40% (December 31, 2014 - 2.40%). Inflation of 1.70% (December 31, 2014 - 1.70%) has also been factored into the calculation. The Company also has $105,535 (December 31, 2014 - $105,535) in various reclamation bonds for its properties held by the British Columbia Ministry of Energy, Mines and Petroleum Resources.

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Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

13

		June 30, 2015			December 31, 2014
Decommissioning obligation, beginning of period	$	5,177,607		$	2,011,282
Increase in estimated future obligations		31,287			3,099,549
Decommissioning obligation expenditures		(2,591	)		-
Accretion expense		62,131			66,776
Decommissioning obligation, end of period	$	5,268,435		$	5,177,607

10.	General and Administrative Expenses ("G&A")

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Gross G&A	$	565,333		$	480,612		$	1,036,235		$	908,289
Capitalized G&A and overhead recoveries		(47,842	)		(102,032	)		(55,301	)		(255,969	)
Net G&A	$	517,491		$	378,580		$	980,934		$	652,320
Share-based payments		2,742			-			221,752			-
Total G&A	$	520,233		$	378,580		$	1,202,686		$	652,320

11.	Finance Income and Expense

		Three Month Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Finance expense:
Interest expense	$	115,775		$	64,918		$	223,783		$	128,861
Part XII.6 tax		-			4,440			-			7,500
Accretion of provision		31,066			8,753			62,131			17,506
Total	$	146,841		$	78,111		$	285,914		$	153,866

12.	Bank Indebtedness

The Company has a demand operating credit facility in the amount of $15,000,000 with Alberta Treasury Branches. The facility is secured by a general security agreement and a floating charge on all lands of the Company. The facility bears interest at the bank’s prime rate plus 1.75%, as well as a standby charge for any undrawn funds.

Pursuant to the terms of the credit facility, the Company has provided a financial covenant that at all times its working capital ratio shall not be less than 1.0. The working capital ratio is defined under the terms of the credit facilities as current assets including the undrawn portion of the revolving operating demand line credit facility, to current liabilities, excluding any current bank indebtedness.

At June 30, 2015, the Company has drawn a total of $9,438,835 from its credit facility (December 31, 2014 - $7,184,147) and was in compliance with the above financial covenant. During the period, the Company underwent the annual review of its credit facility, which was completed in July 2015 (see Note 17).

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14	Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

13.	Share Capital

(a)

Authorized

Unlimited number of common shares without par value.

Issued and outstanding

As at June 30, 2015, the Company had 75,803,498 common shares issued and outstanding.

During the six months ended June 30, 2015, the Company issued 435,000 common shares for the exercise of stock options at $0.25 each.

(b)

Stock options

The Company has a stock option plan in place and is authorized to grant stock options to officers, directors, employees and consultants whereby the aggregate number of shares reserved for issuance may not exceed 10% of the issued shares at the time of grant and 5% of the issued shares to each optionee. Stock options are non-transferable and have a maximum term of five years. Stock options terminate no later than 90 days (30 days for investor-related services) upon termination of employment or employment contract and one year in the case of retirement, death or disability. The grant price may not be less than the last closing price of the Company’s shares and not less than $0.10 per share.

During the six months ended ended June 30, 2015, the Company received gross proceeds of $108,750 from the exercise of 435,000 stock options at $0.25 each.

Details of the Company’s stock options as at June 30, 2015 are as follows:

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Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

15

For the six months ended June 30, 2015, the Company recognized $221,752 (June 30, 2014 - $nil) in share-based payment expense from the granting of 1,325,000 incentive stock options (June 30, 2014 – nil) to directors, officers, employees and consultants of the Company, of which 1,300,000 vested immediately. On January 29, 2015, 25,000 stock options were granted to a company performing investor relations services at an exercise price of $0.24 each and vest 25% at each three-month interval from the grant date. As at June 30, 2015, $2,742 share-based payment expense was recognized for 6,250 stock options that vested in the period.

The fair value of the granted stock options was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:

The weighted-average exercise price for stock options granted during the six months ended June 30, 2015 was $0.25 (June 30, 2014 - $nil). The forfeiture rate has been estimated at 0% (June 30, 2014 - nil).

During the six months ended June 30, 2015, the Company removed $92,359 (year ended December 31, 2014 - $184,094) from the share-based payment reserve and recorded a corresponding recovery in capital stock for exercised stock options.

Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate

(c)

Share purchase warrants

As at June 30, 2015, the Company had no outstanding share purchase warrants.

(d)

Income (loss) per share

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16	Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2015, the Company incurred a loss; therefore, dilutive stock options and share purchase warrants were nil. For the three and six months ended June 30, 2014, the Company had dilutive options and share purchase warrants of 1,763,450 and 1,691,805, respectively.

14.	Commitment

The Company has a commitment to make monthly rental payments pursuant to the office rental agreement at its current location until May 30, 2018. The following table shows the Company’s rental commitment amounts for the next four fiscal years:

		2015			2016			2017			2018
Rental commitment	$	95,613		$	191,226		$	191,226		$	79,678

For the three months ended June 30, 2015, rent expense amounted to $47,639 (June 30, 2014 - $38,287). For the six months ended June 30, 2015, rent expense amounted to $95,209 (June 30, 2014 - $60,612).

15.	Related Party Transactions

For the three and six months ended June 30, 2015, the Company paid fees of $10,000 and $20,000, respectively, to a director of the Company. These fees were charged for services provided by the Chairman of the Company’s Board of Directors.

Remuneration of key executive personnel, consisting of the Company’s officers, directors and Chairman, were awarded as follows for the three and six months ended June 30, 2015 and 2014:

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Short-term benefits	$	205,000		$	157,500		$	410,000		$	315,000
Share-based payments	$	-		$	-		$	135,660		$	-

No long-term benefits were paid to related parties.

16.	Supplemental Cash Flow Information

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Provided by (used in):
Accounts receivable	$	9,471		$	434,568		$	130,577		$	(90,363	)
Prepaid expenses		21,736			15,061			43,232			15,020
Accounts payable and accrued liabilities		21,307			1,302,961			(4,135,087	)		1,509,017
Total changes in non-cash working capital	$	52,514		$	1,752,589		$	(3,961,277	)	$	1,433,674
Provided by (used in):
Operating activities	$	(392,806	)	$	495,387		$	(813,796	)	$	(212,187	)
Investing activities		445,320			1,257,203			(3,147,481	)		1,645,861
Financing activities		-			-			-			-
Total changes in non-cash working capital	$	52,514		$	1,752,589		$	(3,961,277	)	$	1,433,674

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Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

17

Interest paid on the Company’s bank loan during the three months ended June 30, 2015 was $115,775 compared to $64,918 for the three months ended June 30, 2014. For the six months ended June 30, 2015 and 2014 the interest paid on the Company’s bank loan were $223,783 and $128,861, respectively.

17.	Subsequent Event

On July 28, 2015, the Company announced that, following the annual review with its lender, its credit facility will remain at $15,000,000 with no changes to covenants or applicable margins on borrowing costs. Funds available under the credit facility are $14,000,000, and access to the remaining $1,000,000 is based on additional approval with the Company’s lender. The Company’s next review is scheduled for October 31, 2015.

18.	Income Tax

The reconciliation of income tax computed at the blended statutory tax rate of 26.6% to income tax (recovery) expense is:

		Six Months Ended			Year Ended
		June 30, 2015			December 31, 2014
Loss before income tax	$	(816,730	)	$	(1,538,255	)
Statutory income tax rate		26.6%			26.00%
Expected income tax expense (recovery)		(217,250	)		(399,946	)
Non-deductible items		17,702			21,720
Temporary differences of property and equipment
and evaluation and exploration assets		632,675			507,778
Effect of change in tax rate		(28,027	)		-
Unused tax losses and tax offsets not recognized		-			-
Deferred tax expense (recovery)	$	405,100		$	129,552

19.	Segmented Information

The Company operates in one reportable operating segment, being the acquisition, exploration, development and production of petroleum and natural gas interests. The Company’s assets and activities are located in Canada.

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Q2 2015 MD&A

1

MANAGEMENT’S DISCUSSION AND ANALYSIS

Dated as at August 19, 2015

The following Management’s Discussion and Analysis ("MD&A") is a review of the operations and current financial position for the three and six months ended June 30, 2015 for Hemisphere Energy Corporation ("Hemisphere" or the "Company") and should be read in conjunction with the unaudited interim condensed financial statements and related notes for the three and six months ended June 30, 2015, and the audited annual financial statements and related notes for the year ended December 31, 2014. These documents and additional information relating to the Company, including the Company’s Annual Information Form, are available on SEDAR at www.sedar.com or the Company’s website at www.hemisphereenergy.ca.

The information in this MD&A is based on the unaudited interim condensed financial statements which were prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of unaudited interim condensed financial statements including International Accounting Standard 34 Interim Financial Reporting, as issued by the International Accounting Standards Board.

This MD&A contains non-IFRS measures and forward-looking statements. Readers are cautioned that this document should be read in conjunction with Hemisphere’s disclosure under “Non-IFRS Measures” and “Forward-Looking Statements” included at the end of this MD&A. All figures are in Canadian dollars unless otherwise noted. Tables may not add due to rounding. Certain prior period amounts may have been reclassified to conform to the current period’s presentation.

Business Overview

Hemisphere produces oil and natural gas from its Jenner and Atlee Buffalo properties in southeast Alberta. The Company is headquartered in Vancouver, British Columbia and is traded on the TSX Venture Exchange under the symbol "HME".

Jenner, Alberta

Hemisphere has an average working interest of 92% in 26,290 net acres and has continued to build a land position in the Jenner area through Crown land sales and strategic acquisitions. The property is accessible year-round and is located east of Brooks in southeastern Alberta.

Atlee Buffalo, Alberta

The Company operates 100% of its wells in the Atlee Buffalo area. The property is accessible year-round and is located 30 kilometres east of the Company’s Jenner property in southeastern Alberta. Hemisphere has a 100% working interest in 5,432 net acres and has been building a land position in Atlee Buffalo through Crown land sales and strategic acquisitions.

Operating Results

The Company generated funds flow from operations of $1,314,073 ($0.02/share) during the second quarter of 2015 as compared to $1,550,661 ($0.02/share) during the second quarter of 2014. For the six months ended June 2015 and 2014, the Company generated funds flow from operations of $2,563,214 ($0.03/share) and $3,058,768 ($0.05/share), respectively. These changes in funds flow from operations are the result of the decline in commodity prices which began in the fourth quarter of 2014 and persisted through the first half of 2015.

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2	Q2 2015 MD&A

For the second quarter of 2015, the Company reported a net loss of $575,484 ($0.01/share) compared to a net income of $554,465 ($0.01/share) for the second quarter of 2014. The Company reported a net loss of $1,221,830 ($0.02/share) for the six months ended June 30, 2015 as compared to a net income of $1,180,484 ($0.02/share) for the same period in 2014. The net losses for the three and six months ended June 30, 2015 include a deferred tax expense of $405,100.

Production

		Three Months Ended June 30						Six Months Ended June 30
By product:		2015			2014			2015			2014
Oil (bbl/d)		655			454			743			471
Natural gas (Mcf/d)		1,149			584			1,055			529
NGL (bbl/d)		3			2			3			1
Total (boe/d)		849			553			922			560
Oil and NGL weighting		77%			82%			81%			84%

In the second quarter of 2015, the Company’s average daily production increased to 849 boe/d (77% oil and NGL) which represents an increase of 54% over the second quarter of 2014. The Company experienced some downtime due to workovers performed on three wells in the second quarter of 2015 which resulted in a production shortfall of 30 bbl/d of oil. For the six months ended June 30, 2015, the Company’s average daily production increased by 65% over the comparable period in 2014. This increase in production can be attributed to the successful development of the Company’s Atlee Buffalo and Jenner properties in 2014 and the optimization of production from existing wells.

Average Benchmark and Realized Prices

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Benchmark prices
WTI ($US/bbl)(1)	$	57.94		$	102.96		$	53.29		$	100.82
Exchange rate (1 $US/$C)		1.2289			1.0912			1.2344			1.9071
WTI ($C/bbl)		71.21			112.36			65.78			110.61
WCS ($C/bbl)(2)		57.05			90.39			49.59			86.88
AECO natural gas ($/Mcf)(3)		2.62			4.63			2.66			5.07
Average realized prices
Crude oil ($/bbl)		50.49			85.72			42.43			81.17
Natural gas ($/Mcf)		2.57			4.64			2.60			4.54
NGL ($/bbl)		22.56			68.24			22.02			68.24
Combined ($/boe)	$	42.49		$	75.47		$	37.24		$	72.66

Notes:

(1)	Represents price of West Texas Intermediate Oil.
(2)	Represents price of Western Canadian Select.
(3)	Represents the Alberta 30 day spot AECO price.

Hemisphere Energy Corporation

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Q2 2015 MD&A

3

The Company’s oil and natural gas sales may vary over periods as a result of changes in commodity prices and/or production volumes. The West Texas Intermediate pricing ("WTI") at Cushing, Oklahoma is the benchmark reference price for North American crude oil prices. Canadian oil prices, including Hemisphere’s crude oil, are based on the WTI price and adjusted for transportation, quality and the currency conversion rates from United States dollar ("USD") to Canadian dollar.

The Company’s combined average realized price decreased by 44% from $75.47/boe during the second quarter of 2014 to $42.49/boe during the second quarter of 2015. For the six months ended June 30, 2015, the Company’s combined average realized price decreased by 49% to $37.24/boe. These decreases are primarily the result of the decline in WTI despite tighter differentials and a favourable exchange rate in the first and second quarters of 2015. The result of the decline in WTI is also reflected in the decreases of the Company’s average realized oil prices for the three and six months ended June 30, 2015 to $50.49/bbl and $42.43/bbl, respectively, from the comparable periods in 2014. The decline and persistence of low oil prices is due to an oversupply of oil in the global market.

WTI price increased slightly in the second quarter of 2015, which resulted in increases of the Company’s average realized oil price by $14.48/bbl and its combined average realized price by $9.78/boe over the first quarter of 2015. Although WTI prices showed signs of recovery in the second quarter of 2015, they have since dropped in the third quarter and have also been subject to an increased differential between WTI and Western Canadian Select pricing. The exchange rate has continued to be favourable in the third quarter of 2015 due to the low Canadian dollar.

The Company’s average realized natural gas price decreased for the three and six months ended June 30, 2015 by $2.07/Mcf and $1.94/Mcf, respectively, from the comparable periods in 2014. These decreases are in line with the decline in AECO benchmark pricing for the three and six months ended June 30, 2015.

Revenue

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Oil	$	3,009,671		$	3,540,924		$	5,703,496		$	6,917,044
Natural gas		268,741			246,384			496,762			434,300
NGL		5,608			12,153			12,025			12,153
Total	$	3,284,020		$	3,799,461		$	6,212,284		$	7,363,497

Revenue for the three and six months ended June 30, 2015 decreased by 14% and 16%, respectively, from the comparable periods in 2014. These decreases can be attributed to the reduction in the Company’s combined average realized price for the three and six months ended June 30, 2015, despite the Company generating significant production increases during those periods.

The Company’s revenue for the three months ended June 30, 2015 increased by 12% over the first quarter of 2015 as a result of the 30% increase in the Company’s combined average realized price.

Hemisphere Energy Corporation

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4	Q2 2015 MD&A

Operating Netback

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Operating netback
Revenue	$	3,284,020		$	3,799,461		$	6,212,284		$	7,363,497
Royalties		214,321			777,349			456,032			1,329,017
Operating costs		889,930			840,602			1,498,427			1,813,929
Transportation costs		225,523			170,398			475,593			331,436
Operating netback	$	1,954,246		$	2,011,113		$	3,782,232		$	3,889,115
Operating netback ($/boe)
Revenue	$	42.49		$	75.47		$	37.24		$	72.66
Royalties		2.77			15.41			2.73			13.10
Operating costs		11.51			16.70			8.98			17.90
Transportation costs		2.92			3.38			2.85			3.27
Operating netback ($/boe)	$	25.28		$	39.98		$	22.67		$	38.39

Royalties for the second quarter of 2015 were $2.77/boe, representing an 82% decrease from the second quarter of 2014. For the six months ended June 30, 2015, royalties decreased by 79% from the comparable period in 2014. These significant reductions are the result of 12 new horizontal wells drilled in 2014 which have lower associated royalty rates on initial production due to an 18 month Crown royalty holiday. Crown royalties also declined as a result of a lower Crown royalty par price in the first half of 2015 due to commodity price declines. Finally, the Company received a one-time retroactive rebate in Crown royalties as a result of a change in the royalty rate being applied to four of the Company’s producing wells. The royalty rebate accounts for a reduction in royalties of $0.87/boe for the six months ended June 30, 2015. As Crown royalty par price is set based on commodity prices, the Company expects to see low Crown royalties in the third quarter of 2015 given the current pricing environment.

Operating costs include all costs for gathering, processing, dehydration, compression, water processing and marketing of the oil, natural gas and NGLs, as well as additional costs incurred periodically for maintenance and repairs. Operating costs decreased for the three and six months ended June 30, 2015 by $5.19/boe and $8.92/boe, respectively, from the comparable periods in 2014. These decreases are the result of increased production levels in Atlee Buffalo which have low operating costs per boe, as well as realized economies of scale as a result of production from new wells drilled in 2014. The Company has also shut-in four wells with high operating costs in order to maximize operating netbacks and cash flow for the period. In the second quarter of 2015, the Company performed workovers on three horizontal oil wells required to bring them back on production. The costs associated with these workovers for the three and six months ended June 30, 2015 account for $2.26/boe and $1.07/boe, respectively, of the Company’s operating costs.

Transportation costs include all costs incurred to transport emulsion and oil and gas sales to processing and distribution facilities. Transportation costs decreased for the three and six months ended June 30, 2015 by $0.46/boe and $0.42/boe, respectively, from the comparable periods in 2014. These decreases are the result of the Company’s voluntary shut-in of higher water-cut wells that require trucking to facilities for processing.

Operating netback for the three and six months ended June 30, 2015 were $25.28/boe and $22.67/boe, respectively. The Company experienced decreases in operating netback in 2015 as a result of the significant decline in commodity prices, despite reductions in royalties and the Company’s successful efforts in cutting operating costs. Operating netback increased by $4.86/boe over the first quarter of 2015 as a result of the 30% increase in the Company’s combined average realized price.

Hemisphere Energy Corporation

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Q2 2015 MD&A

5

Exploration and Evaluation

Exploration and evaluation expenses generally consist of certain geological and geophysical costs, expiry of undeveloped lands, and costs of uneconomic exploratory wells. Exploration and evaluation expenses for the three months ended June 30, 2015 and 2014 were $6,908 and $12,513, respectively. For the six months ended June 30, 2015 and 2014, exploration and evaluation expenses were $14,300 and $41,666, respectively.

Depletion and Depreciation

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Depletion expense	$	1,447,286		$	985,773		$	3,089,333		$	1,861,117
Depreciation expense		3,364			1,670			6,727			2,603
Total	$	1,450,649		$	987,443		$	3,096,060		$	1,863,720
$ per boe	$	18.77		$	19.61		$	18.56		$	18.39

The depletion rate is calculated using the unit-of-production method on Proved and Probable oil and natural gas reserves, taking into account the future development costs to develop and produce undeveloped and non-producing reserves. Depletion and depreciation expense for the second quarter of 2015 increased by $463,206 over the second quarter of 2014. For the six months ended June 30, 2015, depletion and depreciation expense increased by $1,232,340 over the comparable period in 2014.

Theses increases are the result of a higher depletion rate caused by the Company’s production growth during the three and six months ended June 30, 2015. The depletion rate was applied to the Company’s depletable asset base which, for the six months ended June 30, 2015, also increased by 37% over the comparable period in 2014. Depletion expense for the comparative quarter has been revised in accordance with the Company’s change in accounting for depleting its petroleum and natural gas properties from using the unit-of-production method based on production volumes in relation to estimated Proved reserves to total estimated Proved and Probable reserves. For further information, see Note 2(e) of the Company’s unaudited interim condensed financial statements for the three and six months June 30, 2015.

Capital Expenditures

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Land and lease	$	5,600		$	90,660		$	13,034		$	105,252
Geological and geophysical		28,408			71,224			44,440			187,315
Drilling and completions		283,407			2,614,682			333,106			5,554,894
Facilities and infrastructure		241,080			715,041			301,204			1,936,724
Development capital		558,495			3,491,607			691,783			7,784,185
Property acquisitions		271,000			-			271,000			124,739
Fixed assets		-			23,584			-			23,584
Disposition proceeds		-			-			-			(50,000	)
Total capital expenditures(1)	$	829,495		$	3,515,191		$	962,783		$	7,882,507

Note:

(1)	Total capital expenditures exclude decommissioning obligations.

Hemisphere Energy Corporation

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6	Q2 2015 MD&A

The development capital spent during the second quarter of 2015 included preliminary costs relating to the Company’s planned waterflood pilot schemes in Atlee Buffalo which included the installation of required equipment to the Company’s facilities and the conversion of two wells into a water injector and a source well. The Company is anticipating first water injection at its first waterflood pilot scheme by the end of the third quarter of 2015. The Company also spent development capital in Jenner to improve a water disposal well by adding new perforations and completing an acid job. As part of the Company’s future capital program, some preliminary costs were also spent in the second quarter of 2015 on converting an abandoned well into a disposal well. Finally, the Company completed a strategic tuck-in acquisition of the remaining 15% working interest in 1.75 sections (1,120 acres) of land in Atlee Buffalo. The Company now has 100% working interest in this land.

The Company has taken a conservative approach on capital spending and investment in 2015 as a result of the current commodity pricing environment. The Company’s focus for the remainder of 2015 will be on strategic capital projects that add production and reserves while providing long-term stability and increased oil recovery to the Company’s assets.

The following table is a reconciliation of the Company’s capital expenditures to the additions of property and equipment as shown in Note 8 of the Company’s unaudited interim condensed financial statements for the three and six months ended June 30, 2015 and 2014:

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Total capital expenditures	$	829,495		$	3,515,191		$	962,783		$	7,882,507
Increase in decommissioning obligations		31,287			-			31,287			30,658
Evaluation and exploration expenditures		(220,231	)		(2,152,881	)		(242,504	)		(2,801,980	)
Gain on disposition		-			-			-			2,942
Additions to property and equipment	$	640,551		$	1,362,310		$	751,567		$	5,114,128

General and Administrative Expenses ("G&A")

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Gross G&A	$	565,333		$	480,612		$	1,036,235		$	908,289
Capitalized G&A and overhead recoveries		(47,842	)		(102,032	)		(55,301	)		(255,969	)
Net G&A		517,491			378,580			980,934			652,320
$ per boe	$	6.70		$	7.52		$	5.88		$	6.44
Share-based payments		2,742			-			221,752			-
Total G&A		520,233			378,580			1,202,686			652,320
$ per boe	$	6.73		$	7.52		$	7.21		$	6.44

Gross G&A for the second quarter of 2015 increased by $84,721 over the comparable quarter in 2014 due to higher staffing costs, increased insurance coverage, and increased investor relations activities. For the six months ended June 30, 2015, gross G&A increased by $127,946 over the comparable period in 2014.

The Company capitalizes certain G&A which can be attributed to any costs incurred during the period relating to its development and exploration activities. For the three and six months ended June 30, 2015, capitalized G&A decreased by $54,190 and $200,668, respectively, from the comparable periods in 2014. These decreases in capitalized G&A are consistent with the Company’s decision to defer major capital expenditures and drilling activity until commodity prices have recovered.

Hemisphere Energy Corporation

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7

For the three and six months ended June 30, 2015, the Company realized decreases in net G&A of $0.82/boe and $0.56/boe, respectively, from the comparable periods in 2014 as a result of increased production rates.

Share-based payments are non-cash charges which reflect the estimated value of stock options issued to directors, employees and consultants of the Company. Share-based payments for the three months ended June 30, 2015 and 2014 were $2,742 and $nil, respectively. The Company granted 25,000 incentive stock options in the first quarter of 2015 to an individual performing investor-related services which will vest quarterly over a twelve-month period. In the second quarter of 2015, 6,250 stock options vested resulting in the recognition of $2,742 in share-based payments. For the six months ended June 30, 2015 and 2014, the Company recorded share-based payments of $221,752 and $nil, respectively. This increase is the result of granting 1,325,000 incentive stock options in the first quarter of 2015. All share-based payments are considered to be part of the Company’s G&A.

Finance Expense

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Finance expense
Interest expense	$	115,775		$	64,918		$	223,783		$	128,861
Part XII.6 tax		-			4,440			-			7,500
Accretion of provision		31,066			8,753			62,131			17,506
Total	$	146,841		$	78,111		$	285,914		$	153,866
$ per boe	$	1.90		$	1.55		$	1.71		$	1.52

Finance expense for the three and six months ended June 30, 2015 increased by $68,730 and $132,048, respectively, over the comparable periods in 2014. These increases are a result of the increased accretion expense for the quarter, and the interest expense incurred on the utilization of the Company’s credit facility which carried a higher balance in 2015.

Accretion expense represents the adjusted present value of the Company’s decommissioning obligations which includes the abandonment and reclamation costs associated with wells and facilities. For the three and six months ended June 30, 2015, accretion expense increased by $22,313 and $44,625, respectively, over the comparable periods in 2014 due to the additional decommissioning obligations associated with the new wells drilled in the second half of 2014. The Company also changed its estimate of decommissioning obligations based on Directive 011 as set by the Alberta Energy Regulator, which increased the total decommissioning obligation estimate at December 31, 2014.

Tax Pools and Deferred Taxes

Hemisphere has approximately $45.3 million of tax pools available to be applied against future income for tax purposes. Based on available pools and current commodity prices, the Company does not expect to pay income tax in 2015 or in 2016. Taxes payable beyond 2016 will primarily be a function of commodity prices, capital expenditures and production volumes.

For the three and six months ended June 30, 2015, deferred tax expense of $405,100 was recorded based on the taxable income generated in excess of tax pools resulting from lower capital expenditures which reduced the Company’s deferred tax asset to $1,236,816. This deferred tax expense includes a one-time adjustment of $28,027, which resulted from the increase in the Alberta corporate tax rate from 10% to 12%.

Hemisphere Energy Corporation

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8	Q2 2015 MD&A

Selected Annual Information

The following are highlights of the Company’s financial data for the three most recently completed fiscal years:

		Year Ended			Year Ended			10 Months Ended
		December 31, 2014			December 31, 2013			December 31, 2012
Average daily production (boe/d)		683			463			408
Petroleum and natural gas revenue	$	16,635,279		$	10,573,199		$	7,875,723
Petroleum and natural gas netback		9,275,653			5,607,492			4,657,308
Funds flow from operations(1)		6,673,033			3,789,202			3,265,657
Per share, basic and diluted		0.10			0.07			0.06
Net loss(2)		(1,667,807	)		(510,266	)		(472,045	)
Per share, basic and diluted		(0.02	)		(0.01	)		(0.01	)
Average realized price ($/boe)		66.68			62.55			63.15
Operating netback ($/boe)(3)		37.19			33.17			37.33
Capital expenditures, including property acquisitions		21,316,366			9,969,174			11,888,398
Net debt(4)		11,644,609			6,330,906			3,927,595
Bank indebtedness		7,184,147			4,500,000			1,035,000
Total assets(2)		48,951,632			32,195,577			24,486,865

Notes:

(1)	Funds flow from operations is a non-IFRS measure that represents cash generated by operating activities, before changes in non-cash working capital and may not be comparable to measures used by other companies.
(2)	Certain annual amounts were restated retrospectively due to a change in accounting policy as disclosed in Note 4 of the Company’s audited annual financial statements for the year ended December 31, 2014.
(3)	Operating netback is a non-IFRS measure calculated as the Company’s oil and gas sales, less royalties, operating expenses and transportation costs per barrel of oil equivalent.
(4)	Net debt is a non-IFRS measure calculated as current assets minus current liabilities including bank indebtedness and excluding flow- through share premium.

Summary of Quarterly Results

		2015									2014									2013
		June. 30			Mar. 31			Dec. 31			Sep. 30			Jun. 30			Mar. 31			Dec. 31			Sep. 30
		Q2(2)			Q1(3)			Q4(4)			Q3(5)			Q2(6)			Q1(7)			Q4(8)			Q3(9)
Average daily production (boe/d)		849			995			885			725			553			567			569			461
Petroleum and natural gas revenue		3,284,020			2,928,264			4,568,286			4,703,496			3,799,461			3,564,036			2,958,107			3,165,562
Petroleum and natural gas netback		1,954,246			1,827,986			2,534,334			2,852,204			2,011,113			1,878,003			1,246,355			1,970,836
Funds flow from operations		1,314,073			1,249,142			1,334,422			2,279,842			1,550,661			1,508,107			579,824			1,570,350
Per share, basic and diluted		0.02			0.02			0.02			0.03			0.02			0.02			0.01			0.03
Net income (loss)(1)		(575,484	)		(646,345	)		(3,568,603	)		720,312			554,465			626,019			(1,202,692	)		673,023
Basic and diluted income (loss) per share		(0.01	)		(0.01	)		(0.05	)		0.01			0.01			0.01			(0.02	)		0.01
Combined average realized price ($/boe)		42.49			32.71			56.10			70.52			75.47			69.89			56.55			74.56
Operating netback ($/boe)		25.28			20.42			31.14			42.79			39.98			36.83			23.83			46.42

Notes:

(1)

Certain quarterly amounts were restated retrospectively due to a change in accounting policy as disclosed in Note 4 of the Company’s audited annual financial statements for the year ended December 31, 2014.

(2)

Funds flow from operations and petroleum and natural gas netbacks have shown a slight improvement over the first quarter of 2015 due to a 30% increase in the Company’s combined average realized price, but have remained low compared to 2014 as a result of the decline in commodity prices. Due to taxable income generated in excess of tax pools from lower capital expenditures, the Company utilized deferred tax assets resulting in a deferred tax expense of $405,100 for the second quarter of 2015.

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Q2 2015 MD&A

9

(3)	The decreases in net income, funds flow from operations and petroleum and natural gas netbacks can be attributed to the decrease in the Company’s combined average realized price resulting from the decline in oil prices.
(4)	A significant portion of the loss is due to the $2,702,925 recorded in property impairment and an increase in depletion expense as a result of a change in the Company’s depletion accounting policy.
(5)	Net income can be attributed to a combination of the increase in the Company’s production from its summer drilling program and the improvement of netback resulting from decreased operating and transportation costs.
(6)	The improvement in net income over certain prior quarters is primarily due to the Company’s increase in the combined average realized price resulting in higher operating netback.
(7)	The improvement in net income is primarily due to the Company’s increased production levels from the drilling of three new wells and an increase in combined average realized price.
(8)	A significant portion of the net loss is due to the increase in depletion expense as a result of the Company’s increase in production.
(9)	The high net income is primarily due to the Company’s increased production levels and average realized price for the quarter.

Outstanding Share Capital

		August 19, 2015			June 30, 2015			December 31, 2014
Fully diluted share capital
Common shares issued and outstanding		75,803,498			75,803,498			75,368,498
Stock options		6,860,000			6,860,000			5,970,000
Total fully diluted		82,663,498			82,663,498			81,338,498

Subsequent to June 30, 2015, there were no events that would have impacted the Company’s share capital.

The Company has the following stock options outstanding and exercisable as at August 19, 2015:

					Balance Outstanding			Balance Exercisable
Exercise Price		Expiry Date			August 19, 2015			August 19, 2015
$0.26		30-Sep-15			490,000			490,000
$0.30		23-Dec-15			375,000			375,000
$0.30		27-Jan-16			200,000			200,000
$0.38		9-Feb-16			50,000			50,000
$0.40		26-May-16			475,000			475,000
$0.48		5-Jul-16			50,000			50,000
$0.70		8-Feb-17			1,500,000			1,500,000
$0.65		24-Apr-17			75,000			75,000
$0.61		5-Jul-17			425,000			425,000
$0.50		8-Mar-18			250,000			250,000
$0.55		6-Jan-19			660,000			660,000
$0.65		29-Sep-19			785,000			785,000
$0.61		7-Oct-19			200,000			200,000
$0.24		29-Jan-20			1,225,000			1,206,250
$0.39		1-Mar-20			100,000			100,000
					6,860,000			6,835,000
Weighted-average exercise price					$0.49			$0.49

Liquidity and Capital Management

The Company’s net debt as at June 30, 2015 and December 31, 2014 were $9,938,019 and $11,644,609, respectively, representing a decrease in net debt of $1,706,590.

Hemisphere Energy Corporation

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10	Q2 2015 MD&A

a)

Financing

The Company’s cash provided by financing activities for the three months ended June 30, 2015 and 2014 were $nil and $9,214,919, respectively. For the six months ended June 30, 2015 and 2014, cash provided by financing activities were $108,750 and $9,243,044, respectively. For the six months ended June 30, 2015, the Company issued 435,000 common shares through the exercise of stock options at $0.25 each for gross proceeds of $108,750.

b)	Capital Resources

The Company has a demand operating credit facility in the amount of $15,000,000 with Alberta Treasury Branches ("ATB"), which was renewed in July 2015. Funds available under the credit facility are $14,000,000 and access to the remaining $1,000,000 is based on additional approval from ATB. The facility is secured by a general security agreement and a floating charge on all lands of the Company. The facility bears interest at the bank’s prime rate plus 1.75%, as well as a standby charge for any un-drawn funds.

Pursuant to the terms of the credit facility, the Company has provided a financial covenant that at all times its working capital ratio shall not be less than 1.0. The working capital ratio is defined under the terms of the credit facilities as current assets including the undrawn portion of the revolving operating demand line credit facility, to current liabilities, excluding any current bank indebtedness.

At June 30, 2015, the Company has drawn a total of $9,438,835 from its credit facility (December 31, 2014 - $7,184,147) and was in compliance with the above financial covenant. The Company’s next review is scheduled for October 31, 2015.

The Company manages its capital with the following objectives:

	•	Ensure sufficient flexibility to achieve the Company’s ongoing business objectives including the replacement of production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
	•	Maximize shareholder return through enhancing the Company’s share value.

The Company monitors its capital structure and makes adjustments according to market conditions in an effort to meet its objectives given the current outlook of the business and industry in general. The capital structure of the Company is composed of shareholders’ equity and the undrawn component of the Company’s credit facilities. The Company may manage its capital structure by issuing new shares, repurchasing outstanding shares, obtaining additional financing from the Company’s credit facilities, issuing new debt instruments, other financial or equity-based instruments, adjusting capital spending, or disposing of assets. The capital structure is reviewed on an ongoing basis.

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11

Related Party Transactions

For the three and six months ended June 30, 2015 the Company paid fees of $10,000 and $20,000, respectively, to a director of the Company. These fees were charged for services provided by the Chairman of the Company’s Board of Directors.

Compensation to key executive personnel, consisting of the Company’s officers, directors and Chairman, was paid as follows:

		Three Months Ended June 30						Six Months Ended June 30
		2015			2014			2015			2014
Short-term benefits		205,000			157,500		$	410,000		$	315,000
Share-based payments		-			-			135,660			-

Short-term benefits, which are primarily salaries and wages, have increased during the three six months ended June 30, 2015 mainly as the result of a technical consultant who transitioned to an officer in September 2014.

Commitment

The Company has a commitment to make monthly rental payments pursuant to the office rental agreement at its current location until May 30, 2018. The following table shows the Company’s rental commitment amounts for the next four fiscal years:

		2015			2016			2017			2018
Rental commitment	$	95,613		$	191,226		$	191,226		$	79,678

Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet transactions.

Proposed Transactions

As of the effective date, there are no outstanding proposed transactions.

Critical Accounting Estimates and Judgements

The Company’s significant accounting estimates, judgements and policies are set out in Notes 2 and 3 of the audited annual financial statements for the year ended December 31, 2014 and have been consistently followed in the preparation of the unaudited interim condensed financial statements.

The preparation of the unaudited interim condensed financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. A discussion of specific estimates and judgements employed in the preparation of the Company’s unaudited interim condensed financial statements is included in the Company’s audited annual financial statements for the year ended December 31, 2014.

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12	Q2 2015 MD&A

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Newly Adopted Accounting Standards

Effective January 1, 2015, the Company has not adopted any new accounting standards. A full listing of future accounting pronouncements are disclosed in the Company’s annual audited financial statements for the year ended December 31, 2014.

Disclosure Controls and Procedures

Although TSX Venture ("TSX-V") listed companies are not required to provide representations in filings relating to the establishment and maintenance of disclosure controls and procedures ("DC&P"), the Company has taken initiative to assess the effectiveness of the Company’s DC&P, as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings ("NI 52-109"), under the supervision and with the participation of the Company’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based on their evaluation, the Company’s CEO and CFO have concluded that, with the remediation of the material weaknesses in the internal controls over financial reporting as disclosed in the section below, the Company’s DC&P are effective to give reasonable assurance that the information required to be disclosed in the Company’s annual filings, interim filings or other reports filed, or submitted by the Company under securities legislation were recorded, processed, summarized and reported within the time periods specified under securities legislation, and the Company has included controls and procedures designed to ensure that information required to be so disclosed is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Internal Controls over Financial Reporting

Management, including the Company’s CEO and CFO, is responsible for establishing and maintaining adequate internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. ICFR include those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Due to the inherent limitations of ICFR, they may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Although TSX-V listed companies are not required to provide representations in filings relating to the establishment and maintenance of ICFR, the Company, with the participation of the CEO and CFO, has assessed the effectiveness of the Company’s ICFR. The assessment was based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO 2013"). Management remediated the Company’s ICFR by instituting controls specific to (i) the process for evaluating and reviewing impairment indicators over petroleum and natural gas properties; and (ii) the process for determining the Company’s decommissioning obligations. Based on its assessment, the CEO and CFO have concluded that the Company’s ICFR are effective with the remediation of the above mentioned items and conformity with COSO 2013.

Financial Instruments

Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, changes in assumptions can significantly affect estimated fair values. At June 30, 2015, the Company's financial instruments include accounts receivable, reclamation deposits, bank indebtedness, accounts payable and accrued liabilities.

The fair values of accounts receivable, reclamation deposits, bank indebtedness, accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of these financial instruments.

Risks

The Company’s activities expose it to a variety of risks that arise as a result of its exploration, development, production and financing activities. These risks and uncertainties include, among other things, volatility in market prices for oil and natural gas, general economic conditions in Canada, the US and globally and other factors described under "Risk Factors" in Hemisphere’s most recently filed Annual Information Form which is available on the Company’s website at www.hemisphereenergy.ca or on SEDAR at www.sedar.com. Readers are cautioned that this list of risk factors should not be construed as exhaustive.

The following provides information about the Company’s exposure to some risks associated with the oil and gas industry, as well as the Company’s objectives, policies and processes for measuring and managing risk.

Business Risk

Oil and gas exploration and development involves a high degree of risk whereby many properties are ultimately not developed to a producing stage. There can be no assurance that the Company’s future exploration and development activities will result in discoveries of commercial bodies of oil and gas. Whether an oil and gas property will be commercially viable depends on a number of factors including the particular attributes of the reserve and its proximity to infrastructure, as well as commodity prices and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, and environmental protection. The exact effect of these factors cannot be accurately predicted, and the combination of these factors may result in an oil and gas property not being profitable.

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14	Q2 2015 MD&A

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its payment obligations. This risk arises principally from the Company’s receivables from joint venture partners and oil and natural gas marketers and its reclamation deposits. Any risk associated with accounts receivable is minimized substantially by the financial strength of the Company’s joint venture partners, operators and marketers. The credit risk associated with reclamation deposits is mitigated by ensuring these financial assets are placed with major financial institutions with strong investment-grade ratings by a primary ratings agency. The Company does not anticipate any default. There are no balances past due or impaired.

The maximum exposure to credit risk is as follows:

		As at
		June 30, 2015			December 31, 2014
Accounts receivable
Trade receivables	$	1,123,699		$	1,041,843
Receivables from joint venture		49,976			95,355
Reclamation deposits		105,535			105,535
Total	$	1,279,210		$	1,242,733

The Company sells the majority of its oil production to a single oil marketer and, therefore, is subject to concentration risk which is mitigated by management’s policies and practices related to credit risk, as discussed above. The Company historically has never experienced any collection issues with its oil marketer.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages liquidity risk by anticipating operating, investing and financing activities and ensuring that it will have sufficient liquidity to meet its liabilities when they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company. The Company prepares expenditure budgets on a quarterly and annual basis which are regularly monitored and updated when necessary in order to review debt forecasts and working capital requirements.

At June 30, 2015, the Company had net debt of $9,938,019 (December 31, 2014 - $11,644,609), which includes bank indebtedness of $9,438,835 (December 31, 2014 - $7,184,147). The Company funds its operations through production revenue and a demand operating credit facility. All of the Company’s financial liabilities have contractual maturities of less than 90 days.

Market risk

Market risk is the risk that changes in market prices, such as, foreign exchange rates, commodity prices, and interest rates will affect the value of the financial instruments. Market risk is comprised of interest rate risk, foreign currency risk, commodity price risk, and other price risk.

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Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. Borrowings under the Company’s credit facilities are subject to variable interest rates. A one percent change in interest rates would not have a material effect on net income (loss) and comprehensive income (loss).

Foreign currency risk

The Company’s functional and reporting currency is Canadian dollars. The Company does not sell or transact in any foreign currency; however, commodity prices are largely denominated in USD, and as a result the prices that the Company receives are affected by fluctuations in the exchange rates between the USD and the Canadian dollar. The exchange rate effect cannot be quantified, but generally an increase in the value of the Canadian dollar compared to the USD will reduce the prices received by the Company for its crude oil and natural gas sales. The Company did not have any foreign exchange rate swaps or related contracts in place as at the date of this document.

Commodity price risk

Commodity prices for petroleum and natural gas are impacted by global economic events that dictate the levels of supply and demand, as well as the relationship between the Canadian dollar and the USD. Significant changes in commodity prices may materially impact the Company’s funds flow from operations, and ability to raise capital. The Company has not entered into any commodity hedge contracts as at the date of this document.

Other price risk

Other price risk is the risk that the fair or future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk, foreign currency risk or commodity price risk. The Company is not exposed to significant other price risk.

Non-IFRS Measures

This document contains the terms "funds flow from operations", "operating netback", and "net debt" which are not recognized measures under IFRS and may not be comparable to similar measures presented by other companies.

a)

The Company considers funds flow from operations to be a key measure that indicates the Company’s ability to generate the funds necessary to support future growth through capital investment and to repay any debt. Funds flow from operations is a measure that represents cash generated by operating activities, before changes in non-cash working capital and may not be comparable to measures used by other companies. Funds flow from operations per share is calculated using the same weighted-average number of shares outstanding as in the case of the earnings per share calculation for the period.

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16	Q2 2015 MD&A

A reconciliation of funds flow from operations to cash provided by operating activities is presented as follows:

	b)	Operating netback is a benchmark used in the oil and natural gas industry and a key indicator of profitability relative to current commodity prices. Operating netback is calculated as oil and gas sales, less royalties, operating expenses and transportation costs on an absolute and per boe basis. These terms should not be considered an alternative to, or more meaningful than, cash flow from operating activities or net income or loss as determined in accordance with IFRS as an indicator of the Company’s performance.
	c)	Net debt (working capital) is closely monitored by the Company to ensure that its capital structure is maintained by a strong balance sheet to fund its future growth. Net debt is used in this document in the context of liquidity and is calculated as the total of the Company’s bank debt and current liabilities, less current assets. There is no IFRS measure that is reasonably comparable to net debt.

The following table outlines the Company calculation of net debt:

Note:

(1)

Excluding bank indebtedness.

Boe Conversion

Within this document, petroleum and natural gas volumes and reserves are converted to a common unit of measure, referred to as a barrel of oil equivalent ("boe"), using a ratio of 6,000 cubic feet of natural gas to one barrel of oil. Use of the term boe may be misleading, particularly if used in isolation. The conversion ratio is based on an energy equivalent method and does not necessarily represent a value equivalency at the wellhead. This conversion conforms with the Canadian Securities Regulators National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities.

Forward-Looking Statements

In the interest of providing Hemisphere’s shareholders and potential investors with information regarding the Company, including management’s assessment of the future plans and operations of Hemisphere, certain statements contained in this MD&A constitute forward-looking statements or information (collectively "forward-looking statements") within the meaning of applicable securities legislation. Forward-looking statements are typically identified by words such as "anticipate", "continue", "estimate", "expect", "forecast", "may", "will", "project", "could", "plan", "intend", "should", "believe", "outlook", "potential", "target" and similar words suggesting future events or future performance. In particular, but without limiting the foregoing, this document may contain forward-looking statements pertaining to the following: volumes and estimated value of Hemisphere’s oil and natural gas reserves; the life of Hemisphere’s reserves; the volume and product mix of Hemisphere’s oil and natural gas production; future oil and natural gas prices; future operational activities; and future results from operations and operating metrics, including any future production growth and net debt. In addition, statements relating to "reserves" are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and can be profitably produced in the future.

Hemisphere Energy Corporation

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Q2 2015 MD&A

17

With respect to forward-looking statements contained in this MD&A, the Company has made assumptions regarding, among other things: future capital expenditure levels; future oil and natural gas prices and differentials between light, medium and heavy oil prices; results from operations including future oil and natural gas production levels; future exchange rates and interest rates; Hemisphere’s ability to obtain equipment in a timely manner to carry out development activities; Hemisphere’s ability to market its oil and natural gas successfully to current and new customers; the impact of increasing competition; Hemisphere’s ability to obtain financing on acceptable terms; and Hemisphere’s ability to add production and reserves through our development and exploitation activities.

Although Hemisphere believes that the expectations reflected in the forward-looking statements contained in this MD&A, and the assumptions on which such forward-looking statements are made, are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned not to place undue reliance on forward-looking statements included in this MD&A, as there can be no assurance that the plans, intentions or expectations upon which the forward-looking statements are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur, which may cause Hemisphere’s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the following: volatility in market prices for oil and natural gas; general economic conditions in Canada, the U.S. and globally; and the other factors described under "Risk Factors" in Hemisphere’s most recently filed Annual Information Form available on the Company’s website at www.hemisphereenergy.ca or on SEDAR at www.sedar.com. Readers are cautioned that this list of risk factors should not be construed as exhaustive.

The forward-looking statements contained in this MD&A speak only as of the date of this document. Except as expressly required by applicable securities laws, Hemisphere does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement..

Hemisphere Energy Corporation

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Form 52-109FV2
Certification of Interim Filings
Venture Issuer Basic Certificate

I, Don Simmons, the Chief Executive Officer of Hemisphere Energy Corporation, certify the following:

1.	Review: I have reviewed the interim financial report and interim Management’s Discussion & Analysis (together, the “interim filings”) of Hemisphere Energy Corporation (the “issuer”) for the interim period ended June 30, 2015.
2.	No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.	Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

Date: August 19, 2015

(signed) “Don Simmons”
Don Simmons
Chief Executive Officer

NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i)	controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii)	a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.

1

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Form 52-109FV2
Certification of Interim Filings
Venture Issuer Basic Certificate

I, Dorlyn R. Evancic, the Chief Financial Officer of Hemisphere Energy Corporation, certify the following:

1.	Review: I have reviewed the interim financial report and interim Management’s Discussion & Analysis (together, the “interim filings”) of Hemisphere Energy Corporation (the “issuer”) for the interim period ended June 30, 2015.
2.	No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3.	Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

Date: August 19, 2015

(signed) “Dorlyn R. Evancic”
Dorlyn R. Evancic
Chief Financial Officer

NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i)	controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii)	a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.

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