Pender Growth Fund Inc. — Annual Report 2021

Apr 7, 2022

Financial Statements of

PENDER GROWTH FUND INC.

And Independent Auditors’ Report thereon Year ended December 31, 2021

MANAGEMENT RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying financial statements of Pender Growth Fund Inc. are the responsibility of management. They have been prepared in accordance with International Financial Reporting Standards. PenderFund Capital Management Ltd. (the “Manager”) has developed and maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to produce relevant, reliable and timely financial information, including the accompanying financial statements.

The Board of Directors is responsible for ensuring the Manager fulfils its responsibility. The Audit Committee meets with the Manager and the external auditors to review both the financial statements and the findings of the audit prior to the submission of the financial statements to the Board of Directors. The external auditors have unrestricted access to the Audit Committee. The Audit Committee also considers, for review by the Board of Directors and approval by the shareholders, the engagement or re-appointment of the external auditors.

These financial statements have been approved by the Board of Directors and have been audited by KPMG LLP, Chartered Professional Accountants, on behalf of the shareholders. The auditors’ report outlines the scope of their audit and their opinion on the financial statements.

"David Barr" David Barr Chief Executive Officer PenderFund Capital Management Ltd.

"Gina Jones" Gina Jones Chief Financial Officer PenderFund Capital Management Ltd.

April 7, 2022

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KPMG LLP PO Box 10426 777 Dunsmuir Street Vancouver BC V7Y 1K3 Canada Telephone (604) 691-3000 Fax (604) 691-3031

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Pender Growth Fund Inc.

Opinion

We have audited the financial statements of Pender Growth Fund Inc. (the “Company”), which comprise:

• the statements of financial position as at December 31, 2021 and December 31, 2020

• the statements of comprehensive income for the years then ended

• the statements of changes in equity for the years then ended

• the statements of cash flows for the years then ended

• and notes to the financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2021 and December 31, 2020, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “ Auditors’ Responsibilities for the Audit of the Financial Statements ” section of our auditors’ report.

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other Information

Management is responsible for the other information. Other information comprises:

• the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.

KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG Canada provides services to KPMG LLP.

Pender Growth Fund Inc. Page 2

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Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.

We obtained the information included in the Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report.

We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance

for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial

reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

Pender Growth Fund Inc. Page 3

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We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

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Chartered Professional Accountants

The engagement partner on the audit resulting in this auditors’ report is Duane Tup Chong Vancouver, Canada April 7, 2022

PENDER GROWTH FUND INC.

Statements of Financial Position

As at December 31, 2021 and 2020

	Notes		2021		2020
Assets
Cash		$	10,008,858	$	1,789,278
Due from related parties	5		6,243,402		-
Divestment proceeds receivable			1,671,449		667,631
Interest receivable			198,210		52,075
Prepaid expenses			37,613		4,243
Receivable for investments sold			-		729,274
Investments	4, 12		208,351,197		45,186,746
Total assets			226,510,729		48,429,247
Liabilities
Current liabilities
Income taxes payable	13		3,031,126		-
Accounts payable and accrued liabilities			203,940		116,184
Payable for investments purchased			86,976		-
Interest payable			31,637		-
Due to relatedparties	5		-		1,058,873
Total current liabilities			3,353,679		1,175,057
Non-current liabilities:
Deferred income tax liability	13		19,513,395		-
Loanpayable	10		5,000,000		-
Total non-current liabilities			24,513,395		-
Total liabilities			27,867,074		1,175,057
Shareholders' equity
Class C Common shares:
Contributed capital	8		18,007,980		18,715,287
Retained earnings			180,635,675		28,538,903
Total Shareholders' Equity		$	198,643,655	$	47,254,190
Number of shares outstanding	8		7,616,529		7,740,129
Total shareholders' equity per share		$	26.08	$	6.11
Subsequent events	15

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

Approved on behalf of the Board of Directors:

"David Barr" Director "Kelly Edmison"

Director

1

PENDER GROWTH FUND INC.

Statements of Comprehensive Income

Years ended December 31, 2021 and 2020

	Notes			2021		2020
Revenue:
Dividend income		$	$	-	$	1,593,315
Interest and securities lending income	6			335,229		205,078
Foreign exchange gain (loss)				46,029		(50,541)
Changes in fair value of investments:
Net realized gain				52,499,738		6,950,223
Net change in unrealized appreciation				115,906,623		8,096,531
Total revenue				168,787,619		16,794,606
Operating Expenses:
Management fees	5			987,960		821,648
Transaction costs				662,650		192,641
Interest and financing expenses				304,162		-
Audit and professional fees				278,036		66,039
Administration expenses				268,096		218,116
Directors' fees				58,671		52,262
Legal fees				58,172		29,461
Custody and recordkeeping fees				21,839		29,020
Withholdingtaxes	7			-		1,460
Total operating expenses				2,639,586		1,410,647
Net operatingincome			$	166,148,033	$	15,383,959
Other Items:
Performance fees	5			36,991,288		1,211,315
Fees waived bythe Manager	5			(9,247,822)		(302,829)
Net amount				27,743,466		908,486
Amount of Pender Private Investments Inc.'s ("PPI")
performance fee earned by the Manager attributable to the
Company's ownership of PPI shares	5			(36,236,726)		-
Total performance fee expense / (recovery)				(8,493,260)		908,486
Net income before income taxes		$	$	174,641,293	$	14,475,473
Income taxes
Current	13			3,031,126		-
Deferred	13			19,513,395		-
Total Income taxes				22,544,521		-
Net income		$	$	152,096,772	$	14,475,473
Net income, per share:
Class C shares		$	$	19.90	$	1.84
Weighted average number of non-redeemable
Class C shares outstanding				7,642,298		7,887,267

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

2

PENDER GROWTH FUND INC.

Statements of Changes in Equity

Years ended December 31, 2021 and 2020
Class C shares	Note		2021		2020
Balance, beginning of year		$	47,254,190	$	33,833,017
Net income			152,096,772		14,475,473
Capital transactions	8(b)		(707,307)		(1,054,300)
Balance,end ofyear		$	198,643,655	$	47,254,190
The accompanying notes are an integral part of these	financial statements.

3

PENDER GROWTH FUND INC.

Statements of Cash Flows

Years ended December 31, 2021 and 2020

		2021		2020
Cash provided by (used in):
Operating:
Net income	$	152,096,772	$	14,475,473
Adjustments for:
Dividend income		-		(1,593,315)
Interest and securities lending income		(335,229)		(204,282)
Foreign exchange (gain) loss		(46,029)		50,541
Net realized (gain) loss on sales of investments		(52,499,738)		(6,950,223)
Net change in unrealized (appreciation) depreciation on investments		(115,906,623)		(8,096,531)
(Increase) decrease in due from related parties		(6,243,402)		-
(Increase) decrease in divestment proceeds receivable		(1,003,818)		(667,631)
(Increase) decrease in prepaid expenses		(33,370)		303
Increase (decrease) in deferred income tax liability		19,513,395		-
Increase (decrease) in income taxes payable		3,031,126		-
Increase (decrease) in accounts payable and accrued liabilities		87,756		15,369
Increase (decrease) in interest payable		31,637		-
Increase (decrease) in due to related parties		(1,058,873)		953,120
Increase(decrease)in other receivable		-		20
		(2,366,396)		(2,017,156)
Proceeds on disposal of investments		88,038,318		23,480,499
Purchase of investments		(81,919,604)		(29,005,797)
Dividend received		-		1,593,315
Interest received		128,540		643,383
Net cash provided by (used in) operating activities		3,880,858		(5,305,756)
Financing:
Proceeds from issuance of loan payable		5,000,000		-
Repurchase of shares		(707,307)		(1,054,300)
Net cashprovided by (used in)financingactivities		4,292,693		(1,054,300)
Net increase (decrease) in cash during the year		8,173,551		(6,360,056)
Cash, beginning of year		1,789,278		8,199,875
Increase (decrease) due to exchange rate fluctuations on cash		46,029		(50,541)
Cash,end ofyear	$	10,008,858	$	1,789,278

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

4

PENDER GROWTH FUND INC.

Schedule of Investment Portfolio

Year ended December 31, 2021

	Exercise price/	Expiry date/	Issue	share/units/
	Interest rate	Maturitydate	Currency	Face value		Cost		Fair value
Publicly listed companies: (28.0%)
Common shares: (25.4%)
BuildDirect.com Technologies Inc.				428,240		1,969,904		728,008
Copperleaf Technologies Inc.1				257,759		747,501		6,147,552
GreenSpace Brands Inc.				69,193,248		3,845,233		4,151,595
Inscape Corporation, Class B				6,886,981		4,498,638		7,747,854
MAV Beauty Brands Inc.				250,500		511,587		293,085
Peloton Interactive, Inc.				100,700		5,490,963		4,555,125
ProntoForms Corporation				3,044,333		1,577,078		2,709,456
Quorum Information Technologies Inc.				1,683,100		1,461,268		1,901,903
Redline Communications Group Inc.				378,153		649,717		294,959
Sangoma Technologies Corporation				224,843		4,018,893		4,906,074
Stitch Fix, Inc.				408,384		10,523,301		9,773,796
Tantalus Systems Holding Inc.				486,131		251,200		899,342
Vigil Health Solutions Inc.				1,471,500		507,493		750,465
Zillow Group,Inc.				69,800		5,253,015		5,637,541
						41,305,791		50,496,755
Warrants: (0.0%)
BuildDirect.com Technologies Inc.	4.23	12/31/2030	USD	89,722		-		-
BuildDirect.com Technologies Inc.	6.90	08/13/2023	CAD	428,240		-		-
Else Nutrition Holdings Inc.	3.25	10/06/2022	CAD	11,607		-		754
Freshlocal Solutions Inc.	1.25	12/31/2024	CAD	789,000		-		-
GreenSpace Brands Inc.	0.08	12/23/2022	CAD	42,140,328		-		-
GreenSpace Brands Inc.	0.09	09/28/2023	CAD	612,300		-		-
Newtopia Inc.	1.00	05/03/2022	CAD	178,571		-		-
Redline Communications Group Inc.	0.65	11/22/2024	CAD	223,500		-		29,055
Redline Communications Group Inc.	0.75	11/22/2024	CAD	223,500		-		6,705
Redline Communications Group Inc.	0.85	11/22/2024	CAD	223,500		-		-
Siyata Mobile Inc.	65.25	12/23/2022	CAD	6,896		-		-
						-		36,514
Loans and convertible debentures: (2.6%)
Freshlocal Solutions Inc.	8.00%	12/31/2024	CAD	3,000,000		3,000,000		3,000,000
GreenSpace Brands Inc.	12.00%	10/01/2022	CAD	1,031,177		800,000		800,000
Redline Communications GroupInc.	10.00%	11/22/2024	CAD	1,341,000		1,341,000		1,341,000
						5,141,000		5,141,000
						46,446,791		55,674,269
Private unlisted companies: (76.9%)
Common shares:
Pender Private Investments Inc., Commercialization Shares2				1,002,555		508,096		486,058
Pender Private Investments Inc., Legacy Shares2				6,930,953		19,281,411		146,135,551
Preferred shares:
Checkfront, Inc., Series A-2				38,973		999,993		999,993
D-Wave Systems Inc.				224,144		1,200,000		-
Jane Software Inc.				103,823		4,055,326		4,055,326
Convertible debentures:								-
Clarius Mobile Health Corp.	10.00%	12/31/2023	CAD	1,000,000		1,000,000		1,000,000
						27,044,826		152,676,928
Less: Transaction costs included in cost of	investments					(22,763)
Total investments(104.9%)					$	73,468,854	$	208,351,197
Cash (5.0%)								10,008,858
Other assets less liabilities (-9.9%)								(19,716,400)
Total Shareholders' Equity (100.0%)							$	198,643,655

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

1Copperleaf is the Company's largest single public company holding, representing 89.5% of the Company's Shareholder's Equity, including both its direct holdings and its indirect holdings investment through its investment in Pender Private Investments Inc.

2Considering the make up of the portfolio including the underlying portfolio of our private holding of PPI, an entity that holds both public and private companies, the proportions of Shareholder's Equity made up by publicly listed companies and private Portfolio Companies were 114.7% and 5.3%, respectively.

5

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

1. Incorporation and nature of operations:

Pender Growth Fund Inc. (the “Company”) was incorporated under the laws of British Columbia on March 7, 1994.

The Company has been managed by PenderFund Capital Management Ltd. (the “Manager”) since 2003. The investment objective of the Company is to achieve long-term capital growth from investment in opportunities identified by the Manager.

The Company’s registered office is located at 1830 - 1066 West Hastings Street, Vancouver, British Columbia, V6E 3X2.

2. Basis of preparation:

• (a) Statement of compliance:

The annual financial statements of the Company are prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards (“IAS”) Board.

The Company qualifies as an investment entity under IFRS 10, Consolidated Financial Statements .

These financial statements were authorized for issue by the Company’s Board of Directors on April 7, 2022.

• (b) Basis of measurement:

These financial statements have been prepared on a historical cost basis except for investments, which are measured at fair value.

• (c) Functional and presentation currency:

These financial statements are presented in Canadian dollars, the Company’s functional currency.

• (d) Use of estimates and judgment:

The preparation of financial statements in conformity with IFRS requires the Manager to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized in the period in which the estimates are revised and in any future period affected.

The Company may hold financial instruments that are not quoted in an active market, including derivatives. The determination of the fair value of these investments is the area with the Manager’s most significant accounting judgements and estimates in preparing these financial statements.

6

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

3. Significant accounting policies:

The accounting policies set out below have been applied consistently to all periods presented in these financial statements.

• (a) Financial instruments:

• (i) Recognition and measurement:

Financial instruments are required to be classified into one of the following categories: amortized cost, fair value through other comprehensive income (“FVOCI”) or fair value through profit or loss (“FVTPL”). All financial instruments are measured at fair value on initial recognition. Measurement in subsequent periods depends on the classification of the financial instrument. Transaction costs are included in the initial carrying amount of financial instruments except for financial instruments classified as FVTPL in which case transaction costs are expensed as incurred.

Financial assets and financial liabilities are recognized initially on the trade date, which is the date on which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.

Financial assets and liabilities are offset and the net amount is presented in the Statements of Financial Position only when the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

A financial asset is measured at amortized cost if it meets both of the following conditions:

• it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

• its contractual terms give rise on specified dates to cash flows that are solely payments of principal and/or interest on the principal amount outstanding.

A financial asset is measured at FVOCI if it meets both of the following conditions:

• it is held within a business model whose objective is both to hold assets to collect contractual cash flows and to potentially sell financial assets; and

• its contractual terms give rise on specified dates to cash flows that are solely payments of principal and/or interest on the principal amount outstanding.

All financial assets not classified as and measured at amortized cost or FVOCI as described above are measured at FVTPL. On initial recognition, the Company may irrevocably elect to measure financial assets that otherwise meet the requirements to be measured at amortized cost or at FVOCI, at FVTPL when doing so eliminates or significantly reduces a measurement or recognition inconsistency.

Financial assets are not reclassified subsequent to their initial recognition. Should the Company change its business model for managing financial assets, all affected financial assets would be reclassified on the first day of the first reporting period following the change in the business model.

The Company has not classified any of its financial assets as FVOCI.

7

Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

3. Significant accounting policies (continued):

• (a) Financial instruments (continued):

• (i) Recognition and measurement (continued):

A financial liability is generally measured at amortized cost, with exceptions that may allow for classification as FVTPL. These exceptions include financial liabilities that are mandatorily measured at FVTPL, such as derivatives liabilities. The Company may also, at initial recognition, irrevocably designate a financial liability as measured at FVTPL when doing so eliminates or significantly reduces a measurement or recognition inconsistency.

(ii) Fair value through profit or loss:

Financial instruments classified as FVTPL are subsequently measured at fair value at each reporting period with changes in fair value recognized in the Statements of Comprehensive Income in the period in which they occur. The Company’s investments in securities are classified as FVTPL.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and marketable securities) is based on quoted market prices at the close of trading on the reporting date. The Company uses the last traded market price for both financial assets and financial liabilities. In circumstances where there is no closing price, the average of the closing bid and the closing ask price on the valuation date is used. The Company’s policy is to recognize transfers into and out of the fair value hierarchy levels described in Note 12(a) as of the date of the event or change in circumstances giving rise to the transfer.

The fair value of financial assets and liabilities that are not traded in an active market, including nonpublicly traded derivative instruments, is determined using valuation techniques. Valuation techniques include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and other methods commonly used by market participants and which make the maximum use of observable inputs. Where the value of a financial asset or liability is not readily available or where the Manager is of the opinion that the value available is inaccurate or unreliable, the fair value is estimated on the basis of the most recently reported information of a similar financial asset or liability.

(iii) Amortized cost:

Financial assets and liabilities classified as amortized cost are recognized initially at fair value plus any directly attributable transaction costs. Subsequently, measurement is at amortized cost using the effective interest method, less any impairment losses. The Company classifies cash, receivable for investments sold, Divestment proceeds receivable, subscriptions receivable, dividends receivable, interest receivable, other receivables, due from related parties, accounts payable and accrued liabilities, payable for investments purchased, management and administration fees payable, performance fees payable, redemptions payable to holders of redeemable shares, distributions payable to holders of redeemable shares, balances due to related parties, and loan payable as amortized costs.

8

Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

3. Significant accounting policies (continued):

• (a) Financial instruments (continued):

• (iii) Amortized cost (continued):

The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments through the expected life of the financial asset or liability, or where appropriate, a shorter period.

• (b) Investments in associates and subsidiaries:

The Company meets the criteria required to be considered an “investment entity” under IFRS 10, Consolidated Financial Statements and, as such, in the cases where the Company has control or significant influence over a Company in its investment portfolio, the Company values such investments as financial assets at FVTPL.

• (c) Shares:

The Company classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Where an issued financial instrument is considered a compound financial instrument, it is bifurcated into liability and equity components based on the respective value of each component.

The common shares, which are classified as equity, are measured at the residual shareholders’ equity value. Distributions to holders of non-redeemable shares are recognized in the Statements of Changes in Equity.

• (d) Per share amounts:

Total shareholders’ equity per share is calculated based on the number of shares outstanding at the end of the period. Net income (loss) per share is calculated by dividing the net income (loss) by weighted average number of shares outstanding during the period.

• (e) Securities lending transactions:

The Company enters into securities lending transactions which involve the temporary exchange of securities for collateral with a commitment to redeliver the same securities on a future date.

Securities lending transactions are administered by Canadian Imperial Bank of Commerce and The Bank of New York Mellon (collectively, the “Securities Lending Agent”). The value of cash or securities held as collateral must be at least 102% of the fair value of the securities loaned, sold or purchased. Income is earned from these transactions in the form of fees paid by the counterparty and, in certain circumstances, interest paid on cash or securities held as collateral. Income earned from these transactions is included in the Statements of Comprehensive Income as Securities lending income and recognized when earned.

Note 5 summarizes the details of securities loaned and collateral received and presents a reconciliation of the gross amount generated from securities lending to the securities lending income earned by the Company.

9

Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

3. Significant accounting policies (continued):

(f) Foreign exchange:

These financial statements of the Company are denominated in Canadian dollars. Foreign denominated investments and other foreign denominated assets and liabilities are translated into Canadian dollars using the exchange rates prevailing on each valuation date. Purchases and sales of investments, as well as income and expense transactions denominated in foreign currencies, are translated using exchange rates prevailing on the date of the transaction. Foreign currency gains and losses are recognized in the Statements of Comprehensive Income.

(g) Income recognition:

Interest income shown on the Statements of Comprehensive Income is recognized on an accrual basis. Dividend income is recognized on the date that the right to receive payment is established, which for quoted equity securities is usually the ex-dividend date. Portfolio transactions are recorded on the trade date. Realized gains and losses arising from the sale of investments are determined on the average cost basis of the respective investments.

• (h) Income taxes:

Current tax expense is based on taxable profit for the year. Taxable profit differs from profit as reported in the Statements of Comprehensive Income as certain items of income or expense are never taxable or deductible or are taxable or deductible in a different period than the reporting period. The current tax liability is determined using tax rates that have been enacted or substantially enacted by the end of the reporting period.

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the calculation of taxable profit. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for deductible temporary differences or for carry forward of unused tax losses, to the extent that it is probable that the deductions or tax losses can be utilized. The carrying amount of deferred tax assets are reviewed at each reporting date and reduced to the extent it is no longer probable that the income tax asset will be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability settled, based on tax rates and legislation that have been enacted or substantively enacted at the reporting date. Where applicable, current and deferred taxes relating to items recognized directly in equity are also recognized in equity.

10

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

4. Purchase of Pender Private Investments Inc.:

On May 28, 2021 (the “Effective Date”), the Company completed a transaction (the "WOF Transaction") with the Working Opportunities Fund (EVCC) Ltd. (“WOF”), an investment entity, for the acquisition of WOF’s issued and outstanding shares pursuant to an April 7, 2021 definitive agreement (the “Arrangement Agreement”),under a plan of arrangement.

On the Effective Date of the WOF Transaction, the Company acquired 100% of WOF’s Commercialization Series shares for a total cash purchase price of $508,096 which was paid in full on closing as well as 97% of WOF’s Venture Series shares for a total cash purchase price of $25,316,232, 50% of which was paid on closing with the remaining 50% paid on November 25, 2021. The Venture Series shares were acquired at a discount to their fair value, with their purchase price calculated as 43.5% of the net asset value per Venture Series share on the day prior to the date of the Arrangement Agreement, adjusted for any change of up to 5% in their value to the day before the May 28, 2021 effective date of the WOF Transaction.

The Company had an obligation to make certain additional payments to those Venture Series shareholders that sold their shares (the “Exiting Shareholders”) to the Company for divestments of WOF portfolio investments (the "Contingent Payment Obligation").

The Contingent Payment Obligation was based on a percentage share of the net gains over carrying values of the underlying Venture Series shares’ investment portfolio at the Effective Date and arose as follows: (a) if a divestment completed on or before November 18, 2021, Exiting Shareholders would receive their pro rata portion of 60% of the net gain; (b) if a divestment completed on or before February 18, 2022, Exiting Shareholders would receive their pro rata portion of 45% of the net gain; and (c) if a letter of intent, term sheet or binding agreement for a divestment was entered into on or before February 18, 2022 and such divestment was subsequently completed by May 18, 2022, Exiting Shareholders would receive their pro rata portion of 20% of the net gain.

Upon the closing of the WOF Transaction, WOF changed its name to Pender Private Investments Inc., and the Venture Series shares were renamed the “Legacy Shares”.

On October 13, 2021, in accordance with the Legacy Share rights, a portion of the Company’s Legacy Shares of Pender Private Investments Inc. (“PPI”) were redeemed. As at December 31, 2021, the Company held 97% of the outstanding Legacy Shares, or 6,930,953 Legacy Shares.

The divestment of two of PPI’s portfolio investments triggered a requirement for a pro rata redemption of Legacy Shares at the NAV in effect at the time. Accordingly, in October 2021, PPI redeemed approximately 58.49% of all Legacy Shares, including those held by the Company, on a pro rata basis at a redemption price of approximately $6.4705 per share. The Company received a total of $63,197,947 upon the redemption of 9,767,089 of the Legacy Shares it held. A portion of these proceeds was used to satisfy the additional cash payment to the Exiting Shareholders that was triggered by the divestments and the redemption. The Exiting Shareholders became entitled to receive an additional cash payment of $1.2661 per share, or total value of $21,136,513, which was paid effective October 13, 2021.

11

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

4. Purchase of Pender Private Investments Inc. (continued):

Because there was no letter of intent, term sheet or binding agreement for a divestment entered into after November 18, 2021 and before February 18, 2022, which was the final period during which an additional exit payment could have been triggered, the right to any additional cash payment has ceased and the Exit Venture Shares are expected to be redeemed automatically during 2022.

Under IFRS, the $32,798,793 gain inherent in the difference between the purchase price paid by the Company and the fair value of the assets it acquired, is treated as a deferred gain and contra asset under the investments reported in the Statements of Financial Position. The deferred gain will be recognized to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the investment. During the year, $27,654,608 of the deferred gain was recognized and the remaining balance as at December 31, 2021 is $5,144,185.

5. Related party transactions:

(a) Management and performance fees:

In accordance with the Third Amended and Restated Management Agreement dated May 1, 2017, as amended March 7, 2019 (the “Management Agreement”), the Manager provides management services in connection with all aspects of the identification, investment, development, active monitoring and ultimate divestment of all investments of the Company. This Management Agreement is in effect until April 30, 2023 and shall be renewed automatically at that date for a further term of four years, unless a vote of shareholders determines otherwise.

In exchange for these management services, the Company pays a management fee. Effective May 2019, the management fee was set at 2.50% of the first $15,000,000 of the value of Net Assets and 1.75% of the value of Net Assets above $15,000,000. Prior to May 2019 the management fee was 2.50% of the Company’s total shareholders’ equity per annum on total shareholders’ equity of up to $50,000,000 and 2.00% of the Company’s total shareholders’ equity in excess of $50,000,000 per annum. The management fee is calculated and paid monthly. Subsequent to the WOF Transaction, Net Assets used in the management fee calculation excluded the value of the Company’s investment in PPI. For the year ended December 31, 2021, the Company incurred management fees of $987,960 (2020 - $821,648).

The Manager is entitled to a performance fee plus applicable taxes in certain circumstances, based on achieving certain performance criteria set out in the Management Agreement. The performance fee is calculated as 20% of any net increase in shareholders’ equity above an annual hurdle rate of 6%. The performance fee is calculated on an annual basis and is subject to a high water mark, being the year-end total shareholders’ equity per share for the most recent preceding year in which a performance fee was earned. Subject to the accumulation of the hurdle rate in years in which no performance fee is payable, the high water mark will not be reset other than to be adjusted in the event of a subdivision or consolidation of the shares.

12

Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

5. Related party transactions (continued):

(a) Management and performance fees (continued):

The December 31, 2016 total shareholders’ equity per share was the initial high water mark. A performance fee was earned in the year ended December 31, 2020 which reset the high water mark to $6.22. For the year ended December 31, 2021, the high water mark was reset to $26.77 which represents the portion of the performance fees calculated upon net realized gains. The portion of the performance fees that relates to the net increase in unrealized appreciation of the Company’s direct and indirect holdings of Copperleaf is $2.96.

Performance fees are accrued during the year, where applicable. However, annual performance fees are calculated on the last valuation date of the year and are payable to the Manager each year upon publication of the Company’s audited annual financial statements.

For the year ended December 31, 2021, the Company incurred performance fees of $36,991,288 (2020 - $1,211,315). The Manager has agreed to waive $9,247,822 (2020 - $302,829) of the performance fee, reducing the net performance fee payable to $27,743,466 (2020 - $908,486).

The Manager has agreed pay to the Company an amount equal to the portion of the PPI performance fee earned by the Manager that is attributable to the Company’s ownership of PPI shares, or 97%. During the year, the Company accrued the receivable from the Manager $36,236,726 as the PPI performance fee earned by the Manager that is attributable to the Company’s ownership of PPI Shares. The Company received $2,085,913 related performance fees incurred by PPI for net divestment proceeds received, the remaining $34,150,813 is due from the Manager as at December 31, 2021.

For the year ended December 31, 2021, the total performance fee recovery is $8,493,260 (2020 – total performance fee expense $908,486), equivalent to the net performance fee expense offset against for the receivable amount of PPI performance fee earned by the Manager attributable to the Company’s ownership of PPI shares $36,236,726 (2020 - $Nil).

As at December 31, 2021, the Company had a net balance due from related parties of $6,243,402 (December 31, 2020 – due to related parties $1,058,873), all of which was due from the Manager. Of this amount, $27,907,411 was due to the Manager for normal course management fees, performance fees net of fees waived by the Manager and operating expenses paid on behalf of the Company. This was offset by an amount due from the Manager of $34,150,813 (December 31, 2020 - $Nil) related performance fees earned from PPI that the Manager agreed to pay to the Company, as described above.

• (b) Share holdings

As at December 31, 2021, the Manager, directors and officers of the Company directly or indirectly held 10.0% (December 31, 2020 – 9.1%) of the Company’s Class C Shares.

The aggregate investment by the Company’s directors and officers in all Portfolio Companies did not exceed 1.0% of the issued and outstanding shares of any Portfolio Company.

13

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

6. Securities lending transactions:

As at December 31, 2021, the value of securities loaned is $Nil (December 31, 2020 – $19,955) and collateral received in respect of securities lending is $Nil (December 31, 2020 – $20,965).

Collateral received in respect of securities lending may be comprised of debt obligations of the Government of Canada and other countries, Canadian provincial or territorial governments, governments of states of the United States of America, and evidence of indebtedness of financial institutions whose short-term debt is rated A-1 or R-1 or equivalent by a recognized, widely followed North American credit rating agency.

A reconciliation of the gross amount generated from securities lending transactions to the securities lending income earned by the Company for the years ended December 31, 2021 and 2020 is presented in the following table.

								Securities
		Gross	Withholding			Agent		lending
Years ended		Income		taxes		fees		income
December 31, 2021	$	13,419	$	-	$	(5,367)	$	8,052
December 31, 2020	$	1,462	$	-	$	(666)	$	796

The agent fees were paid to the Securities Lending Agent by the Company and represented 40% of the gross securities lending income net of withholding taxes through to March 31, 2020, and 35% of the gross securities lending income net of withholding taxes thereafter.

7. Withholding tax expense:

Certain dividend income received by the Company is subject to withholding tax imposed in the country of origin. During the year, withholding tax rates were between 0% and 35% (2020 – between 0% and 35%).

8. Share capital:

• (a) Authorized share capital:

On July 24, 2019, the shareholders approved a resolution deleting the Class B and Class R shares, altering the rights and restrictions of Class C shares to remove references therein to Class R shares, and creating a new class of preferred shares.

As at December 31, 2021, the authorized capital of the Company consists of:

• (i) An unlimited number of Class C Participating Common Shares (“Class C Shares”); and

• (ii) An unlimited number of Preferred Shares (“Preferred Shares”).

Class C Shares:

Class C Shares are not redeemable or convertible. Class C Shares are listed on the TSX Venture Exchange (“TSXV”) under the ticker symbol “PTF”.

Each Class C Share is entitled to one vote in any vote on shareholder matters and is entitled to dividends at the discretion of the Board of Directors.

14

Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

8. Share capital (continued):

• (a) Authorized share capital (continued):

Preferred Shares:

The Preferred Shares were created on July 24, 2019. As at December 31, 2021 and 2020, no Preferred Shares have been issued. The special rights and restrictions of the Preferred Shares empower the Board to fix the number of shares in each series of each class of Preferred Shares and to fix the preferences, special rights and restrictions, privileges, conditions and limitations attaching to the shares of that series, before the issuance of shares of any particular series. The Board has the power to fix, among other things, the number of shares constituting any series, the voting powers, designation, preferences and relative participation, optional or other special rights and dividend rate, terms of redemption (including sinking fund provisions), redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series. The issuance of Preferred Shares could affect the rights of the holders of Class C shares.

• (b) Issued and fully paid shares:

During the years ended December 31, 2021 and 2020, the Company has issued and fully paid Class C shares outstanding as follows:

	Balance,			Balance,
	Beginning	Shares	Shares	end
	ofyear	issued	repurchased	ofyear
December 31, 2021
Class C	7,740,129	-	(123,600)	7,616,529
December 31, 2020
Class C	8,083,329	-	(343,200)	7,740,129

On February 10, 2020, the Company launched a Normal Course Issuer Bid (“NCIB”) through the facilities of the TSXV. On the launch date, the Company had 8,083,329 Shares outstanding, of which 7,430,877 Shares represented the Company’s public float. The Company was entitled to purchase up to a maximum of 743,087 Shares, representing 10% of the Company’s public float, over the one-year period that the NCIB was in place.

Following the expiry of its NCIB on February 10, 2021, the Company launched a new NCIB on the TSXV. Upon this launch, the Company had 7,739,121 shares issued, of which 7,008,669 Shares represented its public float. The Company is entitled to purchase up to a maximum of 700,866 Shares, representing 10% of its public float, over the one-year period of this NCIB. The NCIB will continue in effect until February 11, 2022, unless terminated earlier in accordance with its terms.

During the year ended December 31, 2021, the Company bought back 123,600 shares under its NCIB for a total price of $707,307 (December 31, 2020 – 343,200 shares and $1,054,300).

15

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

8. Share capital (continued):

• (c) Equity capital:

The changes in shareholders’ equity for the years ended December 31, 2021 and 2020 are as follows:

	Share	Retained
	capital	earnings	Total
Balance, January 1, 2021	$ 18,715,287	$ 28,538,903	$ 47,254,190
Net income	-	152,096,772	152,096,772
Capital transactions	(707,307)	-	(707,307)
Balance, December 31, 2021	$ 18,007,980	$ 180,635,675	$ 198,643,655
	Share	Retained
	capital	earnings	Total
Balance, January 1, 2020	$ 19,769,587	$ 14,063,430	$ 33,833,017
Net income	-	14,475,473	14,475,473
Capital transactions	(1,054,300)	-	(1,054,300)
Balance, December 31, 2020	$ 18,715,287	$ 28,538,903	$ 47,254,190

9. Capital management:

The Company’s Class C Shares represent the capital of the Company. The Company is not subject to any external or internally imposed restrictions on its capital other than debt covenants as described in Note 10. The investment objective of the Company is to achieve long-term capital growth from investments in public and private companies.

The Company’s objective in managing capital is to ensure it has the ability to continue to make new investments and to make follow-on investments in companies that it has previously invested in, to have sufficient cash for operations and to continue to operate as a going concern.

10. Loan payable

In connection with the WOF Transaction described in Note 4, the Company obtained a three-year term loan from a Canadian chartered bank in the maximum amount of $10,000,000 to be advanced in 2 tranches, such that the outstanding principal amount at any given time is limited to $5,000,000 (the "Term Loan"). As at December 31, 2021, the Company has drawn $5,000,000 on tranche 1 of the Term Loan, which bears interest at a rate of Prime + 5% per annum and matures on May 28, 2024. As security for the Term Loan, the Company granted the lender a security interest in all of the shares of PPI held by the Company and its holdings in its public company investments. The Company is in compliance with all covenants on the loan payable as of December 31, 2021. Refer to Note 15 for further details regarding the amendment to the loan subsequent to year end.

16

Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

11. Financial risk management:

The Company may be exposed to various financial risks in the normal course of business, associated with its investment objectives and strategies, financial instruments and the markets in which it invests. These risks include credit risk, liquidity risk, and market risk which consists of currency risk, interest rate risk and other price risk.

The Company’s investment objective is to achieve long-term capital growth by investing in public and private companies. The Company maintains positions in a variety of financial instruments in accordance with its investment objectives and strategies. The Schedule of Investment Portfolio groups these investment holdings by asset type. The Company’s exposure to financial risk is concentrated in its investment holdings. The Manager manages the potential impact of these financial risks on the Company’s performance by employing and overseeing professional and experienced portfolio advisors who regularly monitor the Company’s positions and market events and diversify the investment portfolio within the constraints of the investment guidelines.

On February 24, 2022, Russia launched a large military invasion of Ukraine. This has resulted in a disruption in the supply of energy resources, a refugee crisis in Europe, global protests and the imposition of sanctions on Russia, which in turn triggered a financial crisis in Russia. The Russian president has placed Russia’s nuclear forces on high alert, increasing tension between the West and Russia. The invasion has introduced a new source of uncertainty for financial markets.

The COVID-19 global health pandemic that began in 2019 continues today. In early 2020, it resulted in significant volatility and turmoil in World markets. The negative economic impact of measures taken to contain the virus have been mitigated to a certain extent by fiscal and monetary stimulus, measures taken to reopen world economies, and the development and rollout of vaccines. The situation has had an impact on many entities and the markets for the securities that they issue and that impact may continue.

As economies re-open, the unprecedented levels of monetary and fiscal stimulus provided by North American central banks in response to the COVID-19 global health pandemic is withdrawn through measures such as the raising of interest rates, tapering of asset purchases and moderation of overall government spending. The uncertainty surrounding the ultimate impact of these supports and conversely, their withdrawal, present risk to the economy as a whole and therefore the investment landscape.

Investment results may be affected by future developments and new information that may emerge resulting from Russia’s invasion of Ukraine, COVID-19, its variants and the pandemic, and the impact of the withdrawal of central bank stimulus measures, factors which are beyond the Company’s control.

The Company will continue to support its Portfolio Companies, to monitor the impact that global events have on them and to reflect the consequences as appropriate in its accounting and reporting.

(a) Credit risk:

Credit risk represents the risk associated with the inability of a counterparty to fulfill its financial obligations. The Company limits its exposure to credit risk related to its excess cash, when applicable, by investing in high quality short-term investments, typically term or other deposits with a large Canadian bank.

17

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

11. Financial risk management (continued):

• (a) Credit risk (continued):

The Company is also exposed to credit risk through its investment in loans, convertible and other notes and preferred shares of its investee companies. The Company manages this credit risk through careful selection and monitoring of its investee companies. Receivables relating to the Company’s investments are also subject to credit risk and are managed through active review of the portfolio of private unlisted investments.

The Company’s maximum exposure to credit risk as at December 31, 2021 is $13,065,978 (December 31, 2020 - $8,125,864).

• (b) Liquidity risk:

Liquidity risk is the risk that the Company may not be able to settle or meet its obligations on time or at a reasonable price. The Company invests in equity securities and other financial instruments. A portion of the Company’s equity holdings are in private unlisted investments for which no active markets exist. Accordingly, timely disposition may not be possible and the realized price may be significantly different from the carrying value.

The Company’s policy is to maintain sufficient cash to meet normal operating requirements. It is also the Company’s policy that the Manager monitors the Company’s liquidity position and that the board of directors reviews it on a quarterly basis.

The following table summarizes the Company’s financial liabilities as at December 31, 2021 and 2020, based on undiscounted contractual cash flows:

		2021		2020
Non-current liabilities:
Loan payable	$	5,000,000	$	-
Current liabilities:
Income taxes payable		3,031,126		-
Accounts payable and accrued liabilities		203,940		116,184
Payable for investments purchased		86,976		-
Interest payable		31,637		-
Due to related parties		-		1,058,873
		3,353,679		1,175,057
Total	$	8,353,679	$	1,175,057

18

Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

11. Financial risk management (continued):

• (c) Market risk:

Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and equity prices, will affect the Company’s income or the fair value of its holdings of financial instruments.

• (i) Interest rate risk:

Interest rate risk is the risk that fair value of a financial instrument will fluctuate because of changes in market interest rates. The Company’s investment portfolio may contain private debt instruments, the majority of which may be convertible. The valuation of these private debt instruments is based on the enterprise value of the underlying Company and generally does not change with changes in market interest rates. The interest rates of these instruments are fixed, so changes in market interest rates will not impact cash flows of the Company. Accordingly, the Manager does not consider there to be significant interest rate risk on the Company’s private debt investments.

(ii) Currency risk:

Currency risk is the risk that the fair value of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company invests primarily in Canadian securities. Accordingly, the Company is not subject to significant currency risk.

• (iii) Other price risk:

Other price risk is the risk that the fair value of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from the aforementioned risks), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in a market. The Manager manages other price risk through careful selection of investments and through diversification of the investment portfolio.

As at December 31, 2021, if the fair value of the Company’s publicly listed investments had increased or decreased by 10% with all other factors remaining constant, the Company’s shareholders’ equity would have increased or decreased by approximately $4,611,000 (December 31, 2020 - $2,682,000). Price sensitivity was determined based on portfolio-weighted beta. In practice, actual results may differ from this sensitivity analysis and the difference could be material.

19

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

12. Fair value of financial instruments:

• (a) Valuation models:

The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices. For all other financial instruments, the Company determines fair values using other valuation techniques.

For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

The Company measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.

• Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.

• Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. prices) or indirectly (i.e. derived from prices).

• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The Company uses widely recognized valuation models for determining the fair value of common and relatively simple financial instruments, such as debt securities, mutual fund units and warrants that use only observable market data and require little management judgment and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, exchange-traded derivatives and simple OTC derivatives such as forward foreign currency contacts. The availability of observable market prices and model inputs reduces the need for management judgment and estimation, and reduces the uncertainty associated with the determination of fair values. The availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

For more complex instruments, the Company uses recognized valuation models. Some or all of the significant inputs into these models may not be observable in the market and may be derived from market prices or rates or estimated based on assumptions. Valuation models that employ significant unobservable inputs require a higher degree of management judgment and estimation in the determination of fair value.

In determining fair value for these types of instruments the Manager considers: the history and nature of the business; operating results and financial conditions; the general economic, industry and market conditions; capital market and transaction market conditions; independent valuations of the business; contractual rights relating to the investment; comparable trading and transaction multiples, where applicable; and other pertinent considerations. Adjustments to the carrying value of the investments may also be determined by the Manager when there is pervasive and objective evidence of a decline in the value of the investment, as indicated by an assessment of the financial condition of the investment based on operational results, forecasts and other developments since acquisition.

20

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

12. Fair value of financial instruments (continued):

• (b) Fair value hierarchy – financial instruments measured at fair value:

The table below presents the fair value of financial instruments as at December 31, 2021 and 2020 by the level in the fair value hierarchy into which the fair value measurement is categorized. The amounts are based on the values recognized in the Statements of Financial Position.

2021 2020	2021 2020
Level 1: Publicly listed companies $ 50,497,509 $ 27,903,494 Level 2: Publicly listed companies 35,760 - Level 3: Publicly listed companies – loans and convertible debentures 5,141,000 950,000 Private unlisted companies 152,676,928 16,333,252 Total Level 3 157,817,928 17,283,252
	Total Level 3 157,817,928 17,283,252
	$ 208,351,197 $ 45,186,746

During the year ended December 31, 2021, Tantalus Systems Holding Inc., BuildDirect.com Technologies Inc. and Copperleaf Technologies Inc. were transferred from level 3 to level 1 of the fair value hierarchy upon becoming publicly traded. (In 2020, Newtopia Inc. was transferred from level 3 to level 1 of the fair value hierarchy upon becoming publicly traded).

The following table shows a reconciliation of all movements in the fair value of financial instruments categorized within Level 3 for the years ended December 31, 2021 and 2020:

	2021	2020
Opening balance	$ 17,283,252	$ 17,845,943
Amounts paid on purchase of investments	56,157,169	3,909,343
Sales and settlements of investments	(76,978,506)	(3,626,682)
Transfer from Level 3 to Level 1	(4,863,951)	(250,000)
Total gain (loss) recognized in comprehensive income	166,219,964	(595,352)
Endingbalance	$ 157,817,928	$ 17,283,252

Included in the net change in unrealized appreciation (depreciation) in fair value of investments on the Statements of Comprehensive Income for the year ended December 31, 2021 is a change in unrealized appreciation of $118,121,235 (December 31, 2020 – unrealized depreciation $364,306 related to Level 3 investments).

21

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

12. Fair value of financial instruments (continued):

• (c) Significant unobservable inputs used in measuring fair value:

The table below sets out information about significant unobservable inputs used at December 31, 2021 and 2020 in measuring financial instruments categorized as Level 3 in the fair value hierarchy.

2021
				Enterprise	Sensitivity to
				value/	change in
				weighted	significant
	Fair	Valuation	Unobservable	average	unobservable
Description	value	technique	input	multiple	input
Unlisted private	$157,817,928 Investment cost/		Enterprise	$157,817,928	The estimated
investments		enterprise value	value		fair value would
					increase if
					enterprise value
					increased
2020
				Enterprise	Sensitivity to
				value/	change in
				weighted	significant
	Fair	Valuation	Unobservable	average	unobservable
Description	value	technique	input	multiple	input
Unlisted private	$ 7,861,067	Investment cost/	Enterprise	$ 7,861,067	The estimated
investments		enterprise value	value		fair value would
					increase if
					enterprise value
					increased
Unlisted private	$ 9,422,185	Market approach	Revenue	1.9	The estimated
investments		using comparable	multiple		fair value would
		traded revenue			increase if
		multiples			the revenue
					multiples
					were higher

Significant unobservable inputs are developed as follows:

• (i) Enterprise value:

Represents the amount that market participants would pay when purchasing the investee company. The Manager determines this value based on arm’s length transactions in shares of entities comparable to the respective company.

• (ii) Revenue multiple:

Revenue multiples are selected from comparable public companies based on geographic location, industry, size, target markets, and other factors that the Manager considers to be reasonable. The traded multiples for the comparable companies are determined by dividing the enterprise value of the company by its revenue and further discounted for considerations such as the lack of marketability and other differences between the comparable peer group and the specific investee company.

22

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

12. Fair value of financial instruments (continued):

• (d) Effects of unobservable input on fair value measurement:

Although the Company believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3, changing one or more of the assumptions used to alternative reasonably possible assumptions would have the following effects on shareholders’ equity at December 31, 2021 and 2020:

		2021		2020
Favourable	$	15,781,793	$	5,167,864
Unfavourable		(15,781,793)		(4,103,980)

The favourable and unfavourable effects of using alternative reasonably possible assumptions for the valuation of unlisted private investments have been calculated by recalibrating the model values using unobservable inputs based on ranges of possible estimates. The recalibrated model considers:

• The impact of a 10% increase or decrease in enterprise value.

• A change in the revenue multiple to alternative reasonably possible assumptions of 1.0 and 3.0, respectively.

• (e) Financial instruments not measured at fair value:

The carrying value of the Company’s financial instruments, other than investments, approximates their fair value given their short-term nature. These financial instruments are classified as Level 2 in the fair value hierarchy because while prices are available, there is no active market for these instruments.

23

PENDER GROWTH FUND INC.

Notes to Financial Statements

Year ended December 31, 2021

13. Income taxes:

The Company’s provision for income taxes for the years ended December 31, 2021 and 2020 is summarized as follows:

as follows:
	2021		2020
Combined federal andprovincial statutoryincome tax rate	27.00%		27.00%
Income tax expense calculated at statutory tax rate	$ 47,153,149	$	3,908,378
Adjustments resulting from:
Non-taxable dividend income	-		(427,567)
Non-taxable portion of realized (gains) losses	(7,087,465)		(938,280)
Non-taxable portion of unrealized (appreciation) depreciation	(15,653,608)		(2,172,417)
Utilization of capital losses and other items	(1,867,555)		(370,114)
Income tax expense	$ 22,544,521	$	-

The taxation year-end of the Company is December 31. As at the end of the 2021 tax year-end, the Company has $Nil capital losses (2020 - $5,903,051) and $Nil non-capital losses (2020 - $12,363,944).

The Company has reflected the net benefit of the losses available for carryover in estimating its income taxes for the year ended December 31, 2021.

For the year ended December 31, 2021, the Company has current tax liability of $3,031,126 (December 31, 2020 - $Nil) and deferred income tax liability $19,513,395 (December 31, 2020 - $Nil).

14. Involvement with subsidiaries and associates:

The table below describes subsidiaries and associates in which the Company holds an interest and that it does not consolidate or account for by the equity method.

Entity	Nature andpurpose	Interest held bythe Company
Inscape Corporation	Industrial	Investment in common shares
Pender Private Investments Inc.	Private Equity Investments	Investment in common shares

The table below sets out interests held by the Company in unconsolidated subsidiaries and associates. The maximum exposure to loss is the carrying amount of the financial assets held.

December 31, 2021 and 2020
Name of	Principal place	Country of	Ownership	Voting
Entity Relationship	of business	incorporation	interest	rights
Inscape Corporation Associate	Canada	Canada	48% (2020 - 48%)	48% (2020 - 48%)
Pender Private Investments Inc. Subsidiary	Canada	Canada	97%(2020 - N/A)	97%(2020 - N/A)

Furthermore, none of the subsidiaries described in the table above are subject to any restrictions.

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Notes to Financial Statements

PENDER GROWTH FUND INC.

Year ended December 31, 2021

15. Subsequent events

From January 1, 2022 through to the expiry of its NCIB on February 11, 2022, the Company repurchased 5,900 Class C Shares, bringing the total purchased under the NCIB to 129,500 shares in the one-year period.

On February 14, 2022, the Company launched a new NCIB on the TSXV. Upon launch, the Company had 7,609,621 shares issued, of which 6,788,397 Shares represented its public float. The Company is entitled to purchase up to a maximum of 678,839 Shares, representing 10% of its public float, over the one-year period of this NCIB. The NCIB will continue until February 13, 2023, unless terminated earlier in accordance with its terms.

On March 31, 2022, although no cash movement occurred, in accordance with the terms of the CIBC loan agreement, CIBC swept the original $5,000,000 owing under tranche 1 and collected prepayment interest of only 6 months, instead of the interest of approximately 12 months to which it is entitled under the loan agreement. Concurrently the Company made a drawdown on the 2[nd] $5,000,000 available under tranche 2 of the facility, for which the interest rate will be revised to Prime + 2% (down from Prime + 5%) for a minimum one year term.

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